Download CHINA CONSUMER FUND TAPPING INTO CHINA`S EvOLvING

Fund perspective
FIDELITY FUNDS - CHINA CONSUMER FUND
Tapping into China’s evolving consumer story
M AY
2 0 11
Please note:
• This fund invests primarily in China or Hong Kong equities. • This fund may be subject to the risks of investing in emerging markets, in single or in a limited number of market(s) or sector(s).
• Investors may suffer substantial loss of their investments in the fund. • The investment decision is yours. Before you decide to invest, you should make sure the intermediary has explained to you that the fund is suitable to you. • Investor should not invest in the fund solely based on the information provided in this document and should read the prospectus (including potential risks
involved) for details.
FIGURE 1: CHINA’S CONSUMPTION AT AN INFLECTION POINT: HISTORICAL PRECEDENTS
Consumption / GDP (%)
Consumption / GDP (%)
90
85
80
90
85
80
China (T=2007)
Korea (T=1988)
Japan (T=1869)
75
75
70
65
70
65
60
55
60
Consumption / GDP (%, 3yr MA)
?
55
T+40
T+35
T+30
T+25
Time Frame
Source: Morgan Stanley Research, November 2010
T+20
50
45
T+15
50
45
T+10
B. Law, Fudan University, Shanghai, China
Furthermore, the 1.3-billion-population will prolong the duration of the consumption boom which is
moving from the richer coastal areas towards Central and Western China. As production bases have
shifted from coastal to Central and Western China, income level in rural China has increased and its
growth is expected to continue. Under-penetrated sectors like luxury goods, brand names, insurance,
education, health care and tourism are likely to benefit over the coming decade as disposable income
grows and living standard rises.
T+5
Education
M. Law, Fudan University, Shanghai, China
Key growth drivers that support this secular transformation among Chinese consumers include:
government pro-consumption policies, rising personal income, under-penetration of consumer goods
and services, consumption upgrade and urbanization.
T
Total investment experience: 11 years
Underpinned by China’s huge population and robust domestic demand, Raymond expects China’s
consumption to witness an annual growth of 15-20% over the next decade. By focusing on China’s
consumption story, investors should be able to enjoy significant growth potential in the medium to
long term.
T-5
1999 – 2000 Teacher / Researcher Fudan
University, Shanghai, China
Raymond finds that the Chinese economy is at an inflection point similar to Japan in 1969 and Korea
in 1988. History suggests that beyond this inflection point, the consumption intensity of the economy
(represented by the consumption-gross domestic product ratio) starts to rise significantly (Figure 1)
bringing China to enter a golden age of consumption.
T-10
2000 – 2006 Assistant Director, Consumer
Team Leader
BNP Paribas Peregrine, Shanghai, China
WHAT ARE THE KEY FACTORS SUPPORTING CHINA’S GOLDEN AGE OF CONSUMPTION?
T-15
2006 – 2009 Investment Analyst (Consumer /
Telecom / Banks / Insurance) Fidelity
International, Hong Kong
T-20
Experience
2009 – Present Director of Research /
Consumer Sector Team Leader Fidelity
International, Hong Kong
Raymond Ma, the portfolio manager of the recently-launched Fidelity Funds - China
Consumer Fund, believes that China is about to enter a golden age of consumption.
Several key drivers are supporting the strong consumption growth and the changing
consumption patterns of Chinese consumers. This offers investors a gateway
to a wealth of enduring growth opportunities in the low-growth world which
characterises the current global landscape.
T-25
Portfolio Manager
T-30
Raymond Ma
Fund perspective
HOW DOES THIS FUND RIDE ON THE CONSUMPTION TREND AND HOW IS IT DIFFERENT
FROM OTHER CHINA FUNDS?
The Fund invests primarily in Chinese and Hong Kong companies that are involved in the
development, manufacture or sales of goods or services to consumers in China. The key benefits of
playing the consumption story via domestic companies versus the global brands are two-folds: 1)
China is a market of 1.3 billion people, and the local companies have the local knowledge so they will
likely win in the long-term; and 2) global brands only have a few percentage of the exposure to China,
so it is very hard to trigger a re-rating story there.
Other key characteristics of the fund include:
• Benefit from the consumption story – Relative to other Chinese equity funds, the Fidelity
Funds - China Consumer Fund takes a more direct and focused approach to participate in China’s
evolving consumer story with relatively higher exposures to the consumer discretionary and
consumer staples sectors.
• Capture both cyclical and secular growth trends – While consumer discretionary and
consumer staples are the sectors that Raymond will consider primarily, he has the freedom to
invest into broader consumer themes across sectors that benefit from China’s emerging middle
class and rising consumerism, such as telecoms and insurance. Raymond believes Chinese
consumers will play an important role in the expansion of the telecom sector, where penetration
is still very low at the moment. Undoubtedly, penetration rates will rise as the field of mobile
data is growing particularly strongly. He also looks at the insurance sector as its penetration is
also currently very low in China, which represents a real growth opportunity.
