3 top Asian picks on Longlead's radar |
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22/10/2020
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<p><strong>Lex Hall:</strong> Hi, I'm Lex Hall for Morningstar. Today I'm joined by Andrew West. He's the Managing Director of Longlead Capital Partners and their chief hunting ground is Asia and today he's going to reveal a few companies that he's got his eye on.</p>
<p>Welcome to Morningstar, Andrew.</p>
<p><strong>Andrew West:</strong> Hi, Lex. Pleased to be speaking here.</p>
<p><strong>Hall:</strong> Now, the first company on your list is a pretty well-known company. It's Alibaba. It's one of those giant tech companies that we've been hearing about for quite a while now. But you've seen some different things that perhaps other people haven't seen. What do you like about Alibaba in particular?</p>
<p><strong>West:</strong> Yeah, I thought I'd start with one that's a little bit more familiar given the general Asian universe perhaps not so well-known to many investors. Alibaba, let's recap on where it makes its money very quickly. Every (indiscernible) of the ecommerce platforms following very much similar to the Amazon model that everyone is very familiar with. That still remains the dominant driver of Alibaba. So, the first point with Alibaba is just that relativity of growth as we compare it to the more familiar U.S. tech names but still at a very reasonable valuation.</p>
<p>The second piece that we like in Alibaba is a little bit more hidden. But we've seen by following Amazon through time the benefit of the valuation of the company, and that is seen in Alibaba's cloud platform, its data center and cloud business. That business is very much at a more junior stage of development than the equivalent business AWS in Amazon. But that's important because it becomes a very long-term growth driver for Alibaba.</p>
<p>The last piece is short-term in nature that's very important to understand and that is the IPO of Ant Financial. This is going to become very topical as more news comes out over the next month or so. The Ant Financial, 33 per cent owned by Alibaba came out of the Alibaba platform network. It is in effect the world's largest fintech which makes it very attractive. It is actually one of the world's largest financial institutions, many times the size of Citibank, Goldman Sachs, et cetera. But many people don't still today understand exactly what it does. And when you think of Ant Financial, as you think more about the IPO, the core of that is its Alipay system, mobile payment system, which is the dominant mobile payment system in China today. But then, Ant Financial is involved in many other areas of finance. It offers insurance, credit, wealth management products, online banking, et cetera. It's a diversified fintech in that respect.</p>
<p>So, Ant Financial has been hidden within the investments line essentially of Alibaba since its inception and many people even five years ago didn't really know about the opportunity offered. We've been following this over a long period of time. Other companies such as Fosun had exposure and we were able to get some information, understand what was going on with Ant Financial. It is an exciting company. Still today, if you look at analyst valuations, many people only have about US$150 billion as their mark, their valuation of Ant Financial on a 100 per cent basis in their selling part. We think that will double in a very short period of time.</p>
<p><strong>Hall:</strong> Okay. Second name on the list is Wuxi AppTec. Tell us about this company, Andrew.</p>
<p><strong>West:</strong> This is probably one that many people don't know about, but it's a very large company in China. It's China's largest pharmaceutical contract research and manufacturing operation. Now, some in the investment community might be aware of Charles River Labs, which has been a fantastic success story in the U.S. we've followed for a decade or so. Wuxi AppTec has many of the same aspects to it. What it does is essentially provide contract research and development activities for the pharmaceutical companies of the world as well as contract manufacturing. And within that it has expertise that these companies can't necessarily carry themselves at all points of their development, which is why they need these contract research and development partners in the complex and costly world of development—that is pre-clinical trials, post-clinical trials, cell and gene therapy, all these very interesting and exciting aspects, even vaccine manufacturing, which is obviously very topical.</p>
<p>Now, contract research and development within the pharmaceutical space is a long-term structural growth driver. That outsourced element has been growing for a decade and will continue to do so. In China it was only a US$6 billion industry in 2018. It's expected to be over US$20 billion industry by 2023, in five years. That's a 30 per cent continuing growth rate and Wuxi AppTec is the largest in the space.</p>
<p><strong>Hall:</strong> Okay. And the third name on the list is Techtronic Industries, a Hong Kong-listed company.</p>
<p><strong>West:</strong> Techtronic Industries, people may know it by the brands it sells already. It's in the power tool market, what we call power equipment, outdoor equipment. The key brands are things such as in the DIY space, the RYOBI brand that people know. I've got the RYOBI lithium mower in my garage. It's been a game changer for my ability, not the lawn, and the MILWAUKEE brand in the, sort of, the premium equipment market, as well as other brands like AEG.</p>
<p>The most important thing is that everyone focuses on things, particularly Asia, like battery technology, electric vehicles, electrification and those sorts of things. Those investment themes are going to affect the world over the next 5 to 10 years, and many companies are still in investment mode, haven't really got any benefits from that yet. Techtronic Industries have been getting benefits from that for the last 5 or so years and continue to do so. It's a now driver of a company's earnings. And the most important thing to understand is, in Techtronic Industries, one of the leaders in the industry, being able to develop the lithium battery technology, faster charging, higher power, lower temperatures that generates the ability to apply that technology to larger and larger equipment. (Indiscernible) piece that is interesting to understand that one is just the way lithium technology in the leadership locks consumers into their products. If you get the RYOBI power tools, you'll know that the largest part of that cost is probably the battery. Once you're in their tool segment, then the same battery can be swapped between the power tools and that means you can share that cost. So, you buy—once you've got RYOBI, you continue to buy RYOBI, and it's the same (indiscernible) et cetera, and it's the same with the larger equipment. Once you've got the mower battery, you can use it on your larger equipment and that generates that consistent compound growth profile and revenues from it.</p>
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