With the Year of the Rat around the corner, we at Urbem decided to celebrate by taking a look at one market that has seldom intrigued us so far – the Chinese market.
We might indeed have some information advantage concerning the country. Still, at the same time, the majority of Chinese businesses, in our opinion, could be quickly ruled out as long-term investing candidates. Some might be good candidates for short-term speculation, but that is by no means our game. The unfavorable fundamental factors mostly include a fiercely competitive landscape, rapidly-moving industry dynamics, low visibility and predictability of individual businesses and the whole system, less sound corporate governance and owner structure and a lesser degree of shareholder friendliness.
Although the entire group might be the last one that investors want to try their luck with to find wonderful businesses, the size of the market is enormous enough to land on one or two stock picks that we may feel comfortable with. We rarely touch Chinese stocks ourselves, but do keep our eyes on a small sample of them.
TravelSky Technology (HKSE:00696, Financial) is one of the interesting names and the only technology stock on our list. Since it was founded in 2000, the Beijing-based information technology provider has devoted itself to building solutions solely for one industry – China’s aviation and travel industry. Today, the company embeds a wide range of its products and services throughout the value chain of the industry, from inventory control to ticket distribution, check-in, boarding, accounting and clearing. Meanwhile, its technology efficiently connects an extensive range of parties in the ecosystem, including airlines, airports, travel agencies/platforms, travelers and cargo transporters. A cohesive network with a high switching cost is how TravelSky dominates the aviation IT space and consistently earns high returns on capital for its owners (see below).
It is also why shareholders of the business should be less worried regarding the competitive threat from technology-driven disruptors such as JD.com (JD, Financial) and ByteDance. Take a look at the rise and fall of the Chinese search engine, Baidu (BIDU, Financial), as well as the retreat of Amazon China (AMZN) in this regard.
Shanghai International Airport Co.
Speaking of a monopoly-like position to bet on the air travel in China, we cannot resist mentioning Shanghai International Airport Co. (SHSE:600009, Financial), which operates Pudong Airport in Shanghai and is also stock pick by Charlie Munger (Trades, Portfolio), who said:
“Always look for durable competitive advantages. One of the things we got into was the Shanghai Airport, the main airport in China with no debt. How can you lose with the main airport of China?”
Shanghai Pudong Airport has been one of the fastest-growing airports in the world in terms of passenger volume, aircraft movements and cargo traffic. It is estimated that the airport “moves” approximately one-third of all outbound international travelers in China. We think it safe to bet on the increase in the absolute traffic volume here, given that less than 5% of all Chinese have a passport, compared to 30% in Japan or 40% in the U.S.
Per the chart below, Shanghai International Airport delivered a more than 10% annual return on invested capital most of the time during the past two decades. Over the past couple of years, the business outperformed other major international airports in Beijing (HKSE:00694, Financial), Guangzhou (SHSE:600004) and Shenzhen (SZSE:000089) in terms of this crucial metric.
Of course, our ideal investment target has always been the B2C business that sells non-durable, everyday-use (or close to every day) consumer items on a repeatable, predictable basis. In this domain, we would like to highlight Kweichow Moutai (SHSE:600519), Dali Foods (HKSE:03799), Vitasoy International Holdings (HKSE:00345) and Foshan Haitian Flavoring and Food (SHSE:603288). All four businesses generated superior annual returns on capital over the past few years (see below), owning a significant share of mind among target customers in their respective categories through competitive advantages of branding and distribution.
Thanks for reading, and we wish everyone a prosperous Year of the Rat!
Disclosure: The mention of any security in this article does not constitute an investment recommendation. Investors should always conduct careful analysis themselves or consult with their investment advisors before acting in the financial market. We do not own any security mentioned in the article.
Read more here:
- Urbem's 'Megatrend' Series: Consumption Upgrade
- Urbem's 'Wonderful Business' Series: L'Oreal
- Century-Old Brands: Betting on Long-Lived Assets, Pt. 2
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