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Efg asset management

  1. 1. China Sets Sail for New Leadership: 2013 Reforms Mansfield Mok Portfolio Manager New Capital China Equity FundFor Qualified and Accredited Investors Only April 2013
  2. 2. China Sets Sail For New Leadership: 2013 ReformsEFG Asset Management An independently managed business of EFG international. EFG Asset Management (EFGAM) is the asset management arm of EFG International, a global private banking group headquartered in Zurich, Switzerland. It is an integral part of EFG International’s private banking activities, working closely with Client Relationship Officers and their clients. It is also a distinct, specialist asset manager, providing a range of actively-managed investment solutions to professional advisors and institutional investors worldwide. The business prides itself on its long-term outlook, and seeks to earn the trust of clients based on independent, expert and objective advice. EFGAM’s investment professionals are based in London, Geneva, Zurich, New York, Hong Kong, Singapore and Miami, and manage over USD 82 billion on behalf of clients.
  3. 3. China Sets Sail For New Leadership: 2013 ReformsSpecialist Strategies for Thoughtful Investors EFGAM is an international advisor delivering leading investment solutions for clients worldwide. With over $8 billion in assets under management, we have over 100 investment professionals located around the world. We offer a wide range of investment solutions reflecting the varied needs and preferences of our clients. Our clients can access our investment solutions through a variety of product structures, including individual and institutional separate accounts, mutual funds and other pooled investment vehicles. Our range of funds span a broad spectrum of investment options with circa $2 billion in assets.3 Figures as at end February 2013
  4. 4. China Sets Sail For New Leadership: 2013 ReformsEconomic IndicatorIs Power Consumption a good proxy to China economic growth?China power consumption growth slowed down to 5.5% yoy in 2012 (11.9% in 2011) Secondary Industry (Light and Heavy industries) saw significant slow down Both household and service industries are robust, reflecting a change in growth driver in Chinese economy China Power Consumption by Industry 2012 yoy Growth % Share of Total (%) Primary Industry 0.0% 2% Secondary Industry 3.9% 74% Tertiary Industry 11.5% 11% Household 10.7% 13% Source: Deutsche Bank4
  5. 5. China Sets Sail For New Leadership: 2013 ReformsPolicy Statements From LeadersTop priority: Stimulate domestic consumption and implement banking reformPresident Hu’s Opening Speech on 8 November 2012: No change in direction of macro-economic policies 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, Nomura5 Note: ** 2020 GDP per capita assumption: GDP per capita double in RMB terms and 6 RMB per USD
  6. 6. 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 reform Pension reform Increase in social spending Relaxing one-child policy6 Source: Deutsche Bank
  7. 7. China Sets Sail For New Leadership: 2013 ReformsBanking Sector TrendNon traditional loan credit is rising; Non bank financials will become a fast growing sector. 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 29.07 Source: PBOC, CBRC, CEIC, Bernstein
  8. 8. China Sets Sail For New Leadership: 2013 ReformsChinese Labour Market TrendSlow down in growth of “working age” population8 Source: IMF
  9. 9. China Sets Sail For New Leadership: 2013 ReformsEconomic Activities: Moving West and Central 2012 Real GDP China: Real GDP growth of 9.4% in 2011 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% Mongolia9 Source: National Bureau of Statistics China Database
  10. 10. China Sets Sail For New Leadership: 2013 ReformsChina Selects The “Regional Expansion Model”10 Source: McKinsey Global Institute
  11. 11. China Sets Sail For New Leadership: 2013 ReformsConsumer Demand Will Come In WavesVariation in income level across China: Tier 2 markets are experiencing strong growth now.11 Source: China Statistical Year Book, Deutsche Bank
  12. 12. 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 Fiscal Gross Public Total Return 8 Countries Account Deficits Debt (USD)* 6 US -2.9 7.8 92 24.5% 4 Japan 1.1 11.3 243 1.6% Euro area 1.0 3.2 94 8.6% 2 China 3.0 1.6 42 4.5% 0 All figures are CS estimates and represented as % of 2012 GDP-2 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 2013F12 Source: Morgan Stanley
  13. 13. 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 – There are some early signs of stabilisation – Loan-to-value ratio of 60-65% should provide • GDP growth stabilises at 7.4% in 3Q and cushion to the banking system 7.9% in 4Q 2012 • China M2 growth bottomed at 13.5% in ► Fear of banking crisis in China Aug 2012 – LGFV loan – Economists on the bear camp are changing their • Refinanced by the fast growing corporate tone after the improving economic numbers bond market • Some brokers are making a “Buy” call on – Shadow banking defaults China. e.g. Credit Suisse in Nov 2012 • No new cases reported • Continuous inflows into Asian markets – Surge in NPL • Reported NPL is still below 1% and loan growth remains healthy at 15% ► Worries of a hard landing – The change of Chinese demographics • China has a slow down in working population13
  14. 14. 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 dataNet exposure Change Since Sept 2012 to Feb 2013** (%pt) Net ex posure change (%) ► Removal of political uncertainties 12% 10% ► Structural change in industries 8% 6% – Creates opportunities to new players and 4% industries who are at the early stage of their 2% “S-Curve” 0% -2% • e.g. Banking and consumer sectors -4% Hong Kong Indonesia Australia India China Singapore Korea Japan Philippines Malaysia New Zealand Taiwan14 Source: * Nomura Securities ** Credit Suisse
  15. 15. 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 economy15 Source: Bloomberg as at 22 March 2013
  16. 16. 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 contraction16
  17. 17. 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 p.a. compound annual return 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 Note: * GDP growth and performance number are in CNY17 Source: Bloomberg
  18. 18. 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 economic growth 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 2.2218 Source: Nomura
