JPMorgan China reports on exceptional year – JPMorgan China Growth and Income has published results covering the year ended 30th September 2020. As the chairman says, the company achieved exceptional returns for the year, with a 66.1% total return on net assets with dividends reinvested and an 82.6% return to shareholders. This compares to the return of 27.3% for ther benchmark index, MSCI China. The company is now paying quarterly dividends based on 4% of the year-end NAV. The first of these was 3.7p, but with the increase in the NAV, the current year’s quarterly dividends are running at 5.7p. most of this is coming from capital – revenue for the year was 2.95p per share.
Extract from the manager’s report
“Although the period under review was dominated by human and economic challenges, the second half of the financial year saw increasing market optimism. This was supported by Chinese companies’ 2020 first half results, which were broadly better than expected, particularly for those resilient businesses that were beneficiaries of COVID-19, such as consumer-facing companies and several leading domestic names. Many delivered material market share gains. Pleasingly, the Company’s impressive performance over the year was driven not by a handful of stand-out stocks but by stock selection across all sectors. In this section, we highlight some of the stock and sector stories that most impacted portfolio performance.
Our stock selection in Information Technology and Healthcare contributed the most, with both sectors benefitting from structural trends that accelerated as a result of COVID-19.
Within Healthcare, a broad number of holdings made significant contributions. These included Wuxi Biologics and Venus Medtech, as well as one of our more recent portfolio acquisitions, Chongqing Zhifei, which researches and produces vaccines. All three companies delivered solid results and positive industry growth, especially in areas like research & development services, medical devices, and vaccine development.
In Information Technology, industry-leading enterprise management software company Kingdee and Glodon (China’s largest construction management software vendor) both did well, thanks to the rapid digital transformation of the Chinese market and, specifically, positive development in cloud transformation across corporate China. Kingdee‘s performance was further boosted by the stock’s inclusion in the Hang Seng Technology Index. On the hardware side, electronic component manufacturer Luxshare Precision continued its strong run, boosted by its recent acquisition of a Chinese iPhone production factory and strong Apple sales, while LONGi Green Energy rose on strong solar energy installations and accelerated capacity expansion.
Our stock picks in the Consumer Discretionary and Consumer Staples sectors also contributed positively, as consumption gradually recovered from short-term COVID-related disruption. E-commerce platform Pinduoduo and the world’s third largest small household appliances manufacturer JS Global were among the top contributors, with solid results. Pinduoduo continued to gain market share in the e-commerce space with strong active buyer growth whilst improving its monetisation capabilities. Meanwhile, JS Global (which counts Shark vacuum cleaners amongst its brands) did well on strong overseas revenue growth.
Despite the pressure on banks across the world, stock selection in Financials was another key source of strength. Our overweight position in Ping An Bank as well as not owning state-owned banks like China Construction Bank, and Industrial and Commercial Bank of China (ICBC) helped performance. The latter entities underperformed on concerns about their state obligations and governmental control over their earnings growth. We are content to remain on the side lines in relation to these large, index-heavy, stated-owned entities as we feel further challenges may await them and believe that they could continue to underperform privately owned equivalents.
Although the portfolio’s performance was outstanding over the year, our underweight positions in some of the market’s leading outperformers detracted. For example, e-commerce platform Alibaba may be our largest holding, but we are underweight relative to our benchmark so its share price rally had a negative impact on relative returns. Not owning online retailer JD.com and internet company Xiaomi also hurt performance as both names rallied along with the broader sector. Meanwhile, two stocks that we do own – Huawei product vendor Sunny Optical and Montage Technology – underperformed due to recent escalations in Huawei-related tensions, including the prospect of tightening US restrictions. Property developers, China Overseas Land & Investment and Country Garden, also underperformed due to tighter regulation on industry leverage which caps leading players’ future growth potential.”
JCGI : JPMorgan China reports on exceptional year