LONDON — Since meeting Dawid Krige (right) earlier this year, my eyes have been opened to investment opportunities in China. Krige, whose own money is invested alongside other co-owners of the Cederberg Greater China Equity Fund, has generated an annualised return of 19% from his share picks since its launch 2012. Such is his growing esteem that Krige was second up at the recent London Value Investor’s conference, where he also provided material for the best-listened-to episode of my Rational Perspective podcast. This feedback from a trip last month to have a close look at some investable Chinese companies is sure to be equally popular. Krige took along 15 investors in his $388m fund, whose performance ranks it in the 99th percentile – ie the top 1% of all that are invested in the best performing stock market on earth. – Alec Hogg
By Dawid Krige of Cederberg Capital*
Day One: Shanghai
We visited some of Shanghai’s prime retail areas to see how Western and Chinese brands present themselves, and how offline and online retail are integrating. The highlight was a visit to Starbuck’s Reserve Roastery, a 30,000 square foot coffee temple, the only one of its kind outside of Seattle. To see how Chinese people – traditionally tea drinkers – are embracing Starbucks makes one want to buy the company’s shares on the spot. This is happening despite the fact that a tall latte will set you back $4.50 vs. $3 in the US. The company has 3 300 stores in China and is planning to open 600 per year for the next several years (compare this with India, where it has taken five years to open 100 stores). Management believes China could eventually surpass the US to become its biggest market. How has Starbucks been so successful? By catering to local tastes, by creating an aspirational luxury brand, and by establishing a culture where staff and customers are treated like family.
We also visited a JD/Elle fashion pop-up store, and saw how JD is using facial recognition technology to help fashion brands by analysing who visits their stores, how they move through the store, what they are browsing etc. This information can help brands to improve their displays and their inventory management. We finished the day with dinner on the Bund, overlooking the famous Pudong skyline.
Day Two: Shanghai
A former marketing manager of Alibaba introduced us to the concept of “new retail”: omni-channel, data-driven retail centred on improving the customer experience. China is at the vanguard of innovation in retail globally: integrating online and offline, leveraging vast data sets to advertise and/or sell, the use of mobile wallets, to name but a few. Cederberg’s holding Alibaba is leading the charge – with arguably the most comprehensive data set of any company globally, it is in an enviable position.
Later we witnessed new retail in action when we visited an Alibaba Hema store. Hema is part grocery store (it stocks fresh, imported items based on nearby residents’ online shopping preferences), part restaurant (chefs will prepare recently purchased goods for consumption in the shop) and part e-tailer (goods ordered online or offline will be delivered within a 3km radius in 30 minutes or less). Since Alipay is the only accepted means of payment, even octogenarians have been forced to use the app!
Next up was a meeting with private wealth and asset manager Noah’s finance director and chief talent officer to assess how the company attracts, trains and retains top talent. Noah’s stringent risk management and compliance culture means employees can sleep better at night, knowing they’re selling the right products to the right people. The industry offers a multi-decade growth opportunity from a low base, both with respects to domestic as well as international investments (96% of Chinese high net worth individuals’ investible assets are domestically held, though this is rapidly changing). As a best-in-class operator with a strong private equity & venture capital business and a broad international footprint, Noah is well-placed to capture this growth.
Day Three: Zhengzhou
Zhengzhou is a third tier city – comparable to Omaha in the US or Newcastle in the UK – yet it boasts a population of 10m people. Our first visit was to Yutong Bus, the largest manufacturer of mid- and large-sized buses in the world. Today, 35% of the c. 70,000 buses they sell annually are electrified, though that figure is steadily rising. The company believes that within a few years, selling new energy buses will be more profitable than selling traditional ones, even without any government subsidies.
That was followed by a visit to condiment brand Yihai’s factory. Its growth potential remains huge due to the strength of its brand vs. point-of-sales penetration of 50%, and due to sister company Haidilao’s growth plans – this year it is adding 200 stores to a base of 300. A visit to one of its Zhengzhou restaurants confirmed business is booming.
Day Four: Guangdong Province
Our first meeting was with Midea, the world’s largest manufacturer of home and kitchen appliances. One would expect this to be a tough business, yet Midea is highly profitable due to its wonderful brand, distribution system and culture, which reminds one of McKinsey or Goldman Sachs. Automation is evident on the factory floor, yet there is scope for further productivity gains, especially in assembly – its recent acquisition of German robotics business Kuka will no doubt play a role in this.
We also met with the CFO of private school operator Bright Scholar Education and visited two of their schools. Bright Scholar is China’s largest operator of international and bilingual private schools, with 35,000 students across 62 schools. Last year, 90% of the students from their Guangdong International School were accepted into the Top 50 universities in the world. No wonder Chinese parents are willing to pay more than RMB 150,000 (US$23,500) per year to send their kids there. Bright Scholar is well-placed to acquire sites for new schools due to its relation-ship with Country Garden, China’s largest property developer, which has over 1,000 projects across China.
Day Five: Guangdong Province
We met with the CFO of YY, the live broadcasting social network with 80m users. YY continues to go from strength to strength, both its core business as well as Huya, the e-sports broadcasting business it started several years ago. Interestingly, our visit coincided with Huya’s IPO – it has since gained over 200%!
Afterwards, we visited the plant of Foshan Haitian Flavouring Co, the largest manufacturer of soy sauce in the world. The massive site is highly automated and boasts stringent hygiene standards. Foshan Haitian’s excellence isn’t restricted to manufacturing: its high-quality products sell at a premium and its distribution system is one of the best we’ve come across. While its current valuation lacks a margin of safety, we hope we’ll get a chance to own this fine company one day.
- Dawid Krige is CEO of Cederberg Capital and fund manager of Cederberg Greater China Equity fund, which runs a tightly focused portfolio of China-listed shares. Alibaba and Tencent are among his top ten holdings (we had to point that out as both are also in the Biznews Global Share portfolio)