CHINA SETS SAIL                   UNDER NEW                   LEADERSHIP: 2013                   REFORMS                  ...
China Sets Sail for New Leadership: 2013 ReformsPolicy Statements From President HuTop priority: Stimulate domestic consum...
China Sets Sail for New Leadership: 2013 ReformsReforms Create OpportunitiesMost likely reforms in the coming 3-4 years  M...
China Sets Sail for New Leadership: 2013 ReformsBanking Sector TrendNon traditional loan credit is rising; Non bank financ...
China Sets Sail for New Leadership: 2013 ReformsEconomic Activities: Moving West and Central                              ...
China Sets Sail for New Leadership: 2013 ReformsChina Selects The “Regional Expansion Model”     Source: McKinsey Global I...
China Sets Sail for New Leadership: 2013 ReformsConsumer Demand Will Come in WavesVariation in income level across China: ...
China Sets Sail for New Leadership: 2013 ReformsGlobal Financial Crisis: An Opportunity for China     The current financia...
China Sets Sail for New Leadership: 2013 ReformsSentiments Shifting To A Soft Landing ScenarioThe bear arguments look over...
China Sets Sail for New Leadership: 2013 ReformsChina Stock Market: An Attractive Asset Class                   MSCI China...
China Sets Sail for New Leadership: 2013 ReformsThe Performance Gap Should NarrowBig changes after the US election and new...
China Sets Sail for New Leadership: 2013 ReformsInvestment PhilosophyIdentify stocks with “Re-rating Potential”           ...
China Sets Sail for New Leadership: 2013 ReformsEconomic Growth vs Index PerformanceIndex performance fell behind GDP grow...
China Sets Sail for New Leadership: 2013 ReformsTop 10 MSCI China Index ComponentsWeighting of mature companies rising80% ...
China Sets Sail for New Leadership: 2013 ReformsChina’s Investment Outlook ► Sustainable, above average economic growth   ...
China Sets Sail for New Leadership: 2013 ReformsCurrent Investment Themes  Domestic Consumption     – Products with low pe...
China Sets Sail for New Leadership: 2013 ReformsPositioning & Outlook  Overweight   – Information technology       • Telec...
China Sets Sail for New Leadership: 2013 ReformsTop 10 HoldingsAs at 31 January 2013                   Holding            ...
China Sets Sail for New Leadership: 2013 ReformsNew Capital China Equity FundInvestment objective & strategy. The New Capi...
China Sets Sail for New Leadership: 2013 ReformsPeer Group Performance ComparisonNew Capital China Equity Fund outperforme...
China Sets Sail for New Leadership: 2013 Reforms        Stock Example: Wharf Holdings (4 HK Equity)        A big landlord ...
China Sets Sail for New Leadership: 2013 ReformsAn Experienced Investment TeamA dedicated, locally-based team supported gl...
China Sets Sail for New Leadership: 2013 ReformsAppendix
China Sets Sail for New Leadership: 2013 ReformsDefinition Of Various China SharesA-Share: RMB-denominated ordinary share....
China Sets Sail for New Leadership: 2013 ReformsMSCI China Index Top Ten Components2007 vs 2012        Dec 2012           ...
China Sets Sail for New Leadership: 2013 ReformsHighlights of Investment ThemesExtract from China’s Stock Market: A Stock ...
China Sets Sail for New Leadership: 2013 ReformsRMB Internationalisation: Banking ReformChina banks are to focus on their ...
China Sets Sail for New Leadership: 2013 ReformsInsurance: An Underpenetrated Business                                    ...
China Sets Sail for New Leadership: 2013 ReformsChina Consumption Has a Much Bigger ScaleIncomes are rising in developing ...
China Sets Sail for New Leadership: 2013 ReformsA Big Increase in Middle Income Group                                     ...
China Sets Sail for New Leadership: 2013 ReformsStrong Demand for DiscretionaryRising importance of consumer spending.31  ...
China Sets Sail for New Leadership: 2013 ReformsDisclaimer For the purposes of distribution to Institutional Clients, whic...
