Bank of America picks Asia-Pacific stocks to sell partly because of high revenue exposure to China
Bank of America's Asia stocks team has not recommended buying China stocks since November 2020. Now with the resurgence of Covid controls, the analysts have screened for stocks outside the country that are vulnerable to a China slowdown. "China is the growth engine of the Asia Pacific region, with 125+ companies under BofA APAC coverage deriving more than 10% of their revenues from China," equity strategist Ritesh Samadhiya and a team said in a recent report. "The pullback in economic activity, partly due to lockdown-induced access restrictions, are expected to result in demand moderation for a variety of sectors," they said, pointing to products ranging from Taiwan and Japanese parts suppliers to Australian infant formula. Since March, mainland China has faced its worst Covid-19 outbreak since the early days of the pandemic in 2020. Economic centers across the country have restricted travel and ordered people to stay home, limiting the ability of factories to produce and transport parts among suppliers. The southeastern metropolis of Shanghai, home to the world's busiest port, is among the hardest hit, with stay-home orders lasting in many areas for more than a month. With that drag on China's growth, here are the Bank of America analysts' least-liked Asia-Pacific stocks: The companies come from a list of 31 stocks within the analysts' coverage that have a market capitalization of more than $15 billion and generate more than 10% of their revenue from China. The three names below are all rated "underperform" — or least attractive in the group of stocks covered. Fortescue Metals Australian materials company Fortescue Metals primarily mines iron ore for export to China, as well as Japan and South Korea, according to its website. Steel is made from iron ore. The company generates 89.7% of its revenue from China, according to the BofA report — the largest exposure to China among the stocks listed. "Restrictions relating to COVID-19 have impacted logistics and steel demand," Fortescue said in a release about the quarter ended in March, noting a drop of 10.5% in Chinese crude steel production from a year ago. The company said it expects policy in China will support steel demand and production for the full year. In the latest quarter, Fortescue said its iron ore shipments rose 10% from the year-ago period, contributing to record-high shipment volume for the nine months ended in March. Mitsubishi Electric Japanese company Mitsubishi Electric 's earnings are driven by factory automation systems and air conditioners, the BofA analysts said. They estimate the company generates about 11.5% of its revenue from China, and a slowdown in growth in the country would drag down demand for those two product categories. The analysts estimate that China accounts for 10% of Mitsubishi Electric's air conditioner sales, and more than 40% of factory automation system sales, when including products sold to companies in Japan and ultimately used in China. Petronas Chemicals The third and final underperform-rated company on the BofA stock list is Malaysian materials company Petronas Chemicals . About 18.5% of the company's revenue comes from China, the report said. In 2021, Petronas reported a 60% increase in revenue to 23.03 billion Malaysian ringgits ($5.27 billion). The cost of revenue during that period rose by 33% to 14.45 billion ringgits. — CNBC's Michael Bloom contributed to this report.

Bank of America's Asia stocks team expects companies in the region to see demand drop as Covid controls drag on China's economy Tian Yuhao | China News Service | Getty Images