Dale Nicholls reflects on 3 years in charge of the trust, the key drivers of performance and outlines how the trust is positioned to capitalise on the changing spending habits of China’s fast-growing middle class. Dale also explains that reforms in state-owned enterprises (SOE’s) have the potential to improve company’s returns and outlines how he is taking advantage of the growth in entrepreneurial activity occurring in China via unlisted stocks.
Transcript of Dale Nicholls video interview below:
Three years in charge – both good numbers versus the benchmark and in absolute terms. When you reflect on the three years, what are the highlights and what’s driven that performance?
The drivers have been the stocks – particularly in the two big sectors I own in the trust. Consumption continues to be a big part of the trust. Specific names in that consumption or consumer discretionary category have clearly been a big driver, as have some names in the technology sector and IT – the internet related names, e-commerce etc. Within that, it’s probably worth highlighting some unlisted names, particularly Alibaba which was a key contributor over the period as well.
So consumption and IT have been the key drivers behind the trust’s positioning and performance. Looking forwards, for the next three years, do you see that changing?
I don’t really. I think the consumption story in China is really the key theme over the next five to ten years, and this is really just natural development of the middle class – that will continue to grow. It’s aligned with the government’s goals of trying to bring about that shift away from reliance on investment and exports towards consumption, and I think a lot of government policies will support that general trend. Likewise in the IT space we continue to see strong numbers in areas like e-commerce despite the fact that we’ve seen penetration rates already above those in the west. The numbers that we see coming through in terms of GMV (Gross Merchandise Value) growth continue to be very strong. Those core trends are likely to continue.
If there is one thing I would highlight that will be different, I am hoping we will see more reform on the SOE (State Owned Enterprise) front. Obviously the core of the portfolio is still private companies, but I do have some holdings in SOEs and I’m hoping that if we see reform there may be some potential to improve the returns on those companies, and hopefully that will be reflected in the stocks moving forwards.
You mentioned earlier, Alibaba, and the success of holding it as an unlisted going through to its IPO. Let’s talk about unlisted companies in the trust today. The Board now allows you to hold up to 10% in unlisted companies. I know you’ve added recently...
The trust has three holdings. Firstly Didi Chuxing, the Uber of China, and I think with their acquisition of Uber last year, they are positioned very well to just really dominate in that area. The second one is Meituan who are the leader in China in so-called offline-to-online services. The best way to understand that is they are trying to be like Alibaba but in the services sector in areas like food delivery etc. Then, the most recent addition is a company called Yigou that is again supported by Alibaba, but they are focused on fresh food, groceries and that sort of thing. They’re already by far the biggest player in that market with a very strong lead, and they will be very hard to catch which can really contribute as well. I would say in general there are just a lot of opportunities in China now in the unlisted space. We are likely to be looking at other things in that area as well.
So they’re some of the good stories... But when people think about China, they often think about risks. What are your thoughts on some of the key risks going forwards?
I still think the biggest risk is the build-up in debt that we’ve had post-2008. There has been significant investment, but a lot of that has been debt driven so there has been a significant increase in debt levels. We’re seeing that come through in rising non-performing loans at the banks and I think we’re likely to see that continue. We’re seeing the banks provision for it, but I think the process is going to take some time. That is probably the key risk and indeed, it’s the reason why I don’t own any Chinese banks in the portfolio currently.
You tend to focus on small and mid-cap companies in China. What’s your view on this space and why do you focus on that part of the market?
The biggest reason is, generally, as companies are smaller they’re less well-known by the market so there is more mispricing. Obviously I’m always looking for mispriced stocks. The more mispriced they are, the more potential upside. It also really allows us to leverage the team we have on the ground which is significant across the team in Shanghai and the team in Hong Kong who are constantly out there looking for new ideas. I think there are ideas which haven’t really been discovered or are not so well understood by the market. That’s the basic reason. A lot of them as well, as a result of being smaller, are just growing faster – so there is a lot of opportunity in small and mid-caps.
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