Value Partners Classic Fund Second Quarter 2014 Commentary
We remain positive on the outlook for the second half of the year. While we have continued to express our belief in a turnaround, we think we are now on the cusp of such a shift. In addition to recent macro data, relaxation in policies and reforms by the Chinese government have all led to actions that have had an impact. Several key events in the period, including the targeted cuts in RRR (reserve requirement ratio) and the successful conversion of B shares to H shares (specifically with our key investment China Vanke – see below) has helped us reap some benefits in the second quarter.
The targeted RRR cuts were significant in that they materialized on two separate fronts: firstly in April for rural lenders, but also on a broader basis in June for qualified banks with exposures to agricultural borrowers and smaller companies. We see continued accommodative monetary policy to support the economy and expect more to come in the second half.
We have also started to see more financial reforms which we believe will have a positive impact on markets. The development of the Shanghai-Hong Kong Stock Connect, or so-called “through-train”, will give investors the opportunity to buy stocks across Hong Kong and A-share markets. And this is just the beginning of the positive measures in the sector. Any liberalization of the Chinese markets could also drive further demand, especially as the inclusion of these markets into external indices has now started to gain momentum. MSCI Inc. recently considered the inclusion of China A shares into some of its indices, and although it eventually decided against it, the door has certainly been opened in the future.
Portfolio outlook for the second half
Against the backdrop of some of these positive measures, and in anticipation of better indicators ahead, we are optimistic about the second half of the year for Chinese equities. Consequently, we have taken a more proactive stance in our portfolio. We have continued to find more value in Hong Kong and China markets and are convinced that now is the right time to stay heavily invested. In the second quarter, consumer stocks have been the key contributors to the Fund while healthcare stocks have been the main detractors. Traditional “old economy stocks” have helped portfolio performance during the period, of which two success cases are highlighted below.
PetroChina and China Vanke
The investment in PetroChina (HKSE:00857) is a reflection of our participation in China’s reforms that are occurring both in the energy sector, as well as for China’s state-owned enterprises (SOEs) in general. China has been reliant on highly polluting coal to generate 77% of the nation’s power while natural gas only contributes 4%. Natural gas is much less polluting compared to coal and is one of the more practical ways in diversifying energy sources and reducing air pollution. Gas production is forecasted to grow rapidly as China targets to increase gas usage from 4% to 10% by 2020. PetroChina is a major beneficiary of gas development as it comprises 61% of China’s domestic gas production, which also represents 35% of PetroChina’s total upstream energy production. Furthermore, gas prices have historically been set artificially lower than market prices by the government. There is currently a 40% gap in pricing between natural gas sold in China and the price that is targeted by policymakers. This gap is expected to be narrowed by 2015.
Using industry analysis such as the EV/PV-10 metric (net future cash flows from future reserve production are discounted using a 10% rate), PetroChina currently trades at 1.3 times, a significant discount to its peers’ average of 1.8 times. We believe if reform drivers continued, it will help accelerate the unlocking of value from the company going forward.
China Vanke (SZSE:200002) is another long-term investment within our portfolio and it has just completed its transfer from B-share listing to Hong Kong Stock Exchange by the end of June. The stock has rebounded over 10% but we remain invested as our conviction in the company has been built over the past decade through its excellent execution, large China market share and fast asset turn property development business model. The relisting not only helps offer greater liquidity for the company’s shares, but also allows them to diversify their funding sources through tapping the much cheaper offshore markets.
While the property sector has been cast under the spotlight on weaker sales and prices, China Vanke has performed strongly through its flexible pricing strategies. In the first six months of 2014, China Vanke has achieved 50% of its sales target, reporting 21% year-on-year growth in sales even though average sales price was in fact rising. From a valuation perspective, China Vanke is trading at over 30% discount to NAV and 6.7 times price-to-earnings ratio.
We are pleased to announce that our investment performance and fund management capabilities have brought us two house awards this year. In AsianInvestor’s Investment Performance Awards 2014, Value Partners (Trades, Portfolio) won the Asian Fund House of the Year title, which is given to the best overall fund house headquartered in Asia Pacific for its outstanding achievement in a wide range of aspects including business strategy, execution, investment performance, innovation and success. Furthermore, we were named Asset Management Company of the Year for Hong Kong in The Asset’s Triple A Investor and Fund Management Awards 2014 as we are seen as delivering long-term fund performance, as well as driving innovation and best practices in the industry.
Value Partners (Trades, Portfolio) Investment Team
9 July 2014
Fund performance mentioned referred to Value Partners (Trades, Portfolio) Classic Fund “A” Unit. All performance figures are sourced from HSBC Institutional Trust Services (Asia) Limited and Bloomberg (Data computed in US$ terms on NAV-to-NAV basis with dividends reinvested) as at 30 June 2014. Performance data is net of all fees.
Individual stock performance is not indicative of fund performance.
Investors should note that investment involves risk. The price of units may go down as well as up and past performance is not indicative of future results. Investors should read the explanatory memorandum for details and risk factors in particular those associated with investment in emerging markets. This commentary has not been reviewed by the Securities and Futures Commission. Issuer: Value Partners (Trades, Portfolio) Limited.
Continue reading here.