As part of our emerging markets special report week, we’ve searched far and wide for the most undervalued stocks in the region covered by Morningstar analysts. The majority of the 5-star stocks are based in China, even though the country’s stock market has been one of the best performing since the pandemic. These include companies like state-owned telecoms operator China Mobile (00941), Guangshen Railway (00525), as well as firms in the cement, food and education sectors. A 5-star rating represents the most undervalued companies in the Morningstar universe, but widening the scope to include 4-star stocks opens up the opportunity set to include the rest of Asia Pacific and Lation America.
Here are five undervalued emerging market stocks, some of which will be familiar to investors, and some which might not previously have been on your radar:
Ping An (601318)/ China
Star Rating: 4
Economic Moat: None
Share Price: 58 Chinese yuan
Fair Value: 85 CNY
Insurance firm Ping An had already benefited from two key demographic trends in emerging markets before Covid-19, a growing population and rising affluence. The coronavirus pandemic has only reinforced the importance of health and life insurance for Chinese consumers. Ping An offers banking services to customers who then upgrade to health and car insurance policies, a sort of “one-stop shop” financial services. The firm plans to buy tech conglomerate Founder Group, which was spun out of Peking University.
Morningstar analyst Iris Tan thinks the shares remain undervalued: “Ping An remains our preferred stock for the sector as we like its strong healthcare ecosystem that can help further differentiate its insurance products and achieve higher-than-peer customer stickiness in the long run.”
Tencent (00700)/ China
Star Rating: 4
Economic Moat: Wide
Share Price: HKD $542
Fair Value: HKD $800
Tencent is one of the most widely held Chinese stocks, not just by EM fund managers but global tech investors too. It might seem surprising then, that the stock is considered undervalued. But the share price, after a very strong 2020, has fallen sharply this year as the Chinese authorities tighten up tech regulation, particularly over the use of consumer data. The company has a wide range of internet activities, taking in payments, messaging services, AI, healthcare services and gaming.
With around 1.2 billion monthly users of its Weixin app, scale and user data are key to Tencent’s wide economic moat, according to Morningstar analyst Chelsey Tam. She says Tencent benefits from a “network effect”, which means that users become more valuable the more people use its products. “A virtuous cycle has formed, and it is difficult for a new entrant to recreate the same ecosystem,” she adds.
Taiwan Semiconductor Manufacturing (2330)/Taiwan
Star Rating: 4
Economic Moat: Wide
Share Price: 581 Taiwan dollars
Fair Value: 760 Taiwan dollars
Taiwan Semiconductor is another undervalued EM stock that is popular with investors. The shares are up 50% over the past year, helped by a global semiconductor shortage, but Morningstar analysts think the company’s shares are still cheap at around 581 Taiwan dollars.
TSMC, a former stock of the week, is the world’s largest contract chip manufacturer, making 13 million units a year. Its products are found in smartphones and electric vehicles, an area where the current chip shortage is being most keenly felt. Morningstar analyst Phelix Lee thinks the supply shortage is likely to continue into next year: “TSMC remains an attractive buy for being the main long-term beneficiary of increasingly intricate semiconductors and computing systems.” Lee adds that TSMC’s wide economic moat stems from premium pricing and a lower cost base than rivals.
Sociedad Quimica Y Minera De Chile (SQM)/ Chile
Star Rating: 4
Economic Moat: Narrow
Share Price: $47
Fair Value: $58
Sociedad Quimica Y Minera De Chile (the Chemical and Mining Company of Chile) is one of South American’s largest companies with a market cap of over $12 billion. Among other commodity products, SQM mines lithium, which is used in the manufacture of electric vehicle batteries (SQM was featured in Morningstar’s latest Electric Vehicle Observer and 12 Stocks to Ride the EV Wave). We forecast that electric vehicles will make up 30% of cars sold globally in 2030, a 10-fold rise from the start of the decade.
“As electric vehicle penetration increases, we expect high-double-digit annual growth for global lithium demand, one of the best growth profiles among commodities,” says analyst Seth Goldstein, who says that shares in this narrow moat company are undervalued.
As well as lithium, SQM produces premium-priced fertilisers and is the world’s largest producer of iodine, which is used in X-rays and pharmaceuticals.
TIM (TIMB)/ Brasil
Star Rating: 4
Economic Moat: None
Share Price: $11
Fair Value: $15
Brazil has two undervalued stocks under Morningstar coverage and they’re both telecoms companies: Telefonica Brasil (VIV) and TIM (TIMB). TIM is majority-owned by Telecom Italia and has 51 million subscribers in Brasil - a market share of 22%. Morningstar analyst Michael Hodel expects this to increase to 30% after the planned takeover of Rio-based rival Oi, which has a dominant position in fixed-line telecoms.
TIM is investing heavily in fibre broadband, and currently has 3 million customers with super-fast internet. Still, Hodel says that the TIM’s rivals, Telefonica Brasil and Mexican telecoms giant America Movil (AMX), have the upper hand because of their fixed-line assets. This allows them to cross-sell products to existing customers: for example, a landline phone customer can take up a mobile phone or broadband contract. “We expect TIM will generate steady results in the coming years, but we believe the firm is at a disadvantage to Telefonica’s Vivo and America Movil, its primary rivals.” TIM has managed to maintain its industry position by focusing on higher-value customers and keeping costs under control.
