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MARKET
INSIGHT
Insight and analysis from Redmayne Bentley
straight to your inbox
ISSUE 7 - FEBRUARY 2021
China
– New Year
& New Dawn
READ THE ARTICLE
ALSO IN THIS ISSUE
Making its mark - China’s Corporate
market dominance cannot Governance in China
be ignored READ THE ARTICLE
READ THE ARTICLEMARKET INSIGHT
KUNG HEI FAT CHOY
JAMES ROWBURY | INVESTMENT RESEARCH LEAD
IN THIS ISSUE
While the rest of the globe has been tentatively opening its
is already two months into markets to the world. At the same
STOCK FOCUS its calendar new year, those time, policymakers have been keen
China – New Year & observing this month’s Chinese to increase the attractiveness to
New Dawn Lunar New Year will be hoping foreign investors, relinquishing
the famed new year greeting state control and aligning Chinese
READ THE ARTICLE – “wishing you to make lots of business to internationally
money or a fortune” - will hold recognised standards of corporate
true to its translation. Rather governance (See: Corporate
INSIGHT fittingly, this year’s zodiac - Governance in China). There is
Making its mark the Ox – gives an appropriate still a long way to go, and now,
- China’s market depiction of the bull run ensuing more than ever, the spotlight is
dominance cannot be in the region’s investment being shone on the country’s record
ignored markets. The Chinese in corporate interference. After
Government all but quashed criticising the government’s finance
READ THE ARTICLE
the Coronavirus in short order, policies earlier in the year, Jack Ma
allowing its economy to open (founder of Alibaba) disappeared
back up sharply, while the rest of from public for two months, raising
TOPIC OF THE MONTH the world still reels in its fallout. concerns over the influence of the
Corporate Governance State. It is a sign that investors
in China As UK investors, we have still need to be comfortable with
watched in awe over the years at state-control and oversight, which
READ THE ARTICLE
the meteoric rise of the Chinese ultimately has the potential to limit
economy. Throughout the innovation and growth prospects.
20th century, the country has
transformed from the “sick man Innovation will continue to be key
of Asia” into the second largest if China is to affirm its dominance
OPENING HOURS
economy in the world, eradicating in technology companies. Posting
Monday–Friday, 08:00–17:00
much of the poverty that plagued a record month for Initial Public
GIVE FEEDBACK the nation’s poorest regions. Today, Offering (IPO) raisings in January,
publications@redmayne.co.uk an affluent middle-class live within the markets are full of new
HEAD OFFICE
China’s abundant metropolises ideas across the sector, pushing
0113 243 6941
that burst with innovation. Though for subscription-based online
investment in China has been met services to rival their behemoth
FOR MORE DETAILS with a little more hesitance, fears counterparts in the US (See: New
redmayne.co.uk of a volatile political landscape Year & New Dawn). Though, like
FOLLOW US and its emerging economy status the US, the region is not immune
have held it back from being a to stock market mania and potential
standalone allocation in portfolios. eye-watering share price rises… and
We think this is changing, and if falls.
the last year has taught investors
RISK WARNING anything, it is to diversify the risk We now watch closely as the
Investments and income arising from and return drivers in a portfolio world emerges bruised from the
them can fall as well as rise in value. (See: Making its Mark). As a near pandemic, and China provides
Past performance and forecasts are not self-sustainable and domestically some certainty to its outlook. The
reliable indicators of future results and focused economy, we are seeing Chinese version of communism
performance. There is an extra risk of more than ever the benefits of remains prevalent, meaning
losing money when shares are bought investment exposure, when global some investors will struggle to
in some smaller companies. Redmayne markets are otherwise interlinked get comfortable with the political
Bentley has taken steps to ensure the to the pitfalls of its key economies. system, but it offers a true
accuracy of the information provided. To facilitate the wave of investment opportunity for the next decade and
capital, the Chinese Government beyond that is worth considering.
