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New capital china equity fund value play sept 2013 Presentation Transcript

  • 1. New Capital China Equity Fund September 2013 Mansfield Mok Portfolio Manager New Capital China Equity Fund For Qualified & Accredited Investors Only China: The Ultimate Value Play
  • 2. New Capital China Equity Fund: China --- The Ultimate Value Play 2 A Golden Decade for China Has Started Rank Country – 2010 GDP* (U$ Million) Country – 2020 GDP* (U$ Million) 1 USA 14,802,081 China 28,124,970 2 China 9,711,244 USA 22,644,910 3 Japan 4,267,492 India 10,225,943 4 India 3,912,911 Japan 6,196,979 5 Germany 2,861,117 Russia 4,326,987 6 Russia 2,221,755 Germany 3,981,033 7 United Kingdom 2,183,277 Brazil 3,868,813 8 France 2,154,399 United Kingdom 3,360,442 9 Brazil 2,138,888 France 3,214,921 10 Italy 1,767,120 Mexico 2,838,722 Source: Euromnitor International from IMF, International Financial Statistics and World Economic Outlook/UN/National Statistics *The GDP numbers are in PPP terms CHINA TO BECOME THE LARGEST ECONOMY
  • 3. New Capital China Equity Fund: China --- The Ultimate Value Play 3 Unstoppable Global Trend…. FROM WEST TO EAST: THE RISE OF CHINESE MNCS • Number of Chinese MNC in the Fortune Global 500 list has jumped sharply over the past eight years in line with the fast economic growth in China. • Chinese corporate has strong influence in the global market as reflected by their involvement in global M&As: ─ China Shuanghui to acquire US Smithfield Foods for US$4.7 billion (May 2013) ─ CNOOC acquired Canada’s Nexen for US$15.1 billion (Feb 2013) ─ Bright Food Group acquired 60% stake of UK’s Weetabix for GBP1.2 billion (Nov 2012) Source: Fortune Global 500 List, 2005 and 2013 Number of MNCs in Fortune Global 500 List Countries 2005 2013 Asia Pacific Japan 81 62 China 16 89 South Korea 11 14 Australia 9 8 India 5 8 Taiwan 2 6 Singapore 1 2 Malaysia 1 1 Thailand 1 1 G-7 Western Countries US 176 132 France 39 31 Germany 37 29 UK 37 26 Canada 13 9 Italy 8 8
  • 4. New Capital China Equity Fund: China --- The Ultimate Value Play 4 China Is Less Affected By Fed Tapering CHINESE ECONOMY IS LESS DEPENDENT ON CAPITAL INFLOW • Slowing US Fed Purchases will have a bigger impact on countries (highlighted in red) whose economies are supported by capital inflows. • China is running at current account surplus: – Chinese economy has surplus domestic liquidity generated from its export of goods and services, compared to other countries. • China has a low loan/deposit ratio: – Chinese banking system is full of liquidity and does not rely on wholesale funding from foreign banks. Source: * Loan-to-Deposit Ratio 2013, Deutsche Bank ** 2013 Current Account/GDP Ratio, Economist Intelligence Unit forecast Country LDR (%)* CA/GDP (%)** Australia 111 -3.6 South Korea 111 3.4 Taiwan 79 10.9 Hong Kong 69 1.2 China 67 1.7 Singapore 96 19.2 Malaysia 78 6.7 Thailand 113 1.0 Indonesia 88 -1.6 India 78 -4.1 Philippines 69 2.5 Euro Land 107 1.6 Japan 68 0.9 US 71 -2.8
  • 5. New Capital China Equity Fund: China --- The Ultimate Value Play 5 Rerating Is Getting Close
  • 6. New Capital China Equity Fund: China --- The Ultimate Value Play 6 Global Financial Crisis: An Opportunity For China Source: Morgan Stanley • 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 Outlook -2 -1 0 1 2 3 4 5 6 7 8 9 China Japan US Euro World 2012 2013E 2014F *Note: Index performance from 31 Dec 2010 to 30 Aug 2013 US( SPX Index); Japan (NKY Index); Euro (SX5E Index); China (MXCN Index) Countrie s Current Accoun t Fiscal Deficits Gross Public Debt Total Return (USD)* US -2.9 5.3 76 37.6% Japan 0.8 10.9 247 14.8% Euro area 2.0 2.5 92 9.6% China 2.9 2.0 52 -4.3% All figures are CS estimates and represented as % of 2013 GDP
