William Fong, Barings
The three technology behemoths have made their shareholders happy in 2017, with Alibaba and Tencent in particular more than doubling their share price during the year. Their dominance of China’s technology sector, however, obscures many opportunities that exist in smaller companies, Fong, lead manager of the Baring China Select Fund and co-manager of the Baring Hong Kong China Fund, told FSA.
What unites the BATs and the smaller companies that Fong likes, is their ability to create sustainable, comprehensive platforms. “The success of China’s tech companies lies largely in a strong team delivering development and innovation, rather than in one or two successful products,” he said.
As Chinese customers become more willing to pay for mobile games and online entertainment, the platforms will generate further revenue via their advertising business.
“Take Netease as an example,” he said. “The strength of the company is the team that keeps generating blockbuster games for its customers. The continuous success of their products has sustained the company’s bottom-line growth which translates into our conviction in the company,” he said. “The company sees a significant monetisation of their homegrown games.”
“Another developer that rolls out only one game that goes viral in a very short time would not fit the criteria,” he said.
In order to find more such opportunities, one has to look at technology companies in China’s A-share market, which is relatively smaller in scale compared to that of Chinese companies listed abroad.
As the industry changes very fast, one also has to go beyond the usual methods of researching companies, such as regular meetings with the management, Fong noted.
“In addition to the discussions with the companies during the interim and annual earnings webcasts, we approach traditional industry consultancies for in-depth insights into a certain sector,” he said.
His approach to research resembles that of a private equity fund, as he also obtains useful insights from unlisted companies, he said.
“The world is changing so fast,” he said. “It seems that listed companies cannot always be the leaders of new products or ideas.”
“Although the fund will not invest in non-listed companies directly, it is helpful to learn the industry norms and new trends from them. It is likely that some small-scale companies are more flexible in implementing new technologies or designing new products, which may be followed by larger and listed companies afterwards.”
Non-listed companies can also be more forthcoming, as no insider information would potentially be involved.
In researching companies for his two funds, Fong forecasts the profits and target prices with a five-year horizon in mind. “It can be challenging for the fourth and fifth year in our forecasting model,” he said. “Sometimes we do not care how accurate a forecast is in exact numerical terms. Instead, it can lead to a discussion within our team. If the management’s decisions and vision are promising, we find ourselves rather comfortable to forecast the development of a company in three to five years.”
While seeking other companies, Fong still maintains a substantial exposure to the BATs. They account for 21% of the assets in his China Select Fund, with the whole information technology sector taking up 38.5%. His exposure to the BATs is slightly underweight compared to the fund’s benchmark, the MSCI China Index.
Baring China Select Fund and Baring Hong Kong China Fund
Source: FE. Returns in US dollars. Performance vs the MSCI China Index and the category average.
