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Precient Investment Management - China Opportunity
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Precient Investment Management - China Opportunity

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  • 1. The China Opportunity
  • 2. CHINA  Most great investments begin in discomfort. – “The things most people feel good about – investments where the underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. Rather, bargains are usually found among things that are controversial, that people are pessimistic about, and that have been performing badly of late.”
  • 3. CHINA MARKET UPDATE Wind Bloomberg 700 1700 2700 3700 4700 5700 6700 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Scary Bubble Where we are now
  • 4. CHINA MARKET UPDATE 0 1000 2000 3000 4000 5000 6000 7000 0 50 100 150 200 250 300 350 400 Earnings Est Earning Est Max Est Min CSI300 Index
  • 5. CHINA MARKET UPDATE Wind Bloomberg 0 0.2 0.4 0.6 0.8 1 1.2 1.4 1.6 1.8 0 1 2 3 4 5 6 7 8 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 China USA Great Recession Fear? Risk Premium?
  • 6. CHINA MARKET UPDATE Bloomberg Estimates End if Mayt 0 5 10 15 20 25 30 35 40 45 2007 October Today Top40 index DAX index MSCI World S&P 500 FTSE 100 CSI 300 (China)
  • 7. CHINA SECTOR UPDATE Inet, Wind 0 5 10 15 20 25 30 35 China South Africa
  • 8. 1960 AND MODERN CHINA Born in 1960 Born in 2009 Life Expectancy 47 73 Per Capita consumption at birth $102 $1429 Per Capita consumption at Death $1129 $21400 Lifetime Consumption $16443 $632024 (38x)
  • 9. CHINESE AND INDIAN CONSUMERS IN THE NEXT DECADE 2010 Income Distribution 2020 income distribution Number of Households (Millions) Share of households (%) Number of Households (Millions) Share of households (%) China Upper 24 6 91 21 Middle 109 28 202 47 Lower 260 66 138 32 India Upper 9 4 32 12 Middle 63 28 117 45 Lower 152 68 110 43  Billionaire’s 1 in 2004, 115 today  Movies total spend 17.6Billion RMB, up 40% a year compounded since 2006, 7x the market size, 2013 3Q growth up another 36%  Holiday makers, 20 Million in 2004, today 90 Million!  Chinese entrepreneurs believe in a 10 x 10 strategy, 10x the size in 10 years
  • 10. COMPANY SPOTLIGHTS Wind Haier - 10 20 30 40 50 60 2007 Now PE Ratio 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Earnings Growth Revenue Growth Growth - 5 10 15 20 25 30 35 40 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 ROE
  • 11. COMPANY SPOTLIGHTS Wind Huayu - 5 10 15 20 25 30 35 40 45 50 2007 Now PE Ratio 0% 5% 10% 15% 20% 25% 30% 35% 40% Earnings Growth Revenue Growth Growth (5.00) - 5.00 10.00 15.00 20.00 25.00 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 ROE Net Margin
  • 12. COMPANY SPOTLIGHTS MaoTai - 20 40 60 80 100 120 2007 Now PE Ratio 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% 30.00% Earnings Growth Revenue Growth Growth - 10 20 30 40 50 60 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 ROE Net Margin
  • 13. COMPANY SPOTLIGHTS Pingan - 10 20 30 40 50 60 2007 Now PE Ratio 0.00% 5.00% 10.00% 15.00% 20.00% 25.00% Earnings Growth Revenue Growth Growth - 5.00 10.00 15.00 20.00 25.00 2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 ROE Net Profit Margin
  • 14. CHINA RISK MAP Government Directed Lending Commercial Banks Low Deposit Rates Private Households Shadow Banking Unlisted SOEs / Policy Banks Private SMMEs Government Tight Lending Standards
  • 15. GOVERNMENT  Huge Reserves  Low debt to GDP  Good government balance sheets with very small deficits  Avenue to further develop taxation in China – Capital Gains – Dividends – Benefit restructuring  Exports continue to be strong, although imports catching up
