Unique and Attractive China A-Shares Market for Global Investors

Transcription

1 Unique and Attractive China A-Shares Market for Global Investors Vivian Lin Thurston, CFA, Partner, Portfolio Manager William Blair Investment Management, LLC

2 Important Disclosures This content is for informational and educational purposes only and not intended as investment advice or a recommendation to buy or sell any security. Investment advice and recommendations can be provided only after careful consideration of an investor s objectives, guidelines, and restrictions. The views and opinions expressed herein are those of the speaker as of the date of publication, are subject to change without notice as economic and market conditions dictate, and may not reflect the views and opinions of other investment teams within William Blair. Factual information has been obtained from sources we believe to be reliable, but its accuracy, completeness or interpretation cannot be guaranteed. Any discussion of particular topics is not meant to be comprehensive and may be subject to change. This material may include forecasts, estimates, outlooks, projections and other forward-looking statements. Due to a variety of factors, actual events may differ significantly from those presented. Past performance is not indicative of future results. Charts or graphs referenced herein are provided for illustrative purposes only, are not indicative of the past or future performance of any William Blair product or strategy, and should not be considered investment advice or a recommendation by William Blair of any particular security, strategy, or investment product. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly. Investing involves risks, including the possible loss of principal. Equity securities may decline in value due to both real and perceived general market, economic, and industry conditions. Investing in foreign denominated and/or domiciled securities may involve heightened risk due to currency fluctuations, and economic and political risks, which may be enhanced in emerging markets. The securities of emerging market companies may be subject to greater volatility and less liquidity than companies in more developed markets. Concentration in a single region or country may increase these risks. Any investment or strategy mentioned herein may not be suitable for every investor. References to specific securities and their issuers are for illustrative purposes only. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable. Cash return on capital invested (CROCI) is a measure of valuation that compares a company's cash return to its equity. Compound annual growth rate (CAGR) is a measure that provides a smoothed growth rate over a specified time period. Correlation measures the degree to which two investments move in relation to each other. Return on equity (ROE) is net income divided by shareholder's equity and is used as a measure of profitability. Sharpe ratio is a risk-adjusted measure calculated using standard deviation and excess return to determine reward per unit of risk. Standard deviation is a statistical measurement of variations from the average. Standard deviation is often used to measure risk, when risk is defined in terms of volatility. State-owned enterprises (SOEs) are companies owned by a government. Copyright 2018 William Blair. William Blair is a registered trademark of William Blair & Company, L.L.C. William Blair refers to William Blair Investment Management, LLC.

3 Contents I. An Attractive Asset Class for Global Investors Favorable market characteristics Rich opportunity set for active management with a quality growth focus Improved market accessibility and regulation II. III. Attractive valuation Attractive Investment Opportunities in the New Economy of China Investible theme #1 Rising middle class and growing domestic consumption Investible theme #2 Innovation and technology led growth Investible theme #3 Secular growth of healthcare spending Risk Factors Trading Suspension Market Volatility

4 An Attractive Asset Class for Global Investors

5 An Impressive China Growth Story x Per Capita GDP Changes in (in current USD) China per capita GDP measured in current USD has risen 28 times in the past three decades, the highest among the top 70 economies in the world x Key Emerging Countries 3.2x 3.1x 2.9x Key Developed Countries 2.0x 2.5x 2.1x 2.0x 1.8x 1.5x - China ($8,827) India ($1,940) Brazil ($9,821) Russia ($10,743) Mexico ($8,903) South Africa ($6,161) US ($59,532) UK ($39,720) Germany ($44,470) France ($38,477) Japan ($38,428) Data as of September Source: Bloomberg.

6 The Largest Equity Market Just Behind the US USD trn ,500 listed companies A-Shares market = $7.5 trillion SZ SH World s Largest Stock Exchanges Market Capitalizations NYSE NASDAQ Shanghai/Shenzhen Japan Euronext Hong Kong London Deutsche Korea Taiwan Singapore Market Cap # of Listed Companies (RHS) Data as of May Source: Goldman Sachs, WFE.

7 Highest Liquidity Among Major Equity Markets in the World USD bn 70 Average Daily Value Traded SZ SH 0 Shanghai/Shenzhen NYSE NASDAQ Japan London Euronext Korea Hong Kong Deutsche Taiwan Singapore Data as of May Source: Goldman Sachs, WFE.

8 A Continued Fast Growing Market The Growth of China s Private Enterprises Total number of Chinese listed companies both onshore and offshore exchanges Onshore SOEs HK SOEs Onshore private firms HK private firms Overseas listings Data as of May Source: Gavekal.

