Investor seeks out China opportunities

Charlie Awdry, an investor at Henderson, has almost £600 mn ($960 mn) in the firm’s China Opportunities Fund. He has more than 10 years’ experience in the Chinese equity market, which he researched in Hong Kong for six months from late 2005 to early 2006.

What were the most significant lessons when you sifted the 2011 corporate results?

About half the companies hit their forecasts. Of the others, more businesses missed expectations than achieved them – it was pretty messy. 

Analysts were wrong for two reasons: first, economic growth worldwide, including China, was slowing in 2011 and equity researchers failed to include that in their forecasts.

Second, Chinese companies were under cost pressures because of wage inflation, and these two factors led to some pressure on profit margins, although profits still grew. We looked at the sector data, and found analysts were too pessimistic about banks, which had decent numbers.

Outside the banking industry, I was pleased by online advertising companies, which are increasing their share of the overall advertising market.

Which impact have political developments had on investment opportunities?

Seven members of the standing committee of the Politburo are to retire, and this turnover is high enough to be important. Before the new members are formally appointed, there is political horse-trading as interest groups and individuals aim to exert an influence on the next decision takers.

It’s very interesting that Premier Wen wants banking reform – he’s on the way out, after 10 years – so the handover in the politburo is not easy. At a time when the authorities have more incremental reasons to ease policy, we are, apparently, in a period of wait-and-see policymaking while the lobbyists jockey for power.

So which companies have created value, irrespective of the distribution of political power?

There have been businesses in industries with high barriers to entry, as well as good returns on equity and strong returns on capital invested. We have found them in a range of sectors, including consumer, technology, energy and financial services. Baidu, China’s Google, is a good example of a company in an industry with high barriers to entry, and we have owned shares in it for two years.

To understand how it benefits from high barriers to entry, think of a country where Google is the preeminent search engine, such as the UK. If you wanted to set up a British competitor, how would you get customers not to use Google? After all, they use it as their home page, unless they select a portal such as Yahoo! 

Of course, Baidu is not cheap, and (at the time of the interview) it is trading on a price/earnings ratio of 29 times its 2012 consensus earnings. But its profit growth has been high.

Which energy companies have generated good returns?

China Shenhua, which owns coal and transports it via its own railways, has good assets and benefits from owning a transportation network. Elsewhere, CNOOC, a producer of crude oil and natural gas, has a good record of increasing production.  

Why have natural gas companies attracted you?

I thought they would be a viable source of cleaner energy and, as such, they would benefit from rising demand, improving availability and potential reforms to pricing.