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FUND VIEW-First State favours China toll roads, TV makers

By Dominic Lau

HONG KONG, Aug 20 (Reuters) - Mainland consumer-driven stocks, such as toll roads and TV makers, are poised to make further gains in coming months as increasingly wealthy Chinese continue to spend, First State Investments said on Wednesday.

"The consumption story in China has a long way to go because salary in absolute terms is still very low and going up," Martin Lau, senior portfolio manager at First State Investments told Reuters. "Consumers are underleveraged or starting to leverage because credit cards and mortgages are still a rarity in China."

Lau, who helps manage $1.8 billion in assets in Asia, said China also needed to correct its large current account surplus relative to the United States, which it can do by increasing imports through domestic spending.

"The way to correct it is for Chinese consumers to spend more and for the U.S. consumers to spend relatively less, so exports might start to slow down and Chinese consumption will start to pick up," he said, after his company launched a new Hong Kong fund to invest equally in Asian dollar bonds and equities.

Among consumption-related stocks, the fund manager likes toll road operators, such as Zhejiang Expressway Co Ltd , and Chinese television makers.

"If people begin to travel more because of economic activity, traffic will continue to improve and therefore the earnings for toll roads will continue to improve," Lau said.

Zhejiang Expressway on Monday posted a net profit of 492 million yuan (US$59.4 million) in the first six months, up 10.3 percent from a year earlier.

Lau said TV maker Skyworth Digital Holdings Ltd also looked attractive because the stock was cheap.

The stock closed 3.77 percent lower at HK$1.02 on Wednesday, but it has gained more than 41 percent in the past three months.

"The TV industry went through a very bad price war over the last three years. The industry has been consolidated. The big ones, like TCL and Skyworth, have become bigger."

MORE H-SHARE RALLY

Lau also said the recent rally in H-shares , mainland companies listed in Hong Kong, still had further to run.

"Everyone is so excited about China, so everyone is rushing into China. H-shares in general are a bit overbought. Technical consolidation is possible. However, the current China rally is going to be much more sustainable than previous cycles."

He said investors were more rational and focused on companies with strong earnings growth. "It is unlike the previous cycles where any stocks with the name China on it, or Shanghai, Beijing or Nanjing etc, went up," he added.

By comparison, Lau said Hong Kong's benchmark Hang Seng Index was expected to move sideways as the territory was battered by record high unemployment and persistent deflation.

"I don't see the Hang Seng Index going much above 10,500, but at the same time, I don't think it will fall much either. The downside will be limited because of high dividend yields."

Among Hong Kong stocks, Lau favoured property developer Hang Lung Group and soy milk maker Vitasoy International Holdings because of cheap valuations.

"Vitasoy has already gone past the capex cycle. Their cash flow is be going to be very strong, which means they will increase dividend payout quite substantially," he said.

(US$=HK$7.8)