Transcript
Hi, I’m Rob Brewis. I’m just back from a two week tour of Southern China, along with my colleague, Camellia. We visited five cities, 20 companies, and it was really the first time I’d been back since COVID. I think for me it was a stark reminder of how developed these southern Chinese cities are. Shenzhen, Guangzhou, very much back to life as normal and impressive modern cities that they are. My tour continued down through Macau and back to Hong Kong doing a complete circuit of the Pearl River Delta and hopefully it’s given us some insights and some and views on where China is today.
One thing it’s quite difficult to establish is really what has changed in China post-COVID. And I think there are all sorts of reasons why we think that the consumer behaviour has changed. The property market, the job market and people’s incomes have all been impacted. But actually, when you’re wandering around these cities today, there’s very little evidence of COVID itself on the underground. maybe a third to a quarter of people have masks on still but other than that people are really getting back to normal which is encouraging. Clearly the other issues such as income growth and the property market are still challenges.
So clearly we had great expectations of a strong rebound post-COVID in early 2023 and that really didn’t materialise for some of the reasons I’ve touched on. You know, I think there are early signs that that is improving. Certainly when you’re visiting places like Shenzhen and Guangzhou, there’s no evidence of significant job stress or unemployment. People are getting on with their lives. You know, the property sector, I think, as we know, has remained pretty soft and pretty weak. But I think at the margin, there’s elements of improvement and certainly going to the shops and wandering around the shopping malls and people are still out spending, but spending still cautiously.
One of the strongest drivers in the southern part of China has been the export market. And that’s clearly been helping the economy grow. And electric vehicles have been a big part of that and growing exports in that area. One thing you notice there is the prevalence of electric vehicles now. You do not find the DD driver that does not have an EV. It just makes financial sense. Clearly, there are many world-leading companies. BYD is one. But actually we’ve taken a step back from the sector for the moment purely because there is a huge competition in that sector. vehicles and makes of electric vehicles that you’ve never heard of that suddenly appear with incredibly nice looking and impressive EVs and I think that is impacting prices and we’ve just seen BYD’s profit per car has more or less halved over the last six months or so.
It will be a survivor but at the moment it’s a tough market out there. But it is also a warning for the rest of the world that the Chinese cars are coming and they will become a very strong export force in that area.
So despite being cautious about China for some time, we’ve kept a waiting there and we’ve focused on specific stocks that we like. And we think the Chinese consumer is being very selective what they spend their money on. But certain businesses like travel and Trip.com is a good beneficiary of that, have continued to do well. One of our best performing stocks last year was New Oriental Education, an education company in China. And a company like Proya Cosmetics has continued to perform well throughout this whole cycle. Yes, it’s been derated, particularly last year, but actually it’s still a solid business and continues to grow. And so, you know, when people say to us, well, why do you invest in China at all? I think the fact is it’s a big place.
There are good companies. And if you’re in the right area, you can make decent returns. And that’s what we continue to try and do.
So yeah, there have been signs of life in the Chinese stock markets of late. The first quarter GDP number was a little bit better than expected, very much manufacturing driven, investment driven. At the consumer level, I would say we’re still to be fully convinced that we’re getting a resurgence in consumption. I think there’s still a lot of caution around. That said, This trip certainly threw up two or three potential candidates for inclusion in the portfolio and we’re evaluating those as we speak.
So, in summary, I would say that life goes on in southern China and it remains a hugely competitive export powerhouse and will remain so. And in fact, will probably be one of the areas that is exporting deflation in the form of lower product prices to the rest of the world for some time. Secondly, the consumer is still cautious and I think with good reason. The property market is showing few signs of picking up and the job market remains soft. But at the margin, I think confidence is gradually returning and that gives us some encouragement. And finally, there are still plenty of opportunities in China. You have to be selective and you have to focus on the right areas. But there are opportunities to make money.
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