China Strategy:Shenzhen:Ready to Connect

Top picks

Our 20 top picks in the Hang Seng SmallCap index offer an average 40% upsideto our target prices. 15 of the stocks operate in areas with strong secular growth:rising consumer spending, industrial upgrading and environmental spending. Theselection trades on 12x forward earnings and we are forecasting 20% earningsgrowth in 2017. Half of the stocks trade on single-digit earnings multiples, mostlyin the renewables, oil services and property sectors.

Our top Shenzhen A-share picks offer 20% to our target prices. This selection isslightly more expensive (15x forward earnings) but offers better growth (25%),size (USD11b avg mkt cap), sector leadership and trading liquidity (USD55m avgper day). Globally competitive companies Midea, Hikvision, GoerTek andEverwin are included, along with consumer leaders Yanghe Brewery, PingAnBank, ChangAn Auto and Rapoo.