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Value Partners: China’s tech giants to continue gains in 2018

In 2018, Value Partners’ fund manager Frank Tsui is bullish on the technology and consumer sectors across greater China with a preference for larger names.

Tsui manages the Value Partners Classic Fund, an equity fund investing in greater China. The bulk of the portfolio (62%) is invested in two sectors, telecom, media and technology (38%) and consumer products (24%), according to the fund’s factsheet.

He is optimistic on China’s tech sector in 2018 because of what he sees as exponential growth in non-core businesses, such as the development of cloud services, payment tools and peer-to-peer lending.

“Although Chinese e-commerce and internet firms record slower growth in their core business, the exponential growth from non-core business largely offsets the impact,” Tsui told FSA. “Some firms even posted 100% growth in their non-core business.”

He declined to name specific tech firms. But FE data shows that Alibaba is the top holding in the fund,  representing 9.7% of the portfolio and Weibo was the third largest holding at 5.1%.

The positive outlook is biased toward large cap firms. Resources for research and development are limited for smaller tech firms and they therefore face difficulties in expanding market share, he explained.

“Market leaders can leverage the difference in scale and resources, compared with small-sized peers. In the near term, through mergers and acquisitions, large caps have a higher chance of expanding their market share. A situation such as ‘winner takes all’ might happen,” he added.

Blackrock’s Andrew Swan, however, remains cautious on the IT sector in Asia, in particular some e-commerce platforms in China and large-cap tech companies in Taiwan. Widely-held names in this sector include Tencent and Alibaba in China and TSMC in Taiwan.

Swan’s rationale for caution on the IT sector is valuation. He sees a mismatch in the sector’s expanding P/E ratio and earnings growth.

Tsui argues that tech firms have performed better than market expectations for eight quarters in a row. The reason for that is the difficulty in estimating how fast companies in the sector can monetise investments. In this regard, the Chinese tech firms have surprised the market, Tsui said. He sees the stock price of some large (unnamed) tech firms still at a discount to their intrinsic value.

In the consumer sector, Tsui said in 2018 current trends will gather pace. China’s growing middle-class population and urbanisation will boost consumption, particularly for consumer discretionary goods and services.

In the category, Tsui has taken an overweight in a home appliance manufacturer, white wine maker, and education service provider as these types of products and services are in demand but have low penetration among the domestic population.

However, market volatility could come from consolidation in the the tech and consumer industries. Large players will grow larger and marginalise smaller players, Tsui believes.

Macro risk is mainly policy-driven. Tsui is cautious on old economy industries such as materials, and sectors such as real estate that will be strongly impacted by  government measures to control the economy.

Although commodity prices and earnings in some materials producers have picked up substantially after China’s supply-side reform, the improvement is short-term, Tsui believes.

“The earnings growth is not proven to be sustainable as the improvement is mainly attributed to the authorities efforts to reduce production capacity,” Tsui added. In addition to weak market demand, the weighting of materials firms will remain limited in the fund, according to Tsui.

According to FE data, basic materials account for 3% of the portfolio.


The fund’s three-year performance against its benchmark, the Hang Seng Index, and the sector average.

Source: FE. In US dollars.

Part of the Mark Allen Group.