  19. 19. 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 political uncertainties► Risks – Geo-political uncertainty19
  20. 20. 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 operators20
  21. 21. China Sets Sail For New Leadership: 2013 ReformsIndustry TrendImportant Quotes – China Construction Bank 2013 Annual Results page 62: “……market competition tends to be more intensive as both non-bank financial and quasi-bank institutions intervene in banking businesses including wealth management, payment and settlement…..” – China Banking Regulatory Commission CBRC warns of risks from industries including property, solar Industry, machinery, steel, wind power and PV. – China Mobile: will spend Rmb 41bn to build 200+ TD-LTE base stations to cover 100 major cities. – Jack Ma, Chairman of Alibaba Group at Credit Suisse AIC 2013: “…e-commerce in the US is a dessert. It’s an addition to their main business, because in the US the infrastructure of doing business is so good. But in China, because the infrastructure of commerce is bad, e-commerce becomes the main course….”21
  22. 22. 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 – Accumulate growth stocks on price consolidation22
  23. 23. China Sets Sail For New Leadership: 2013 ReformsTop 10 HoldingsAs at 28 March 2013 Holding % Nature of Business Wilmar International 4.97 A plantation conglomerate which will distribute corn flakes in China New China Life – H Share 4.82 One of the largest life insurance companies in China Wharf Holdings 4.42 A big landlord in China Chongqing Rural Commercial Bank 4.40 A restructured commercial bank China Minzhong Food 4.14 A farming company China Everbright Ltd 4.08 A listed China Fund manager Tecent Holdings 4.05 The China internet company having a “Facebook” business model HK Exchange & Clearing 3.73 A platform to distribute RMB financial products Dah Chong Hong 3.65 A car distributor and services company Far East Horizon 3.60 A financial leasing company in China23
  24. 24. 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 Sub-Fund Name New Capital China Equity Fund in the People’s Republic of China and Hong Kong. The equities are quoted securities listed or traded on stock Equities Long Only, with options and futures for Investment Style protection exchanges worldwide Markets China and Hong Kong primarily (all caps) The investment strategy adopts a fundamental stock- Benchmark MSCI China Index picking approach by investing in small, medium and Base Currency USD large companies which have re-rating potential Max Cash No cash limit and no leverage Stock selection is driven by bottom-up analysis of UCITS IV – New Capital UCIT FUND PLC earnings outlook, profitability trend, balance sheet Fund Entity Regulated by the Central Bank of Ireland strength and management quality of a company Base Fee 1.75% (Ordinary) 0.90% (Institutional) The investment horizon of the strategy is between one Liquidity Daily dealing to three years, allowing the hidden potential of the companies to be reflected in the share price over time to achieve capital appreciation24
  25. 25. China Sets Sail For New Leadership: 2013 ReformsPeer Group Performance ComparisonNew Capital China Equity Fund outperformed peers and benchmark since inception (20/8/2012) 130 125 120 115 110 105 100 95 90 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 New Capital UCITS Fund PLC - China Equity Fund MSCI China Index25 Source: Bloomberg as at 27 March 2013 BAIF-Open End Chinese Equity Funds Domiciled in an Offshore Market
  26. 26. China Sets Sail For New Leadership: 2013 ReformsStock Example: Wharf Holdings (4 HK Equity)A big landlord in China. 72.00 70.00 Wharf is a major beneficiary of rising Chinese 68.00 66.00 tourism through its retail property portfolios in 64.00 62.00 Hong Kong which provides good cash flow for 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 4x after the completion of 2.1m sqm 48.00 46.00 International Finance Centres in five second 44.00 42.00 tier cities 40.00 38.00 36.00 Wharf stands out from its Chinese property 34.00 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 Date26 Source: Bloomberg
  27. 27. 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.27
  28. 28. China Sets Sail For New Leadership: 2013 ReformsAppendix28
  29. 29. 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 RMB by domesticinstitutions, organizations and individuals (exclude Taiwan, HK and Macao investors).B-Share: RMB-denominated special share. It is traded in foreign currency on the Shanghai and Shenzhen markets.B-share transaction was only for natural persons, legal persons and other organizations overseas or in Taiwan, HKand Macao, Chinese citizens settled in foreign countries, and other investors allowed by the CSRC. After February19, 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 approved by the ChinaSecurities Regulatory Commission (CSRC). Shares in these companies are listed in Hong Kong, subscribed for andtraded in Hong Kong dollars or other currencies, and referred to as H shares.Red Chip: enterprises that are incorporated outside of the Mainland and are controlled by Mainland Governmententities. The most important difference between a red chip company and an H-share company is that a red chipcompany is not Mainland-incorporated Source: China Securities Regulatory Commission website29 HK Stock Exchange website
  30. 30. 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 & Chemical 2.68 Ping An Insurance 2.50 Ping An Insurance 2.22 BOC – H 1.8330 Source: Nomura
  31. 31. China Sets Sail For New Leadership: 2013 ReformsHighlights of Investment ThemesExtract from China’s Stock Market: A Stock Picker’s Paradise (Oct/Nov 2012)31
  32. 32. 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 lender32
  33. 33. 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$)33 Source: IMF, Swiss Re, Manulife
  34. 34. 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 at anyprevious point in history.1Time to increase per capita GDP in PPP terms from $1,300 to $2,60034 Source: McKinsey Global Institute
  35. 35. 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.35 Source: McKinsey Insights China
  36. 36. China Sets Sail For New Leadership: 2013 ReformsStrong Demand for DiscretionaryRising importance of consumer spending.36 Source: McKinsey Insights China
  37. 37. 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.37 Disclaimer