Seeing China by oneself

Last week we spent four days with a group of 20 investors, mainly representatives from various European institutional investors and some individual private investors, in Hong Kong and Shanghai for one of our nowadays traditional East Capital investor trips. We believe that for investors there is no better way to understand an equity market than to actually be in it, meeting with the management of companies, discussing important issues with our own team members and external specialists. So basically the same basic philosophy that characterizes the way we work, but applied to our own investors that also can do their own due diligence on our team and on the investment case.

We started the trip in Hong Kong listening to Lenovo, which is today the second largest PC manufacturer in the world. Lenovo which acquired the PC division of IBM in 2005 has developed its market share globally but is also extremely successful in China, thanks to an unrivalled distribution network throughout the country.

 
A Lenovo’s reseller in the countryside in Yunnan province.

The PC penetration in China is growing fast but is still very low in the rural area with only 7% rural households (where I took the picture) owning a computer, compared to 66% in the cities (but the figure was 10% in the urban area only 10 years ago!). Lenovo has been one of our core holdings in the China portfolio since the start of the funds.

During the next days we had a number of presentations by members of our team, our China advisors and some external specialists such as a Citibank representative about the Chinese currency’s increasing use internationally. But most of all we had presentations from several companies.

The CFO of Glorious Property, a real-estate developer, told us about the current challenging environment the sector experiences as a consequence of continuous tightening by the Chinese government - albeit less  challenging than most people seem to believe - and the long term prospects that remain very interesting on the back of the growth of urban centers and increasing disposable income.

The CFO of SaSa spoke about the way Chinese consume beauty products from north to south. Notably the consumption boom in mainland China is not always easy to exploit. Chinese people from the mainland goes to Hong Kong to do their shopping, a market in which the company prospers while expanding its footprint in mainland China remains a challenge.

TingYi gave us an overview on the noodle and beverage market in China, and explained the logics behind their recent acquisition of Pepsi Co’s Chinese bottling operation.

In Shanghai we visited exciting sites theld by turbine-manufacturer Shanghai Electric and clothes retailer Bosideng. We also crossed the boundaries to neighboring Jiangsu province in order to visit a state-of-the art factory of paperboard producer Nine Dragon Paper with its own coal plant and water treatment facility; interestingly it sources 50% of its raw material through recycling of imported cardboard and paper.

Nine Dragons Paper has its own pier by the mouth of the Yangtze River to unload its coal

Quite a few of the participants had not been in China before. It is always interesting for me to hear what people react on, as the real experience is usually quite different compared to expectations before such a trip. Some investors commented on how clean the streets and the factories are, how “capitalistic” the environment is in a country run by a communist party or how complex the country is to grasp.

Obviously Shanghai is one of the wealthiest cities in China and other parts of China offer very different realities, and that is one part of the difficulty of understanding this market. It is then again our job to travel around and draw our own conclusions, but I hope that we might be able to take our clients to see other parts of China by themselves during a future trip.