Research Postcard: Bell Asset Management

Amazon grassroots campaign in China

05-Feb-2015

By Ned Bell

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Bell Asset Management chief investment officer Ned Bell speaks to theinstoreport about his recent research trip to China.

Where and when did you go on your trip?

I recently attended the UBS Greater China Conference in Shanghai and Beijing and met with a wide range of companies and analysts across multiple industries.

I also attended the [conference’s] internet and e-commerce tour.

What was the purpose of the trip?

There were three main reasons for the trip. First of all to identify companies that can potentially be global leaders in their respective sectors.

Secondly, to look for companies that have been able to grow earnings in an environment where growth is clearly slowing.

And finally, to get a better sense of the underlying drivers of the economy.

What stood out most about the companies you visited?

The overall corporate quality has not improved much in the last three to four years, including management, franchise strength and corporate governance.

I also felt that a number of companies had excess capacity and arguably too much balance sheet leverage, which is not a good combination in a decelerating macro environment.

How is this sector performing at present?

Chinese equities had a great year in 2014, outperforming the MSCI World ex-Australia Index by 50.2 per cent. Having said that, from 2011 to 2013 they underperformed by 64 per cent.

What can local investors learn from this market?

Investors can learn that bottom-up, company-specific issues will drive stock prices over the long term and you should never be too heavily influenced by macro factors in isolation.

Do you have any holdings in this sector?

Yes, we have one small position in a company called Hengan. They are a producer and distributor of high-end tissues, sanitary napkins and baby diapers.

Are you considering changing your allocations to this sector?

No, I would not expect to increase our allocation any time soon.

What is driving the growth in this sector?

Growth drivers are lacking; gross domestic product growth is clearly decelerating.

Infrastructure spend and property investments have historically been big drivers of growth, but they have clearly slowed. I also felt the overall health of the consumer in China was pretty poor.

What are the risks to this sector?

I would say the property market represents a meaningful risk in that the banks have meaningful exposure to the sector and there is clearly excess supply in tier two and three cities.

I would also expect the non-performing loan ratios at the banks to pick up quite a bit.

What implications do these findings have for your portfolios?

We will most likely keep our distance from the Chinese equity market and focus our attention on better opportunities in the United States.

What was the most interesting or unusual custom you came across?

In Beijing, most people were breathing with the aid of a face mask, which initially seemed odd.

On the day I arrived, the pollution measurement rating hit 500, which was much higher than normal. Hence the need for the mask became very clear.

Next planned trip?

I will be heading to Chicago in May for the RW Baird Growth Conference.

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