Baillie Gifford China backs Beijing’s ‘sensible’ reforms

Baillie Gifford China Growth fund managers describe Beijing’s crackdown on internet companies, which has wiped off nearly a quarter of its share price since June, as ‘remarkably sensible’.

Baillie Gifford China Growth (BGCG ) has described Beijing’s crackdown on internet companies, which has wiped off nearly a quarter of its share price since June, as ‘remarkably sensible’. 

In comments for the trust’s half-year results, fund managers Sophie Earnshaw and Roddy Snell said they were sticking with their big holdings in e-commerce giant Alibaba and social media platform Tencent, whose shares have fallen 29% and 16% this year, while upping exposure to stocks involved in China’s green energy push.

They also said they had minimal exposure to China’s property sector, which has been wracked by the near collapse of indebted developer Evergrande.

Although the trust did not hold the online education companies that were effectively outlawed by the Communist Party leadership in the summer, its portfolio was in the firing line from China’s new data security law which imposed stringent restrictions on internet platforms and undermined the valuations of tech companies.

Moves by regulators in both US and China making it more difficult for Chinese companies to list in the US also knocked the fund which had 10% in American depositary receipts (ADRs) and 37% of assets in ‘variable interest entities’ (VIE). The latter have been the preferred overseas structure for companies in China wishing to access foreign capital but have been the cause for long-standing concern among some investors as their shareholders have no ownership rights to the underlying operating businesses.

The fund managers said the company was agnostic as to where Chinese companies were listed and that, ‘at face value’, regulations encouraging companies to list domestically were of no concern.

Much more problematic, however, has been the administration’s anti-monopoly probes in healthcare, education and property to curb what officials call the ‘disorderly expansion of capital’ in an attempt to lower living costs for ordinary people.

‘The market has largely taken these regulatory moves as an attack on the private sector,’ said Citywire AAA-rated Snell and AA-rated Earnshaw. ‘We disagree and would note that the vast majority of regulation in the internet space has been remarkably sensible.

‘Weeding out practices such as forced supply exclusivity and differential pricing is a positive for the companies we own. It encourages them to double down on what they do best, ie, building platforms that create significant value for all stakeholders,’ they added.

Tencent and Alibaba were the £237m closed-end fund’s biggest positions at the end of August, accounting for 8.4% and 7.3% respectively, although the managers pointed out these were ‘modest overweights’ against the MSCI China All Shares index.

On balance the China Growth managers believe Alibaba’s business is a ‘strong force for good’, having created millions of jobs and ensured the availability of goods and services to the country’s poorest consumers. 

‘With e-commerce penetration below 30%, we think the growth opportunity and returns for shareholders remain sizeable, particularly given the current valuation,’ they said.

Similarly, Tencent was impossible to ignore, they suggested, as its WeChat app remains the main way Chinese people organise their lives and communicate with companies. 

‘Comparisons with Facebook do not do this business justice,’ they said in reference to the US social media platform’s increasingly existential struggle with politicians, regulators and whistleblowers. ‘Whilst the market obsesses over regulation which affects less than 10% of Tencent’s business (namely restrictions on gaming time spent by under-18s), our attention lies elsewhere,’ they wrote.

They also remained supportive of other rapidly growing online businesses that had been hit in the sell-off of US-listed Chinese consumer stocks. Cosmetics retailer Yatsen was poised to deliver exceptional returns if it continued with its innovative, data-driven model, they said, while Bilibili, or ‘B-Site’, a video sharing website, was beginning to monetise the dedicated youth following it had built.

Meituan, the group discount website, was also badly hit as investors feared new minimum wage laws and the expansion of social security benefits to part-time drivers would hike delivery costs. However, Snell and Earnshaw did not believe this threatened the company’s business model, particularly as it enjoyed a 130% surge in revenues in the first quarter. ‘We continue to believe that this is one of the best growth businesses in our universe and remain happy holders,’ they said.




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