China-U.S. Tech Competition to Give Birth to New Unicorns: Affin Hwang’s David Ng

2021年05月14日 20:34 来源:证券市场周刊 作者:李健

“The Chinese A-share market should be able to provide moderate upside from now till the end of the year, supported by decent earnings growth,” said Affin Hwang’s David Ng in an interview with Weekly on Stocks.

The rise of China’s capability in innovation has brought the country to a larger playground to compete with the United States. The intensifying competition could be a catalyst for both sides to step up in R&D and lead to the birth of new unicorns with exciting investment opportunities, said David Ng, Deputy Managing Director and Chief Investment Officer of Affin Hwang Asset Management.

David Ng also said that the business moat and long-term growth potential of Alibaba and Tencent remain in place despite the recent regulatory changes targeting at them. Meanwhile, healthcare and premiumisation are among the areas of opportunities in Asia.

The following is full text of Weekly on Stocks’ interview with David Ng, Deputy Managing Director and Chief Investment Officer of Affin Hwang Asset Management.

Part 1: Alibaba is more attractive than Amazon; high quality companies will command a premium in valuations

Q: We noticed from the latest quarterly report that your Affin Hwang Select Asia Pacific Dividend Fund has reduced holdings of Alibaba and Tencent. How do you evaluate the values of the two Chinese Internet giants?

A: The recent regulatory changes have reduced the companies’ long-term earnings visibility. Despite that, the business moat and long-term growth potential of both companies remain in place. While the fund has reduced the holdings of the two companies, both companies remain as the fund’s top-10 positions.

Q: The primary businesses of Alibaba and Amazon are similar, but why does your fund have a much higher position in Alibaba than that in Amazon?

A: Alibaba’s valuation is currently more attractive than Amazon’s. Bear in mind also that the fund is an Asian-focused fund and our larger positions tend to be those of Asian companies.

Q: How do you think of the China-U.S. tech competition in the next decade? And how do you see the investment opportunities in tech unicorns in the two countries?

A: It is quite encouraging to see the rise of Chinese unicorns in the past decade or two. The emergence of technology giants like Tencent and Alibaba, and unicorns with the likes of SenseTime and Bytedance have effectively proven that Chinese Internet and Technology companies have what it takes to compete in the global landscape. No doubt the competition will be intense in the coming decade, as both China and the United States will be spending and investing vast amounts of money to be ahead in advanced technology. For the Chinese companies, keep in mind also that China has a large domestic market or consumption base into which to sell their products and services.

Many have highlighted the negative impact caused by the battle between China and the United States, but it could also act as a catalyst for both sides to step up in innovation and R&D in ways that we might not have seen in the past decade. It could lead to the birth of many new companies or unicorns that could bring exciting opportunities in the future.  

Q: Do you think stocks of Chinese Internet companies such as Tencent, Alibaba, JD.com, Xiaomi and Pinduoduo can be included in some of the longest-term investments such as pension funds?

A: It depends on the pension fund’s strategy and asset allocation. These are established companies with decent fundamentals. We believe they have built strong business moats that should be able to sustain them in the long run. Over a longer term, as these companies continue to generate strong cash flows, the possibility of share buybacks or paying dividends would also prove attractive to pension funds should the corporate structure permit.

Q: What is your opinion on the opportunities in China’s Baijiu (Chinese spirits) sector? Some investors consider it to be overvalued, and their stock prices have seen corrections recently.

A: The sector’s fundamentals are decent. From the latest data we have gathered, volume growth remains healthy with some signs of upside in average selling prices (ASPs). Certain stocks have seen their valuations re-rate in the past year especially the national dragonheads. Hence, the correction in share prices comes as valuations reset. Overall, we view the fundamentals in the sector as favorable.

Q: How do you use valuation models in your investment?

A: Ideally, we would like to invest in high quality companies at undemanding valuations as well. Unfortunately, such opportunities are not easy to come by. Increasingly we have come to accept that high quality companies will command a premium in valuations.

That being said, we are not one to pay up blindly just for the sake of exposure. Valuations will need to be sound in accordance to future growth prospects, management execution, and the quality of governance.

Part 2: Asian markets continue to provide the most exciting areas for growth; China’s A-share market would provide moderate upside in 2021

Q: What are the new excitements for investing in Asia?

A: We believe the Asian markets continue to provide the most exciting areas for growth and opportunities for investors. Economies in the region have grown strongly in the past 20 years driven by urbanization and rising income levels. Today, as the pace of innovation picks up, we see opportunities in areas such as technology as the region develops further, the healthcare sector as the overall population is aging and premiumisation as consumers look to upgrade their lifestyle and experiences.  

