I recently spent five days in China with the renowned fund manager Anthony Bolton. We went to three major cities, Hong Kong, Beijing and Shanghai, visiting 18 companies most of which he owns in his Fidelity China Special Situations Trust. It was a most insightful trip, which highlighted both the opportunities and the risks of investing in China.
Mr Bolton’s approach is precisely the same as it was at launch just over two years ago. He wants to own unloved, undervalued companies whose true potential is not widely recognised by the market. This has been his strategy throughout his career, most of which has been highly successful. His particular focus is on companies benefiting from domestic consumption in China, a part of the economy the government is keen to stimulate.
China’s story for the past 30 years has been its growing exports, but the authorities now recognise a need to rebalance; especially now wages are rising making low-cost manufacturing less competitive. Encouraging the frugal Chinese to spend rather than save will take time, although improvements to healthcare and social security are gradually taking effect.
Clearly this is an exciting trend for investors. Yet it is also a long-term one, and China is experiencing growing pains. Last year was a bad one for Hong Kong and China shares, with the market sharply down. It has been a strong tide for Anthony Bolton to swim against, especially with gearing in the fund of around 25 per cent, which exaggerates market movements, both up and down. To compound matters, small and medium sized companies, which make up much of the portfolio, were particularly badly hit.
Turning to some of the companies we visited, Anthony Bolton’s largest position is Ping An, the second largest insurance company in China. The shares underperformed last year as its life insurance division was hurt by weak equity markets. It employs 12,000 people in Shanghai and has the largest telemarketing operation in the world, with one million calls a day. It insures 32 million vehicles, yet there are still only just over 100 million cars in China against a population of 1.34bn, so the potential for the company is enormous.
I met many entrepreneurs on the trip, such as Zhang Xin, the CEO of the commercial property company SOHO China, and one example of the many women in Chinese business with very senior roles. Property development is, of course, an area the Western press suggests is dead in the water. Yet all her buildings are fully occupied and rents rose by 50 per cent last year. Indeed, she said the market for offices was the best she had ever known. Ms Zhang did admit that retail property such as shopping malls is a much tougher area as consumer spending, while growing strongly, has not been enough to utilise the supply of retail space. SOHO trades at a 45 per cent discount to its net asset value, suggesting that sentiment could be a major factor in determining share prices presently.
Another company we visited was National Natural Beauty, whose objective is to become the leading national beauty chain in China. It has a five-year plan of shop roll-outs, and the one I visited in Shanghai would not have been out of place in Bond Street – and nor would the prices!
The company has no borrowings, is cash rich and yields 6 per cent with a policy of dividend growth. Profits surged by 275 per cent last year to HK$115m (£9.2m), and the company looks perfectly positioned to harness the rise of the Chinese middle class.
Interestingly, many companies like this are under-researched, mainly because you have to go into China to find them. International funds tend to buy only the big, well-known companies, so they potentially miss the most exciting opportunities. Anthony Bolton is, however, determined to uncover the best of them.
While the story on the ground looks exciting, the economic background ismore threatening. Money supply is contracting alongside industrial output. The authorities reacted last week by cutting bank reserve requirements, freeing up more capital to lend, but making the transition from an export-based economy to a domestic one is not going to be easy. Let’s hope the Chinese manage it. Otherwise attention could rapidly shift from the eurozone to Asia, with consequences for all markets.
Mark Dampier is head of research at Hargreaves Lansdown, the asset manager, financial adviser and stockbroker. He spent five days in China as a guest of Fidelity. For more details about the funds included in this column, visit www.hl.co.uk