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JPMorgan China produced positive return against difficult backdrop

Volatile markets make for a difficult year for JPMorgan Chinese

JPMorgan China produced positive return against difficult backdrop – JPMorgan China Growth & Income has published results for the year ended 30th September 2021. The total return on net assets over the year was +4.1%. This compares with an -11.2% fall in the MSCI China Index. The company delivered a return to shareholders of -2.9%, reflecting a widening in the discount. For the year ended 30th September 2021 dividends paid totalled 22.8p (2020: 7.4p – before the policy of paying out 4% of NAV was introduced).

Extract from the managers’ report

Positive contributions to performance came from several sectors including Consumer Discretionary (+5.8%), Information Technology (+3.4%), Industrials (+2.3%) and Health Care (+1.8%). At the stock level, positions in new energy, electric vehicles (EVs), semiconductor production and internet companies contributed the most. In this section, we highlight some of the sector and stock stories that most impacted portfolio performance.

Within Consumer Discretionary, our internet stock selection was the largest contributor, thanks to our underweight in internet retailer Alibaba (which we had reduced over concerns of its profitability following the regulatory crackdown), and overweights in its competitor Pinduoduo and in gaming and multimedia company Bilibili, which possess better growth prospects. Our investment in Xpeng, the EV manufacturer, also performed well. The collapse of the private tutoring companies had a limited impact on performance, as we had reduced exposure prior to the regulation and exited the remaining position upon the regulation announcement.

In Information Technology, outperformance was mainly due to our positions in Silergy and Starpower, two semiconductor component producers benefiting from import substitution and global shortages in this sector. Our position in LONGi Green Energy was another top 10 contributor to returns over the year. LONGi is the world’s largest producer of solar panel wafers, supplying around half the market.

In Industrials, the largest positive contribution came from Contemporary Amperex Technology (CATL). CATL is China’s leading EV lithium battery maker, supplying about half the domestic market. Its share price rallied due to better-than-expected industry EV sales volumes and the company’s deepening links with international vehicle component suppliers. Yunnan Energy New Material, a supplier of EV components, also performed well during the period. These gains helped offset the drag on performance from not owning EV makers Nio and BYD.

Despite widespread and deep price cuts imposed by government procurement policies, our overweight in Health Care made a positive return in the period, thanks mainly to our holdings of two contract research organisations (CROs), Wuxi Biologics and Hangzhou Tigermed, and service provider Aier Eye Hospital, which are not subject to government price cuts. Outperformance thanks to these positions was only partially offset by the adverse impact of Venus Medtech, a medical devices company specialising in heart valves. It delivered decent results, but investors are worried that the government will impose prices cuts on its products, while demand has been hit by pandemic-related delays to elective surgery.

Performance was also hurt by our underweight and stock selection in value sectors such as Energy, Financials and Utilities, as these sectors outperformed during the rotation from growth to value. We had zero weightings in oil, coal and shipping stocks, as investment in these sectors is not consistent with our long-term, growth-oriented strategy. One of our largest Financials holdings, Ping An Insurance, underperformed, as several factors weighed on the share price. Investors have been disappointed by delays to reforms intended to boost productivity of its sales force. In addition, recent events in the property sector pose risks to its property investments. These developments prompted us to sell this company. We also exited Ping An Bank due to concerns about potential capital constraints imposed by its parent company.”

JCGI : JPMorgan China produced positive return against difficult backdrop

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