  • 16. PRIVATE HOUSEHOLDS  Housing is a store of wealth  Huge deposits for housing  EXTREMELY low debt levels – Still not used to debt – Consumption very low  20% of residential housing un-occupied – A 30% drop in prices will result in around 11% of these houses to be underwater – A 30% drop in prices in occupied housing will only result in 2% of these homes to be underwater – High level of deposit  Rules and regulation against speculation
  • 17. HOUSE PRICE GROWTH Y-o-Y change -5% 0% 5% 10% 15% 20% 25% 01/07/2005 01/10/2005 01/01/2006 01/04/2006 01/07/2006 01/10/2006 01/01/2007 01/04/2007 01/07/2007 01/10/2007 01/01/2008 01/04/2008 01/07/2008 01/10/2008 01/01/2009 01/04/2009 01/07/2009 01/10/2009 01/01/2010 01/04/2010 01/07/2010 01/10/2010 01/01/2011 01/04/2011 01/07/2011 01/10/2011 01/01/2012 01/04/2012 01/07/2012 01/10/2012 01/01/2013 01/04/2013 01/07/2013 01/10/2013 01/01/2014 01/04/2014 Tier1 Cities (CNSB) 70 Cities (CNSB)
  • 18. SMMES  Very difficult to get access to credit – Get expensive credit through shadow banking signal  Shadow banking actually works like a real bank / corporate bond market – Depositors get higher yield with higher risk – SMMEs get access to credit although expensive credit  Trusts make up only 7-10% of GDP  HSBC research that 90% of products issued by trusts are issued by companies with huge financial backing and profitability, will have no problems in making investors whole  In general trust credit spreads are around 5%, which implies a default rate of around 33% over 5 years for investors to still be better off invested in them, current default rates are tiny around 1%
  • 19. UNLISTED SOES  Listed SOEs have some of the lowest debt levels across all companies – Makes sense as the privatisation / listing process started with the ones that was best managed  Unlisted SOE – GOD HELP THEM… – Restructuring – Government bail out – Local access  Government reform plans shows that those with polluting, excess capacity and low productivity will be allowed to default and close – Myth that Government do not fire people – Civil service reforms in early 1990s resulted in around 50 million people losing jobs before rehired in more efficient industry
  • 20. FINANCIAL STABILITY REPORT 2014  The Chinese Central Bank ran a stress test on the banks using the following scenario: – 4% GDP growth – Top 3 clients of each bank renege on their contracts – 30% default in developers – 15% default in private residential – Interest rate spread lowers by 100bps – Bad loans rises to 15%
  • 21. CONCLUSION  Very Cheap  Risky, growth slows down, new consumption model, reforms – In the price already?  Good Diversification  Long term picture more stable
  • 22. Equity Process
  • 23. CHINA BALANCED FUND Equity Factor Allocation Arbitrage, 6% Behavioural, 19% Quality, 19% Historical Earnings, 28% Forecasted Earnings, 28% Value, 56% Factor Allocation
  • 24. FACTOR PERFORMANCE Month Since Inception Value Behavioural Quality Value Behavioural Quality 2013-04-23 -0.08% 1.52% 1.97% -0.08% 1.52% 1.97% 2013-05-27 -3.22% 0.65% 1.69% -3.30% 2.19% 3.70% 2013-06-26 0.65% -1.64% 2.79% -2.67% 0.51% 6.59% 2013-07-25 -0.56% -1.92% -0.14% -3.21% -1.41% 6.44% 2013-08-23 1.30% 2.58% -1.50% -1.96% 1.13% 4.85% 2013-09-18 0.53% 2.05% -4.50% -1.43% 3.20% 0.13% 2013-10-29 0.63% 1.09% -1.87% -0.81% 4.32% -1.74% 2013-11-27 0.73% 1.26% -2.14% -0.09% 5.64% -3.84% 2013-12-27 0.39% 1.96% 2.36% 0.30% 7.71% -1.58% 2014-01-28 -0.02% 0.15% 0.11% 0.28% 7.87% -1.47% 2014-02-26 0.38% 5.62% -1.04% 0.66% 13.94% -2.49% 2014-03-26 1.70% 4.02% 0.91% 2.37% 18.52% -1.61% 2014-04-24 0.20% -3.21% -0.60% 2.57% 14.71% -2.19% 2014-05-27 0.45% -0.38% -0.34% 3.04% 14.28% -2.53%
  • 25. ALPHA DISTRIBUTION 0 100 200 300 400 500 600 700 800 900 Alpha Distribution
