Premium China Funds Management’s Jonathan Wu shares the findings of a recent study tour to China and his belief that, notwithstanding some challenges, the country will remain a major driver of global growth.
My recent visit to China has confirmed the old saying that you don’t know China unless you’ve been there.
To see the buzz, the excitement of people in a fast-growing economy was encouraging, confirming that China will definitely maintain its contribution to global growth in the years ahead.
The focus of the tour was on companies representing a range of industries in order to give us an insight into how business is done there, what the current conditions are, and what opportunities exist in the short and medium term.
One of the first companies we visited was Lenovo. As many may know, Lenovo is now the largest distributor of computers in the world, surpassing Hewlett Packard in the third quarter of 2012.
This is a key point to note, as Lenovo only acquired IBM Personal Computing in 2005.
From an innovation perspective, we got to see first-hand the latest tech and gadgetry including an all-in-one PC where the screen can be laid flat down to allow multiple people to interact at the same time.
From there we turned to the motor vehicle industry in the shape of Zhengtong Auto Services, which has a business model of taking franchises in BMW, Mercedes, Jaguar and the like and then setting up showrooms selling cars, just like any other dealer.
The major difference is that its largest profit centre doesn’t come from selling cars but from after-sales service which, according to the company’s presentation, attracts profit margins of more than 25 per cent.
The company noted that Chinese car ownership is expected to grow from 100 million in 2011 to 200 million by 2016.
Current levels of car ownership in China are very low, sitting at around 15 cars per 100 households compared to the US or Australian figure of over 80 per 100.
Even with the recent Chinese Government restrictions on the number of new cars permitted to enter road networks in Beijing, people who can afford the licences will be focused on buying premium brands.
One of the areas most riddled with misconceptions for investors looking at China has to be the property market.
With so much talk about property bubbles in China, we decided to visit a development to take a first-hand look at the situation.
China Resources Land is one of the largest developers in the country and is currently developing prime land called Oak Bay in Central Beijing.
This development is certainly on a massive scale. It began the development in 2006 with prices around 7,000 RMB per square metre (A$1,093).
With Stage 4 completed in 2012, it is selling those same apartments at a rate of 35,000RMB per square metre (A$5,468AUD).
By the end of Stage 5, the whole development will house 70,000 people. In a simple five-year time period, prices have grown five-fold, but the key point to take away is that they are already sold out.
Now, being sold out during the US housing bubble-burst was worrying because people were using borrowed funds – but in China restrictions have been extremely tough, with down payments of 50 per cent required on most property transactions.
An observation that occurred to the group during the visit was – “where are the marketing brochures?”.
The answer was that none were needed, because each stage sold out very quickly. With a burgeoning middle class wanting to upgrade their living standards, properties like those in Oak Bay are being snapped up very quickly.
Arriving into Shanghai, we all took part in a half-day lecture-style conference where analysts briefed us about different areas of the Chinese economy.
The managing director of Macquarie Securities in Hong Kong discussed the Chinese banking system, pointing out that in stark contrast to the world’s developed nations its banking system has remarkable growth potential – but that the market was treating it very harshly in terms of price-to-earning ratios of 4-5x 2012 earnings, combined with a dividend yield of anywhere between 5-7 per cent.
Ultimately, seeing is believing. No one can claim that they understand China unless they have at least been there. From a personal learning-experience viewpoint, it is always invaluable to visit the companies you directly invest in.
Jonathan Wu is associate director – head of distribution and operations at Premium China Funds Management.
