William Yuen, investment director, said in a recent webinar meeting that the biggest concern when investing in China’s tech giants is related to their relative high valuations.
Yuen co-manages two SFC-authorised fund, the Invesco Asia Consumer Demand Fund and the Invesco PRC Equity Fund. Tech giants like Alibaba, Tencent, JD and Net Ease are all in the top 10 holdings of the two funds.
“The tech sector generally delivers superior growth, which makes them trade at relative higher valuations than the market average. Any disappointment in growth could lead to a potential valuation de-rating,” he noted.
In the PRC fund, most investments are in domestic Chinese companies, like China Construction Bank (5.8%), Weibo (2.5%) and China Mengniu Dairy (2.3%).
“Ultimately, we look for competitive businesses, in growing industries, trading at good valuations,” he said, adding that he avoids tech hardware companies.
Yuen said tech hardware companies have high valuations and their technology lags that of US competitors.
“We don’t see the [technology] gap closing as rapidly as the market is predicting,” he added.
Yuen’s Asia Consumer Demand Fund and the PRC Equity Fund are both overweight the consumer discretionary and communication services sectors and underweight financials, according to the factsheets.
However, year-to-date, the Asia Consumer Demand Fund is outperforming the category average and benchmark while the PRC Equity Fund is underperforming the category average and benchmark (see charts below).
“The Asia Consumer Demand Fund has been positioned in a more aggressive way compared to its benchmark in terms of geographic positioning,” Yuen said. For example, he has taken large positions in Hong Kong and China.
The fund’s benchmark, the MSCI AC Asia ex Japan, has a 50% weighting of China and Hong Kong combined while the fund has around 70%. In other Asia exposure he is invested in Korea and Taiwan, given their economies and stock markets are more related to the factors of global economic growth. Both markets could benefit if global recovery continues.
Turning to the PRC fund, Yuen said it is more of a value-based investing strategy with an emphasis on mid- and large-caps. “There are some small-mid cap and new economy stocks which I felt were very expensive in terms of valuation at a certain point in time. So I didn’t take an aggressive position compared to the benchmark.”
In the PRC Equity Fund, positions in Tencent and Alibaba combined account for around 20% of total assets, according to the factsheet.
About the concentration, Yuen noted that “in the past, if you look at the Hang Seng index, the concentration was very high for a few stocks, like traditional banks, big real estate and telecom companies. Nowadays, because of the way the internet has grown and how the market has grown, the concentration of tech companies is something that we will be getting used to”.
Earlier this year, Hong Kong said it will permit secondary listings and stocks with unequal voting rights — often large China tech companies — to be included in the Hang Seng Index from August.
“There are a diverse range of market views over the index eligibility of weighted voting rights (unequal voting rights). As these entities are usually large technology-related mainland companies with global business interests, it seems inappropriate to exclude these large-cap companies from key benchmark indexes,” Hong Kong Stock Exchange officials said previously.
Nasdaq-listed Net Ease debuted on the Hong Kong Stock Exchange last week. When e-commerce giant JD is listed in Hong Kong, the index will have five companies with dual-share classes. The other three are Alibaba, Meituan Dianping, and Xiaomi.
The Invesco Asia Consumer Demand Fund vs category average and benchmark year-to-date
The Invesco PRC Equity Fund vs category average and benchmark year-to-date