Historically the Chinese portion of the strategy has been selected quantitatively, and the Indian portion through fundamental analysis. Performance of the China portion of the strategy has been volatile and, over extended time periods, poor. The original basis of the quantitative models previously used continues to provide valuable screening ideas to the Leaders strategies. Producing in-depth fundamental research on Chinese companies should enable a higher degree of conviction for each holding to be established. The quantitative system previously employed generated a very high degree of portfolio turnover (buying and selling), which will now be avoided. Portfolio diversification requires consideration of single factor exposures in order to avoid unpleasant results. To this end, looking forwards, construction of the strategy will endeavour to combine the top down views of the Ashburton Macro Forum along with the bottom up fundamental analysis performed by the equity investment team. A detailed review of the Chinese positions resulted in most being sold. This included a substantial allocation to highly leveraged property companies. New positions were established in companies fulfilling Ashburton’s fundamental equity investment quality and valuation criteria. These included Alibaba, CK Hutchison, JD.com, Ping An, Shenzhou, Tencent, Uni President, Want Want, and Yum China. Some detail on the largest positions taken is provided below.
Alibaba – the world’s largest on-line retailer has been trying to branch out of their bread and butter business of e-commerce, with ventures into cloud computing, digital media and innovations initiatives. Cloud computing revenue, in particular has been growing at an impressive rate, although, it is off a relatively small base. Revenue growth is around 50% per annum which makes a mockery of most superficially sensible looking valuation financial models.
Tencent Holdings- most simply Tencent is China’s Facebook, Paypal, Spotify / YouTube but with their own content, plus online games. With Facebook banned from China, Tencent reigns supreme with its own social media chat apps like QQ and Weixin (WeChat); while Facebook leads in the rest of the world. The firm has grown to become an investment holding company providing internet and mobile value-added services, games, online advertising and e-commerce. New ventures are being developed and acquired as the firm evolves from social media giant consumer internet business to an “industrial internet player” including relationships with financial services companies. The firm has a market share of over 62% in Chinese online PC games and 47% share in smartphone games. The social media platforms dominant China, QQ and Weixin have close to 1.1bn users combined. Continuing to monetise the user base, while ensuring a high level of engagement, should help ensure a continued level of high growth.
Shenzhou International is a global leader in knitwear manufacturing supplying quality branded products to Nike, Puma, Adidas and Uniqlo. The company is expected to grow earnings at around 20% per annum as a result of their strong market positioning, innovation, and the consumers move to casual sportswear and healthier lifestyles. Buyers are also looking to consolidate suppliers which should work in Shenzhou’s favour as a result of their ability to produce large volumes. This provides a natural barrier to entry to this market.
CK Hutchison Holdings Limited is a quality well diversified conglomerate with operations spanning infrastructure, a mobile phone network “Three”, hydrocarbon exposure though a listed Canadian entity and leading positions in ports and health and beauty retail (Watsons and Superdrug).
The Chindia strategy returned 5.5% in October. This was above the returns generated by the Chinese equity index (+4.0%), the Indian equity index (+3.8%) and wider Emerging Markets (+4.2%). It’s too early to consider this a success and there is much more work to be done. A thorough review of the Indian holdings is underway. Initial signs are encouraging and we do not anticipate such wholesale changes will be required.
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