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CELEBRATING 145 YEARS | ESTABLISHED1875MARKET INSIGHT
STOCK FOCUS
CHINA
– NEW YEAR & NEW DAWN
This column would not have been written a decade there is a Tencent, and for every Just-Eat there is a Meituan.
ago. In fact, it was unlikely to have been written five
years ago. The tenacious and precipitous rise of China But forgetting about these big names, the focus of this article is
as a global superpower has kickstarted the wealth on Kuaishou, the Chinese video-streaming app which rose to
management world into action. Investment managers are prominence mid-February after it raised US$5.4bn overnight
slowly dipping their toes into what has previously been in the largest technology listing since Uber raised US$8bn
characterised as dangerous waters, out of bounds for in 2019. ‘Asia’s-decade’ is certainly living up to its billing: a
most investors. record US$13bn was raised through Asia IPOs in January.
In truth, while corporate governance in China remains flimsier Founded in 2011, the company allows users to share animated
than in the West, and despite the questionable political and images (gifs) and is the world’s second most popular short-
ethical policies and standards employed by the Government, video platform with 769m monthly active users. The millions
the Chinese market has an array of supercharged companies. of users check the Kuaishou app an average of ten times a day,
For every Amazon there is an Alibaba, for every Facebook spending an average of 86 minutes watching videos. If that
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sounds impressive, that its shares were more than 1,200 times What makes Kuaishou’s first-day performance even more
oversubscribed in its IPO and nearly tripled on their first day frightening was that it failed to raise eyebrows; shares jumping
of trading in Hong Kong, trumps the lot. on their first day of trading has become the rule, rather than
the exception – the visa-versa should certainly hold true in an
You may think that sharing short videos is a niche market, efficient and stable market. Bubble, the dating-app, saw its
but it is turning out to be quite the battleground; ByteDance, shares swell 64% on day one, while Dr Martens was valued
TikTok’s parent company, is considering a market-listing, at over ten times what its past owners had paid on its market
with Douyin, its Chinese arm, already boasting over double debut.
the number of users as Kuaishou. Furthermore, Kuaishou’s
US$6.3bn of sales in the first nine months of last year may
seem impressive, yet are dwarfed by ByteDance’s US$30bn,
albeit over the full year, while the latter generates more than
three times the advertising revenue per user hour of Kuaishou. “You may think that
As we have learnt from the developed US tech market,
advertising often lies at the crux of businesses revenue streams.
sharing short videos
Yet, according to a local source, Kuaishou’s strength lies in its
is a niche market,
ability to attract ‘ordinary’ Chinese users, who seem to remain but it is turning
extremely loyal to the platform. Moreover, Kuaishou has an
advantage in developing online game-related business thanks out to be quite the
to its ties with Tencent, while Kuaishou leads the race in online
battleground...”
6%
Kuaishou shares now trade at an enterprise value-to-sales
ratio of 15x which, even by tech standards, is looking frothy.
Additionally, it is not as if the corporate governance stands
up for much; Chief Executive Su and Cheng Yixiao, the
32% REVENUE 62% company’s founder, effectively control the company through
BREAKDOWN a special class of stock with ten times the voting power
of ordinary shares. Moreover, regulators are scrutinising
livestreaming e-commerce, while recent legislation has
tightened controls on tipping on platforms such as Kuaishou.
In China, tipping your favourite livestreaming host has
become as common as tipping a waiter in a restaurant. With
this accounting for 62% of Kuaishou’s revenues over the past
nine months, this is a sign of potential danger.
All-in-all, investors should be wary. Not only did the company
fail to turn an operating profit in its latest trading update,
Kuaishou is also operating in a highly competitive, politically
LIVE STREAMING charged and tightly regulated market; with pricing-caps now in
place on users sending tips, there is effectively a limiter on the
ADS AND ONLINE MARKETING company’s potential cash streams.
E-COMMERCE AND GAMES
The likes of Tencent, which holds a c.22% stake in Kuaishou,
alongside the investment banks which led the IPO, Bank of
shopping - between December 2019 and May 2020, Kuaishou America and Morgan Stanley, will be pleased with their work.
sold products worth 104.4bn yuan compared to just 11.9bn Retail investors should tread with caution.
yuan on Douyin.
Please note that this communication is for information only and
Nevertheless, retail investors were clearly intent on continuing does not constitute a recommendation to buy or sell the shares of the
the global theme of ignoring a business’s intrinsic value, investments mentioned.
pumping more air into the ever-growing bubble.
