QFII and Private Equity / Deals in China Before the updates on QFII policy announced in 2012, QFIIs were only allowed to invest in (i) RMB denominated A- shares, treasury bonds, convertible bonds, corporate bond and warrants traded in stock exchanges; (ii) securities investment funds; and (iii) other financial instruments permitted by the CSRC. As per The 2012 QFII Policy Updates, stock-index futures and fixed-income products traded on the inter-bank bond market are also included in the investable universe. Although policies regulate QFII on public market investment and foreign investors require obtaining a QFII license before making any purchase in financial instruments mentioned above, a number of QFIIs have well established their own private equity portfolios to explore private equity projects in China, even before getting their QFII license. According to our research, roughly 74% of existing QFIIs have either set up their in-house private equity team or become a limited partner in PE funds. These QFIIs tend to partner with other investors to diversify their investment risks, while some still prefer to be the sole investor, when they directly invest into companies or deals in China. In some cases, QFIIs establish a JV with Chinese companies to conduct securities brokerage, asset management and investment banking businesses. Investor Investee Year Details 2013 KNB holds 45.3% of Parkway Pantai Limited, one of Asia's largest private healthcare providers, which operates clinics in Beijing and several cities in China. 2012 BMO completed the acquisition of a 19.99% interest in COFCO Trust Co., a subsidiary of COFCO Group, established in 2009 with AUM of US$5.7 bil as of 2011. 2012 OrbiMed invested in Beijing East Whale Imaging Tech, which focuses on R&D, manufacturing, and marketing of high-tech medical imaging devices. 2011 Power Corporation of Canada purchased 10% of China Asset Management, the largest asset manager in China, from CITIC Securities, for US$270 million. 2010 GIC doubled its stake in CICC, making it the secondlargest shareholder of the first Sino-foreign investment bank with stake of more than 16.35%. 2009 Greenwoods invested RMB30million in Inner Mongolia Shengmu High-Tech Co., a milk producer in China. 2009 Goodman China Logistics Holding (GCLH) is a joint venture between CPP and Goodman investing in high quality stabilized logistics assets across first tier cities. 1998 Eurizon Capital (49%) invested in Penghua Fund Management, the first asset management joint venture in China, with Guosen Securities (51%).
Ranking: Top Favorite Sector by QFII We conducted a survey and proprietary research on the investment preference for QFII investors. In our research and survey, which covered approximately 200 QFII investors, we collected data directly from investment decision makers and company websites and analyzed their sector preference as reflected in their latest asset allocation strategy. Overall, Financials, which is dominated by banks, insurance and real estate companies, is the most preferred sector with approximately 30% QFII investors considering Financials as one of their top 3 picks. Consumer Discretionary, such as automobiles, retailers and consumer durables, ranks second on QFII investor preference list as 16% would choose to invest into this sector. The third most-preferred sector is Information Technology, which are mostly technology hardware & equipment, software & services and semiconductor companies. We further grouped QFII investors into five types - banks, insurance, securities companies, asset management and others (government institutions, trust, pensions, and sovereign wealth funds, etc.) and looked into their preferences by each type of investors. Table: Summary of Sector Preference By QFII Type Asset Mgr Banks Insurance Others Securities Overall Consumer Discre. 7 Consumer Staples 6 7 7 9 6 Energy 5 8 8 5 Financials Health Care 8 4 7 5 7 8 Industrials 4 4 4 Information Tech. 4 Materials 7 4 7 6 7 Telecom 8 10 6 6 7 9 Utilities 10 9 7 10 7 10
Sector preference by Banks Sector preference by Asset Managers Sector preference by Securities Companies Sector preference by Insurers Sector preference by Others It is not surprising to see Financials remain the most favorite sector, given QFIIs are financial institutions by nature and possess better knowledge in the fundamental dynamics for financial companies (i.e. familiarity bias). In addition, some QFIIs have partnered with Chinese financial companies to set up JV in securities brokerage, asset management and investment bank, therefore making them more inclined to choose Financials as their top pick. An example is Credit Suisse forming a JV with Founder Securities to establish Credit Suisse Founder Securities Ltd in 2008. With the exception of securities companies, Consumer Discretionary and Information Technology remain the 2 nd and 3 rd most preferred sectors. Health Care, Telecom and Utilities are the least preferred choices for QFII investors. However, as investors start to look into undervalued plays, we expect these three sectors will gain traction in the coming future.
Ranking: Top Favorite A shares by QFII Insurance 保险中国平安 中国人寿 中国太保 Banks 银行兴业银行 北京银行 华夏银行 Real Estate 房地产万科 世茂股份 中国国贸 Health Care 医疗仁和药业 华润三九 康芝药业 Consumer Discretionary 消费 ( 耐用品 ) 格力电器 丽江旅游 中国国旅 Information Technology 信息技术 飞乐音响 漫步者 锦富新材 Industrials 工业徐工机械 三一重工 柳工 Energy 能源冀中能源 东华能源 中国石化 Consumer Staples 消费 ( 日用品 ) 贵州茅台 燕京啤酒 伊利股份 Materials 材料江西水泥 海螺水泥 宝钢股份 Telecom 电信用友软件 方正科技 东方通信 Utilities 公共事业首创股份 南海发展 永清环保