Baillie Gifford China’s results for the 12 months ended 31 January 2025 saw its NAV total return recover to 35.4%, ahead of its benchmark which returned 32.4%. Unfortunately, a wider discount meant that the share price return was 29.4%. However, the trust still has some way to go to make up earlier underperformance. Over the period from the mandate change in September 2020 to end January 2025, the NAV and share price were behind the benchmark by 11.7% and 16.3%, respectively.
The revenue return per share increased by 4.5% from 2.42p to 2.53p. The board is proposing a final dividend of 2.20p, an increase of 10% on last year.
The trust’s only private investment, ByteDance, is also its largest. The valuation has now increased by 74% and is the largest single contributor to performance since it was acquired. There is no imminent prospect of a ByteDance IPO.
Extracts from the manager’s report
The main detractors at sector level were our stock selection in information technology and our underweight position in financials. Regarding financials, our lack of exposure to state-owned banks was a key driver.
Stock specific contributors to relative performance were varied. One of the largest was Shenzhen Megmeet. Megmeet makes power supply and electric automation products for both industrial and consumer electronics clients. The company is exposed to several exciting end markets that include industrial automation, new energy vehicles, smart home appliances and advanced intelligent manufacturing. Recently, the company announced that it had been selected as a supplier to NVIDIA. Share prices more than doubled on the back of this news. Whilst the news is supportive of our investment hypothesis for the company in that it demonstrates, yet again, the ability of its R&D- heavy culture to expand product lines and win new customers, we believe the market reaction had overshot the potential operational impact. As such, we took this opportunity to reduce the position size.
Pop Mart, a toy designer and distributor, was another top contributor to performance. Pop Mart has a unique position in the market. While the final product presented is trendy toys, its overall concept is focusing on serving emotions: connections, self-expression, and bringing joy to people’s lives through an innovative approach to collectible toys. Pop Mart’s toys focus on creating emotional experiences rather than just physical products. The company has delivered strong operational performance over the year: net profit almost doubled in the first half of 2024, and in Q3 2024 it reported positive 120% year-over-year revenue growth. While the domestic business continues to grow strongly (50%-plus), the company has been aggressively expanding overseas and has gained traction. The overseas business is now contributing 30% of the total revenue, and Pop Mart expects the revenue split between eastern and western markets to reach a near 50:50 ratio in the next three to four years. It plans to open 200 stores in the US. We reduced the holding after a very positive share price performance.
Our holding in Meituan was also a key contributor to returns. In the first three quarters of 2024, Meituan’s total revenue grew around 26% year-over-year, while net profit surged by around 373% year-over-year. The core local commerce segment saw a roughly 22% year-over-year increase, driven by strong food delivery and ‘instashopping’ demand, while new initiatives expanded by around 33% year-over-year, led by community group-buying and travel services. Meituan maintained its 69% market share in food delivery and pursued international expansion, including the launch of Keeta in HK and Saudi Arabia. With AI-driven efficiencies boosting profitability, the company remains well-positioned, despite rising competition from Douyin and others.
Other positive contributors to our relative return included Brilliance China, ByteDance, and gearing. Brilliance China is a JV partner to BMW. The shares responded strongly during the year to the management team’s decision to return excess cash to shareholders in the form of a number of extraordinary dividends. ByteDance was also a positive absolute contributor. It delivered a return of c. 38% following another year of exceptional operational performance. Revenue grew 36% during the last twelve months to September 2024, well ahead of most of its peer group and in spite of weakness in the overall Chinese economy. In addition to its strong revenue growth, the valuation multiple applied to the company also increased in line with the multiple expansion experienced by its peer group. Gearing for the year averaged 4.3% and contributed positively to returns in the context of a rising market.
The main stock-specific detractors to performance were also varied. Xiaomi, a leading mobile phone manufacturer, was one of the best performing stocks in 2024 as the market reacted positively to its entrance into the EV market. Not owning shares in the company was a large detractor to our relative performance and a key factor in our weak performance in the information technology sector as noted above.
Our second largest detractor to relative performance was Guangzhou Kingmed. Kingmed is a leading player in China’s independent clinical laboratory (ICL) industry. There was a sharp decline in its share price due to weak revenue growth, collapsing profit margins, and financial concerns. In Q3 2024, revenue remained flat at CNY 2.02bn, but net income plunged 99% to just CNY 4.19m, with profit margins shrinking from 15% to 0.2%. Additionally, rising concerns over accounts receivable and slowing non-Covid-related revenue further dampened investor confidence, contributing to the stock’s weak performance. We are in the process of reviewing the company to understand if the long term thesis remains intact. As a reminder, Kingmed was purchased due to the belief that testing volumes were likely to increase as prices fell and as preventative medicine was increasingly utilised in order to reduce healthcare system costs. Additional kickers to growth were likely to come from increased outsourcing of testing and via the potential monetisation of Kingmed’s data assets through the use of AI.
Zhongji Innolight was also a detractor to relative performance. Innolight manufactures optical transceivers, crucial components in AI chip-training clusters used in datacentres and training large language models. This is a relatively new purchase for the portfolio. The investment case is based on the growth in global AI-related capex and datacentre buildout, as well as the potential uptick in Chinese AI capex. Innolight’s technological edge has been verified by leading global customers such as Amazon and Google. The stock weakened in Q4 following Q3 2024 financial results which missed analysts’ forecasts. We are aware that growth in semiconductor-related businesses rarely comes in a straight line and are therefore happy to look through this short-term hiccup.
Kweichow Moutai and Yifeng Pharmacy were also detractors to relative performance. Whilst Moutai’s operational performance remained strong with revenue continuing to grow at a double digit rate, the shares were weak as market sentiment was cautious on high-end consumption. Yifeng Pharmacy’s shares were also weak after it failed to meet ambitious store opening targets. We believe this is likely to be a shorter-term headwind in an industry with strong growth ahead of it. Pharmacy store penetration is still low and the market is very fragmented. Yifeng, as one of the leaders in the industry, is likely to act as a consolidator and therefore deliver above industry level growth. We remain happy holders of the shares.
BGCG : Baillie Gifford China beats China’s bounce