• Encompass the opportunities in Greater China – Raymond believes not only Chinese
companies will benefit from this secular growth theme but companies in Hong Kong and
Taiwan also benefit from the structural shift in consumption upgrade. As an example, the influx
of mainland Chinese shoppers and their preference for high-end luxury products have been
key drivers of the Hong Kong retail market. Moreover, Taiwan’s travel and tourism sector is
benefiting from the influx of Chinese tourists to visit Taiwan (due to further deregulation and
more direct flights).
The “C.A.S.E” investment approach
• Communication – builds conviction
through belief in management
• Analysis – believes fundamental
research can add value and avoid
pitfalls
• Structure – likes to have this in place
to build best balance between risk and
return
• Expectations – aims to outperform
the MSCI China Index over a 3- to
5-year period
THERE ARE OVER 5,000 CHINA-RELATED STOCKS, HOW DOES THE FUND MANAGER
MAKE INVESTMENT DECISIONS?
Investment ideas come from 4 particular sources (see Figure 2), and are then narrowed down to
a pool of 400-600 relevant consumer stocks. Raymond believes that the strength of the fund is
the detailed analysis of the available opportunities by himself and by the team of Fidelity research
analysts. In particular, he benefits from the 1,000 research notes produced by the analysts every
year. Through the “C.A.S.E” investment approach, the portfolio manager selects the best 80 to 120
stock opportunities for including in the fund.
FIGURE 2: SUMMARY OF INVESTMENT PROCESS
Ideas come from 4 sources
1. Fidelity Analysts
1000 Research Notes
2. Over 300 company
meetings a year
3. External sources
provide ideas for IPOs
4. Ideas gained from
companies on suppliers
or competitors
C.A.S.E
Communication, Analysis, Structure, Expectations
Great
Companies
Growing
Companies
Companies with
inherent potential
70%-80% of the portfolio
these are broadly a consensus view with market
Companies with
attractive valuations
Special
Situations
20%-30% of the portfolio
these are broadly non-consensus positions
Companies are viewed in 5 particular ways
Fund perspective
WHAT IS THE IMPACT OF INFLATION ON CONSUMER STOCKS?
In line with the expectations of Raymond, China’s inflation, Producer’s Price Index (“PPI”) in
particular, has been gradually slowing down as the monetary tightening filters through. Meanwhile,
consumption remains resilient.
China’s CPI (“Consumer Price Index) rose 5.3% year-on-year in April, down from the 32-month high
of 5.4% in March. CPI rose 0.1% month-on-month in April, with food prices down 0.4% (vegetable
prices down by 11.2% month-on-month in April). Non-food prices went up 0.4% month-on-month
(2.7% year-on-year). Retail sales growth remained buoyant at 17.1% year-on-year in April.
While China’s CPI could reaccelerate over the next 2 months as a result of the lower base effect
and the catch-up of non-food inflation, Raymond expects China’s inflation to peak out in 2H11 as the
monetary policy normalization continues and the growth of money supply decelerates. In addition,
food prices are likely to decline further as the supply of food tends to increase during the summer.
Raymond believes that the strong growth in household income should offset the negative impact of
the monetary tightening and should continue to support the resilient consumption in China.
Chinese consumer stocks have in the past demonstrated strong performance, and resilience during
periods of inflation. Chinese consumer stocks1 gained 372% over the past 10 years and outperformed
the general China stock market (Figure 3).
FIGURE 3: CHINA CONSUMER STOCKS1 OUTPERFORMED THE GENERAL CHINA STOCK MARKET
600
Rebased to 100
8
400
6
300
4
200
2
100
0
0
04-2001
%
500
10
China CPI y-o-y (RHS)
MSCI China
MSCI China consumer stocks1
-2
04-2003
04-2005
04-2007
04-2009
04-2011
Source: FIL Limited, Bloomberg, as of 30/04/2011, period: 30/04/2001 – 30/04/2011, performance of MSCI China, MSCI China Consumer Staples and MSCI
China Consumer Discretionary, price indices in local currency, indexed to 100. China CPI y-o-y refers to China CPI year-on-year growth rate.
MSCI China consumer stocks depict MSCI China Consumer Staples and MSCI China Consumer Discretionary index performance, indexed to 100 and then
equally weighted. 1
WHERE DO OPPORTUNITIES LIE IN TERMS OF VALUATIONS?
Raymond believes that valuations are fair compared to growth. As long as liquidity stays strong, the
risk of valuation correction is believed to be limited. Based on Fidelity’s research, Raymond believes
that Hong Kong retailers will see further upward re-rating because one-third of sales of Hong Kong
retailers are attributed to mainland shoppers, and this trend is expected to continue.
CONCLUSION AND OUTLOOK
Raymond has conviction that the Chinese consumption story offers investors unique potential and
he firmly believes that this burgeoning area will outperform the broader Chinese market over the
medium- to long-term. The Fidelity Funds - China Consumer Fund is set to offer an ideal investment
vehicle for investors to gain exposure to this huge and developing story.
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