  • 7. New Capital China Equity Fund: China --- The Ultimate Value Play 7 China Stock Market: Attractive Valuation • 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 CS Prime Services data. Source: Credit SuisseSource: Nomura Securities, as at end August 2013 0 5 10 15 20 25 30 35 40 45 50 1/31/2000 1/31/2001 1/31/2002 1/31/2003 1/31/2004 1/31/2005 1/31/2006 1/31/2007 1/31/2008 1/31/2009 1/31/2010 1/31/2011 1/31/2012 1/31/2013MS China - 12mth Fwd P/E(x) Net exposure Change since Sept 2012 to 27 Aug 2013 ** (%pt)
  • 8. New Capital China Equity Fund: China --- The Ultimate Value Play 8 What Will Trigger Rerating? • Short-Term and Medium-Term Re-rating Catalysts: – New QFII Monies Inflow: − SAFE has granted some US$7billion+ QFII quota to foreign investors during the period from Dec 2012 to June 2013. − These monies will need to invest into the Chinese A share and Bond market within the next six months from the date of the grant. – QDII2 (Qualified Domestic Individual Investor): − This is a new program subject to approval, which allows Chinese investors to take positions in overseas capital markets. – Structural Reforms: − The 3rd plenary session of 18th CPC Central Committee meeting will be held in November to discuss deepening reform measures. Market friendly reforms are expected to be implemented in due course. − These new reforms will unlock the growth potential of China, underwriting the start of a multi-year bull market of Chinese equity. THREE IMPORTANT CATALYSTS WILL SUPPORT THE MARKET IN THE NEXT FEW MONTHS
  • 9. New Capital China Equity Fund: China --- The Ultimate Value Play 9 President Xi Has A Strong Desire For Reform STARTED WITH ANTI CORRUPTION CAMPAIGN • “The national anti-graft watchdog launched its official website, which allows citizens to send information they have about corrupt officials either anonymously or by using their real names.” South China Morning Post, 3rd September, 2013 • “Top Communist Party leaders have agreed to open a corruption investigation into former security tsar Zhou Yong-kong, a retired member of the Politburo Standing Committee….” South China Morning Post, 30th August, 2013 • “China's Ministry of Supervision said Monday it was investigating Wang Yong-chun, a vice president at state-owned China National Petroleum Corp. for "severe disciplinary violations”….” Asian Wall Street Journal, 26th August, 2013 • “The official Xinhua News Agency reported that the agency that supervises assets said an audit of China Resources Group was under way and that any wrongdoing, if found, would be punished…” South China Morning Post, 19th July, 2013
  • 10. New Capital China Equity Fund: China --- The Ultimate Value Play 10 Reforms Create Opportunities FOLLOWED BY MARKET FRIENDLY REFORMS TO UNLOCK GROWTH POTENTIAL 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 policy Source: Deutsche Bank
  • 11. New Capital China Equity Fund: China --- The Ultimate Value Play 11 Active Approach To Capture Economic Growth
  • 12. New Capital China Equity Fund: China --- The Ultimate Value Play 12 Economic Growth vs Index Performance INDEX PERFORMANCE FELL BEHIND GDP GROWTH DURING 2007-2012 Source: Bloomberg China Nominal GDP compound annual Growth p.a. MSCI China Index Performance compound annual return p.a. 3 Years to 6 Years to 3 Years to 6 Years to 2006 +16.8 +14.6 +27.5 +16.5 2007 +18.5 +15.9 +46.7 +31.3 2012 +15.0 +15.7 -1.3 +1.9 Note: * GDP growth and performance number are in CNY
  • 13. New Capital China Equity Fund: China --- The Ultimate Value Play 13 What is “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 company and put in a low valuation. − Insurance company at 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 company saw sharp decline in production growth over the years. They became utilities and experienced P/E contraction.
