What’s driving investor interest in the maturing Chinese bull market?

19/06/2017

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Charlie Awdry, China equities manager, shares his team’s findings from a recent research trip to China. He explains the reasons for upbeat sentiment surrounding the region and analyses the implications of recent developments as the bull market matures.
 
Stronger-than-expected business confidence and activity levels  
Well, when we were in China we found a lot of confidence at the corporate level. Unsurprisingly, given the upswing in the economy and the profit growth reported by these companies, we’re seeing what we expected in the service sector, which is robust growth, good cash flows and confident outlooks, but we also found in more manufacturing and industrial sectors a lot of companies working at, frankly, pretty high utilisation rates. And I think, frankly, they may see some weakness over the summer. That’s typical. And we’ve seen some tightening in the monetary environment in China which may feed through into that activity level.
 
Solid recovery in Macau gaming sector
I think it’s worth pointing out two specific areas related to the service economy and Chinese consumers that are proving stronger than people expected, and I think are newsworthy. The first one is the Macau economy. The Macau economy is obviously focused very much on casinos and gambling. It is the one area in China where gambling is allowed, and the Western or Las Vegas operators are operating in Macau.
 
The cycle there is really recovering more strongly than people expected. We have a continuous growth of mass gaming driven really by tourism and visitation, but on top of that you have a credit-driven gaming economy driven by what’s called junkets bringing in high end spenders, high end gamblers who use credit, and that part of the Macau economy is doing better than people think.
 
So we saw a number of operators who were bullish and positive on the outlook there. We think the data is tracking better than people’s expectations and we’ve added to our existing exposure in the fund, and that remains a very interesting and cash generative part of the consumer economy and the portfolio.
 
Impressive Alibaba revenue growth forecast
The other stock of interest that’s hit the headlines just recently is Alibaba, currently one of the largest holdings in the portfolio. They guided up for revenue growth for their next financial year at an investor day in Hangzhou from what consensus was sitting at about 35% year on year growth, and they shocked the market really with a number of plus 45% to 49%. Now, that in itself for revenue growth for a large company is very high, but when you consider that their revenue last year was US$23 billion, that growth number is even more impressive.
 
This is not just gross merchandise value going through their websites, but how they monetise it. They’re making great strides in how they use the data accumulated by people’s purchases to drive a better product for the merchants and to drive advertising expenditure. So it’s not just the cycle of the economy, it’s actually the company performing better than people expected. 
 
A maturing bull market
So some good news on the service and consumer front. Turning to the fund and to the markets, it’s interesting to see that we continuously see typical steps for a bull market. The latest to occur is the first what I would call genuinely hot IPO. That is an IPO of a quality company that is heavily oversubscribed both by institutionals and retail investors in Hong Kong, closes early, and in this case popped by 37% on the first day.
 
Rising investor interest in Chinese equities
We’ve also seen a number of secondary market placements coming through, and these have been taken pretty well by the market. So what we see is, you know, frankly, typical stages in a maturing bull market in China, and I think we’re also seeing more engagement from clients and investors in the asset class which bodes well I think because China has really been out of the limelight for a long time, and it’s only now that people are willing to look past some of the macroeconomic issues that we’ve been talking about for a long time and see that, actually, at the company level there’s lots of good news.
 
 
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