JPMorgan Chinese limiting Tencent and Alibaba exposure – JPMorgan Chinese says that, for the year ended 30 September 2017, the company delivered a return to shareholders of +36.4%. This includes the final dividend of 1.6 pence paid in February 2017. The company’s total return on net assets was +28.5%; this return was just marginally behind the MSCI China Index return of +28.8%.
The managers say that stock selection in China was the most positive contributor to relative performance while exposure to the non-index markets of Taiwan and Hong Kong detracted a little. Also, while the two largest holdings in the portfolio, Tencent and Alibaba, rose by 58.0% and 63.0% respectively, they limited exposure to these holdings to 10% which is less than their weight in the MSCI China Index (16.5% and 13.3% respectively); this has had a small negative impact on performance relative to the index but they think it is important for the portfolio to remain broadly diversified.
During a period of rising markets gearing, that averaged 8.1%, added value.
A-share holdings were among the top contributors. The overweight in the surveillance solution provider, Hangzhou Hikvision, continued to add value on strong earnings backed by promising product expansion into new industry sectors. Han’s Laser rose on the back of the Apple product cycle and capex demand and the order and sales momentum is expected to continue. Stocks were also lifted on MSCI’s decision to include A-shares in the indices next year. Stocks held in the information technology sector, especially the key Apple smartphone component suppliers, fared well. In addition to Han’s Laser, AAC Technologies and Largan Precision outperformed, as share prices rose on a continued upbeat outlook for acoustics and dual-camera lens respectively. Despite some profit-taking in the Apple supply chain in September, on weaker sentiment around the new iPhone 8 launch, concerns may be overdone as orders have not incorporated the potential demand for iPhone X. Stock exposures within financials also contributed to returns as the underweight in large cap, index heavy banks, added value. They lagged the stronger performance of the overall market, despite delivering positive performance over the period on improving asset quality and margins. One of our highest conviction holdings in the Trust, Ping An Insurance, also contributed on the back of strong earnings and the government’s intensified scrutiny on high guarantee wealth management products. Remaining with zero exposure to China Mobile benefited relative performance as the stock fell by 12.0% over the year.
Meanwhile, not owning leveraged real estate developers, which continued their rally this year, hurt performance. A lack of exposure to Sunac China, China Evergrande and Country Garden detracted from performance. They retain a preference for CR Land and China Overseas Land & Investment, the latter of which was a new purchase in the portfolio in the latest quarter, given what they believe are sustainable return profiles, good track records and attractive valuations.
Several of the top detractors were driven by company specific reasons. Regina Miracle was the biggest single detractor for the period as the textile supplier struggled with structural changes from its key clients and this holding has now been sold. The share price of IMAX China also halved during this period as its film titles lagged the overall China box office. However, the position has been retained as there are signs of a sequential recovery in growth rate and results in the latest quarter. The share price of Spring Airlines sold off as its earnings results came under pressure after its international routes, particularly to Japan and Thailand, were loss-making given increased competition and weakened demand. China Resources Phoenix Healthcare, a hospital service provider, fell 30% and the stock was sold given the limited upside in its current businesses and difficulties in integration following the recent merger.
JMC : JPMorgan Chinese limiting Tencent and Alibaba exposure