  • 14. New Capital China Equity Fund: China --- The Ultimate Value Play 14 Top 10 MSCI China Index Components WEIGHTING OF MATURE COMPANIES RISING 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 80% of top 10 Index component are mature companies and may not catch up with the economic growth of China Source: Nomura
  • 15. New Capital China Equity Fund: China --- The Ultimate Value Play 15 Outlook And Investment Theme
  • 16. New Capital China Equity Fund: China --- The Ultimate Value Play 16 China’s Investment Outlook • Sustainable, above-average economic growth – Among the major economies, China offers attractive GDP growth of 7% pa backed by fiscal stimulus and structural reforms. – China is changing its economic model to one 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 – Despite the concern of US Fed tapering, global economy remains lukewarm and there is no sign of inflation. – PBoC will maintain its monetary easing policy in view of lacklustre global economy and low inflationary pressure. • Attractive valuation – Market is trading at historical low levels in both P/B and P/E terms. • Smooth leadership transition – Implementation of structural reforms will unlock China’s growth potential. • Risks – Geo-political uncertainty.
  • 17. New Capital China Equity Fund: China --- The Ultimate Value Play 17 Industry Trends • SAP Second Quarter and First Half Results 2013: “We’ve just started to see projects being released again. We’ll start to see some of that [State-owned enterprises] spending happening in the third quarter, and we believe a lot more will happen in fourth quarter”. SAP Asia-Pacific and Japan president Steve Watts, comments reported in SCMP, 20th July 2013. • China Aviation Market : “China is taking steps to deregulate its domestic and international aviation market, and may amend its closely watched air transport treaty with the US.....”, reported in Asian Wall Street Journal, 5th September 2013. • China Mobile: “Citing industry sources, Reuters yesterday reported that China Mobile awarded supply contracts worth about Rmb 20bn in its recent 4G infrastructure tender, with Huawei and ZTE getting about 25% each of that total…..The tender was for the build-out of about 207,000 TD-LTE base stations to cover the main districts of 100 major cities across the mainland””, reported in South China Morning Post, 24th August 2013. IMPORTANT QUOTES
  • 18. New Capital China Equity Fund: China --- The Ultimate Value Play 18 Current Investment Themes … • Internet Boom − Growing importance of E-commerce and on-line shopping. – Rising CAPEX for telecom operators • 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.
  • 19. New Capital China Equity Fund: China --- The Ultimate Value Play 19 Another Major Trend In E-Commerce CHINA WILL EMERGE AS THE LARGEST E-COMMERCE MARKET GLOBALLY IN 2013 • China has the largest population of Netizen, with over 600m internet users and 286m of on- line buyers. • The e-commerce activities in China will pick-up faster because of: – Increase in broadband penetration – Rising smartphone penetration – Popularity of on-line payment systems – Increase in internet usage Source: Credit Suisse E-commerce penetration and sales
  • 20. New Capital China Equity Fund: China --- The Ultimate Value Play 20 A Big Increase in Middle Income Group Source: McKinsey Insights China • China’s middle income consumer will reach 166 million household by 2020, double total of US, Japan and Germany. • The increase in middle income consumer will support the demand for discretionary goods. UNDERWRITING STRONG CHINA DEMAND FOR CONSUMER PRODUCTS
  • 21. New Capital China Equity Fund: China --- The Ultimate Value Play 21 RMB Internationalisation: Banking Reform CHINA 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
  • 22. New Capital China Equity Fund: China --- The Ultimate Value Play 22 … and the Ones to Avoid • Gaming: – Lack of Earnings transparency – over 70% of profit are from VIP tables. – Forecasting earnings growth is impossible as VIP revenue is not predictable. • Alternative Energy: − Solar Energy: - Sub-standard business model which requires government subsidy. – Shale Gas in China: - Not feasible under the current environment as China has a water shortage issue. NOT ALL INVESTMENT THEMES ARE INVESTABLE FROM A BOTTOM-UP PERSPECTIVE. EXAMPLES:
  • 23. New Capital China Equity Fund: China --- The Ultimate Value Play 23 Positioning & Strategy • Overweight − Information technology - Telecom equipment provider - Internet Company – 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 – No exposure in Energy because it is a mature sector. Their flat production volume means that they cannot capture Chinese underlying economic growth. – Zero weighting in materials and capital goods. • Strategy – The implementation of the market friendly reform will kick-start a multi-year bull market for China Equity. – The current correction will provide an excellent opportunities to accumulate selective names.
