Buy... China fund is coming, the QDII factor

If you don't know what does QDII means, it is actually short form of Qualified Domestic Institutional Investors. China is allowing the local fund house to invest money in overseas stock with QDII status. The purpose is to let part of the saving to go out of the country to ease RMB appreciation pressure.

Last Thu/Fri, Merrill Lynch has recommended investor to load up Singapore based China stock, citing undemanding valuation and the potential fund flow. Stocks suggested were Yangzijiang, Cosco, Synear, MIDAS, China Hongxing, Yanlord, Celestial, Hongguo, Capital Retail China Trust, China Energy, China Sky and Beauty China.

In the Saturday Business Times "Show Me The Money" column, the writer presented a table of China stock that could be the potential winner. From the list, my pick for the good stock which would benefit from the increase China consumption and also QDII fund flow are Fiberchem, Synear, China Sky, Chine Lifestyle, Celestial, Hongguo, China Hongxing, Sihuan Pharma, Sino-Env, China Energy and China Sports. Personally, I favour consumer stocks, consider them to be safer than the rest. In the list, other than consumer stocks, there are few companies with unique competitive advantage.

Today, CIMB also issues similar report citing their picks are Cosco, Synear, China Hongxing, China Energy, Fibrechem, Delong, China Sky, China Fishery, Hong Leong Asia, Sino Techfibre. From here it is not difficult to spot the trend. In order for the fund manager to load up the counter, the company must have substantial size or market cap. Many undervalued small cap remains under valued because the fund house has restriction on market cap of the stock that they can buy.

Ok, we got so many good stocks on the exchange, but which one to put your money in? Stock do well when your business is doing well. We need to pick those which offer unique value and growth potential. However, as a retail investor, the capital is limited. We can only affort to put that much.

My pick for this run,

Hongguo - Trading at significant discount relative to Hongkong listed woman shoe maker. With past 3 years annual growth of more than 20%, this is one of the "safer" stock you can get.
Synear - Consider the market leadership, bigger market cap (which would attract the institutional investor). This would also be a "safer" bet. Bigger size company recover better from any earning disappointment or business change.

Sentiment aside, after Fri and today's great run, the margin for error would be significant narrower. The room for upside is limited, but I do not see it peak as of now. Be careful... Invest at your own risk.