9 Attractive Historical Performance Albeit High Volatility 800 A-Shares Outperformance Since Dec-04 May-05 Oct-05 Mar-06 Aug-06 Jan-07 Jun-07 Nov-07 Apr-08 Sep-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 Apr-13 Sep-13 Feb-14 Jul-14 Dec-14 May-15 Oct-15 Mar-16 Aug-16 Jan-17 Jun-17 Nov-17 Apr-18 CSI 300 MSCI China MSCI Emerging Markets MSCI World Past performance is not indicative of future results. A direct investment in an unmanaged index is not possible. China A is represented by the CSI 300 Index, China Investible represented by MSCI China, Emerging Markets by MSCI Emerging Markets, and Developed Markets by MSCI World. Data as of June Source: Bloomberg.

10 Significantly Underrepresented in Global Equity Markets China A-Shares Equities as % of World 20% 16% 15% 12% 11% 11% 8% 4% 0% 3% 0.1% 0.7% GDP Consumption Market Cap China H & ADRs as % of MSCI AC World China A-Shares as % of MSCI AC World post initial inclusion China A-Shares as % of MSCI EM post initial inclusion Data as of July Source: Goldman Sachs.

11 Technical Support from Further MSCI Inclusion Potential MSCI Index Inclusion Roadmap of China A-Shares Current MSCI EM Weight (China A inclusion factor IF = 5%) Data as of July Source: MSCI. MSCI Inclusion Roadmap assumes the initial step is to add 222 selected A-Shares and IF=5%, and then inclusion universe is expanded to all 459 MSCI China A Index constituents.

12 A Largely Under-Owned Asset Class 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% 2% China A-Shares Foreign Ownership, Lowest Among Major Markets 38% 38% 38% 28% 28% 30% 22% USA India Indonesia Japan UK Taiwan Korea 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Composition of Household Total Balance Sheets 11% 20% 20% 27% 4% 39% 35% 10% 22% 23% 20% 8% 11% 35% 8% 14% 18% 33% 62% 49% 41% 34% 35% 18% Taiwan Japan UK Australia United States China Real Estate Currency & Equivalent Equity & Mutual Funds Other 1 1 Other includes Insurance and Pension, Other Securities. Data as of September Source: Bank of America Merrill Lynch, Goldman Sachs.

13 Limited Correlation with the US and Rest of the World Correlation Between China A-Shares and Global Equity Indices (weekly, past 10 years) China A China H Asia Japan US EU EM DM Average China A 51% 34% 22% 21% 20% 32% 22% 29% China H 51% 85% 57% 66% 67% 88% 72% 69% Asia 34% 85% 86% 74% 81% 90% 85% 76% Japan 22% 57% 86% 55% 60% 59% 66% 58% US 21% 66% 74% 55% 85% 78% 97% 68% EU 20% 67% 81% 60% 85% 84% 95% 70% EM 32% 88% 90% 59% 78% 84% 85% 74% DM 22% 72% 85% 66% 97% 95% 85% 75% Past performance is not indicative of future results. Data as of September Source: FactSet.

14 An Inefficient and Largely Retail-Driven Market 12% 10% Stock Selection Opportunity in Inefficient Market (7 Year Average Monthly Standard Deviation of Constituents Returns) 11% Highest dispersion of returns among the China A-Shares stocks 100% 90% 80% Retail vs Institutional Trading Volumes Retail 35% 8% 6% 7% 7% 7% 6% 6% 70% 60% 50% Retail 85% 4% 2% 0% CSI 300 FTSE 350 HSCEI Nikkei 225 FTSE 100 S&P % 30% 20% 10% 0% Institutional 15% A-Shares Institutional 65% H-Shares Past performance is not indicative of future results. Data as of September Source: UBS.

15 Limited Sell-Side Research 700 China A-Shares: Under-Researched Universe # of stocks ,500 stocks with <5 analysts # of Analyst Coverage (I/B/E/S) Data as of September Source: Goldman Sachs.