  • 24. New Capital China Equity Fund: China --- The Ultimate Value Play 24 Sector Weighting AS AT 30 AUGUST 2013
  • 25. New Capital China Equity Fund: China --- The Ultimate Value Play 25 Top 10 Holdings AS AT 30 AUG 2013 Holding % Nature of Business Baidu Inc 5.70 The largest search engine in China Shenzhen Int’l 4.62 An RMB Internationalization play New China Life -– H Share 4.29 One of the largest life insurance companies in China Tencent 4.11 The China internet company having a “Facebook” business model China Everbright Ltd 4.08 A listed China Fund Manager ZTE – H Share 4.03 One of the largest telecom equipment makers China Life – H Share 4.01 The largest life insurance company in China Far East Horizon 3.92 The largest leasing company in China Wilmar International 3.86 A plantation conglomerate which will distribute corn flakes in China Chongqing Rural Commercial Bank – H Share 3.58 A niche Chinese bank with strong deposit franchise
  • 26. New Capital China Equity Fund: China --- The Ultimate Value Play 26 Year-to-Date Attribution vs MSCI China Source: Bloomberg as at 30 August 2013
  • 27. New Capital China Equity Fund: China --- The Ultimate Value Play 27 New Capital China Equity Fund • The New Capital China Equity Fund invests in equities of public companies with significant business activities in the People’s Republic of China and Hong Kong. The equities are quoted securities listed or traded on stock exchanges worldwide • The investment strategy adopts a fundamental stock- picking approach by investing in small, medium and large companies which have re-rating potential • Stock selection is driven by bottom-up analysis of earnings outlook, profitability trend, balance sheet strength and management quality of a company • The investment horizon of the strategy is between one to three years, allowing the hidden potential of the companies to be reflected in the share price over time to achieve capital appreciation INVESTMENT OBJECTIVE & STRATEGY. Sub-Fund Name New Capital China Equity Fund Investment Style Equities Long Only, with options and futures for protection Markets China and Hong Kong primarily (all caps) Benchmark MSCI China Index Base Currency USD Max Cash No cash limit and no leverage Fund Entity UCITS IV – New Capital UCIT FUND PLC Regulated by the Central Bank of Ireland Base Fee 1.75% (Ordinary) 0.90% (Institutional) Liquidity Daily dealing
  • 28. New Capital China Equity Fund: China --- The Ultimate Value Play Peer Group Performance Comparison NEW CAPITAL CHINA EQUITY FUND OUTPERFORMED PEERS AND BENCHMARK SINCE INCEPTION (20/8/2012) Source: Bloomberg as at 30 August 2013 28 -10 -5 0 5 10 15 20 25 30 20/08/2012 03/09/2012 17/09/2012 01/10/2012 15/10/2012 29/10/2012 12/11/2012 26/11/2012 10/12/2012 24/12/2012 07/01/2013 21/01/2013 04/02/2013 18/02/2013 04/03/2013 18/03/2013 01/04/2013 15/04/2013 29/04/2013 13/05/2013 27/05/2013 10/06/2013 24/06/2013 08/07/2013 22/07/2013 05/08/2013 19/08/2013 New Capital China Equity Fund MSCI China Index BB China Peers Index
  • 29. New Capital China Equity Fund: China --- The Ultimate Value Play 29 Stock Example: Baidu (BIDU US Equity) CHINESE GOOGLE GOES MOBILE Source: Bloomberg from 31 Dec 2010 to 30 August 2013 • Baidu is a Chinese web services company with a dominant position in Chinese language search engine for websites, audio files and images. • The company has been expanding its mobile services to include on-line video and mobile app store, capturing the fast growing ecommerce in China. • Baidu has strong balance sheet and cashflow from advertising revenue. Its recent acquisitions will bring the company to the next stage of fast growing business opportunities in Chinese ecommerce market. Date Price
  • 30. New Capital China Equity Fund: China --- The Ultimate Value Play 30 An Experienced Investment Team A DEDICATED, LOCALLY-BASED TEAM SUPPORTED GLOBALLY. Years denote investment experience in industry.
