JPMorgan China Growth and Income has published results for the year ended 30 September 2024. The NAV lagged the benchmark by some distance, with the trust returning 3.6% compared to 12.7% for MSCI China. The discount widened to 13.1%, leaving shareholders with a return of just 2.3%.
The chairman says “The rise of the MSCI China Index was driven by value stocks, particularly state controlled energy and financial companies. Quality and growth stocks, which are favoured by the company’s disciplined portfolio managers, lagged behind.”
The dividend is set as 4% of the year end NAV. For the accounting year ended 30 September 2025, the four quarterly NAVs will total 10.92p, down from 11.04p for the year ended 30 September 2024. [This is interesting, as it indicates that dividends will follow the NAV downwards rather than the board attempting to maintain or increase the dividend with a higher transfer from reserves.] The revenue return for the 2024 accounting year was 3.39p, and the rest was transferred from capital reserves.
No shares were bought back during the year.
Extracts from the manager’s report
During the financial year, stock selection and sector allocation both undermined performance, detracting 5.1% and 2.9%, respectively. The use of gearing was neutral to performance.
Unfortunately, as was the case in the previous financial year, performance was hit by a style headwind, as the MSCI China Value index outperformed the MSCI China Growth index by 7.5 percentage points during the review period. Sectors that we tend to underweight such as Financials and Energy, which are characterised by limited growth prospects, were the two best performing sectors, returning 21% and 15% respectively during the financial year, while the quality and growth stocks we favour lagged. In terms of stock selection, we also have room to improve in some sectors that offer more growth opportunities, such as Healthcare, Information Technology and Industrials.
On the positive side, we outperformed in the largest sector of the benchmark, Consumer Discretionary, which accounts for 29.5% of the Index. This was mainly due to our long-term holding of food delivery and restaurant review platform Meituan and Trip.com, an online travel booking service. Both these businesses reported continued improvement in margins and decent growth in a very challenging macro environment. Not owning the pure electrical vehicle (EV) automakers Li Auto, Xpeng and Nio collectively contributed positively. Our positioning in this sector is consistent with concerns we expressed in 2023 Annual Report on intensifying price competition, the difficulties associated with forecasting the popularity of specific new models and the large capital issuance for the loss-making players. We prefer to gain our exposure to the rising penetration of EVs indirectly, via component makers such as Fuyao Glass, an auto glass maker, and Hongfa Technology, a high voltage relay maker (used in various electrical modules including the battery charging).
Our exposure to Real Estate was also a major contributor, thanks to our overweight position in KE Holding, which operates the largest internet property information portal and the largest nationwide agent network. KE is a well-managed, asset-light business with improving profitability and good cash flow generation and it is committed to returning excess cash to shareholders via share buybacks. The business will also benefit significantly from all the past year’s policy measures aimed at rejuvenating property transactions. Not owning any of the developers also helped performance.
Healthcare made the largest negative contribution, mainly due to our exposure to two types of companies. First, our two holdings in the contract development & manufacturing organisation (CDMO) sector, Wuxi Biologics and Asymchem, came under pressure. These companies provide comprehensive services to pharmaceutical, biotechnology, and medical device companies. Their share prices plummeted as the US House of Representatives sought to pass federal legislation called the ‘Biosecure Act’, which would prevent US federal funded projects from employing Chinese CDMOs, based on national security concerns. There are further market concerns that if the act is passed, it may also reduce the willingness of privately owned US pharmaceutical companies to use Chinese CDMOs, even if these commercial projects are not funded by the US government. As a result of these developments, we exited Asymchem and Wuxi Biologics following the year-end.
The second group of healthcare underperformers were those with exposure to discretionary healthcare services and public sector healthcare spending. Contrary to our expectations, the post-pandemic recovery in discretionary and out-of-pocket healthcare services proved to be short-lived. Consequently, these stocks reported disappointing results. To rectify this misjudgment, we exited Imeik Technology, a cosmetic dermo filler maker, and Aier Eye Hospital, a private eye hospital. The procurement of medical products, services and equipment has been negatively impacted by the prolonged anti-corruption campaign in healthcare and, to a lesser extent, post COVID austerity at the local government level. This adversely impacted our holdings in Guangzhou Kingmed Diagnostics (independent pathological labs) and Qingdao Haier Biomedica, a manufacturer of biomedical lab and public healthcare equipment. We exited the former as the investment case is very dependent on local governments honouring outstanding COVID-related payments to Kingmed for providing tests, which we think may be quite a challenge for many of them given local governments’ austerity programmes. We retain a small position in the latter, waiting for the eventual recovery of healthcare capex in China partially funded by the central government and a recovery of its exporting business that was disrupted by the wars in the Middle East and Ukraine.
In the Information Technology (IT) sector, our stock selection bore mixed results. Our positions in solar energy, including module components maker Xinyi Solar, and equipment makers Zhejiang Jingsheng Mechanical and Electrical and Suzhou Maxwell Technologies, detracted the most. An industry downturn triggered by overcapacity has proved deeper and more protracted than expected. We exited some of these positions. Our long-term holdings in the software sector, namely Kingdee International Software, an enterprise resources planning (ERP) software provider, and Hundsun Technologies, a software provider for the securities and asset management industries, also performed poorly. Despite long-term growth potential from increasing penetration and import substitution, these companies were more sensitive to the macroeconomic downturn and cuts in corporate IT spending then we anticipated. We exited Hundsun Technologies. On the positive side, our long-term strategy of investing in secular growth opportunities in technology bore some fruit during the year. Top 10 single stock contributors included a few long-held IT names such as Silergy Technology, a Taiwan listed manufacturer of analogue integrated circuits. This business is benefiting from the expansion of product types, rising market share and an industry-wide cyclical recovery. Our position in Foxconn Industrial Internet also added to performance. This company is an A-share listed subsidiary of Hon Hai, best known as the iPhone assembler. It is the largest global supplier of servers and racks and is Nvidia’s main supplier of generative AI graphic processing unit (GPU) modules.
JCGI : JPMorgan China Growth and Income held back by growth focus
