China A Share Strategy

Investment Approach

The strategy aims to maximise total returns from the changing growth dynamics in the China A-share market by investing in quality companies (at attractive valuations) in sectors (with high growth potential) benefitting from long-term mega-trends.

Investment Philosophy:

We believe quality companies with high growth potential can offer a return premium in China A-share market. We believe we can generate alpha over a medium to long-term time horizon by focusing on companies benefitting from long-term mega-trends and bottom-up stock selection.

Through our own robust research and strong local presence, we believe we can spot mispricing in the market place and identify opportunities to generate returns higher than the market average, with the firm standing as a disciplined long-term investor.

Investment Process:

From a market of 3,700 RMB denominated stocks listed on the China A-share markets in Shanghai and Shenzhen (Shanghai A, Shenzhen A), we apply an initial investment screen to arrive at a primary research universe of circa 200 stocks which is determined by looking at liquidity, financial strength, ESG negative screen and industry representation.

Our investment process is 80% bottom-up stock selection and 20% top-down sector allocation.

Top-Down Analysis (20%)

Through our top down view of the market, our thematic analysts have identified mega trends happening in the Chinese economy and society – the “New China Economy”. These mega trends and underlying sub-themes aid our portfolio managers and analysts with their idea generation.

We focus on quality companies within sectors set to benefit from the dynamic environment and growth trends as well as differentiated products and/or services, high or stable market share, low ESG risk and those less affected by China’s government policy headwinds.

Bottom-Up Research (80%)

Fundamental research is focused on 4 pillars to narrow down the Primary Research Universe of circa 200 China A-share stocks to portfolio constituents of 40 – 70 stocks in the internal research process:

✓ Growth potential, profitability and stability

✓ Well-defined business strategy – differentiated products and services

✓ Corporate governance

✓ Pro-government business posture

Corporate governance is a strong feature of our strategy:

We believe that corporate governance is the key to determining sustainable earnings growth and alignment of interest, especially in an emerging market like China.

We are committed to ensuring good corporate governance standards and to provide our clients with the comfort that we fully embrace the need for responsible investment. We are a signatory to the UN-backed Principles for Responsible Investment, principles which have been fully integrated into the ethos of our investment process.

Our portfolio managers and sector analysts tend to look for negatives within Environmental and Social issues and positives for Governance related actions, e.g. improvement in management and shareholder return policies.

Our main focus areas are:

✓ Structure of shareholders and board members

✓ Capital discipline and transparency

✓ Track record of the treatment of minority shareholders and any violation of the law, etc.

Moreover, we believe that the treatment of minority shareholders and the alignment of interest with majority shareholders are critical for the long-term performance of Chinese companies. We therefore focus on companies with a good ESG score or those whose scores are improving.

Key Strengths

Strong Research Capabilities & Unrivalled Access:
Dedicated China A-share specialists, based in Shanghai, and able to leverage local presence and knowledge.  Able to meet company management teams regularly, keep abreast of policy and regulatory developments.

Extensive Track Record:
With our long track record of investing into the China A-share market, we have accumulated significant experience in taking advantage of changes in the Chinese economy and policy trends.  Our ability to obtain in-depth understanding of government policy and evaluate its consequences, enables us to efficiently mitigate risks and identify opportunities.

Distinctive Portfolio Management:
Our portfolio turnover rate is low as we are oriented to long-term investments with excess return coming from a company's fundamentals rather than stock trading.  By taking a medium- to long-term perspective and keeping the turnover of the portfolio at a low level, we have achieved a favourable risk-return profile.