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Efg asset management

  1. 1. CHINA SETS SAIL UNDER NEW LEADERSHIP: 2013 REFORMS Mansfield Mok Portfolio Manager New Capital China Equity FundFor Qualified and Accredited Investors Only March 2013
  2. 2. China Sets Sail for New Leadership: 2013 ReformsPolicy Statements From President HuTop priority: Stimulate domestic consumption and implement banking reformPresident Wu Speech on 8 November 2012 Build a moderately prosperous society by 2020 Double 2010 GDP and per capita income for both urban and rural residents by 2020 Deepen reform of financial system Development of next generation information infrastructure China GDP per Capita * 2010 2020** Urban Household Rmb 21,033 (USD 3,183) Rmb 42,066 (USD 7,011) Rural Household Rmb 8,119 (USD 1,229) Rmb 16,238 (USD 2,706) Source: CEIS, Nomura Note: ** 2020 GDP per capita assumption: GDP per capita double in RMB terms and 6 RMB per USD
  3. 3. China Sets Sail for New Leadership: 2013 ReformsReforms Create OpportunitiesMost likely reforms in the coming 3-4 years Most likely reforms Possible reforms Least likely reforms Resource pricing reform Personal income tax reform SOE reform Interest rate liberalisation Hukou reform Property tax Capital account liberalisation Rural land reform Central-local relations Greater exchange rate flexibility Budget transparency VAT reform De-monopolisation Resource/environmental tax Pension reform reform Increase in social spending Relaxing one-child policy Source: Deutsche Bank
  4. 4. China Sets Sail for New Leadership: 2013 ReformsBanking Sector TrendNon traditional loan credit is rising; Non bank financials will become a fast growingsector. Breakdown of Total Credit (%) CAGRs (%) 2009 2012 2009-2012 Traditional Loan 74.4 67.3 16.5 Social Financing (defined by PBOC) 21.4 28.0 31.7 Entrusted Loans 6.2 7.0 25.4 Trust Loans & others 2.1 3.1 37.2 Banker Acceptance Bills 5.6 7.6 33.6 Corporate Bonds 5.5 7.9 35.7 Other Non Bank Financing 4.2 4.7 25.6 Total Credit 100 100 20.5 Total Credit ex-RMB Loan 30.1 37.0 29.0 Source: PBOC, CBRC, CEIC, Bernstein
  5. 5. China Sets Sail for New Leadership: 2013 ReformsEconomic Activities: Moving West and Central 2012 Real China: Real GDP growth of 9.4% in 2011 GDP Growth China 7.8% Beijing 7.7% Shanghai 7.5% Zhejiang 8.0% Guangdong 10.2% Guizhou 13.6% Chongqing 13.6% Sichuan 12.6% Inner 11.7% Mongolia Source: National Bureau of Statistics China Database
  6. 6. China Sets Sail for New Leadership: 2013 ReformsChina Selects The “Regional Expansion Model” Source: McKinsey Global Institute
  7. 7. China Sets Sail for New Leadership: 2013 ReformsConsumer Demand Will Come in WavesVariation in income level across China: Tier 2 markets are experiencing strong growthnow. Source: China Statistical Year Book, Deutsche Bank
  8. 8. China Sets Sail for New Leadership: 2013 ReformsGlobal Financial Crisis: An Opportunity for China The current financial crisis presents an opportunity for China – Low interest rates will prevail and surplus liquidity will look for areas with strong growth potential – Chinese central government has healthy balance sheet and stronger economic growth vs. G3 – Policy reforms taking place: • Economic driver: domestic consumption will take the lead supported by the increase in minimum wage • Pricing reform: facilitated by lower commodity prices and low inflation rate • Financial System Reform Real GDP Growth Outlook10 Current Total 8 Countrie Accoun Fiscal Gross Return s t Deficits Public Debt (USD)* 6 US -2.9 7.8 92 24.5% 4 Japan 1.1 11.3 243 1.6% 2 Euro area 1.0 3.2 94 8.6% 0 China 3.0 1.6 42 4.5%-2 All figures are CS estimates and represented as % of 2012 GDP China Japan US Euro World *Note: Index performance from 1 Jan 2011 to 31 Jan 2013 US( SPX Index); Japan (NKY Index); Euro (SX5E Index); China (MXCN Index) 2011 2012E 2013F Source: Morgan Stanley
