Update mansfield china 2013 a year of reform may 2013 asia disc

China Sets Sail for

New Leadership:

2013 Reforms

May 2013

Mansfield Mok

Fund Manager

New Capital China Equity Fund

For Qualified and Accredited Investors Only

China Sets Sail For New Leadership: 2013 Reforms

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Figures as at end February 2013 3


4

Economic Indicator

China power consumption growth slowed down to 5.5% yoy in 2012 (11.9% in 2011)

Secondary Industry (Light and Heavy industries) saw significant slow down

Both household and service industries are robust, reflecting a change in growth driver in Chinese economy

Is Power Consumption a good proxy to China economic growth?

China Power Consumption by Industry 2012 yoy Growth % Share of Total (%)

Primary Industry 0.0% 2%

Secondary Industry 3.9% 74%

Tertiary Industry 11.5% 11%

Household 10.7% 13%

Source: Deutsche Bank


5

Policy Statements From Leaders

President Hu’s Opening Speech on 8 November 2012: No change in direction of macro-economic policies

Build a moderately prosperous society by 2020

Double 2010 GDP and per capita income for both urban and rural residents by 2020

Deepen reform of financial system

Development of next generation information infrastructure

Top priority: Stimulate domestic consumption and implement banking reform

China GDP per Capita * 2010 2020**

Urban Household Rmb 21,033 (USD 3,183) Rmb 42,066 (USD 7,011)

Rural Household Rmb 8,119 (USD 1,229) Rmb 16,238 (USD 2,706)

Source: CEIS, Nomura

Note: ** 2020 GDP per capita assumption: GDP per capita double in RMB terms and 6 RMB per USD


6

Reforms Create Opportunities

Most likely reforms in the coming 3-4 years

Most likely reforms Possible reforms Least likely reforms

Resource pricing reform Personal income tax reform SOE reform

Interest rate liberalisation Hukou reform Property tax

Capital account liberalisation Rural land reform Central-local relations

Greater exchange rate flexibility Budget transparency

VAT reform De-monopolisation

Resource/environmental tax reform Pension reform

Increase in social spending Relaxing one-child policy

Source: Deutsche Bank


7

Banking Sector Trend

Non traditional loan credit is rising; Non bank financials will become a fast growing sector.

Breakdown of Total Credit (%) CAGRs (%)

2009 2012 2009-2012

Traditional Loan 74.4 67.3 16.5

Social Financing (defined by PBOC) 21.4 28.0 31.7

Entrusted Loans 6.2 7.0 25.4

Trust Loans & others 2.1 3.1 37.2

Banker Acceptance Bills 5.6 7.6 33.6

Corporate Bonds 5.5 7.9 35.7

Other Non Bank Financing 4.2 4.7 25.6

Total Credit 100 100 20.5

Total Credit ex-RMB Loan 30.1 37.0 29.0

Source: PBOC, CBRC, CEIC, Bernstein


8

Chinese Labour Market Trend

Slow down in growth of “working age” population

Source: IMF


9

Economic Activities: Moving West and Central

China: Real GDP growth of 9.4% in 2011

Source: National Bureau of Statistics China Database

2012 Real GDP

Growth

China 7.8%

Beijing 7.7%

Shanghai 7.5%

Zhejiang 8.0%

Guangdong 10.2%

Guizhou 13.6%

Chongqing 13.6%

Sichuan 12.6%

Inner

Mongolia

11.7%


10

China Selects The “Regional Expansion Model”

Source: McKinsey Global Institute


11

Consumer Demand Will Come In Waves

Variation in income level across China: Tier 2 markets are experiencing strong growth now.

