Marco Li, TT International
Investing in Chinese stocks can be difficult, especially given the sizable investment universe. There are nearly 3,000 Chinese stocks, which include H-shares, A-shares and US-listed ADRs.
According to Marco Li, Hong Kong-based co-portfolio manager of the TT China Focus strategy, combining a top-down and bottom-up approach to investing is key to identifying mainland stock opportunities.
“One of the things that we consistently look at is different themes. China is an ever-changing country because a lot of its wealth is changing, and given the size of the country, there are different consumption patterns in every region,” Li told FSA in a recent interview.
For example, foreign investors might not know of Shandong province, although it has a 100 million population. Last year, the province had high birth rates, which increased consumption of household products.
“The typical beneficiaries of this would be supermarkets, and we were able to identify an A-share listed supermarket. It focuses also on providing fresh food and the Chinese really cherish this,” he said.
The supermarket also has an employee share option scheme, which Li believes could drive better operations and financial results.
Another consumption trend that Li has identified is the expected increase in mainland Chinese tourists in Hong Kong because of the new high-speed railway that connects the mainland and the SAR.
“A listed real estate company in Hong Kong, which has a mall, should benefit from the increased flow of southbound travellers,” he said.
The firm is also invested in an insurance company as the industry is still not mature in China.
“We see this as a very long-term structural theme,” he said.
In general, Li likes to invest in companies that have industry-leading profit margins. “In other words, they have a moat around their business models and we construct our portfolios consistently with these characteristics.”
The firm’s TT China Focus Fund, which was launched in 2017, is highly concentrated with only 30 names. It invests in Chinese companies listed in the mainland, Hong Kong and US-listed ADRs.
According to Li, he and other partners of the firm have their own money invested in the fund. The product is only available to professional investors.
The TT China Focus Fund
Source: TT International
Regulatory reshuffle risk
Li acknowledged that investing in Chinese companies is not without risks.
“In China, there is not much that isn’t subject to macro risks. There are businesses with great business models that can grow regardless of the macro situation. But in 2018, macro impacted quite a heavy amount of what people were willing to pay on a valuation basis,” he said.
A lot of investors have focused on the slowdown of the Chinese economy, Li said. However, the greater worry is the restructuring of the different policy bureaus in China, he believes.
“There are around 26 state bureaus that have to restructure either through the amalgamation of other bureaus or some change in leadership. These things were relatively unannounced and have caused a lot of market uncertainty,” he explained.
This has caused a lot of de-ratings in particular sectors, particularly in education, healthcare and technology.
“These particular sectors were hit very hard and it is very difficult to assess what a particular regulator is thinking.”
However, the de-ratings, he believes, have also made some names attractive on a valuation basis.
“We try to find companies that are consistently growing, and as they get cheaper, we don’t mind backing our conviction levels and buying more of them,” he said.
Hedge fund roots
TT International, which is headquartered in London, in 2004 opened a Hong Kong office.
The firm began its business first as a global macro hedge fund and has since expanded its product suite to include long-only equity funds.
“We were a global macro hedge fund and so there has always been a heritage in looking at the top-down analysis,” Li said.
The firm does not have a China-focused hedge fund yet.
“The focus at the moment is to get an A-share portfolio running and [build a track record],” he said.
The firm manages around $6.8bn in assets. About 23% are sourced from Asia-based clients.
A majority of the firm’s clients in the region are institutional investors. However, plans are underway to expand its client base to include wealth managers, insurers and family offices, according to a spokesman for the firm.
The TT China Focused Strategy versus its benchmark index since inception
Source: FE. In US dollars.