  • 31. New Capital China Equity Fund: China --- The Ultimate Value Play 31 Fund Manager AN AWARD WINNING FUND MANAGER: THE SUCCESS OF A “BOTTOM-UP RE-RATING” STRATEGY • Mansfield Mok has over 22 years of investment experience • During his five year tenure at GAM, the $1.5 billion GAM Star China Equity Fund, co- managed by Mansfield, outperformed the MSCI China Index from August 2007 to April 2012 by 72.1%* net of fees • Mansfield began his investment career in 1990 as an analyst with Hoare Govett, before moving on to ING Barings Securities HK Limited in 1992 and Munich Re Asia Capital Management in 2000 • Awards won: – Taipei Foundation of Finance-Bloomberg Awards 2012 & 2011: GAM Star China Equity Fund – Best Foreign Fund (3 years) – Professional Adviser Awards 2011: GAM Star China Equity Fund – Best Fund Manager Over 3 years – Lipper Fund Awards 2011, Switzerland: GAM Star China Equity Fund – Best Equity China Fund Over 3 years – Lipper Fund Awards 2011, Hong Kong: GAM Star China Equity Fund – Best Equity China Fund Over 3 years *Source: Bloomberg (31 July 2007 – 30 April 2012). Past performance is not an indicator of future performance.
  • 32. New Capital China Equity Fund: China --- The Ultimate Value Play 32 0 20 40 60 80 100 120 140 160 180 200 5432112111098765432112111098765432112111098765432112111098765432112111098 201220112010200920082007 Aberdeen Global Chinese Equity A2 Templeton China A Acc $ GAM Star China Equity USD Acc Fidelity Greater China A-USD First State China Growth II Acc Schroder Greater China Characteristics of a Concentrated Portfolio: • Alpha is mainly generated in an up-market where the “Buy and Hold” re-rating strategy is most successful (early 2009 to mid 2010) • Insurance protections including use of index put option and the increase in exposure of high dividend yield stock will enhance return in the down market (2008). • Insurance protection policy will be less effective when the Fund’s AUM reaches USD500m (mid 2010). • When the Fund’s AUM grows beyond US$500m: - the investable universe will shrink - more time to build/exit a position During Mansfield Mok’s five year tenure at GAM, the $1.5 billion GAM Star China Equity Fund outperformed the MSCI China Index by 71.1% Past performance is not an indicator of future performance. Source: Bloomberg Competitive Landscape
  • 33. New Capital China Equity Fund: China --- The Ultimate Value Play 33 UNDER MOK’S CO-MANAGEMENT, THE GAM STAR CHINA EQUITY FUND ACHIEVED SIGNIFICANT ABSOLUTE AND RISK-ADJUSTED OUTPERFORMANCE AGAINST BOTH THE BENCHMARK AND COMPETITORS. GAM Star China -20 -15 -10 -5 0 5 10 0 10 20 30 40 50 60 Std Dev 5-yrreturn Return (Ann) vs. Std Dev (Aug 2007 – July 2012) Past performance is not an indicator of future performance. Benchmark MSCI China Index Source: GAM, MSCI, Lipper Source: Morningstar Outperformance of the Index calculated net of fees, in USD Top 10 out of 122 Peer Group Peer Group Analysis
  • 34. New Capital China Equity Fund: China --- The Ultimate Value Play 34 Appendix
  • 35. New Capital China Equity Fund: China --- The Ultimate Value Play 35 Definition Of Various China Shares A-Share: RMB-denominated ordinary share. It is issued by domestic companies for trade with RMB by 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 and Shenzhen markets. B-share transaction was only for natural persons, legal persons and other organizations 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 approved by the China Securities Regulatory Commission (CSRC). Shares in these companies are listed in Hong Kong, subscribed for and traded 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 Government entities. The most important difference between a red chip company and an H-share company is that a red chip company is not Mainland-incorporated Source: China Securities Regulatory Commission website HK Stock Exchange website
  • 36. New Capital China Equity Fund: China --- The Ultimate Value Play 36 QFII (Qualified Foreign Institutional Investor) Scheme: This is a transitional arrangement introduced in 2002, allowing foreign investor’s direct access to China's capital market. Institutional investors who meet certain qualification are allowed to invest in a limited scope of cross-border securities products in Mainland. Under which, the quota, products, accounts, and fund conversions are strictly monitored and regulated. RQFII (RMB Qualified Foreign Institutional Investor) Scheme: a scheme which allows qualified holders of RQFII quota to raise funds in Hong Kong and channel such funds to directly invest into Mainland securities available in the Mainland securities market. QDII (Qualified Domestic Institutional Investors) Scheme: Under this scheme, qualified domestic financial