Source: China Statistical Year Book, Deutsche Bank


12

Global Financial Crisis: An Opportunity For China

Source: Morgan Stanley

The current financial crisis presents an opportunity for China

– Low interest rates will prevail and surplus liquidity will look for areas with strong growth potential

– Chinese central government has healthy balance sheet and stronger economic growth vs. G3

– Policy reforms taking place:

● Economic driver: domestic consumption will take the lead supported by the increase in minimum wage

● Pricing reform: facilitated by lower commodity prices and low inflation rate

● Financial System Reform

Real GDP Growth Outlook

-2

0

2

4

6

8

10

China Japan US Euro World

2011 2012E 2013F

*Note: Index performance from 1 Jan 2011 to 30 Apr 2013

US( SPX Index); Japan (NKY Index); Euro (SX5E Index); China (MXCN Index)

Countries

Current

Account

Fiscal

Deficits

Gross Public

Debt

Total Return

(USD)*

US -2.9 5.3 76 33.5%

Japan 0.8 10.9 247 19.3%

Euro area 2.0 2.5 92 6.7%

China 2.9 2.0 52 -2.8%

All figures are CS estimates and represented as % of 2013 GDP


13

Sentiments Shifting to a Soft Landing Scenario

► Concern about property crash in China

– Property selling prices have stabilised

– Loan-to-value ratio of 60-65% should provide

cushion to the banking system

► Fear of banking crisis in China – LGFV loan

• Refinanced by the fast growing corporate bond market

– Shadow banking defaults • No new cases reported

– Surge in NPL • Reported NPL is still below 1% and loan

growth remains healthy at 15%

► Worries of a hard landing – The change of Chinese demographics

• China has a slow down in working population

The bear arguments look overstated and there are some signs of shifting sentiment.

Signs of stability in the equity market:

– There are some early signs of stabilisation

• GDP growth stabilises at 7.4% in 3Q and

7.9% in 4Q 2012

• China M2 growth bottomed at 13.5% in

Aug 2012

– Economists on the bear camp are changing their

tone after the improving economic numbers

• Some brokers are making a “Buy” call on

China. e.g. Credit Suisse in Nov 2012

• Continuous inflows into Asian markets


14

China Stock Market: An Attractive Asset Class

► Attractive valuation

– Valuations at historically low level in both P/B

and P/E terms

► Under-owned asset class

– APAC hedge fund managers are still bearish

on China as reported by Credit Suisse Prime

Services data

► Removal of political uncertainties

► Structural change in industries

– Creates opportunities to new players and

industries who are at the early stage of their

“S-Curve”

• e.g. Banking and consumer sectors

MSCI China – 12 month Fwd P/E(X)*

Source: * Nomura Securities ** Credit Suisse

Net exposure Change Since Sept 2012 to Mar 2013** (%pt)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

Chin

a

Hong

Kon

g

Taiw

an

Mal

aysia

Indi

a

New

Zeal

and

Indo

nesia

Sing

apor

e

Kore

a

Philip

pine

s

Aust

ralia

Japa

n

Net ex posure change (%)


15

Market Moving Events in Early 2013

► Smooth transition of Chinese Leadership in March

► Aggressive Bank Of Japan Quantitative Easing program

Source: Morgan Stanley

Data as of 24 April 2013


16

Investment Philosophy

Zone A: Re-Rating (Accumulate)

Company gradually increases its market share and

gains pricing power

Investors are sceptical about the growth potential of the

company and put in a low valuation.

– e.g. Insurance companies in the current cycle

are trading at historic low New Business

Multiple despite the low penetration rate of

insurance product

Zone B: De-Rating (Reduce)

Company sees declining growth

– Chinese oil companies saw a sharp decline in

production growth over the years. They

became utilities and experienced P/E

contraction

Identify stocks with “Re-rating Potential”


17

Economic Growth vs Index Performance

Index performance fell behind GDP growth during 2007-2012 and 2010-2012

Source: Bloomberg

China Nominal GDP

compound annual Growth p.a.

MSCI China Index Performance

compound annual return p.a.

