Stocks for emerging markets

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Lex Hall: Patricia Ribeiro is Senior Portfolio Manager for the Emerging Markets Fund at American Century Investments. Today we're going to drill down into three stocks that she's got her eye on.

Hi again, Patricia. Welcome back to Morningstar.

Patricia Ribeiro: Thank you. Thank you for having me again.

Hall: The first name on the list today is a Chinese name, it's Contemporary Amperex Technology. Tell us a little bit about why you're interested in this stock.

Ribeiro: Yeah. So CATL is the world's largest supplier of power batteries, EV batteries, right. With a 28 per cent global market share, also a 50 per cent market share in China. So clearly very established in terms of the reach that they have. Also, their technology is really seen as much superior to others in the domestic market as well. So, they have, there are several things in terms of inflections and what we're seeing there in terms of acceleration, earnings acceleration for them. One is that it started actually last year, and it has been the result of the Chinese government extending the subsidy that they have for EV batteries. It was supposed to end in the second half of 2020. And now they have pushed it for another two years. The other thing that we're seeing is because of their technology, and also the reach they have already in China, there are other, there was quite a few well-known global OEMs that are also signing up with them. Tesla has done it last year, BMW, Honda. So, they have a pretty significant list of clients, global clients that are actually signing up with them. So that's also very positive in terms of the demand and their ability to actually grow their sales significantly.

Hall: The second name, it's another Chinese company is WuXi Biologics. Tell us a little bit about WuXi. I've heard about it before but give us a reminder of what you've got your eye on.

Ribeiro: Yeah, so WuXi Biologics. They are the global leading biologics like research and development services provider. And they provide services, they provide customized services to pharmaceutical companies as well as biotech companies. So, what happens is outsourcing has, really the demand for outsourcing has been very strong, has remained actually very strong globally. And capacity utilisation has also stayed very elevated. So, the pipeline has been very strong for WuXi Biologics specifically obviously very high in terms of technology there. And so that has—and they have actually, what we saw also in 2020 and going into 2021, is that they have really added record high levels of new projects and so they have new projects in the pipeline. So, their pipeline is pretty strong. Part of those projects have also been COVID vaccine, they actually got one of those signed up a contract to be able to really produce a vaccine, which has been obviously very significant there. They're also working on introducing certain new technologies in terms of antibodies, and also new vaccine, as well. So, they're adapting on that front.

And so, all of that combined, has actually really created this very strong pipeline for a company that continues to really, I would say, not only match but exceed expectations in terms of the opportunity here in terms of developing new capabilities, expanding also capacity, which is also important in this business, obviously. So, very strong backlog for this company. So, as we look forward, what we like is obviously the opportunity for them to continue to grow that backlog, but also continue to deliver very strong in terms of earnings, like earnings acceleration as well for now.

Hall: The third name on your list, you've got 12 per cent exposure to Latin America, and the third name is a Mexican company called Cemex.

Ribeiro: Yes, so Cemex is actually one of our top 10 active exposures in the portfolio more recently. So, Cemex is a very different sort of story. Here's a more of a cyclical story of – very cyclical story, versus the other two that we were talking about. So Cemex we added to the portfolio last year. And what we saw there was initially when we're looking for those inflection points there, what we saw with Cemex was that the data coming out of Mexico, Mexico being the largest market for them in terms of not only sales, but also margin, the best sort of margin there for them. So, by the way, Cemex is a very global cement company, they have exposure not only to Latin America, but the U.S. as well, Europe, Asia, so they're really spread out globally. But Mexico being a very relevant market for them. And what we saw, we started to see some data points telling us that there was that inflection happening, a positive inflection happening in Mexico, volumes were picking up.

And then when we started looking with more details, what we saw is that there were several drivers of that happening in Mexico. One was that there were more remittances coming into Mexico. And what that usually means is that—the money being sent from abroad into Mexico is really being used for people that buy cement, in bags, in units. And they tend to be the ones doing the build out in their own homes. So, they will buy the bags of cement, and they will build one additional part to their homes, and then they do it again. And so that's how it evolves. And that's actually a big market for Mexico. It's the really retail sort of bags of cement. So that was starting to grow there driven by remittances. We also saw that there was a lot of social programmes from the parent government expanding in terms of growing more schools, hospitals, and that will also see more demand for cement as well in that country.

Hall: Sounds like you've picked a winner there. That's great. So that's Contemporary Amperex Technology, Cemex, which we just heard about, and WuXi Biologics before that. Patricia Ribeiro from American Century Investments, thank you very much for your time and your insights today.

Ribeiro: Thank you.

This report appeared on 2022 Morningstar Australasia Pty Limited

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