institutions (such as banks, funds and investment companies) are entrusted by domestic investors to invest in stipulated overseas financial products according to their agreed investment terms and methods. Investment gains and risks will be borne by investors or shared between investors and QDII holders according to agreed terms. QDII2 (Qualified Domestic Individual Investors 2) Scheme: This is a trial program which allow Chinese investors to take positions in overseas capital markets. Currently, Chinese individual investors can only invest in foreign capital markets via funds offered by authorized fund managers or securities companies under the QDII program. Different Investment Schemes In China Source: China Securities Regulatory Commission website; HK Stock Exchange website
  • 37. New Capital China Equity Fund: China --- The Ultimate Value Play 37 China: Emphasis on Quality Not Quantity • “To achieve this year’s development targets the room to rely on stimulatory policies and direct government investment is not big and we will need to rely on market mechanisms.” Li Keqiang, Chinese Premier, comments reported in FT article (by Jamil Anderlini), 15th May, 2013 • “China’s undergoing economic restructuring, which sometimes is not in lockstep with growth. We need to sacrifice short-term growth for the purposes of reforms and structural adjustments.” Zhou Xiaochuan, PBOC Governor, comments reported in Bloomberg article, 22nd April, 2013 • “China’s model of development is not sustainable so it is imperative for us to speed up the transformation of the growth model.” Xi Jinping, Chinese President, comments reported in FT article (by Jamil Anderlini), 8th April, 2013
  • 38. New Capital China Equity Fund: China --- The Ultimate Value Play 38 Strong Demand for Discretionary Source: McKinsey Insights China RISING IMPORTANCE OF CONSUMER SPENDING
  • 39. New Capital China Equity Fund: China --- The Ultimate Value Play 39 Insurance: An Underpenetrated Business Source: IMF, Swiss Re, Manulife GDP, Penetration and Life Market (Life Insurance penetration vs. GDP per Capita 2011Premiumas%ofGDP 2011 GDP per Capita (US$) Emerging Markets Mature Markets Future Giants
  • 40. New Capital China Equity Fund: China --- The Ultimate Value Play 40 Market Review: 1H 2013
  • 41. New Capital China Equity Fund: China --- The Ultimate Value Play 41 Three Major Macro-Economic Events • Aggressive Bank of Japan QE program – Over the past year, Asia Pacific Equity portfolios have been underweight Japan. – The aggressive BoJ QE program has triggered inflow back into Japan due to portfolio adjustment. – The China equity market was one of the funding sources. • Investors worry that US Fed may start tapering its QE program – Bond yield edges higher. – Higher bond yield triggered profit taking on EM Bonds, EM Equities and high dividend yielding stocks. • Surge in SHIBOR – SHIBOR went up in late June ahead of the half-year end. The market considered it as an early sign of a credit crunch in China. – The concern of a likely credit crunch in China led to selling pressure on Chinese banks. PORTFOLIO ADJUSTMENT SAW WEAKER CHINA EQUITY PRICES
  • 42. New Capital China Equity Fund: China --- The Ultimate Value Play Portfolio Adjustment Is Almost Done • Asia Pacific Equity Portfolios have been underweight Japan for the past few years. ─ As reflected from the continual outflow since late 2007. • Portfolio adjustment started in late 2012 following an aggressive BOJ QE program: – Portfolio managers put monies back to Japan by reducing exposure to other Asian countries, in particular China. – Cumulative flow for Japan went back to mid 2007 level suggesting that the adjustment is almost done Data as of 24 July 2013 42 Source: Morgan Stanley
  • 43. New Capital China Equity Fund: China --- The Ultimate Value Play 43 Interbank Rate Has Less Influence on China CHINESE CORPORATE FUNDING COST IS STILL LARGELY BASED ON PBOC OFFICIAL LENDING RATE • Interbank lending in China only accounts for a small portion of China’s real economy. − China has a close capital market and its interest rate is not fully liberalised. Most corporate borrowing rates are still based on the PBoC lending rate. • Investors should view the proactive action of CBRC positively. − The surge in SHIBOR in June was due to the tightening measures implemented by CBRC on various financing channels. • Risk of a credit crunch is low in China − China has large FX reserves and should be able to provide liquidity into the banking system if needed. Source: Morgan Stanley Recent Regulatory Tightening on New Financing Channels
