Lessons from over a decade investing in Asia
“It’s like drinking from a firehose.”
That’s the way Qiao Ma describes the experience of meeting with some of China’s, and Asia’s for that matter, emerging group of company leaders. Speaking at The Inside Network’s Equities & Growth Assets Symposium, Qiao was challenged to deliver unique insights from her extensive experience pounding the pavement in one of the world’s most exciting investment markets.
Emerging markets have been among the most popular destinations for capital over the last year, with investors large and small seeking growth and diversification outside the traditional US-dominated mega-caps. Yet Qiao warns that “all isn’t always as it seems” in Asia. In fact, she highlights that “over one-third of companies on emerging market indices are actually state-owned enterprises.” Clearly this fact has been under-appreciated by many; it would likely be difficult to convince investors who did that this was the best use of their capital.
The giveaway, suggests Qiao, is a “well-dressed CEO surrounded by piles of paperwork offering a plethora of statistics.” In many cases, she says, an experienced investor can quickly determine if they are speaking to a politician (rather than a founder) who is more worried about their political career than the future of the company. These companies clearly have a role to play in Asia, she says, with many involved in commodities, manufacturing and energy, but it is simply “not the pond we like to fish in” at the founder-focused Cooper Investors.
With more than $13 billion in assets under management across global equity markets from Asia to Europe, the firm undertakes more than 500 company visits a year in its pursuit for quality leaders and founder-led companies. The results speak for themselves after two decades in operation, yet the approach requires a significant amount of groundwork.
Speaking regularly about her early meeting with Alibaba founder Jack Ma, Qiao highlights the “massive upgrade in management team quality” that has occurred in Asia over the last decade alone. Just ten years ago, she suggests, it “would have been difficult” to put together a portfolio of 50 Asian companies and be confident that the company managers were of at least similar quality to the US. But now, the team at Cooper has identified a group of over 150 companies with the integrity, governance and leadership quality that is “every bit as good as the rest of the world.”
The opportunity, she suggests, lies in the fact that many of these well-led domestic Chinese and other Asian companies are still being treated as “emerging market companies,” meaning they trade at a discount to their developed market peers.
She highlights Chinese domestic infant formula producer Feihe (HKG:6186) as an example: the company has moved from low-cost mass-produced products to a premium range sold throughout China. Rather than focusing solely on the larger cities, like global leaders A2 Milk (ASX:A2M), Feihe focused on lower-tier cities and successfully built a business with a gross margin of 73%, compared to 56% at A2. Importantly, it invested more heavily into marketing and delivered a larger amount of profit. Prior to A2 Milk’s share price halving, Feihe was available at around a 20% discount to the market leader.
Similar, she says, is the US-listed Yum China (NYSE:YUMC), which owns the KFC franchise throughout the country. Qiao says its management mantra is, “we are a technology company that sells fried chicken.” The management team’s daily discussions aren’t about recipes or menu items, but how Yum China leverages technology to continue its stunning growth, which currently sits at 1,000 new stores per year.
Finishing with a number of insightful nuggets, Qiao highlights the trend of older-style companies like hotel operators and insurance companies leveraging technology to break outside their own box. Ping An Insurance (SHA:601318) is held as a perfect example of a technology company that happens to sell insurance, yet trades on a price/earnings ratio of just 8 times. Huazhu Hotels (HKG:1179), another portfolio holding, offers the software and tools that assist hotels to become more efficient, effective and profitable, with the “ability to deliver that rare ‘network effect’”, Qiao says.