  9. 9. China Sets Sail for New Leadership: 2013 ReformsSentiments Shifting To A Soft Landing ScenarioThe bear arguments look overstated and there are some signs of shifting sentiment.► Concern about property crash in China Signs of stability in the equity market: – Property selling prices have stabilised – Economists on the bear camp are changing their – Loan-to-value ratio of 60-65% should provide tone after the improving economic numbers cushion to the banking system • Some brokers are making a “Buy” call on China. e.g. Credit Suisse► Fear of banking crisis in China • Continuous inflows into Asian markets – LGFV loan • Refinanced by the fast growing corporate bond market – Shadow banking defaults • No new cases reported – Surge in NPL • Reported NPL is still below 2% and loan growth remains healthy at 15%► Worries of a hard landing – There are some early signs of stabilisation: • 3Q GDP growth stabilises at 7.3% • China M2 growth bottomed at 13.5% in Aug and up 14.8% in Sept9
  10. 10. China Sets Sail for New Leadership: 2013 ReformsChina Stock Market: An Attractive Asset Class MSCI China – 12 month Fwd P/E(X)* ► Attractive valuation – Valuations at historically low level in both P/B and P/E terms ► Under-owned asset class – APAC hedge fund managers are still bearish on China as reported by Credit Suisse Prime Services data Net exposure Change Since March 2012** (%pt) ► Removal of political uncertainties 1.50% 1.00% 0.50% 0.00% ► Structural change in industries -0.50% -1.00% – Creates opportunities to new players -1.50% -2.00% and industries who are at the early stage -2.50% of their “S-Curve” -3.00% -3.50% • e.g. Banking and consumer N Zealand China ong ong Japan ustralia Australia Indonesia Indonesia India Singapore India Taiwan Indonesia Hong Kong Korea Philippines China Japan ingapore orea hilippines Newew Zealand alaysia an sectors Taiw H K K A M S P Source: * Nomura Securities ** Credit Suisse
  11. 11. China Sets Sail for New Leadership: 2013 ReformsThe Performance Gap Should NarrowBig changes after the US election and new Chinese leadership ► US Market – Worries of fiscal cliff – Concern about raising tax ► China Market – Removal of political uncertainties – Soft landing of economy Source: Bloomberg as at 25 Feb 2013
  12. 12. China Sets Sail for New Leadership: 2013 ReformsInvestment PhilosophyIdentify stocks with “Re-rating Potential” Zone A: Re-Rating (Accumulate) Company gradually increases its market share and gains pricing power Investors are sceptical about the growth potential of the company and put in a low valuation. – e.g. Insurance companies in the current cycle are trading at historic low New Business Multiple despite the low penetration rate of insurance product Zone B: De-Rating (Reduce) Company sees declining growth – Chinese oil companies saw a sharp decline in production growth over the years. They became utilities and experienced P/E contraction
  13. 13. China Sets Sail for New Leadership: 2013 ReformsEconomic Growth vs Index PerformanceIndex performance fell behind GDP growth during 2007-2012 and 2010-2012 China Nominal GDP MSCI China Index Performance compound annual Growth compound annual return p.a. p.a. 3 Year to 6 Years to 3 Years to 6 Years to 2006 +16.8 +14.6 +24.5 +24.0 2007 +18.5 +15.9 +43.7 +28.3 2012 +15.0 +15.7 -4.0 -0.6 Source: Bloomberg
  14. 14. China Sets Sail for New Leadership: 2013 ReformsTop 10 MSCI China Index ComponentsWeighting of mature companies rising80% of top 10 Index component are mature companies and may not catch up with the economicgrowth of China MSCI China Dec 2012 % Outlook and View China Mobile 9.91 Mature; Zone B CCB – H 8.17 De-rating due to interest rate deregulation ICBC – H 6.52 De-rating due to interest rate deregulation CNOOC 5.45 Mature; Zone B BOC – H 4.74 De-rating due to interest rate deregulation Tencent 4.60 Petrochina – H 4.22 Mature; Zone B China Life Insurance 3.43 China Petroleum & Chemical 2.68 Mature; Zone B Ping An Insurance 2.22 Source: Nomura
  15. 15. China Sets Sail for New Leadership: 2013 ReformsChina’s Investment Outlook ► Sustainable, above average economic growth – Among the major economies, China offers attractive GDP growth of 7% pa backed by fiscal stimulus – China is changing its economic model to one that is based on self-sustainable domestic consumption • Supported by healthy demographics and high saving rates ► Global interest rate to stay low for a longer period of time – The US Federal Reserve expects fed fund rate to stay below 0.25% until mid 2015 – In view of lacklustre global economy and low inflationary pressure, PBOC will continue the monetary easing policy ► Attractive valuation – Market is trading at historical low levels in both P/B and P/E terms ► Change of leadership – Removal of politic uncertainties ► Risks – Geo-political uncertainty
