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China’s champions
By Esther Armstrong -
What is it about Chinese firms that helps them blossom? Sophie Earnshaw and Roderick Snell, joint managers of the new Baillie Gifford China Growth Trust, pick the best of the bunch for Esther Armstrong
Please remember that the value of a stock market investment and any income from it can fall as well as rise and investors may not get back the amount invested.
This article originally featured in Baillie Gifford’s Autumn 2020 issue of Trust magazine.
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Roderick Snell at the Royal Botanic Garden Edinburgh.
Photography by Chris Close.Sophie Earnshaw at the Royal Botanic Garden Edinburgh.
Sophie Earnshaw, Snell’s co-manager on both the trust and Baillie Gifford’s China Fund (launched in 2008), says you get a feel for the growth possibilities when you veer off the beaten track. “I took a truck journey along the Silk Road from Xinjiang province to Shaanxi province, through some of China’s most remote western areas. It brought home the scale of the middle class opportunity,” she says. “I visited cities I’d never heard of, and these are places with populations of over 3m people. These cities are like Shanghai 10 years ago – less developed, with poorer infrastructure and largely offline – but they’re only going in one direction, especially given the huge sums of investment from the Chinese government.”
With such vast opportunities, I asked Snell and Earnshaw to pick four of the companies they believe have the makings of domestic and global champions.
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In the growth greenhouse: Four stocks to watch
Li-Ning
One area Snell sees gaining traction is Chinese brands. “Older generations in China often associate home-grown brands with poorer quality and a lack of social cachet, but millennials and Generation Z have grown up in an era of Chinese economic and political strength,” he says.
As these generations come of age and come into money, they are proud to purchase Chinese goods.
A favourite of the China Growth Trust Team is the sports apparel brand Li-Ning, established in 1990 by the eponymous Li Ning, winner of three Olympic gold medals for gymnastics at the 1984 Los Angeles games. “The company has tapped into this rise in Chinese pride and spending power,” notes Snell. “One example is its newly-launched running shoe Red Rabbit, named after one of the fastest horses in Chinese history.”
Li-Ning’s share of the Chinese market is about 5 per cent, but it is poised to vault further up the leader board and challenge Nike and Adidas’s dominance.
Burning Rock
Recently listed healthcare company Burning Rock could lead its field, according to Earnshaw. Its liquid biopsy tests from blood samples help determine the best treatment for many cancers, including liver, colorectal and lung cancer. In China, it has domestic first mover advantage, strengthened by its steady acquisition of patient data.
“Burning Rock uses this data to inform subsequent improvements to cancer treatment, becoming more accurate and sought after,” Earnshaw notes.
Another application of the biopsy technology excites her even more. “Early stage cancer detection is a nascent industry globally. Our research found Burning Rock’s data to be as compelling as its western equivalents,” she says. “The lives that could be saved and the possible reduction in healthcare costs through detecting cancer early are phenomenal. Any firm that is successful here has a global growth opportunity, which further strengthens our conviction in the company.”
CATL
A greener future is not solely a western goal, with the Chinese government targeting 25 per cent of all new car sales to be electric by 2025.
The country’s leading battery maker, CATL, controls almost half of the Chinese market, a proportion Snell believes is unlikely to diminish. “Since CATL has such dominance, its costs are lower than anyone else’s. This is a fantastic competitive advantage and means whenever subsidies for the battery industry are removed, CATL is likely to grow stronger,” he says.
“We like CATL’s ability to expand outside China too. It already supplies BMW and Tesla, which makes it a company to reckon with on the global stage.”
Yonyou
Established in 1988, Yonyou is the leading provider of software for large companies in China, with over 5m clients. It has strategic partnerships with some of the largest tech companies in the country, such as ecommerce behemoth Alibaba and telecoms firm Huawei.
Its founder Wang Wenjing embodies the rags-to-riches story woven into the fabric of many economic booms, says Earnshaw: “Born to a poor farming family in southeast China, he is now at the helm of a $20bn Shanghai-listed tech company.”
She believes Wang’s customer-centric ethos is vital to the company’s success. “He is reported to have travelled halfway across China to help a company struggling to install Yonyou’s software, despite being CEO at the time,” she says. “In an industry relying heavily on customer retention to maintain strong revenue, such dedication to service is incredibly important.”
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The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
Some of the views expressed are not necessarily those of Baillie Gifford. Investment markets and conditions can change rapidly, therefore the views expressed should not be taken as statements of fact nor should reliance be placed on them when making investment decisions.
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Esther Armstrong
Esther Armstrong is a freelance journalist who has written for Money Observer and Portfolio Adviser. She previously worked for a fund manager in London and New York.
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