  • 26. EQUITY CARVE-OUT ALPHA -2.00% -1.00% 0.00% 1.00% 2.00% 3.00% 4.00% 5.00% 6.00% Cumulative Alpha
  • 27. MAY PORTFOLIO Fin, 35% Mat, 7% Ind, 13% Util, 4% Tel, 0% IT, 5% Eng, 5% Con Dis, 11% Con Stap, 7% HC, 8%Sectors -4.09% -0.86% -1.41% 0.86% -0.45% 0.71% -0.12% -1.05% -0.29% 1.62% -5.0% -4.0% -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% Fin Mat Ind Util Tel IT Eng Con Dis Con Stap HC Sector Under/Overweight 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Great Wall Motor Co Ltd Huadian Power International… Hong Yuan Securities Co Ltd Qingdao Haier Co Ltd Bank of Beijing Co Ltd Dashang Group Co Ltd Anhui Gujing Distillery Co Ltd Avic Capital Co Ltd Xiamen C & D Inc Changjiang Securities Co Ltd Huaxia Bank Co Ltd Top 10 Over Weight -3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0% Industrial Bank Co Ltd China Merchants Bank Co Ltd Ping An Insurance Group Co of… Gree Electric Appliances Inc Haitong Securities Co Ltd CITIC Securities Co Ltd China Everbright Bank Co Ltd China Pacific Insurance Group Co… Anhui Conch Cement Co Ltd Kweichow Moutai Co Ltd Top 10 Under Weight
  • 28. FUND TILL END OF MAY Prescient 2014 YTD Since Inception Fund Gross of Fees in USD -7.38% -10.76% CSI300 Total Return in USD -9.97% -14.32% China CPI+3 in USD -0.71% 5.47% -7.38% -10.76% -9.97% -14.32% -0.71% 5.47% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% Fund Performance Fund Gross of Fees in USD CSI300 Total Return in USD China CPI+3 in USD
  • 29. FUND AVAILABILITY  UCITS regulated fund in Ireland  Feeder fund structure in South Africa
  • 30. China Debt Fund Opportunity
  • 31. CHINA CONSERVATIVE FUND  As of Wednesday the 17th June – CNYZAR exchange rate is 1.62 ZAR per CNY – CNYZAR 1 year forward rate is 1.73 ZAR per CNY – Start with 100 rands buy CNY at 1.62 at the same time sell CNY forward at 1.73 for 1 year ahead – 100 / 1.62 = 61.66 CNY – We earn 4.3% in CNY = 64.31 CNY – We sell CNY back to ZAR at 1.73 – 111.07 ZAR – We make 11.07% in 1 year  This has no currency risk, assets invested in money market instruments in China – No duration risk Arbitrage
  • 32. CHINA CONSERVATIVE FUND  The biggest opportunity in China ATM comes from the mispricing of the forwards Arbitrage -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 23-Aug-09 23-Oct-09 23-Dec-09 23-Feb-10 23-Apr-10 23-Jun-10 23-Aug-10 23-Oct-10 23-Dec-10 23-Feb-11 23-Apr-11 23-Jun-11 23-Aug-11 23-Oct-11 23-Dec-11 23-Feb-12 23-Apr-12 23-Jun-12 23-Aug-12 23-Oct-12 23-Dec-12 23-Feb-13 23-Apr-13 23-Jun-13 23-Aug-13 23-Oct-13 23-Dec-13 23-Feb-14 23-Apr-14 EUR assets CNY assets
  • 33. CHINA CONSERVATIVE FUND Potential Fund Asset Allocation CSI Short Term Bond Index (1 year) Portfolio Weighting Return Weighting Return 0 - 3 months 21% 4.2% 25% 4.7% 3 - 6 months 30% 4.3% 25% 4.3% 6 - 12 months 49% 4.6% 50% 5.2% Weighted Return 4.4% 4.7%
  • 34. CHINA CONSERVATIVE FUND Arbitrage
  • 35. CHINA CONSERVATIVE FUND Arbitrage
  • 36. CHINA CONSERVATIVE FUND  Fixed income fund with less than 2 year maturity – Average 1 year – Maximise yield – Avoid defaults – Building block  3 classes – CNY – USD – ZAR – Segregated  Official benchmark – Chinese CPI – Chosen also because China lacks a proper short term fixed income benchmark
  • 37. Thank you Regulatory Information This presentation has been compiled to provide factual information on the product offered and does not constitute advice. A copy of this presentation is available from Prescient upon request. Prescient Investment Management is a Financial Services Provider authorised under the Financial Advisory and Intermediary Services Act of 2002 (FSP 612). Business address: Prescient House, Westlake Business Park, Otto Close, Westlake, Cape Town, 7945 Tel: 021 700 3600 Fax: 021 700 3700

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