3 Years to 6 Years to 3 Years to 6 Years to

2006 +16.8 +14.6 +24.5 +24.0

2007 +18.5 +15.9 +43.7 +28.3

2012 +15.0 +15.7 -4.0 -0.6

Note: * GDP growth and performance number are in CNY


18

Top 10 MSCI China Index Components

Weighting of mature companies rising

MSCI China Dec 2012 % Outlook and View

China Mobile 9.91 Mature; Zone B

CCB – H 8.17 De-rating due to interest rate deregulation

ICBC – H 6.52 De-rating due to interest rate deregulation

CNOOC 5.45 Mature; Zone B

BOC – H 4.74 De-rating due to interest rate deregulation

Tencent 4.60

Petrochina – H 4.22 Mature; Zone B

China Life Insurance 3.43

China Petroleum & Chemical 2.68 Mature; Zone B

Ping An Insurance 2.22

80% of top 10 Index component are mature companies and may not catch up with the economic growth of China

Source: Nomura


19

China’s Investment Outlook

► Sustainable, above-average economic growth

– Among the major economies, China offers attractive GDP growth of 7% pa backed by fiscal stimulus

– China is changing its economic model to one that is based on self-sustainable domestic consumption

• Supported by healthy demographics and high saving rates

► Global interest rate to stay low for a longer period of time

– The US Federal Reserve expects fed fund rate to stay below 0.25% until mid 2015

– In view of lacklustre global economy and low inflationary pressure, PBOC will continue the monetary easing policy

► Attractive valuation

– Market is trading at historical low levels in both P/B and P/E terms

► Change of leadership

– Removal of political uncertainties

► Risks

– Geo-political uncertainty


20

Current Investment Themes

Domestic Consumption

– Products with low penetration rates: e.g. autos, Smartphones, insurance products

– Consumer companies with pricing power and good distribution networks

– Consumer staples benefit from rising rural consumption

RMB Internationalisation

– Stronger pipeline for RMB offshore products

– Banking reform

• Deregulation of China’s interest rate policy

Gradual breakdown of old monopoly

– Structural de-rating of some State Owned Enterprises e.g. Big policy banks

Internet Boom

– Growing importance of E-commerce and on-line shopping

– Rising CAPEX for telecom operators


21

Industry Trend

Important Quotes

– China Construction Bank 2013 Annual Results page 62:

“……market competition tends to be more intensive as both non-bank financial and quasi-bank

institutions intervene in banking businesses including wealth management, payment and settlement…..”

– China Banking Regulatory Commission CBRC warns of risks from industries including property,

solar Industry, machinery, steel, wind power and PV.

– China Mobile: will spend Rmb 41bn to build 200+ TD-LTE base stations to cover 100 major cities.

– Jack Ma, Chairman of Alibaba Group at Credit Suisse AIC 2013:

“…e-commerce in the US is a dessert. It’s an addition to their main business, because in the US the

infrastructure of doing business is so good. But in China, because the infrastructure of commerce is

bad, e-commerce becomes the main course….”


22

Positioning & Outlook

Overweight

– Information technology

• Telecom equipment provider

– Autos and consumer staples

Underweight

– Chinese banks but overweight special lenders, insurance and HK financials

– Telecom operators because of rising expenses due to handset subsidy

– Energy. Prefer refineries as they are beneficiaries of China’s pricing reform.

– Zero weighting in materials and capital goods

Strategy

– Accumulate growth stocks on price consolidation


23

Sector Weighting

As at 31 March 2013


24

Top 10 Holdings

As at 30 April 2013

Holding % Nature of Business

New China Life – H Share 4.94 One of the largest life insurance companies in China

Wilmar International 4.51 A plantation conglomerate which will distribute corn flakes in China

Chongqing Rural Commercial Bank 4.18 A restructured commercial bank

Wharf Holdings 4.15 A big landlord in China

China Everbright Ltd 4.11 A listed China Fund manager

Tecent Holdings 4.10 The China internet company having a “Facebook” business model

HK Exchanges & Clearing 3.91 A platform to distribute RMB financial products

Shenzhen Int’l 3.82 RMB Internationalization Play

Far East Horizon 3.78 A financial leasing company in China

Dah Chong Hong 3.58 A car distributor and services company


25

New Capital China Equity Fund

The New Capital China Equity Fund invests in equities

of public companies with significant business activities

in the People’s Republic of China and Hong Kong. The

equities are quoted securities listed or traded on stock

exchanges worldwide

The investment strategy adopts a fundamental stock-

picking approach by investing in small, medium and

large companies which have re-rating potential

Stock selection is driven by bottom-up analysis of

earnings outlook, profitability trend, balance sheet

strength and management quality of a company

The investment horizon of the strategy is between one

to three years, allowing the hidden potential of the

companies to be reflected in the share price over time

to achieve capital appreciation

Investment objective & strategy.

