“You must never forget that the unification of Germany is more important than the development of the European Union, that the fall of the Soviet Union is more important than the unification of Germany, and that the rise of India and China is more important than the fall of the Soviet Union.” Henry Kissinger
Our fundamental approach to investing is a long-term strategy based on the most significant changes in the global economy. Although “technology may be the next macro”, we still believe looking forward to 2030, that India and China will constitute the biggest opportunity to invest in growing populations and rising incomes in Asia, (and we cannot find any parallels in Europe, North America, or the other nations of the emerging world). That is why Lloyd George Management is this month completing its range of three funds with the launch of “China New Era Fund” for international investors. Our objective is to invest in technology, consumer, and medical companies in China, many of which are smaller capitalisation shares listed as A Shares in Shenzhen as well as Shanghai.
The headline news at the end of February is that China is going to abolish term limits for the presidency which effectively means that Xi Jinping can continue to be the President for life. This news has been greeted in different ways by the Chinese and Hong Kong press (who essentially support the national effort to clean up corruption and strengthen the country which has been President Xi’s hallmark policy), and the foreign press which is criticizing the emergence of a Putin-like dictatorship. From an investment angle we do not see any significant impact, although it is interesting that the market’s first reaction in Hong Kong and China was to strengthen. At the same time there have been further crackdowns on the most aggressive private Chinese companies making foreign purchases such as Anbang, which bought the Waldorf Astoria in New York, and whose chairman has now been arrested, and HNA, whose shares have been suspended. On the other hand, we see the example of Geely, whose chairman is closely related to the President, and who has personally just spent US$9 billion buying a 10% stake in Daimler. The company already owns Volvo and this has caused some reaction in Europe where Volvo and Mercedes are keen rivals.
There is no doubt that China’s ambitions, both military, strategic, and economic, encompass nearly all regions of the world, particularly those in the ‘One-Belt-One-Road’ strategy of Central, South and South East Asia, and even as far as Africa and the Piraeus in Greece. But the imperative perhaps today, is in the field of technology. China is forging ahead in Artificial Intelligence, as well as in solar power, electric vehicles and other key strategic areas, in which, under Trump’s administration, the USA is beginning to retreat from leadership. If we therefore take a neutral view on political developments, we can see that there will be great opportunities in the area of technology in China.
Another key area is biotechnology, or the field of Biosimilars, in which Amgen and Biogen have lead in the US. There are a number of Chinese companies in this field and the one which our China analyst team has selected is Wuxi Biologics. We selected this company because we are convinced that with rapid investment in R&D for biologics, Wuxi is the number one contract development, and manufacturing, organization in China, with a 48% market share. Wuxi has 92 projects in preclinical development, and has had a 100% customer retention rate since 2010. The US FDA has recently completed its inspection of Wuxi’s facility for the commercial manufacturing of Ibalizumab for launch in the US. This is the latest stage molecule in Wuxi’s pipeline. If this molecule approved, it will be the first-China-manufactured biologic to be marketed in the US.
We also made an interesting visit last month to New Delhi, during which we were reassured that there would be continuity in BJP policies of opening up and anti-corruption, even after Prime Minister Modi. Although we have made a significant investment in private banks and financial groups such as Gruh Finance, HDFC Bank, HDFC Standard Life, ICICI, Oracle Financial and Yes Bank, we have recently decided to exit our investment in the mortgage lending company, Repco Home Finance. This company operates in the state of Tamil Nadu, where there have been contradictory and surprising policy changes from the state authorities regarding building permits, cement production and mortgage lending, which will in our view restrict the potential growth of Repco. We are always conscious of local conditions and regulations as they affect the value of our investments.
Although we have been cautious on the Indian real estate market generally, because of the lack of transparency, one exception is the long established Bombay group, Godrej Properties, which has a large land bank and is managed to the highest standards of corporate governance. We have also added a remarkable retail group named Vmart, whose CEO and senior management we met in Delhi last month. We are very impressed by their commitment to financial discipline. In the Indian Ocean Fund, we have reduced our exposure in both Bangladesh and Sri Lanka, and trimmed Vietnam, because of our desire to increase the focus on Indian mid-caps.
In the Bamboo Fund, our focus continues to be mainly on China and Hong Kong, which are almost 45% of the Fund. Our Chinese shares have returned over 30% per annum over the last 3 years since we launched, and this gives us the confidence in our selection of 36 key names, half of them A shares, which we will include in our China New Era Fund beginning in early April. This will be a combination of healthcare, technology, consumer, financials and some exposure to the booming travel business in China such as Travelsky and Shenzhen Airport. Our belief is that the A-Share market will benefit from the stable Renminbi, tighter controls of Chinese capital flowing overseas and a cooling property market. This means that the A-Share market at 14x PE, or about half of the S&P 500, presents a compelling alternative for the very large amount of Chinese private savings.
In Hong Kong we also see some recovery in the traditional defensive high yield stocks such as HSBC, Hang Seng Bank, China Light and Power and the large property groups such as SHK Properties, which now appear to benefit from the loosening up of the government policy on property development in the New Territories. There are plans to build about 500,000 new apartments over the next decade to counter the present elevated prices for the younger generation, and balance the supply and demand.
Hong Kong also appears to benefit from the steady and growing inflow of Mainland capital through the Shanghai-Hong Kong connect, which favours some of these undervalued Hong Kong blue chips.
In a meeting with HSBC senior management this week, we learned that 77% of profit is now coming from Asia, mainly Hong Kong and Southern China. In addition to this “back to their roots” pivot to Asia, HSBC is benefitting from rising interest rates, growing trade finance, and the end to a decade of heavy compliance and fines.
Robert Lloyd George
2 March 2018