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INSIGHT
MAKING ITS MARK - CHINA’S
MARKET DOMINANCE CANNOT
BE IGNORED
If the COVID-19 pandemic has returns and lower levels of volatility, the brink of ‘developed’ status, namely a
taught us one investment lesson, given the state of financial markets population rapidly increasing its wealth,
it’s that diversification remains across such countries. significant investment into infrastructure
key to helping guide investors and globally emerging businesses
through a variety of market cycles While many in the UK investor with healthy finances. In fact, rather
and significant financial shocks. community have been hesitant to invest astonishingly, China’s share of global
Portfolio geography was particularly into China, the economic, demographic GDP has risen from approximately 2%
important last year as investors and corporate changes that have taken during the 1970’s to around 13% as of
focused domestically, as is traditional place in the past decade and continue 2020, mostly at the expense of Europe,
amongst many in the UK, suffered to do so, are likely to provide a plethora the US and Japan. This translates into
poor returns and little in the way of of investment ideas to both diversify significant consumer growth, with the
downside protection. However, those risk and improve overall portfolio Asia Pacific region forecast to help lift
investors, with exposure to a range performance. Taking a purely top-down nearly 1.5 billion people into the middle
of geographies such as Asia, North view on China, the country possesses class between 2020-2030, with China
America and indeed Europe, were many of the key characteristics we would responsible for over a third of this
more likely to experience greater hope to find from a developing nation on transition.
140
120
100
80
60
40
20
FTSE 100 S&P 500 Value Index MSCI China MSCI Europe excl. UK
0
01/01/20 01/02/20 01/03/20 01/04/20 01/05/20 01/06/20 01/07/20 01/08/20 01/09/20 01/10/20 01/11/20 01/12/20
Source: Redmayne Bentley
Figure 1 – FTSE 100, S&P 500, MSCI China & MSCI Europe EX UK during 2020
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REVENUE GROWTH RATES %
15
10
5
0
-5
MSCI CHINA
-10
MSCI USA
-15
MSCI UK
-20
Source: Factset Data Systems
This not only further cements China’s market has soared in comparison to the Vietnam and Thailand, which are often
position as a global superpower, it also UK. While the UK market often possess extremely difficult for UK investors to
means that over 500 million people will a value stock bias, leading to greater than tap into. With a now significant and
turn from subsistence to consumers as average rebounds after economic shocks, rapidly growing financial services sector,
their incomes increase and discretionary the long-term growth trajectory is far less China has been able to reduce its reliance
spending increases with it, fuelling fruitful than across Asia, and China in on Dollar denominated debt, as well
demand for products and services. particular. as attracting other Asian economies to
utilise the Yuan, helping to create not just
This, then, feeds into the bottom- Currency exposure has also been a a self-sustaining financial system but also
up view for China, with companies key talking point in recent years with one that is attractive internationally.
both domestically and internationally the British Pound severely impacted
capitalising on the structural changes by Brexit and the US Dollar affected Given the macroeconomic picture for
within China and the general Asia Pacific by global events such as the US-China China over the next decade and beyond,
region. In fact, Chinese companies have trade war and the COVID-19 crisis. coupled with the ever-increasing plethora
been able to sustain a high rate of growth With this in mind, the appetite within of exciting and fast-growing companies
consistently, with forecasts suggesting the investor community to diversify emerging from the region, a direct,
that this will likely continue at much currency exposure within portfolios or at the very least, indirect allocation
higher levels than many of its global has become an issue at the front and to China is likely a sensible decision
peers. One of the reasons that large UK centre of portfolio construction. While from a performance and diversification
companies have tended to underperform investing internationally may help, the standpoint. However, as a developing
compared to their US and Chinese extent to which investors are actually nation, China does possess a far less
counterparts has been down to their lack diversifying their currency exposure rigorous corporate governance structure,
of growth and attribution towards cyclical with investments into Europe, North leading many to not overweight their
sectors such as banking, and traditional America and Asia, may be limited. In portfolios towards Chinese assets. The
energy such as oil, gas and mining. This fact, the FTSE 100 accounts the US Asia Pacific region and, in particular
has meant that many such companies Dollar for approximately 23.35% of its China, is likely to play a much bigger
have limited long-term upside potential, revenues, and with emerging market role in portfolio construction going
given their maturity, as well as significant assets increasingly linked to the Dollar forward as such issues are addressed by
downside risk given their cyclicality. The through USD denominated debt and the government and corporate bodies.
