Dale Nicholls, fund manager of Fidelity China Special Situations, isn't worried about Beijing's curbs on tech, as new draft competition rules follow the dramatic suspension of the world's largest ever flotation.
The dramatic derailing of Ant Group’s flotation last week does not represent a major threat to it and other Chinese companies’ long-term prospects, according to Dale Nicholls, manager of the £1.9bn Fidelity China Special Situations (FCSS ) investment trust.
Ant, the financial services arm of Chinese tech giant Alibaba (BABA.N), had raised $37bn for what would have been the world’s largest ever initial public offer (IPO), with its shares set to begin trading on the Shanghai and Hong Kong exchanges last Thursday.
But Beijing suspended the listing late on Tuesday, after announcing new regulations affecting financial technology companies and hauling in Jack Ma and other executives for questioning. The former Alibaba head, who retains a controlling stake in Ant with Alibaba owning about a third of the Alipay-operator, had criticised the ‘pawnshop mentality’ of China’s state-owned banks at an October summit.
Nicholls said the regulatory crackdown reflected ‘unfortunate timing’ for Ant, but the development itself was not a surprise.
‘We’ve been following, obviously, Ant for some time but also the potential for regulation to increase in the whole fintech space. There’s always been a gap versus traditional banks in terms of the way they’re regulated, and that’s been evolving. It’s really no surprise that you’re starting to see more regulation come in on the fintech side,’ said Nicholls.
‘You can probably argue that Jack Ma’s speech may have accelerated that whole process. Clearly, it didn’t go down well. And you could probably argue that was a trigger in terms of bringing things forward.’
The manager said the IPO ‘will come’, but speculated it had been delayed about six months.
Fidelity China Special Situations does not hold a stake in Ant, but had a net 15.6% position in top holding Alibaba at the end of September.
Scottish Mortgage (SMT ), Baillie Gifford’s £15bn global trust, was hit directly. Ant is its largest unquoted holding, while it also owns a big slice of the parent company.
Tech competition curbs
The incident was a reminder to investors of Beijing’s willingness to intervene in public and private markets, but could also mark the beginning of wider curbs on tech companies, and in particular giants Alibaba and Tencent (0700.HK).
On Tuesday, China published draft antitrust rules aimed at curbing the monopolistic power of the platforms. China’s State Administration for Market Regulation said it wanted to prevent platforms from dominating the market or blocking fair competition, according to Reuters.
Nicholls said this move, which will see China attempt to define for the first time what represents anti-competitive practice among tech companies, had long been a possibility.
‘It’s just a reminder that the government is ever-present. I guess we shouldn’t really be too surprised. They’ve become very big businesses, very big parts of the economy overall. We’re just at the consultation paper stage, but there’s a recognition of the strength of these businesses and just a reminder that they really can’t “over-monetise”,’ said Nicholls.
‘The focus seems to be, we sense, on e-commerce. So companies like Alibaba will need to watch the sort of programmes they have with their merchants.’
The owner of Taobao, the world’s biggest e-commerce site, has been accused of forcing some sellers to exclusively use its platform.
Both of the platform giants’ shares crashed on the announcement. Tencent is down over 7% since Tuesday, while Alibaba has crashed 13%, after staging something of a recovery from the blow of Ant’s suspended IPO.
In addition to its bumper Alibaba stake, the Fidelity trust had a 12.6% position in Tencent at the end of September. Reflecting how extreme the groups’ growth has been, in fact, those whopping positions were both underweight relative to Alibaba’s 20.7% and Tencent’s 14.2% respective weightings in the MSCI China index, according to the trust’s latest factsheet.
Ant still a ‘winner’
Nicholls (pictured) said it was too soon to tell the ‘winners’ and ‘losers’ of Beijing’s evolving approach to tech companies, but on changing fintech regulation, he thought it might play into Ant’s hands longer term.
Ant currently funds just 2% of its consumer loans, according to analysts. Draft rules could hike that to 30%, forcing it and other fintechs to hold much more capital on their balance sheets. While that would crimp margins, it would be easier for Ant to raise that money than rivals.
‘If they’re really going to require more capital, obviously the ability to raise capital will be an issue. And from that sense someone like Ant is going to be, I think, in a strong position,’ said Nicholls.
On e-commerce, new rules could prove a boost to relatively smaller players like JD.Com (JD.O) and Pinduoduo (PDD.O), albeit both are still large companies with huge customer bases. But the manager also played down the extent to which the tech giants had abused their positions.
‘We need to see how things evolve but I think if you’re looking at an area like e-commerce, probably the risks are lower with the lower share players,’ he said. ‘But it doesn’t feel like the big platforms are really over-monetising at this point.’
Gearing runs hot
Total returns for the Fidelity trust’s shareholders have been 64.8% this year, far outstripping the 25% rise for the MSCI China index. That has been helped by the shares moving to trade just under net asset value (NAV), versus a more than 8% average discount over the last year. Over five years, shareholder returns have been 191% versus 115% for the index.
Rival JPMorgan China Growth & Income (JCGI ) has done slightly better, with shareholders enjoying returns of 72.2% this year and 282% over half a decade.
Nicholls defended gearing, or borrowing, running at over 20% of NAV, despite the big gains made already in 2020. Gearing amplifies returns in rising markets, as well as losses when stocks falls.
The fund manager said plenty of value remained in large positions in the insurance sector, while he is encouraged by how some holdings he thought had been undervalued for an extended period have been recognised by the market this year, resulting in the trust’s strong returns.
He picked out SKSHU Paint (603737.SS) and e-bike company Yadea Group Holdings (1585.HK) as examples of domestic growth stories. The former’s shares are up two and a half times this year, while the latter has shot up five-fold.
In addition to the Fidelity and JPMorgan funds, this year has seen the entrance of a third London-listed China trust, after Baillie Gifford won the mandate of Witan Pacific and relaunched it as Baillie Gifford China Growth (BGCG ). Investor excitement has pushed £262m trust’s shares to a heady 21% premium, at close of trading on Wednesday. While not as concentrated as the Fidelity trust’s bets, BGCG also has large stakes in Alibaba and Tencent, 9.4% and 6.9% respectively at the end of September.