I have always counted myself very lucky that I do a job which allows, and even requires, me to travel to some very different and interesting places. My latest research trip took me to China where we visited Chengdu, Yibin and Beijing. I was particularly keen to understand what impact, if any, the continued US/Sino trade friction was having on the consumer.
In Yibin we were taken on a conducted tour of the vast premises occupied by Wuliangye Yibin, the second largest maker of Baijiu, an extremely powerful alcoholic spirit. It is the global best seller: 6 billion litres were sold in 2016, rising to 10.9 billion litres in 2018, more than the worldwide sales of gin, whisky, vodka, tequila and rum combined. Wuliangye has a 40% share of this huge market, and although its shares are listed and freely available, it is majority owned by the Government. Baijiu is distilled from fermented sorghum, although other grains, and even rice, can be used. Wuliangye uses five different grains in its process, (which is, in fact what Wuliangye means), with water from the nearby Min River, (after heavy purification, one hopes!). We tasted the extremely powerful product, with varying degrees of enthusiasm, and the company is expected to achieve sales growth of 15% in both 2019 and 2020, with earnings at least 20% higher.
We then spent several days in Beijing, meeting a very interesting variety of consumer orientated companies. These ranged from e-commerce retailers, through to education services providers and restaurateurs. Invariably, we found ourselves greatly encouraged by what they had to say. China International Travel, for example, another State Owned Enterprise, which operates almost all of China’s Duty Free outlets, told us that outbound tourists were up by 14% this year, while JD.com, China’s nearest equivalent to Amazon, is firmly focussed on improving its already excellent delivery capability, especially in what are called “lower tier cities”. These now account for around half its business.
One of our most interesting meetings was with ByteDance, which operates the video sharing app, Tik Tok, amongst others. Although still privately owned and a mere seven years old, it is China’s fastest growing social media platform, where apparently 60 million short videos are uploaded every day. The model is driven by advertising revenues and the app is primarily targeted at millennials and teenagers. We learned that it made a profit in June, having been loss making overall in the first half, but it already accounts for 13% of all time spent online in China and is second only to Tencent, which remains well ahead at 43%. Whilst we are well aware of the challenges in the social media space and that tastes can be fickle, the numbers appear compelling. It looks likely to list at some stage in the next year or so, a prospect which we view with great interest.
Education is a massive priority in China, with parents, and indeed grandparents, willing and increasingly able to spend quite substantial sums on a child’s education. It is hard to know the exact size of the sector, but New Oriental achieved sales of over US$3bn last year, and they believe that they have a mere 2% share. Annual tests determine the grade of class to which pupils are assigned for the following year, and it is thus a very competitive system, with nobody wanting to fall behind. After school tutoring has therefore become hugely important, and New Oriental Education has long been the national leader in this area. Although there are an increasingly large number of players entering this huge industry, most of them are providing online courses. While these are cheaper and quite popular, (and indeed are also offered by New Oriental), there are fewer barriers to entry, and differentiation is difficult. New Oriental, by contrast, operates 1200 physical learning centres, which pupils attend after school, and although their courses are more costly, it is a more effective approach, with better attendance, a better completion rate, and much better results. On average, a New Oriental student takes 2.5 courses per year, with a course taking four hours per week over three months, at a cost of US$400. The company expects to open around 100 new centres per year to meet the growth in demand, which is running at over 30% per annum. It looks likely to be a long term, core holding in the portfolio.
Healthcare is also an area of great interest to us. There is a serious lack of hospitals and doctors in China, and as yet there are very few private providers. Doctors and hospitals are almost overwhelmed by demand, and long waiting times for attention are standard. That said, one of whose facilities we visited in Beijing, is a private ophthalmic hospital, with a public listing. They provide all aspects of eye care, but specialise in laser and cataract surgery, and lens replacement. Their facility was bright, expensively equipped, and busy. My colleague, who has had persistent problems with dry eye, was sufficiently impressed to book an appointment for the following day. This seemed to go well, except for the bill, which came to $800 for a fifteen minute appointment. This news seemed to have a very beneficial effect on the shares, which rose 4% the next day! Although profit growth is likely to top 30% this year, the stock has already appreciated substantially and looks fully valued for now. Given this, we will monitor it as an interesting prospect and the company is clearly not undercharging.
Finally, we met Haidilao, a company that we have been following for several months. Haidilao is one of the country’s leading operators of hot pot restaurants. This is the most popular form of dining in China. The meeting endorsed our view that it remains a very attractive opportunity. This was further confirmed by visiting one of their establishments in Beijing. Hot pot dining most closely resembles a European fondue, in as much as raw meat is cooked at the table in a soup base. In our case, we opted for one of chili, and one of mushroom, and were served significant quantities of meat, (partly by a robot!), from Australia and New Zealand.
As the evening progressed the bubbling chilli base became hotter and hotter, to the point of being unapproachable, but that slight issue apart, we had an excellent and very reasonably priced meal, in an attractively appointed restaurant with outstandingly good staff. Haidilao already operates almost 600 restaurants throughout the country, as well as a small number in South East Asia, with plans to open around 130 outlets each year. Independent research suggests that the hot pot sector is growing at around 10% a year, and Haidilao only has a 2-3% market share. The company seems to have a very bright future, and from experience in the USA, Chipotle Mexican Grill being a prime example, we have found that investing in profitable restaurant concepts as they expand, can be extremely rewarding.
The Aubrey Global Emerging Markets Opportunities Fund invests only in consumer facing companies, all of which are well behind the front lines of the Sino US “trade war”. We saw around 15 companies during the week, and none so much as mentioned it during our meetings. These consumer businesses enjoy a huge tailwind of growing wealth, leading to higher consumption and increased premiumisation. Household per capita income in China is expected to rise by around 8% this year, while inflation is quite subdued, at a mere 3%. Most importantly, a still quite young and upwardly mobile population harbours keen ambitions for a better, more comfortable and convenient life. During the China trip we confirmed that despite the general negativity on China, there remain some absolutely outstanding opportunities from which we expect to profit substantially.
Please click here for a pdf version
This document has been issued by Aubrey Capital Management Limited which is authorised and regulated in the UK by the Financial Conduct Authority and is registered as an Investment Adviser with the US Securities & Exchange Commission. You should be aware that the regulatory regime applicable in the UK may well be different in your home jurisdiction.
This document has been prepared solely for the intended recipient for information purposes and is not a solicitation, or an offer to buy or sell any security. The information on which the document is based has been obtained from sources that we believe to be reliable, and in good faith, but we have not independently verified such information and no representation or warranty, express or implied, is made as to their accuracy. All expressions of opinion are subject to change without notice. Any comments expressed in this presentation should not be taken as a recommendation or advice.
Please note that the prices of shares and the income from them can fall as well as rise and you may not get back the amount originally invested. This can be as a result of market movements and of variations in the exchange rates between currencies. Past performance is not a guide to future returns and may not be repeated.
Aubrey Capital Management Limited accepts no liability or responsibility whatsoever for any consequential loss of any kind arising out of the use of this document or any part of its contents. This document does not in any way constitute investment advice or an offer or invitation to deal in securities. Recipients should always seek the advice of a qualified investment professional before making any investment decisions.