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Asian stock markets may have had a weak year, but excessive cash in the region’s companies is a hidden opportunity for investors, according to Jefferies. “This year is turning out to be another disappointment for [the MSCI Asia-Pacific ex-Japan index]. While MSCI HK/China have underperformed, not a single Asian market has outperformed S & P 500 in US-dollar terms,” the investment bank’s analysts wrote in a Nov. 15 research note titled “APxJ Quant: Hidden Value in Ex-Cash PE.” “Excessive cash,” they added, is keeping price-to-earnings ratio higher. “When a company hoards cash on its balance sheet, its PE valuations look lot more expensive than what it should be, without the excess cash,” the analysts wrote. They added cash is a relatively “risk-less” asset, with limited impact on earnings but still adding to price. The P/E ratio is a company’s share price divided by its earnings per share — in general, a high number could mean a stock is overvalued, whereas a low number could indicate it is undervalued. Asian ex-cash P/E is just 9.1 times, indicating “significant value,” Jefferies’ analysts noted. The region’s stocks are also “appealing from the shareholder return perspective,” given stronger prospects of buybacks backed by free cash flows and high cash balances, they wrote. Jefferies screened for Asian companies with “significant ex-cash value and strong fundamentals,” and which it said make “good candidates” for buybacks and dividends. It used the following criteria, among others: Asia-Pacific ex-Japan firms with a market capitalization of more than $2 billion. Ex-cash price-to-earnings ratio of less than 10 times. High free cash-flow (FCF) yield of over 4%. Chinese players Chinese internet tech giants Alibaba , Baidu and JD.com appeared on the screen. Other Chinese companies that showed up on the screen include telecommunications firm China Communications Services , Qingdao Port International , natural gas company KunLun Energy and e-commerce player Vipshop Holdings . “China by far has the best FCF cover in Asia along with a high net cash proportion of companies, indicating significant potential to boost shareholder returns. Indeed, with the pace of growth slowing for the sector and valuations at multi-year low, it makes an easy case for the FCF to be used for buybacks (and to increase dividends),” the analysts wrote. Beyond the mainland, Taiwan’s Foxconn Technology , the main assembler of Apple’s iPhones, also showed up. South Korea, Australia, Singapore South Korean automaker Kia and car parts manufacturer Hyundai Mobis as well as food and health-care company Orion Corp turned up on the screen. Other Asian stocks that made Jefferies’ list include Singapore’s transport company ComfortDelGro and Indian oil and gas company Petronet . — CNBC’s Michael Bloom contributed to this report.
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