  16. 16. China Sets Sail for New Leadership: 2013 ReformsCurrent Investment Themes Domestic Consumption – Products with low penetration rates: e.g. autos, Smartphones, insurance products – Consumer companies with pricing power and good distribution networks – Consumer staples benefit from rising rural consumption RMB Internationalisation – Stronger pipeline for RMB offshore products – Banking reform – Deregulation of China’s interest rate policy Gradual breakdown of old monopoly – Structural de-rating of some State Owned Enterprises e.g. Big policy banks Internet Boom – Growing importance of E-commerce and on-line shopping – Rising CAPEX for telecom operators
  17. 17. China Sets Sail for New Leadership: 2013 ReformsPositioning & Outlook Overweight – Information technology • Telecom equipment provider – Autos and consumer staples Underweight – Chinese banks but overweight special lenders, insurance and HK financials – Telecom operators because of rising expenses due to handset subsidy – Energy. Prefer refineries as they are beneficiaries of China’s pricing reform. – Zero weighting in materials and capital goods Strategy – Cautiously optimistic – Market liquidity is an overhang but should improve in 1Q 2013 – Increase exposure to growth stocks to be funded by selling high dividend yield stocks
  18. 18. China Sets Sail for New Leadership: 2013 ReformsTop 10 HoldingsAs at 31 January 2013 Holding % Tencent Holdings 5.3 New China Life – H Share 5.1 Wilmar International 4.8 China Life – H Share 4.7 Hong Kong Exchange & Clearing 4.5 Dah Chong Hong 4.3 Far East Horizon 4.3 Wharf Holdings 4.3 China Everbright Ltd 4.0 PICC P&C 3.8
  19. 19. China Sets Sail for New Leadership: 2013 ReformsNew Capital China Equity FundInvestment objective & strategy. The New Capital China Equity Fund invests in equities of public companies with significant business activities in the People’s Republic of Sub-Fund Name New Capital China Equity Fund China and Hong Kong. The equities are quoted Equities Long Only, with options and Investment Style securities listed or traded on stock exchanges futures for protection worldwide Markets China and Hong Kong primarily (all caps) The investment strategy adopts a fundamental Benchmark MSCI China Index stock-picking approach by investing in small, Base Currency USD medium and large companies which have re-rating potential Max Cash No cash limit and no leverage UCITS IV – New Capital UCIT FUND Stock selection is driven by bottom-up analysis of PLC Fund Entity earnings outlook, profitability trend, balance sheet Regulated by the Central Bank of strength and management quality of a company Ireland Base Fee 1.75% (Ordinary) 0.90% (Institutional) The investment horizon of the strategy is between Liquidity Daily dealing one to three years, allowing the hidden potential of the companies to be reflected in the share price over time to achieve capital appreciation
  20. 20. China Sets Sail for New Leadership: 2013 ReformsPeer Group Performance ComparisonNew Capital China Equity Fund outperformed peers and benchmark since inception(20/8/2012) Source: Bloomberg as at 25 Feb 2013
  21. 21. China Sets Sail for New Leadership: 2013 Reforms Stock Example: Wharf Holdings (4 HK Equity) A big landlord in China. 72.00 Wharf is a major beneficiary of rising Chinese 70.00 68.00 tourism through its retail property portfolios in 66.00 64.00 Hong Kong which provides good cash flow for 62.00 60.00 building its empire in China 58.00 56.00 54.00 Rental income from China could jump at leastPrice 52.00 50.00 48.00 4x after the completion of 2.1m sqm 46.00 44.00 International Finance Centres in five second 42.00 40.00 tier cities 38.00 36.00 34.00 Wharf stands out from its Chinese property 32.00 peers because of its prudent management Mar-11 May-11 Jun-11 Jul-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 May-12 Jun-12 Jul-12 Oct-12 Nov-12 Dec-12 Jan-13 Sep-11 Sep-12 Apr-11 Aug-11 Apr-12 Aug-12 and healthy balance sheet Date Source: Bloomberg
  22. 22. China Sets Sail for New Leadership: 2013 ReformsAn Experienced Investment TeamA dedicated, locally-based team supported globally. Years denote investment experience in industry. Please refer to individual biographies within this presentation for more information.
