As a thematic investor, Platinum looks for opportunities where others are not - in the assets being left behind and not where we see ‘bubble-like’ valuations.
Key themes in our portfolios currently are a combination of exaggerated demise (semiconductors or travel) or underappreciated growth (Chinese consumers and healthcare, two areas where we believe we have a structural edge through experience and expertise respectively). We delve into each theme below.
1. Booming Chinese consumption
Andrew Clifford, CIO and CEO, has been looking at Asian stocks since 1989. It has been the largest geographical exposure in the global equity portfolio since 2014. What does the growing middle class in China actually mean? Some numbers around the cohort’s growth show the exciting investment opportunities, driven by internal Chinese demand and hence somewhat shielded from geopolitical tension.
The McKinsey China Consumer Report 2020, noted that in 2010, of the 800 million urban population in China, 92% only had enough money to cover basic needs like food, clothes and housing (disposable income below A$28,000). Today, more than 50% are living in relatively well-to-do households (with annual disposable incomes of A$28,000 - $60,000). This is a huge lift in disposable incomes, and what consumers desire most with their new-found wealth include eating better, looking more beautiful, a better home, mobility/connectivity, wellbeing, luxury and having more fun.
Having more fun is expected to be a significant growth area for the Chinese consumer over the next decade. This includes going out to eat, trips out of town, video gaming and sports - a thematic we are exposed to via Anta Sports Products and Li Ning.
In 2007, 100 million people actively participated in sports activities in China and the state council expects that number to grow to 500 million by 2025 (i.e. 10% annual growth). In 2011, only 400,000 people in China took part in marathons and running events and that number (until COVID-19 hit) was on track to reach 10 million this year (i.e. 40% annual growth). While running a marathon may not be everyone's idea of “having fun” it is extraordinary growth in sport.
This sports boom underpins our investment in Anta Sports. Anta is the largest domestic sportswear company in China. Chinese customers allocate just 9% of their apparel and footwear budget to sportswear, much lower than 19% in other Asian markets. Closing this gap drives a growth cycle beyond the 2022 Winter Olympic Games (to be held in China). We expect Anta to benefit as the national champion of sportswear, and drive a doubling of earnings in the next three years, with further potential upside from the recent acquisition of Finnish company, Amer Sports.
Li Ning is another Chinese sports apparel business that competes with the likes of Nike and Adidas. Li Ning was established by its namesake, who won a gold medal in gymnastics at the 1984 Los Angeles Olympic Games. The brand was the “original” domestic sports brand, but struggled for a number of years in what has been a torrid competitive environment. Improvements in product design and a refreshed brand has seen the company turn its fortunes around, resulting in a strong improvement in sales and profits. Given the deterioration in US-China relations, we think that Chinese consumers will show a tendency to move toward brands with Chinese heritage in the years ahead.
Another way we are investing in growing Chinese consumption is via our holding in ZTO Express - China’s largest e-commerce parcel express network (i.e. the ‘FedEx of China’), delivering 12 billion packages in 2019.
The aggregate number of packages delivered in China has risen 10-fold since 2005 with solid growth expected to continue. China’s express delivery market is being driven by a positive outlook for online retail sales (c.70% of China’s parcels are related to e-commerce). We expect around 20% express and on-demand volume growth over the next few years, helping position ZTO as a market leader.
More recently, growth has accelerated even more, as ZTO benefited from a whole new cohort of consumers introduced to ordering online during the COVID-19 lockdown. It is widening its lead versus competitors in terms of service quality and cost structure.
We believe that Anta Sports, Li Ning and ZTO Express are excellent growth businesses largely overlooked due to their businesses being predominantly conducted in mainland China. With our experience in the region, we think they are compelling investments.
2. Resurgent semiconductor sector
The acceleration of the shift to online due to COVID-19 is well documented.
Among these accelerated e-commerce trends, semiconductors are the ‘oxygen’ powering the growth. This might seem at odds with technology stocks being white hot, but this is where a pricing disconnect creates opportunity.
The memory business has historically been cyclical, as seemingly endless growth always brought in new competition. But as Moore’s Law continues to get harder to achieve, the market has consolidated from around 10 players to only three in DRAM, and five in flash memory (NAND). There are now huge barriers to entry thanks to accumulated ‘know-how’, patents, intellectual property and huge capital requirements. This has boosted potential profitability for DRAM/NAND, helping Samsung Electronics’ earnings – a stock we have held for many years.
Samsung’s other businesses are already performing better – their foundry business has seen the number of competitors fall away from the leading-edge process as they struggled to keep up with investments needed. Samsung also makes high-end smart phones and is taking market share, especially in Europe.
At just above 1x book value, we are obtaining exposure to the growth in technology without paying ‘bubble-like’ prices. Samsung has spent billions of dollars on research and development and is a clear global leader benefiting from structural tailwinds, and it has consistently been one of our largest positions in recent times, as the market exaggerates its demise.
With COVID-19 front and centre of the pandemic, it’s important to remember biotech is not new to us. The Platinum International Health Care Strategy (which is managed by trained virologist Dr Bianca Ogden) is 17 years old.
 Source: McKinsey Global Institute, 18 December 2019, https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20consumer%20report%202020%20the%20many%20faces%20of%20the%20chinese%20consumer/china-consumer-report-2020-vf.pdf
 Source: Bloomberg consensus figures, correct as of 18 August 2020, http://www.wuxinews.com.cn/2019-11/11/c_423455.htm.
 Source: FactSet Research Systems, Fubon Securities.
 Source: FactSet Research Systems, TH Data Capital.
 Source: Bloomberg consensus figures, correct as of 18 August 2020.
 Source: FactSet Research Systems, 31 October 2020.
 This strategy is not available outside Australia and NZ.
 Source: International Civil Aviation Organisation.
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