16 Active Management with a Quality Focus is Essential Active Management is Essential China A-Shares Universe by Quality Quintiles 2 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% New China 82% 18% CSI Old China 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Non-SOEs 74% 26% CSI 300 SOEs Annualized Returns 22 Quintile 1 20 Quintile 2 Quintile 3 18 Universe Quintile 4 16 Quintile Standard Deviation Past performance is not indicative of future results. 1 New China includes GICS Sectors: Healthcare and Information Technology and GICS sub-industries: Education, Publishing, Advertising, Movies & Entertainment, Travel & Leisure, Internet Retail, Environmental Services, and Renewable Electricity, Airfreight and Logistics. Data as of July Source: Goldman Sachs. 2 The Quality Quintile performance information is based on William Blair s proprietary models and does not in any way relate to the return of any William Blair product or strategy. William Blair may or may not hold the companies included in the Quality quintiles shown. Quality is defined as those companies with good balance sheet metrics, efficiency, and higher returns. 2 Data shown for period between May 31, 2005 June 30, Source: William Blair China A- Shares Universe.

17 Rich Opportunity Set for Quality Growth Investors 80% 70% 60% 50% 40% 30% 20% 10% 0% China A-Shares Korea Higher Growth Profile 1 India Taiwan China Indonesia Thailand Brazil Russia South Africa % 60% 50% 40% 30% 20% 10% 0% South Africa With Abundant High Quality Opportunities India Thailand Russia Indonesia Taiwan China China A-Shares Brazil Korea % of Companies Exhibiting Higher Growth than average Number of companies with Higher Growth than average (RHS) % of Companies Exhibiting Higher ROE than average Number of companies with Higher ROE than average (RHS) 1 Growth is defined as the William Blair long-term growth rate which is based on a combination of realized and forecast growth rates. Actual Growth rate for the emerging markets universe is 12.5%, and actual ROE for the universe is 7.9%. Data as of October Source: William Blair, FactSet. Universe consists of all listed emerging market companies with market caps above $100 million USD.

18 Improved Market Accessibility and Regulation Shanghai-Hong Kong Connect launches Shenzhen-Hong Kong Connect launches MSCI announces inclusion of China A-Shares MSCI Inclusion of China A-Shares Nov Special Segregated Accounts introduced (SPSA) International Investors beneficial ownership clarified DVP (Delivery vs Payment) Trading Suspension Rules Allows trading with multiple brokers to ensure best execution CSRC defines shareholders rights Ensures delivery when payment occurs Rules created to better regulate and curb trade suspensions Data as of June Source: HKSCC Circular.

19 Attractive Valuation China A-Shares (CSI 300) 12M Forward P/E U.S. Equities (S&P 500) 12M Forward P/E Oct-08 Apr-09 CSI300 average = 12.4x Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 CSI E EPS Growth: 11% CSI E EPS Growth: 15% Apr-12 Oct-12 Apr-13 Oct-13 Apr-14 CSI300 avg +/-1 s.d. CSI300 ex banks Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 Apr-17 Oct-17 Apr Oct-08 Apr-09 S&P E EPS Growth: 4% S&P E EPS Growth: 10% Oct-09 Apr-10 Oct-10 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 S&P 500 average = 15.7x Oct-13 Apr-14 Oct-14 Apr-15 Oct-15 Apr-16 Oct-16 S&P 500 avg +/-1 s.d Apr-17 Oct-17 Apr Data as of September Source: Goldman Sachs, Bloomberg.

20 Attractive Investment Opportunities

21 Prominent Exposure to the Structurally Growing New China RMB in Trillion Total Market Value Distribution By Exchange % 29% 10% % 46% 9% % 41% 10% 9% % % 19% % 10% 10% % % 44% 46% 15% % 72% 28% 19% % 34% 15% 13% 49% 52% 63% 29% 44% 72% 73% 55% 90% 2% 8% 36% 18% 12% 32% 9% Banks IT Cap Goods Materials Retail Energy Real Estate Health Care Cons Stap Auto Insurance Utilities Transport Divers. Fin Telecom Shenzhen Shanghai Hong Kong US and Others Data as of September Source: Citi.

22 Superior Fundamentals and Performance of New China Superior Fundamentals in New China 1 Have Translated Into Superior Performance Results 50% 40% 40% 30% 20% 10% 22% 21% 14% 12% 9% 6% 0% -10% -5% Revenue Growth CROCI Net Margin Net Debt /Equity New China Old China (ex-banks) Past performance is not indicative of future results. A direct investment in an unmanaged index is not possible. 1 New China includes GICS Sectors: Healthcare and Information Technology and GICS sub-industries: Education, Publishing, Advertising, Movies & Entertainment, Travel & Leisure, Internet Retail, Environmental Services, and Renewable Electricity, Airfreight and Logistics. Data as of July 2017, based on the CSI 300 Index. Revenue Growth, CROCI, and Net Margin as of Net Debt/Equity as of Source: Goldman Sachs, WFE.

