25th January 2016
David Raper, manager of the Comgest Growth Greater China fund believes the negatively over the country has been overdone, he explains why…
The consensus view on China is resolutely negative, with skepticism driven by the slowdown in growth in the country’s manufacturing and exports, ballooning debt levels, underperforming state owned enterprises and high valuations of small pockets of the Chinese equity market.
This negativity was crystallised in the large China sell-off in summer 2015, as well as the difficult start to 2016. While many of these concerns are valid, they only tell one side of the story. There should be a distinction made between the two sides of China: the ’OLD’ China and the ‘NEW’ China.
The ‘OLD’ China is dominated by manufacturing and infrastructure industries, which have been the basis for China’s past success in the export markets and the strength of its infrastructure. The ‘OLD’ China has struggled with the slowdown of global trade and the transition of the Chinese economy. Capacity has to be reduced and productivity needs to be raised for these areas to recover.
The ‘NEW’ China, on the other hand, hosts a range of companies, for example in the internet, insurance or gaming space, with high margins, strong capital returns, cash rich balance sheets and good growth prospects.
In our view, the ‘NEW’ China offers valuable investment opportunities over the next stage of China’s development.
NetEase, an online gaming and advertising company, is a stock we are invested in that has demonstrated sustained growth over more than a decade. It has very sound cash fundamentals and was extremely successful in shifting its gaming software franchise from desktop computers to mobile computing, which now accounts for more than 50% of its gaming revenues.
We are confident that the ‘NEW’ China will continue to grow and become a more dominant part of the country’s economy. Penetration rates for many consumer goods and services are still rising.
At the same time the sophistication of the consumer has made huge steps forward and the internet continues to revolutionise the sector.
One can look at Parkson Retail or Golden Eagle to realize that department stores struggle to stay relevant. Stock picking skills remain important and it is not good enough to just buy companies exposed to the Chinese consumer.
An area of expansion in China is life and health insurance services, which should prove an effective vehicle for Chinese citizens in which to save, as the state pension system is insufficient and ‘out of pocket’ healthcare spending remains elevated.
The sector provides more profitability and higher capital returns compared to developed market peers, and regulation is favorable, especially in China. Stock picks in the sector, such as China Life, provide a number of compelling propositions for investors.
We are aware that the magnitude of the transition currently under way in China can lead to bumps in the road, but we believe that these changes offer a wealth of stock picking opportunities, and should help us to remain comparatively insulated from possible shocks in the economic trajectory while benefiting from its long-term growth drivers.