Targeted opportunities in China

James Thom, Investment Manager
Aberdeen New Dawn Investment Trust PLC

• There are some exciting long-term growth segments within China, including the aspirational consumer and green energy
• There are also areas that are more difficult, as the recent troubles for high profile property companies have shown
• To navigate the Chinese market successfully and to target those areas of most interest, Aberdeen New Dawn Investment Trust has changed its approach to the ‘A’ Shares market

As the second largest economy in the world, and with burgeoning capital markets, China is a rich source of growth for all investors in Asia. However, it also comes with a lot of noise. It is a fast-evolving market, with many moving parts. At Aberdeen New Dawn Investment Trust, we aim to isolate the growth opportunities in China, while navigating its pitfalls.

While investors periodically panic about debt levels or the Chinese property market, there are undoubtedly some exciting long-term growth segments within China. The government is keen to encourage domestic consumption growth, steering the Chinese economy away from its dependency on exports. This has been successful, with retail sales thriving, even during the tough times of the pandemic.

At Aberdeen New Dawn Investment Trust, we have been particularly focused on the aspirational consumer. The Chinese consumer has embraced high-end brands.

While this was initially focused on European luxury goods, an increasing number of Chinese premium brands are now also finding favour after a significant push from the Chinese authorities to repatriate spending by Chinese tourists that previously went overseas. There has been a swathe of policy changes to support these efforts.

With this in mind, we hold groups such as Kweichow Moutai, which owns one of China’s premium liquor brands. Companies like these can find vast end markets. We also hold Chinese Tourism Group Duty Free Corporation for similar reasons. It has 90% market share and is now the biggest duty free retail chain of its kind globally.

Another major theme is renewable energy, where China is increasingly a stand-out global leader. We have two companies focused on solar energy. One is a producer of modules used in solar panels. It is the market leader in an area where China leads the world.

We also hold Sungrow Power Supply, which makes invertors that take the direct current (DC) out of solar panels and converts it into alternating current (AC) for use in the grid and households. These are both high growth energy solutions businesses.

However, there are clearly areas of the Chinese market that are more difficult, as the recent troubles for high profile property companies have shown. There have also been concerns about increasingly intrusive regulation.

This has conspicuously hit the internet sector, which is a huge part of the Chinese market, plus areas such as after-school tuition and healthcare. While we view this as more a normalisation of policy than trying to clamp down on innovation, it has created some volatility.

To navigate the Chinese market successfully and to target those areas of most interest, we have recently changed our approach to China’s ‘A’ Shares domestic market.

Our China holdings are split between Hong Kong (‘H’ Shares) and Shanghai and Shenzhen (‘A’ shares): each market has its own unique characteristics and opportunity set. The ‘A’ shares market, for example, is home to a number of the domestic consumption and green energy companies that we favour.

However, until recently, a complicated quota system made it tough for foreign investors to get access. The Trust had used a dedicated ‘A’ shares fund to take exposure. The market opened up with the Hong Kong Stock Connect programme. This meant that investors in Hong Kong could buy companies listed in Shanghai and Shenzhen easily and efficiently and vice versa. It allowed us to take a more targeted approach to China’s domestic market.

The ‘A’ shares market also has high retail investor participation, which means that it can be volatile. However, we already had analysts working across both markets, based in Hong Kong and Shanghai and this helped us build a much higher comfort level.

We took the decision to invest in seven to eight direct holdings, rather than a diversified fund. We believe this direct ‘A’ Shares exposure will increase in the Trust as the Chinese market matures and expands.

While the Chinese market can be volatile, the structural long-term growth potential is still compelling. We see more people drinking Moutai and buying high-end cosmetics and handbags. The Chinese market had a strong bull run during 2020 and valuations had started to look extended, particularly in the A Shares market. After the recent sell-off, valuations have fallen and we find many more companies at attractive valuations for inclusion in the Trust. Our recent change in approach to A Shares allows us to focus on the strongest growth ideas in a vast and ever-changing market.

Companies selected for illustrative purposes only to demonstrate abrdn’s investment management style and not as an indication of performance.

Important information

Risk factors you should consider prior to investing:

• The value of investments and the income from them can fall and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
• Derivatives may be used, subject to restrictions set out for the Company, in order to manage risk and generate income. The market in derivatives can be volatile and there is a higher than average risk of loss.

Other important information:

Issued by Aberdeen Asset Managers Limited which is authorised and regulated by the Financial Conduct Authority in the United Kingdom. Registered Office: 10 Queen’s Terrace, Aberdeen AB10 1XL. Registered in Scotland No. 108419. An investment trust should be considered only as part of a balanced portfolio. Under no circumstances should this information be considered as an offer or solicitation to deal in investments.

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