23 Theme #1: China s Structural Consumption Growth 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Chinese Household Income Shift by Affluent (>$34k) Upper Middle Class ($16-$34k) Mass Middle Class ($6k-$16k) Poor (<$6k) Projected CAGR % 26.6% 1.2% -3.8% Trillions $USD (PPP-adjusted) $6.8tn 10% China India Middle-Class Consumption $4.7tn USA Japan Russia Germany Brazil E E CAGR (RHS) UK 16% 14% 12% 10% 8% 6% 4% 2% 0% 1 Middle-class is defined as four-person households with annual income between $14, ,000 in 2005 PPP terms. Data as of June Source: Bloomberg, McKinsey Global Institute, Credit Suisse, Brookings Institution, William Blair.

24 Company A: World s Leading Liquor Producer A Few Facts about Company A s core liquor product Baijiu : Key Financials Comparison ($USD, mm) Alcohol % 53% China s Low Per Capita Liquor Consumption Supports Further Growth liters per capita Retail Price $260+ per 500ml Volume Share in China 6% China s Leading Liquor Producer FY2018 (12/31/2018) Largest Multinational Liquor Company FY2018 (6/30/2018) Market Cap (current) $121,224 $81,713 Revenue $11,802 $17,128 Net Profit $5,450 $4,195 0 Turkey Mexico China Chile Japan Italy Netherl Canada USA OECD34 Korea Spain UK Australia Portugal Poland Germany France Belgium Gross Margin (current) 88.3% 61.7% Operating Margin 62.2% 31.4% Sales 10yr CAGR 24.5% 1.0% EPS 10yr CAGR (local) 21.7% 7.0% Past performance is not indicative of future results. References to specific securities and their issuers are for illustrative purposes only, are intended to represent leading issuers within the investable themes in China, and are not intended as recommendations to purchase or sell such securities. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable. Data as of October Source: OECD Data, WING, company data.

25 Theme #2: China s Innovation Boom 5-Year CAGR 25% China is Second Largest R&D Spender after USA Global Private Startups Valued at $1bn or More Total = % Thailand # of Unicorns 34% 47% 19% 15% 10% 5% 0% Philippines Malaysia Indonesia Hong Kong India China UK Singapore Taiwan Germany US Japan Korea R&D to GDP ratio (%) Total = $883bn USD Valuation 43% 45% 12% 0% 20% 40% 60% 80% 100% China USA Rest of the World Data as of September Source: UBS, McKinsey Global Institute, UBS.

26 China s Future Innovation Focuses Artificial Intelligence: China Is Now in Second Place Ten Priority Fields for Development Aerospace & Aviation High-Tech Shipping New Metals Robotics & Precision Machines Biomedical Drugs and Equipment Made in China 2025 Advanced Railroad Equipment Energy Conservation Modern Agriculture Electric Equipment Next Generation IT Data as of August Source: Goldman Sachs Global Investment Research.

27 Company B: The Global Leader in Security Surveillance Price Index of Leading Security Surveillance Company vs. Overseas Brands World Excluding China Surveillance Market Share (2015) Others 59.6% Company B Company C 9.0% Honeywell 1.1% Axis Communications 8.5% Panasonic 5.4% Hanwha Techwin 5.2% Bosch Security Systems 4.8% Dahua 4.4% Domestic Price Overseas Price Overseas Brands Price Products TAM: Growing Importance of China Traditional Surveillance AI Surveillance Machine Vision Product References to specific securities and their issuers are for illustrative purposes only, are intended to represent leading issuers within the investable themes in China, and are not intended as recommendations to purchase or sell such securities. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable. Data as of July, Source: Bernstein, Morgan Stanley.

28 Theme #3: China s Secular Health Care Spending Growth Health Care Market Value Growth Health Care Expenditure in China Among Lowest in the World $USD (bn) $900 $800 $700 $600 $500 $400 $300 $200 $100 $ E 2018E $10,000 $9,000 $8,000 $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $0 $9,403 17% USA Sweden Australia Germany France UK Japan Korea Brazil Poland Mexico S. Africa Turkey 5.6% $420 China India 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Per capita % of GDP (RHS) Data as of December Source: World Health Organization.

29 Increased Chronic Disease Prevalence and Aging Population China s Chronic Disease Prevalence Has Risen Significantly China s Aging Population Projections Source: China s Office of National Working Commission on Aging, US Census Bureau, Japan s National Institute of Population and Social Security Research, Google. Note: Japanese projection is based on a medium-fertility and medium-mortality assumption.

