The managers of Baillie Gifford’s China funds have said the country is likely to lead the world in the ‘electric vehicle race’, due to the government’s major investment in charging infrastructure and the advantage conferred by the scale of its domestic market.
Citywire AAA-rated Sophie Earnshaw said it was an example of a trend they were increasingly seeing in the portfolios of the Edinburgh firm’s £913m China fund and £352m Baillie Gifford China Growth (BGCG ) investment trust. Chinese businesses are starting to become global leaders in increasingly advanced areas, rather than just followers or ‘copycat’ companies.
That helped win the attention of the board of the lacklustre Witan Pacific, which handed the reins to Baillie Gifford. The renamed trust converted to an all-out China growth strategy, with investor demand pushing the shares to trade at a sometimes eye-watering premium rating ever since. They closed at a 15% premium to net asset value (NAV) yesterday, according to broker Numis Securities.
Sophie Earnshaw: Watch her and co-manager Roderick Snell discuss China and their investment approach in our ‘Big Broadcast’ in November.
While Earnshaw and Snell have only been at the helm since September, that reflects investor excitement about their backing of innovative firms in areas like batteries and electric vehicles (EVs), as well as opportunities in unlisted private companies.
‘I think if anywhere’s going to win the EV race it’s going to be China, because of the huge amount the government has invested into things like charging infrastructure. That’s a massive bottleneck but one which China’s just been investing a huge amount in over the past five to seven years,’ said Earnshaw.
The central way they are playing that trend is a stake in CATL, which stood at 2.5% of the fund’s portfolio at the end of December and 2.2% of the trust in January. The company is the world’s largest EV battery maker, with around a 50% share of the Chinese market.
Earnshaw said CATL’s technology ‘stacks up really, really well’ with Korean competitors like Samsung SDI and LG Chem. It is also now beginning to land more deals beyond the domestic market, including with BMW and Tesla.
‘CATL is the dominant player within China. It has a huge revenue opportunity and it’s likely to benefit from scale there,’ said the Baillie Gifford manager.
‘Those scale benefits within China might translate globally. They might have a cost advantage because of the size of the Chinese EV market that they can exploit to offer cheaper batteries globally.’
‘We missed Nio’
Earnshaw and colleagues are also targeting the same theme via a couple of smaller positions.
Geely Automobile Holdings is one of China’s leading car brands, with plans to launch an electric model soon. It also owns Volvo Cars (as distinct from the Sweden-listed AB Volvo, which manufactures larger vehicles), giving access to its technology. They believe Geely’s strong domestic brand gives it a ‘good shot’ at taking share within the Chinese electric market.
Heating and cooling parts manufacturer Zhejiang Sanhua Intelligent Controls, or Sanhua, is also a supplier to Tesla. Auto components are a small but quickly growing part of its business.
Elsewhere, Baillie Gifford has been a major backer of the electrification of transport. The firm remains a major Tesla shareholder, despite some of its trusts and funds slashing their stakes last month.
The China funds also do not own Nio, an EV name held in the group’s global flagship Scottish Mortgage (SMT ) whose US-listed shares have risen from about $4 in late February last year to over $50 today. Earnshaw said it was ‘one that we just missed’.
China’s healthcare ambition
Life sciences is another sector where they are seeing firms with increasingly cutting-edge technology – and where, importantly, the Chinese state also wants to develop a home-grown industry that can challenge the US.
Burning Rock is a recent buy, following its IPO (initial public offering) last year. Its liquid biopsy tests from blood samples help determine the best treatment for many cancers. Earnshaw said its results so far were ‘almost on par’ with US peers like Grail which are leading the industry.
Ping An Good Doctor, formerly known as Ping An Healthcare and Technology, is another holding she highlighted in that regard. Asked how it stacked up to a US telemedicine competitor like Teladoc, Earnshaw said the business’s artificial capabilities were ‘world leading in that space’, allowing doctors on its platform to see many times more patients and make more accurate diagnoses than normal doctors.
Consumer pride and IPO buys
Other relatively recent buys include Bilibili, a social media platform that is ‘very roughly similar to YouTube’. It is particularly popular with ‘Gen Z’ consumers, those around 24 years old and younger. The managers have owned it since the middle of 2020, following its US IPO.
Like Baillie Gifford Pacific , the China fund bought Kuaishou when it listed earlier this month. The trust did not, instead holding around a 3% position in short-form video peer Bytedance. The TikTok owner became the trust’s first private investment at the end of last year.
Earnshaw said the pipeline for private companies in the trust looked ‘really exciting’. Although she made no guarantees about buying more unquoted businesses this year, she said allocation to this exciting area could reach 20% of the portfolio in the ‘medium term’.
Online-only cosmetics company Yatsen was another buy after it went public in late 2020.
Shifting brand perceptions and tastes among younger people and those in the burgeoning middle class outside China’s largest urban centres are another major theme. In essence, these consumers are becoming more willing, and even proud, to buy Chinese brands.
Other beneficiaries in the portfolios include Proya Cosmetics and sportswear brand Li Ning, which has about 5% market share currently but looks poised to challenge Nike and Adidas.
The fund and trust’s twin top positions remain internet giants Tencent and Alibaba, which have been at the receiving end of increasing pressure from government regulators recently. Earnshaw echoed the views of Baillie Gifford colleagues that regulatory challenges in the consumer internet sector are a global rather than uniquely Chinese issue and that the companies still have great growth prospects.
In the five years to 22 February, the fund has delivered a 282% return versus 125% for the MSCI China All Shares index, which it now uses as a benchmark.
The trust’s shareholders have seen extreme returns in the short-term, as the shares have moved from a chunky discount to a large premium. Over the past six months, covering most of the time Baillie Gifford have been in charge, shareholders have enjoyed a 62.2% return versus NAV total returns of 34.3%, according to Numis. The index is up 16.9% over that time.
The trust has been continually issuing shares since October. The board has announced it is contemplating a larger equity raise, which would help to address the premium, but no more details have been announced.
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