Chinese equities have staged a volatile comeback on Beijing’s latest promise of stimulus measures, but JO Hambro’s Samir Mehta isn’t one to follow the crowd.
With one eye on Beijing’s efforts to revive the Chinese economy, Mr Mehta is sticking to his well-worn strategy: he’s hunting for companies across Asia that aren’t battling intense competition and have management teams focused on costs, cash generation and high payouts to shareholders – and he’s using AI to do the early legwork.
“Particularly in the last five years, well-managed businesses in China have understood that for the first time in 40 years, neither the Chinese government nor the PBOC are going to come to their rescue in terms of big stimulus packages,” Mr Mehta said.
“We don’t know how big the latest stimulus package will be. But we do know that the better managed companies in China are cutting costs, reducing working capital, reducing capital expenditure, and assuming that growth is going to be quite challenged. And if they have excess cash, they’re buying back shares or returning money to shareholders.”
Along with cutting costs and spending, Chinese companies, in particular, have been preparing for a Donald Trump presidency, determined not to get burned like the last time. “Any company you speak to across Asia today is thinking about Plan B, about a contingency plan,” Mr Mehta said.
“Take the shoe manufacturing companies for the likes of Nike and Adidas. They used to have 90 per cent of their shoes manufactured in China. Today it’s less than 20 per cent in China. They’re in Indonesia and Vietnam.”
Technology giant Tencent is one of the biggest holdings in the Pendal Asian Share Fund, which Mr Mehta co-manages. The fund invests in Asia ex-Japan, with a focus on China, Taiwan, India and ASEAN countries. Tencent has bought back about $US8bn ($12.1bn) of shares so far this year, with estimates its capital return to shareholders could reach $US13bn by the end of the year, including dividends.
Alongside the tech giant, the fund’s biggest holdings include names such as chipmaker TSMC, Indian motorcycle maker Bajaj Auto and Tata Consultancy Services.
But one of the top performers in its portfolio, with a one-year share price surge of 150 per cent, is Jentech Precision, a Taiwan-based tech company that makes “heat spreaders” to dissipate heat to help cool AI servers.
Jentech is one of those companies that fits into the chain of manufacturing but is not well talked about. The decision to invest was only made possible with the use of ChatGPT.
“We had no clue about the company. We had no information,” Mr Mehta said. “Usually you have sell side coverage, so that would give us some information on the company, what the background was, but with Jentech there was no sell side coverage.
“We downloaded their annual reports, got hold of their presentations and fed them through the models, and then tried to understand who the competitors are. It was the first time we had used ChatGPT for analysis.”
The fund now uses ChatGPT as a core part of its analysis for stock picking.
Mr Mehta will present at the Sohn Australia conference in Adelaide next month. While keeping quiet on his chosen stock, he said his top pick was a Chinese company with a peer listed in the US.
“I want to focus people’s attention on thinking around this country, that many say is uninvestible,” he said. “It fits into the category of having great management, doing all the right things, including buybacks of shares.
“They have a peer that is listed in the US and well admired … and it fits into my narrative of what I would call redemption.”
This year’s Sohn Hearts & Minds will be held on Friday, November 15 at Festival Theatre in Adelaide. The annual conference, which has been running since 2016, raises funds for medical research. It is on track to top $70m in total funds raised over the past eight years by November.
Themes for this year’s event will explore space, AI, geopolitics, biosciences and investing.
A host of top stock pickers outline their best pick for the coming year, including leading investment experts Jordan Katz, managing director at Advent Global Opportunities in Boston; Beeneet Kothari, chief executive at New York-based Tekne Capital Management; Ricky Sandler, CEO of Eminence Capital; and Sydney-based Vihari Ross, portfolio manager at Antipodes Partners.
It is being held in partnership with the South Australian government.
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