  23. 23. China Sets Sail for New Leadership: 2013 ReformsAppendix
  24. 24. China Sets Sail for New Leadership: 2013 ReformsDefinition Of Various China SharesA-Share: RMB-denominated ordinary share. It is issued by domestic companies for trade with RMBby domestic institutions, organizations and individuals (exclude Taiwan, HK and Macao investors).B-Share: RMB-denominated special share. It is traded in foreign currency on the Shanghai andShenzhen markets. B-share transaction was only for natural persons, legal persons and otherorganizations overseas or in Taiwan, HK and Macao, Chinese citizens settled in foreign countries,and other investors allowed by the CSRC. After February 19, 2001, the commission opened the B-share market to domestic investors with foreign currency.H-Share: companies incorporated in Mainland China and whose listings in Hong Kong are approvedby the China Securities Regulatory Commission (CSRC). Shares in these companies are listed inHong Kong, subscribed for and traded in Hong Kong dollars or other currencies, and referred to asH shares.Red Chip: enterprises that are incorporated outside of the Mainland and are controlled by MainlandGovernment entities. The most important difference between a red chip company and an H-sharecompany is that a red chip company is not Mainland-incorporated Source: China Securities Regulatory Commission website HK Stock Exchange website
  25. 25. China Sets Sail for New Leadership: 2013 ReformsMSCI China Index Top Ten Components2007 vs 2012 Dec 2012 % Dec 2007 % China Mobile 9.91 China Mobile 17.57 CCB – H 8.17 China Life Insurance 6.05 ICBC – H 6.52 Petrochina 5.60 CNOOC 5.45 CNOOC 4.28 BOC – H 4.74 China Petroleum & Chemical 4.20 Tencent 4.60 CCB – H 3.47 Petrochina – H 4.22 ICBC – H 3.46 China Life Insurance 3.43 China Shenhua 3.19 China Petroleum & 2.68 Ping An Insurance 2.50 Chemical Ping An Insurance 2.22 BOC – H 1.83 Source: Nomura
  26. 26. China Sets Sail for New Leadership: 2013 ReformsHighlights of Investment ThemesExtract from China’s Stock Market: A Stock Picker’s Paradise (Oct/Nov 2012)
  27. 27. China Sets Sail for New Leadership: 2013 ReformsRMB Internationalisation: Banking ReformChina banks are to focus on their main banking business. Basel III: Banks are required to increase their Capital Adequacy Ratios and have no additional capital for other businesses e.g. insurance Interest rate deregulation: This will break the oligopoly of the big five banks and provide a more favourable operating environment for other specialty lenders Deepening/broadening corporate bond market: This will result in an additional funding source for new players. Emergence of the non-bank financial sector: –Insurance and specialty lender
  28. 28. China Sets Sail for New Leadership: 2013 ReformsInsurance: An Underpenetrated Business GDP, Penetration and Life Market (Life Insurance penetration vs. GDP per Capita Mature 2011 Premium as % of GDP Markets Future Giants Emerging Markets 2011 GDP per Capita (US$) Source: IMF, Swiss Re, Manulife
  29. 29. China Sets Sail for New Leadership: 2013 ReformsChina Consumption Has a Much Bigger ScaleIncomes are rising in developing economies faster, and at a greater scale, than atany previous point in history.1Time to increase per capita GDP in PPP terms from $1,300 to $2,600 Source: McKinsey Global Institute
  30. 30. China Sets Sail for New Leadership: 2013 ReformsA Big Increase in Middle Income Group ► China’s middle income consumer household is expected to reach 166m by 2020, double the total of US, Japan and Germany combined. ► The increase in middle income consumers should support the demand for discretionary goods. Source: McKinsey Insights China
  31. 31. China Sets Sail for New Leadership: 2013 ReformsStrong Demand for DiscretionaryRising importance of consumer spending.31 Source: McKinsey Insights China
  32. 32. China Sets Sail for New Leadership: 2013 ReformsDisclaimer For the purposes of distribution to Institutional Clients, which are defined as those non- The Analysis and research in this publication is intended for the private use of the clients Retail Clients falling within the UK Financial Services Authority’s categories of and investors of EFG Asset Management (UK) Limited. The information and data Professional clients or eligible counterparties, this document has been approved and contained in this publication has been obtained form sources believed to be reliable, but issued by EFG Asset Management (UK) Limited, which provides, manages and is not guaranteed. Past performance is not necessarily a guide to future performance. administers the products and services described herein. EFG Asset Management (UK) Limited expressly disclaims any liability, including incidental or consequential damages, arising from errors or omissions in this publication. EFG Asset Management (UK) Limited is authorised and regulated by the Financial Reproduction of this publication, either in whole or in part, is expressly prohibited without Services Authority. EFG Asset Management (UK) Limited is registered in England and the written permission of EFG Asset Management (UK) Limited. The research and Wales No 7389736 and a member of EFG International. analysis included herein has been procured by EFG Asset Management (UK) Limited for The registered Office for EFG Asset Management (UK) Limited is Leconfield House, its own purposes and may have been acted upon for their own purposes. Data used in Curzon Street, London W1J 5JB. this publication has been obtained from a variety of sources including Bloomberg, Thomson Reuters, OECD, World Bank, IMF, ISI. Disclaimer32

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