- ‘Pearls don’t just lie on the shoreline; you must dive in ocean to find them’ – Chinese proverb
Janus Henderson Investors today launches Signals and Smokescreens the first of an eight-part educational series on China investing. Based on extensive research, overseen by Mike Kerley, Director of Pan-Asian Equities, and Tim Clissold, China expert and author, the series provides a snapshot of how China’s growth story has shaped corporate governance structures and created specific, often misunderstood, risks for investors.
Due-diligence on China stocks has never been more important following the recent inclusion of Chinese domestic ‘A-shares’ in the MSCI Emerging Market and Asia Pacific indices. While many China stocks have performed extremely well in the last decade, there have been a number of high profile failures, often due to governance issues. For global investors, viewing opportunities within the unique context of China is essential.
For the study, Janus Henderson used its decades of investment experience in Chinese and Asian equities to analyse companies that have undergone periods of intense financial stress. Based on whether the stock price collapsed or survived, it has identified a set of pre-existing signals and common characteristics – “red flags” and “green flags” – that can help identify China-specific risks going forward and/or the potential for a company to weather a storm.
Mike Kerley, Director of Pan-Asian Equities and Portfolio Manager said, “There are pearls to be found in China, but it requires diligent analysis. China’s entrance onto the world investment stage has been dramatic and its importance will only grow in the years ahead. However, there are significant differences in how companies in China are run compared to the rest of the world, including: board structures, corporate governance; and how the relationship between management and individual investors works. By sharing our knowledge, we hope global investors’ will gain a better understanding of the specifics of Chinese corporate culture and an insight into risk beyond the numbers.”
Tim Clissold, China expert and businessman, added, “The business environment in China is still young and this has consequences. High growth entrepreneurial companies are often still led by the founder, who by their nature, are incredibly focused, driven, and independent risk takers. This tends to be coupled with relatively weak governance. With the tradition of strong boards and external audits still fairly new, and the regulatory framework also in its infancy compared to the US, there are exciting opportunities but equally significant risks that it is essential for investors to understand.”
The study will be released as a series of modules and include insight from Janus Henderson’s Asian equity investment managers. The first module ‘Financial Ratios’, looks at the importance of contextualising and cross-checking company financial statements in order to determine their veracity, given the high-growth nature of China’s emerging market. The second module ‘Board Oversight’, explores consistent key indicators that can help investors assess the real intentions of a company’s controlling shareholders.
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Notes to editors
The Chinese growth story at a glance:
- 2228% rise in market capitalisation of the MSCI China since 2000*
- Chinese economy – larger than the US (in purchasing power parity terms)
- Alibaba (Chinese internet stock) – largest IPO in history in 2014
- US$40bn losses from China-based reverse takeover frauds in 2011
- 200+ Chinese A share companies to join MSCI EM Index in June 2018
*Source: Bloomberg, 1/1/2000 to 31/12/2017 in US$ terms
The purpose of the study is to share knowledge and help global investors gain a better understanding of risk and corporate culture in China. The complex and unique structure of Chinese businesses can make understanding the associated risks a difficult task.
Building on Janus Henderson’s decades of experience investing in Chinese equities, the study has conducted case study analyses on over 50 Chinese companies with securities listed on the global stock markets, particularly NASDAQ and the Hong Kong Stock Exchange. We looked at companies that endured periods of intense financial stress, such as during a short attack. We then examined publically disclosed information available prior to that short attack and identified characteristics of each company’s corporate governance that appeared to determine the eventual outcome. Where the short attack resulted in substantial destruction of shareholder value, we identified a series of commonly re-occurring indicators of risk or ‘red flags’. Where the share price weathered the storm and the company went on to prosper, we identified a series of positive attributes, or ‘green flags’. Certain patterns emerged from the data; we hope that by sharing the results of our work, we will help investors to feel more confident about their own conclusions on the risks of any particular Chinese stock. We think that the flags described in the study should be considered holistically and we aim only to paint a more nuanced picture of the interplay of the various factors that contribute to the state of a particular company’s governance. We do not assert any causal link between flags and outcomes; as such an approach would be overly simplistic given the intricacies of the Chinese economy and governance structure. Instead, we will explore areas of governance that we have found to be prone to greater risk in China; for each of these areas, we will pose key questions investors should consider when analysing a particular opportunity.
Mike Kerley, Director of Pan-Asian Equities | Portfolio Manager
Mike Kerley is Director of Pan-Asian Equities and a Portfolio Manager at Janus Henderson Investors. He has managed Pacific equities since joining Henderson in 2004. Mike has been managing investment trusts at Henderson since 2007 and is co-manager of the Janus Henderson Asian Dividend Income strategy.
Previously, he worked as a Fund Manager at Invesco Asset Management for 18 years. He has 33 years of financial industry experience and has managed money in the Asia-Pacific region since 1993.
Tim Clissold, report co-author and businessman
Tim Clissold is the author of ‘Mr China’ and ‘Chinese Rules’. Tim first went to China in 1987 and in 1992 co-founded one of the first private equity groups in China. He later ran Goldman Sachs’ China distressed investment business in Beijing. In between writing, he is involved in dispute resolution projects where he negotiates settlements in cases where serious disagreements have arisen between Chinese businesses and foreign investors.
About Janus Henderson Investors
Janus Henderson is a leading global active asset manager dedicated to helping investors achieve long-term financial goals through a broad range of investment solutions, including equities, quantitative equities, fixed income, multi-asset and alternative asset class strategies.
Janus Henderson has approximately US$371.9 billion in assets under management (as of 31 March 2018), more than 2,000 employees and offices in 27 cities worldwide. Headquartered in London, we are an independent asset manager that is dual-listed on the New York Stock Exchange (NYSE) and the Australian Securities Exchange (ASX).