SIMON BROWN: I’m chatting with Charlie Dutton, a fund manager at Ninety One Asia Pacific Franchise. Charlie, I appreciate your time. If we look at China specifically, there’s a good argument to say that they came out of 2020 stronger as a nation, as an investment destination. It’s a lot easier to invest into China than certainly it was a decade ago, with a markedly improved investment quality, again, than perhaps a decade or so ago. I don’t want to use the phrase ‘perfect storm’, but certainly it’s an investment destination we can no longer ignore and just simply say, well, we’ve got some Naspers. It’s a space we need to get involved in.
CHARLIE DUTTON: Simon, yes, I completely agree with you. And I think it’s very interesting that at a lot of the trends that we were very supportive of in China going into the Covid-19 crisis have actually been accelerated by that crisis – and certain events of the technology leadership, the high levels of R&D [research and development] which are coming through, and also the expansion of local brands.
I think you’re absolutely correct, as well, in terms of the ability to access the market being vastly improved, whether it’s through individual funds, whether it’s through the Hong Kong connect, or whether it’s actually buying directly in the Asia market. So those are all going to only increase going forward, all those trends that I’ve just mentioned.
SIMON BROWN: You mentioned R&D and that’s actually a presentation you and your colleagues did earlier in the week. China is en route to actually outspend the US in R&D and, that just doesn’t give them the lead now. That’s a lead that will last for four years, if not decades if they continue the outspending.
CHARLIE DUTTON: Absolutely. And I think, as you were saying if you look back 10 years ago the access to the China market was pretty low. But also, when you think about the quality of the stocks available in China, they’re pretty low in that it tends to be very much industrial, manufacturing-based, highly cyclical. We all know about the copycats going on within China in terms of (products). Where actually, if you look at it today, they are actually innovators. You’re absolutely right when you talk about Naspers and Tencent, but expanding that to Alibaba, to Meituan, the other technology sector, but also within healthcare as well.
If you look at how they have coped with Covid-19, how they came out with their own vaccine which has been very effective within the population, you could actually argue it’s ahead of where the West is.
SIMON BROWN: Ahead of where the West is and profitable. If we turn to the US, the Nasdaq, yes, the big stocks there are profitable. But we don’t have to go to China and look for those wannabe stocks. You mentioned a bunch of them and there are others, which are resoundingly profitable at this point. And it’s only going to get better.
CHARLIE DUTTON: Yes, absolutely. They still have those up-and-coming stocks which you’re talking about, your Teslas of this world. But if you’re looking at the established stocks, as I mentioned, the Alibabas, the Tencents, the Meituans, the JDs, they are established, very profitable and, most importantly, taking that profitability and reinvesting that cashflow in future growth and future R&D.
Conversely, if you want to go down that more kind of grossly unprofitable level, then there are other stocks out there. There’s a company called Nio actually, which is the Tesla equivalent in China, which started last year at about a $10 billion market cap and it’s now $150 billion, that makes huge losses in plants and not something that we would look at. But there are all those new innovative companies coming through as well.
SIMON BROWN: Valuations. I mentioned the Nasdaq and I look at some of those stocks – Apple, a world-class stock, but (with) price/earnings north of 30, a little bit eye-watering. The valuations sort of in the established, profitable businesses – do they have reasonable valuations?
CHARLIE DUTTON: Do you know what, some of them actually do, and still at a discount to their Western peers. But you would actually argue that the pathway for growth for the likes of Alibaba and Tencent is much longer than for their Western peers. And really, you just need to look at what’s happening to the middle class in China, and just look at the fact that over the next 10 years there should be 350 million to 400 million people coming to that.
The key category that we look at or the key GDP per capita that we look at is $10 000.
Once you start earning over $10 000, your disposable income goes up significantly, and that’s when the likes of these technology stocks, of these branded products, start to really, really explode. And, as I say, if you’re looking at 450 million people, just think about that as a number – 450 million people coming into that category over the next 10 years; that’s a significant pathway to growth.
SIMON BROWN: Yes. We still get staggering numbers out of China. They’ve always been, and they remain largely [so].
My last question is around increased regulation. We’ve certainly seen a fair bit coming. Most notably was the cancellation/delay of the Ant Group IPO of last year. They’ve been Jack Ma’s financial arm. Certainly, it’s coming. My sense is regulation is not a bad thing, particularly for the incumbent.
CHARLIE DUTTON: Absolutely. At the end of the day, the Chinese government is most interested in improved productivity and improved being the end consumer. If the technology leaders in terms of Alibaba and Tencent are actually producing that, they’re there to encourage it. And recent legislation, which has come out and the recent proposals which have come out are very supportive in saying that we want to continue our technology leadership in these areas, but let’s just be careful about creating systemic risk if that’s been peer-to-peer lending or in fintech, and let’s make sure that we’re also creating a fair playing field in terms of e-commerce.
So I actually see the regulation as being very productive for the incumbents and also very productive for long-term growth.
SIMON BROWN: Sort of bringing it in line with the global and developed-market type of environment. We’ll leave that there. That’s Charlie Dutton, a fund manager at Ninety One Asia Pacific Franchise. Charlie, I really appreciate your time.