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Alternative Market Briefing

Investing in China growth without following consensus works well for this manager

Tuesday, March 16, 2021

amb
Michelle Leung
B. G., Opalesque Geneva:

Investing in the high growth generational theme in China can be rewarding especially if the investor seeks non-consensus stocks with attractive values, according to a manager whose fund returned 40% net last year, compared to the MSCI China index's 26%.

Michelle Leung is the founder and CEO of Xingtai Capital Management, which is based in Hong Kong and Shanghai. She describes the firm as a value-driven investor in Chinese growth.

She founded Xingtai Capital because she believed with strong conviction that the way to make maximum returns in public equities in China is to invest using more of a private equity approach. "You have to be on the ground in China, close to company management, and do your own proprietary research and your own channel checks to be a successful investor," she tells Matthias Knab during Opalesque's latest Clubhouse podcast.

The portfolio is made up of high conviction growth and consumer-related equities and the managers talk to the companies in the portfolio every month."Our primary objective is to capture high growth, agnostic of the sector, so the average EPS of our portfolio is above 30%."

Not following the herd

"Because of where China is in the growth cycle, most of our stocks in our portfolio are high growth, consumer driven-type equities," she explains. "But while we try to capture growth, our core philosophy is to capture growth with a margin of safety. This is particularly relevant in China: it is a market where a lot of the investors are following market consensus and there is a lot of capital chasing big cap consensus ideas. Most investors will associate investing in China with stocks like Alibaba and the like. But we tend to not follow the herd. We don't hold any of these consensus stocks in meaningful weight. Rather, we tend to invest in stocks that offer equally high growth, or even higher growth, but that trade at very attractive values.

"So it is possible to do something different in China. This differentiated approach has yielded a very strong alpha generation," she adds.

Xingtai is not a value investor, she says. It is a growth investor. "It is just that the way we capture growth is with more of a value approach. So most of the stocks in our portfolio are domestic demand-driven consumer companies where the growth is driven by the ability of the consumer to pay for more and more products and services. This is a generational theme in China that will be very strong and drive GDP growth for the next 20 to 30 years.

"But while you capture growth, you cannot be blind to the values you want to pay… our approach is more value-focused and therefore the performance is less volatile, and times when there is downmarket pressure, we tend to defend that downside by more than 50%."

Mrs. Leung will present in the Corona Fighters REVISITED Webinar on March 30th.

The fund

The Xingtai China Cayman fund, a long-only fund regulated in Hong Kong, invests in Chinese growth with a disciplined value overlay.

It returned 5% in December 2020, when sporting goods, property management services and apparel were the biggest positive contributors, according to the monthly report. The portfolio benefited most from a mid-sized property management services company, China's largest down jacket manufacturer, and China's largest electric bike manufacturer which delivered +4% in aggregate. The main underperforming stock was a leading auto dealer.

The fund was up 40% net last year, and 219% net since inception in April 2014, annualising almost 19% since, compared to 9.3% for the MSCI China index. This year, it returned +4.2% in January and -2.5% net in February.

Pandemic style

The investment style did not change much during the pandemic. The managers used the same investment approach, the same philosophy, and the same framework.

When Covid-19 appeared in China in January, they had very little visibility as to what was going to happen next. The China team was in full lock-down through Q1. The only thing they did at the time was to run a slightly more diversified book with more than 40 positions and reduce exposure in some of the top positions. The recovery in China was fast, so in H2, the managers went back to a more concentrated portfolio.

Economic growth in China is expected to accelerate sharply in 2021, according to FocusEconomics. Private consumption should be the main growth driver as it recovers from the coronavirus-induced slump and the impact of social distancing measures. Despite the new Democrat-led administration in the U.S., uncertainty over the China-U.S. relationship will likely persist and affect investment decisions. GDP is expected to expand by 7.9% in 2021.

***

You can listen and subscribe to the Clubhouse podcasts here:

Apple: https://podcasts.apple.com/podcast/alternative-investments-clubhouse-sessions/id1558267132

Spotify: https://open.spotify.com/show/0JFfFxaZOVAbl3H6vr1xZj

TuneIn: https://tunein.com/podcasts/Business--Economics-Podcasts/Alternative-Investments-Clubhouse-Sessions-p1416074/

Deezer: https://www.deezer.com/us/show/2412242

Player FM: https://player.fm/series/alternative-investments-clubhouse-sessions

RSS: https://feeds.buzzsprout.com/1731954.rss

Register here if you are interested in speaking at a future Clubhouse session of the Clubhouse Alternative Investment Club: https://www.opalesque.com/clubhouse/


***

Upcoming webinar:

Corona Fighters REVISITED

The "winners of the winners": Strategies that not only performed in Q1 2020 but also during the rebound later that year.
With:
• Stephane Prigent, Katch Investment Group
• Michelle Leung, Xingtai Capital
• Tony Bremness, Laureola Advisors
• Jagdeesh Prakasam, Rotella Qdeck

When: Tuesday, March 30th at 10 am EST
Free registration: www.opalesque.com/webinar/

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