COVID-19 crisis has both illustrated financial reporting, UK investors may The diversification benefit of not only
and exacerbated this point, with UK be more exposed to a smaller handful of accessing previously untapped markets,
companies at far greater risk of significant currencies than they believe. but also dispersing one’s currency
revenue declines and poorer long-term exposure to countries that look set
forecast growth afterwards. Unlike traditional emerging markets, to increase their share of the global
Chinese assets tend to provide investors economic environment, will likely create
This greater level of consistency and with much less exposure to the US Dollar a smoothing effect, reducing volatility
growth compared to UK companies’ and greater exposure to the domestic in the longer term and building a
often inconsistent growth over a longer Chinese Yuan, as well as other emerging portfolio that is able to create value across
period of time has meant that the Chinese Asian economies and currencies such as constantly evolving market conditions.
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TOPIC OF THE
MONTH
CORPORATE GOVERNANCE IN CHINA
The economic reforms introduced in the post-Mao era opened
China to a wave of foreign investment and entrepreneurship,
catalysing China’s rise as an economic superpower and
attracting global attention to the Chinese stock market. Until
recently, the systems in place by which listed companies were
governed and controlled remained a significant barrier to entry
for most foreign investors seeking to take advantage of the ever-
growing economy.
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Prior to the 1990’s, almost all Chinese necessary, the state will provide financial
companies were state-owned and support and act as a safety net for
with no established stock exchange or underperforming businesses. It also
regulatory body to monitor the market, allows ease of access to a continuously
it was difficult for individual investors to growing and stable customer base.
get their foot in the door. It was not until According to a report in 2019, around
the government created the Shanghai 40% of Chinese companies are state-
and Shenzhen stock exchange, along owned, with the rest partially owned or
with the China Securities Regulatory not at all. The implications highlighted
Commission (CSRC), that the first will therefore have decreasing levels of
steps were taken to create an oversight impact as the portion of state-ownership
mechanism that would work towards decreases.
international standards of corporate
governance. In the past, individual Corporate governance issues also
minority shareholders have been persist in companies that are not owned
discouraged from investing as their by the state. One example is Luckin
interests were not fairly represented; Coffee, which pledged to overtake
this was due to majority shareholders Starbucks as China’s biggest coffee
utilising their position to accumulate chain when it went public in 2019 but
shares through in-party transactions. was soon investigated by the State
Since then, the introduction of several Administration for Market Regulation,
policies aiming to address the power uncovering £250m in fake transactions.
imbalance between state and individual The falsification of financial earnings
shareholders have improved the levels remains an issue, however, it is clear the
of corporate governance among listed Chinese government is taking steps to
companies. Nonetheless, Chinese solve complex issues with most listed
enterprises are still heavily concentrated companies subject to information
with state-ownership compared to disclosure rules, internal controls, and a
other developed economies, which is vast improvement of investor relations.
an important factor to assess before Many Chinese companies have also
investing in the region. begun to participate in corporate
social responsibility to combat the
As a direct result of ownership environmental impact they have as a
concentration, boards of directors country.
can be subject to government controls
surrounding general operations
and decision-making. The lack of
independence among directors trickles
down the business hierarchy, with
supervisors unlikely to implement their
own management styles and employees
having little to no input on business “...state-ownership
decisions. Innovation within state-
owned companies can therefore be is not necessarily a
limited as the state holds an influence
over management while employees are disadvantage, as
encouraged to focus on their direct roles.
It could be argued that this improves companies are backed
efficiency, although such influence
presents the opportunity for corruption.
by the government it
It is possible that political objectives is unlikely they will
replace the maximisation of shareholder
value as the indirect principles of be left to fail... ”
management, with a self-interest culture
also giving rise to insider trading.
On the contrary, state-ownership is not
necessarily a disadvantage, as companies
are backed by the government it is
unlikely they will be left to fail. If
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