Sub-Fund Name New Capital China Equity Fund

Investment Style Equities Long Only, with options and futures for

protection

Markets China and Hong Kong primarily (all caps)

Benchmark MSCI China Index

Base Currency USD

Max Cash No cash limit and no leverage

Fund Entity UCITS IV – New Capital UCIT FUND PLC

Regulated by the Central Bank of Ireland

Base Fee 1.75% (Ordinary) 0.90% (Institutional)

Liquidity Daily dealing


Peer Group Performance Comparison

New Capital China Equity Fund outperformed peers and benchmark since inception (20/8/2012)

Source: Bloomberg as at 26 April 2013 26


Stock Example: Wharf Holdings (4 HK Equity)

A big landlord in China.

Wharf is a major beneficiary of rising Chinese

tourism through its retail property portfolios in

Hong Kong which provides good cash flow for

building its empire in China

Rental income from China could jump at least

4x after the completion of 2.1m sqm

International Finance Centres in five second

tier cities

Wharf stands out from its Chinese property

peers because of its prudent management

and healthy balance sheet 32.00

34.00

36.00

38.00

40.00

42.00

44.00

46.00

48.00

50.00

52.00

54.00

56.00

58.00

60.00

62.00

64.00

66.00

68.00

70.00

72.00

Mar-

11

Apr-

11

May-1

1

Jun-1

1

Jul-11

Aug-1

1

Sep-1

1

Oct-

11

Nov-1

1

Dec-1

1

Jan-1

2

Feb-1

2

Mar-

12

Apr-

12

May-1

2

Jun-1

2

Jul-12

Aug-1

2

Sep-1

2

Oct-

12

Nov-1

2

Dec-1

2

Jan-1

3

Date

Pri

ce

Source: Bloomberg 27


28

An Experienced Investment Team

A dedicated, locally-based team supported globally.

Years denote investment experience in industry.


29

Appendix


30 30

Fund Manager

An award winning fund manager: the success of a “bottom-up re-rating” strategy

● Mansfield Mok has over 22 years of investment experience

● During his five year tenure at GAM, the $1.5 billion GAM Star China Equity Fund, co-managed by Mansfield, outperformed the MSCI China Index from August 2007 to April 2012 by 72.1%* net of fees

● Mansfield began his investment career in 1990 as an analyst with Hoare Govett, before moving on to ING Barings Securities HK Limited in 1992 and Munich Re Asia Capital Management in 2000

● Awards won:

– Taipei Foundation of Finance-Bloomberg Awards 2012 & 2011: GAM Star China Equity Fund – Best Foreign Fund (3 years)

– Professional Adviser Awards 2011: GAM Star China Equity Fund – Best Fund Manager Over 3 years

– Lipper Fund Awards 2011, Switzerland: GAM Star China Equity Fund – Best Equity China Fund Over 3 years

– Lipper Fund Awards 2011, Hong Kong: GAM Star China Equity Fund – Best Equity China Fund Over 3 years

*Source: Bloomberg (31 July 2007 – 30 April 2012). Past performance is not an indicator of future performance.


Competitive Landscape

Source: Bloomberg Past performance is not an indicator of future performance.

0

20

40

60

80

100

120

140

160

180

200

5432112111098765432112111098765432112111098765432112111098765432112111098

201220112010200920082007

Aberdeen Global Chinese Equity A2 Templeton China A Acc $ GAM Star China Equity USD Acc

Fidelity Greater China A-USD First State China Growth II Acc Schroder Greater China

During Mansfield Mok’s five year

tenure at GAM, the $1.5 billion GAM

Star China Equity Fund outperformed

the MSCI China Index by 72.1%

Characteristics of a Concentrated Portfolio:

● Alpha is mainly generated in an up-market

where the “Buy and Hold” re-rating strategy is

most successful (early 2009 to mid 2010)

● Insurance protections including use of index

put option and the increase in exposure of

high dividend yield stock will enhance return

in the down market (2008).