30 Company C: China s Frontrunner in Innovative Medicine 2,500 2,000 1,500 1, Total Revenue and Profit (RMB, mn) FY 2006 FY 2007 FY 2008 FY 2009 FY 2010 FY 2011 FY 2012 FY 2013 FY 2014 FY 2015 FY 2016 FY 2017 FY 2018E FY 2019E Revenue Net Profit (rhs) Antiinflammatory 3% Cardiovascular 2% Revenue Breakdown (2017E) Contrast agent 12% Other drugs 12% Anesthetic drugs 26% Drug exports (ex cancer drugs) 2% Cancer drugs 43% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% 4% R&D as % of Total Revenue 13.0% 10.9% 9.7% 8.9% FY 2014 FY 2015 FY 2016 FY 2017 Past performance is not indicative of future results. References to specific securities and their issuers are for illustrative purposes only, are intended to represent leading issuers within the investable themes in China, and are not intended as recommendations to purchase or sell such securities. William Blair may or may not own any securities of the issuers referenced and, if such securities are owned, no representation is being made that such securities will continue to be held. It should not be assumed that any investment in the securities referenced was or will be profitable. Data as of May Source: Bloomberg, company data, UBS-S estimates.

31 Risks

32 Trading Suspension and Resumption for Listed Companies Memorandum on Trading Suspension and Resumption for Listed Companies in May % 50% 40% 30% 20% 10% 0% 28-Jan May Sep Jan May Sep-11 Trading Suspension as % of Total A-Share Stocks 28-Jan-12 Average = 6.7% 28-May Sep Jan May Sep Jan May Sep Jan May Sep-15 Suspended companies as % of total A-Share Stocks New Trading Suspension Rules 28-Jan May Sep Jan May Sep-17 average Current = 2.3% 28-Jan May Sep-18 Key Areas of Improvement Expanded Coverage of trading suspension rules Duration Limits Enhanced Information Disclosure relative to suspension Exchange authority to stop accepting suspension applications Reinforced Controls and Sanctions Data as of September 2018 Source: CICC.

33 Market Volatility Shanghai Stock Exchange Composite Index (CNY) Shenzhen Stock Exchange Composite Index (CNY) Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec Dec-96 Dec-97 Dec-98 Dec-99 Dec-00 Dec-01 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Dec-07 Dec-08 Dec-09 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Dec-15 Dec-16 Dec-17 Statistical Summary Shanghai Composite Shenzhen Composite USA Emerging Markets Developed ex US Markets Annualized Return (USD) 7.96% 8.86% 8.51% 6.47% 5.53% Standard Deviations (Monthly Returns) 7.85% 8.88% 4.27% 6.67% 4.72% Sharpe Ratio Past performance is not indicative of future results. A direct investment in an unmanaged index is not possible. Data as of September Based on monthly returns from December 1996 to September Source: Bloomberg. Emerging Markets is represented by the MSCI Emerging Markets Index, USA is represented by S&P 500 Index, and Developed ex US Markets by the MSCI World ex USA Index.

34 Appendix

35 Index Definitions CSI 300 Index: a market capitalization weighted index that consists of 300 A-share stocks traded in the Shanghai and Shenzhen stock exchanges. FTSE 100 Index: a market capitalization weighted index of the largest 100 companies by capitalization listed on the London Stock Exchange. FTSE 350 Index: a market capitalization weighted index of the largest 350 companies by capitalization listed on the London Stock Exchange. Hang Seng China Enterprises Index (HSCEI): the major index that tracks the performance of China enterprises listed in Hong Kong in the form of H shares. MSCI All Country World Index: an index designed to measure the performance of developed and emerging markets. MSCI China Index: an index which captures large and mid cap representation across China H shares, B shares, Red chips, P chips, and foreign listing. MSCI China A Index: an index which captures large and mid cap representation across China securities listed on the Shanghai and Shenzhen exchanges. MSCI Emerging Markets Index: a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. MSCI World Index: a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets. MSCI World ex-usa Index: a free float-adjusted market capitalization weighted index that is designed to measure the equity market performance of developed markets, excluding the United States. Nikkei 225 Index: a price-weighted average of 225 Japanese companies traded on the Tokyo Stock Exchange. S&P 500 Index: a market capitalization weighted index of 500 stocks designed to measure the performance of the broad U.S. economy. Shanghai Composite Index: an index of all stocks traded on the Shanghai Stock Exchange. Shenzhen Composite Index: an index of all stocks traded on the Shenzhen Stock Exchange. Indices are unmanaged, do not incur fees or expenses, and cannot be invested in directly.