Q: Still, many of the global institutions allocate insufficiently in the Chinese stock market. Why is that?

A: In a broad sense, China is a relatively “mysterious” market to foreign investors outside of China. Many might not be too familiar with the centrally managed system, both economically and politically. As such, it could take time to build higher levels of confidence and conviction. That said, we believe that as China has committed to opening up to global markets (and we have seen good progress in that so far), we believe that barrier is diminishing.

Q: It looks contradictory that the Chinese stock market has not been outperforming while the country’s economy has strongly rebounded this year. What are the reasons?

A: There might be several reasons for the market to head in a certain direction, and to pin point a particular driver behind the movement could be challenging. One of the reasons could be due to the resetting of expectations. Easy liquidity has been a key theme in the stock markets in recent years, especially for 2020 when governments and central banks across the globe injected tremendous amounts of liquidity to support the economy and cushion the impact of COVID-19. China was no exception as the first country to be hit by the coronavirus. But with the worst of the pandemic behind China, there are signs that the liquidity condition in China is incrementally tighter as a result of policy normalization.

On top of that, we have seen efforts from the Central Government to step up regulatory governance in several sectors (e.g. platform economy, after school tutoring, pharmaceutical Group Purchasing Order, etc.) that could change investors’ expectations on future growth and valuations. Against such a backdrop, investors may choose to stay on the sidelines for now while awaiting further clarity before taking more convicted positions in the stock market.

Q: How do you forecast the performance of China’s A-share market in 2021?

A: We think the market should be able to provide moderate upside from now till the end of the year, supported by decent earnings growth. Valuations have fallen back to a reasonable level post-recent correction, providing some downside support. We will be watching out for several risks including geopolitical risk, the local government debt situation and monetary policy direction.

Part 3: More prudence is required in a bubble; proper diversification is critical

Q: You have more than 23 years’ experience in making investment, and have been through many ups and downs in the global market, including the Asian Financial Crisis, the Internet Bubble, the Great Financial Crisis, and the COVID-19 pandemic. What lessons have you learned?

A: With the exception of the COVID-19 crisis, most of the crises mentioned relates to financial bubbles. Investing when valuations are excessive can lead to permanent capital loss.

On the other hand, proper diversification, valuation discipline, and a long-term investment approach have proven to be an effective remedy in managing crises.

Another critical lesson is that there are significantly more financial frauds every time there is a bubble. When investors are too eager to make quick money, they tend to invest blindly. In such an environment, there are plenty of victims for fraudsters to take advantage of. Unscrupulous companies overstate their earnings to raise money through placements or initial public offerings at high valuations. Ponzi schemes that promise high returns begin to emerge. As such, more prudence is required in a bubble.

Q: How do you define risk? What do you think of the meaning of diversified investments?

A: There are many ways to define risk. One of the critical ones, from the perspective of long-term investment, is the risk of permanent capital loss. Permanent capital loss happens when we invest into companies that go bust, or companies with long-term deterioration in business performance.  

To us, a proper diversified investment entails asset, geographical and sector diversifications. While talks of diversification may sound like a cliché in the investment world, they are crucial to long-term investment objectives because the world changes and the future is inherently unpredictable. Not all the best investment ideas survive the test of time. As such, it is not prudent to park all our savings in one basket.

Q: We saw your motto on your website – “We only invest in what we believe and know. As stewards of our investors’ wealth, we hold fast to the simple principle of managing their money like we would our own.” How do you make sure that you carry it out? And How do you know that you "really know"?

A: To build conviction in our stock selection, there are a few key areas that we look out for. I think they are best expressed in bullet points.

-Industry long-term growth outlook

-Management’s trustworthiness and execution capability

-Capital management

-Company’s business moat

-Balance sheet strength

How do we “really know”? That is a thoughtful question. The truth is it is often on a best-effort basis. We do not have perfect foresight of everything about how an industry or a company will evolve in the future. In that sense, one never “really knows” with absolute clarity and certainty. 

We learn as much we can to develop a rough sense of what is probable and what is not probable. And with that, we invest accordingly using probability-weighted approaches. A fund delivers good long-term returns by getting more rights than wrongs. The fact that we do make mistakes in investing is why it is critical for a fund to have a basket of stocks from different industries.    

Q: Lastly, would you give some advice to our readers and audience?

A: From our observation, a few practices have proven to be truly beneficial and will help investors grow their wealth. They are proper diversification, long-term patience in investing, and valuation discipline.

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