● Insurance protection policy will be less

effective when the Fund’s AUM reaches

USD500m (mid 2010).

● When the Fund’s AUM grows beyond

US$500m:

– the investable universe will shrink

– more time to build/exit a position


32

A-Share: RMB-denominated ordinary share. It is issued by domestic companies for trade with RMB by domestic

institutions, organizations and individuals (exclude Taiwan, HK and Macao investors).

B-Share: RMB-denominated special share. It is traded in foreign currency on the Shanghai and Shenzhen markets.

B-share transaction was only for natural persons, legal persons and other organizations overseas or in Taiwan, HK

and Macao, Chinese citizens settled in foreign countries, and other investors allowed by the CSRC. After February

19, 2001, the commission opened the B-share market to domestic investors with foreign currency.

H-Share: companies incorporated in Mainland China and whose listings in Hong Kong are approved by the China

Securities Regulatory Commission (CSRC). Shares in these companies are listed in Hong Kong, subscribed for and

traded in Hong Kong dollars or other currencies, and referred to as H shares.

Red Chip: enterprises that are incorporated outside of the Mainland and are controlled by Mainland Government

entities. The most important difference between a red chip company and an H-share company is that a red chip

company is not Mainland-incorporated

Definition Of Various China Shares

Source: China Securities Regulatory Commission website

HK Stock Exchange website


33

MSCI China Index Top Ten Components

2007 vs 2012

Dec 2012 % Dec 2007 %

China Mobile 9.91 China Mobile 17.57

CCB – H 8.17 China Life Insurance 6.05

ICBC – H 6.52 Petrochina 5.60

CNOOC 5.45 CNOOC 4.28

BOC – H 4.74 China Petroleum & Chemical 4.20

Tencent 4.60 CCB – H 3.47

Petrochina – H 4.22 ICBC – H 3.46

China Life Insurance 3.43 China Shenhua 3.19

China Petroleum & Chemical 2.68 Ping An Insurance 2.50

Ping An Insurance 2.22 BOC – H 1.83

Source: Nomura


34

Highlights of Investment Themes

Extract from China’s Stock Market: A Stock Picker’s Paradise (Oct/Nov 2012)


35

RMB Internationalisation: Banking Reform

China banks are to focus on their main banking business.

Basel III: Banks are required to increase their Capital Adequacy Ratios and have no

additional capital for other businesses e.g. insurance

Interest rate deregulation: This will break the oligopoly of the big five banks and provide a

more favourable operating environment for other specialty lenders

Deepening/broadening corporate bond market: This will result in an additional funding

source for new players.

Emergence of the non-bank financial sector:

–Insurance and specialty lender


36

Insurance: An Underpenetrated Business

Source: IMF, Swiss Re, Manulife

GDP, Penetration and Life Market

(Life Insurance penetration vs. GDP per Capita

2011 P

rem

ium

as %

of

GD

P

2011 GDP per Capita (US$)

Emerging Markets

Mature

Markets

Future

Giants


37

China Consumption Has a Much Bigger Scale

Source: McKinsey Global Institute

Incomes are rising in developing economies faster, and at a greater scale, than at any previous point in history.

1Time to increase per capita GDP in PPP terms from $1,300 to $2,600


38

A Big Increase in Middle Income Group

Source: McKinsey Insights China

► China’s middle income

consumer household is

expected to reach 166m

by 2020, double the

total of US, Japan and

Germany combined.

► The increase in middle

income consumers

should support the

demand for

discretionary goods.


39

Strong Demand for Discretionary

Source: McKinsey Insights China

Rising importance of consumer spending.


40

Disclaimer

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together EFGAM) do not hold the necessary registration or license. Individuals or legal

entities in respect of whom such prohibitions apply, whether on grounds of their

nationality, their place of residence or on other grounds, must not use or rely on the

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registered or licensed under legal and regulatory provisions governing financial services

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Past performance is not indicative of future performance.

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Update mansfield china 2013 a year of reform may 2013 asia disc

Economy & Finance

Transcript of Update mansfield china 2013 a year of reform may 2013 asia disc