  • 44. New Capital China Equity Fund: China --- The Ultimate Value Play 44 US Credit Crunch in 2008 2008 US CREDIT CRUNCH WAS TRIGGERED BY PROPERTY CRASH • 2008 US credit crunch was triggered by a property crisis where property prices dropped 20% from their peak. This led to rising property foreclosure. • US property/mortgage has unique features which contributed to the collapse: ─ Very small (No need for) down payment • Less cushion for the banking system ─ Mortgage loan is a non-recourse loan • Bank will have big capital loss on default ─ High urbanisation rate in the US • Less genuine end-user demand
  • 45. New Capital China Equity Fund: China --- The Ultimate Value Play 45 Risk Of a China Credit Crunch is Low RESIDENTIAL PROPERTY PRICES ARE STILL ON AN UP TREND • Property market remains healthy and will not put banks at risk: ─ Property price is still on an up trend ─ Mortgage’s loan-to-value ratio of around 60-65% ─ China’s urbanisation rate is only 50 and rising ─ Highly leveraged property developers are the weakest link • Risk of a credit crunch in China is low: ─ China is running a close capital account and can control the inflow and outflow of capital ─ China has US$3.4 trillion foreign reserves and can be injected into the banking system ─ State-owned banks still dominate in the banking system and will become the lender of last resort if needed.
  • 46. New Capital China Equity Fund: China --- The Ultimate Value Play 46 Chinese Households Are Less Indebted Than The US
  • 47. New Capital China Equity Fund: China --- The Ultimate Value Play 47 Chinese Labour Market Trend Slow down in growth of “working age” population Source: IMF
  • 48. New Capital China Equity Fund: China --- The Ultimate Value Play Disclaimer 48 Issued by EFG Asset Management (UK) Limited which is authorised and regulated by the Financial Conduct Authority. Registered No: 7389746. Registered address: Leconfield House, Curzon Street, London W1J 5JB. Telephone: +44 (0)20 7491 9111. This document does not constitute an offer to sell, solicit or buy any investment product or service, and is not intended to be a final representation of the terms and conditions of any product or service. The investments mentioned in this document may not be suitable for all recipients and you should seek professional advice if you are in doubt. Clients should obtain legal/taxation advice suitable to their particular circumstances. This document may not be reproduced or disclosed (in whole or in part) to any other person without our prior written permission. Although information in this document has been obtained from sources believed to be reliable, EFGAM does not represent or warrant its accuracy, and such information may be incomplete or condensed. All estimates and opinions in this document constitute our judgment as of the date of the document and may be subject to change without notice. EFGAM will not be responsible for the consequences of reliance upon any opinion or statement contained herein, and expressly disclaims any liability, including incidental or consequential damages, arising from any errors or omissions. Performance results shown are net of applicable fees and expenses. The value of investments and the income derived from them can fall as well as rise, and you may not get back the amount originally invested. Past performance is no indicator of future performance. Investment products may be subject to investment risks, involving but not limited to, currency exchange and market risks, fluctuations in value, liquidity risk and, where applicable, possible loss of principal invested. The information contained in this fact sheet is merely a brief summary of key aspects of the New Capital UCITS Fund plc. More complete information on the fund can be found in the prospectus, the simplified prospectus or key investor information document, and the most recent audited annual report and the most recent semi-annual report. These documents constitute the sole binding basis for the purchase of fund units. Copies of these documents are available free of charge in the United Kingdom at EFG Asset Management (UK) Limited (“EFGAM”), Leconfield House, Curzon Street, London W1J 5JB, United Kingdom. Copies of these documents are available free of charge in Germany at the offices of the German information agent, HSBC Trinkaus & Burkhardt AG, Königsallee 21/23, 40212 Düsseldorf, Germany. Copies of these documents are available free of charge in France from the French centralizing agent, Societe Generale, 29, boulevard Haussmann – 75009 Paris, France. Copies of these documents are available free of charge from the Swiss Representative: CACEIS (Switzerland) SA, Chemin de Précossy 7-9 CH-1260 Nyon, Switzerland. Paying Agent: EFG Bank AG. Bahnhofstrasse 12, PO Box 2255, 8022, Zurich Switzerland. Country of origin of the collective investment scheme: Ireland