Download  Jupiter China Sustainable Growth Fund Philip Ehrmann

March 2010
 Jupiter China Sustainable Growth Fund
How we aim to profit from China’s search for Sustainable Growth
Philip Ehrmann
1
 “Dig the well before you are thirsty” (Chinese proverb)
Twenty-eight years ago, the Chinese people embarked upon the historic
drive of reform, opening-up and modernisation and have made
phenomenal progress through unremitting efforts.
Hu Jintao, Yale University, 21 April 2006
GDP
1978: c.1% global GDP
2009: c.8% global GDP
World Trade
1978: c.1% global trade
2009: c.8% global trade
Shanghai Stock Exchange
(A Share Index)
Q1 2000: US$30bn
Q4 2009: US$3trn
Urban Population
1978: 172m
2009: 625m
There are many favourable conditions for China to maintain
sustained and fast growth. China is in the stage of rapid
industrialisation and urbanisation and has huge potential for
economic growth. The important period of strategic opportunities
for China's development will last quite a long time.
Wen Jiabao, World Economic Forum, Summer 2008
Source: Deutsche Bank, CEIC.
2
 Introduction – Jupiter China Sustainable Growth, Luxembourg Sicav
China is endeavouring to build a harmonious society…
a society of democracy and rule of law, fairness and justice,
integrity, fraternity, vitality, stability, order and harmony
between men and nature.
President Hu Jintao, April 2006
 Jupiter’s sustainability strategy is about delivering good
financial returns by investing in companies which are working
to address the longer term environmental, social and
governance issues that affect their business
 Experienced investment manager working with unique SRI
insights and specialist research
…Chinese Sustainable Growth presents long term secular
investment opportunity
3
 Philip Ehrmann
Jupiter’s China
specialist
 Launched Jupiter China Fund, a £215m unit trust, following arrival
at Jupiter in October 2006
 Has been investing in China for over 15 years
Deep emerging
market
experience
 Twenty years experience running emerging market funds
Long-term track
record
 In 2002 he re-launched Gartmore’s China Opportunities Fund
Source: Jupiter as at 31.01.10.
 Prior to joining Jupiter, was Head of Pacific & Emerging Markets
at Gartmore (1995 – 2006) running assets totalling £3.5bn
and Head of Emerging Markets at Invesco (1990 – 1995)
 Between 2003 and 2006 it became the best performing Asian
fund in the UK unit trust industry
4
 JCSF benefits from an experienced team with access to market knowledge
Jupiter Green & SRI
Research Team
Jupiter Asian Team
Philip Ehrmann’s Asian
equities investment team
Manager
Market Intelligence
Stock specific sustainability
assessment
Philip Ehrmann
Jupiter China
Specialist
Investment Team
Research-Works
SDCL
Shanghai based research team
providing in-depth sector coverage
based on long term trends,
“Big Ideas” and “Misconceptions”
Top-down insights from Hong Kong &
Shanghai into investment implications
of sustainable development policy
& practice in China
Sector and stock research
Major international investment
banking and specialist local
research teams
5
 China’s rapid economic expansion is set to continue
 Real GDP growth QoQ saar estimated
% YoY
% QoQ saar (estimated)
CPI, %yoy (RHS)
25
10
(%)
8
20
6
15
10yr avg
10% pa
 Dramatic change in fortunes between Q408
and Q409 has its precedents
 Economic growth expected to be 8-10% p.a.
over the next few years
 Export-led growth has given way to
broadening domestic consumption,
urbanisation and rural reforms
4
10
2
 Fiscal and monetary policy moving towards
“neutral” as economy recovers
5
0
0
-2
-4
(5)
00
01
02
03
04
05
06
07
08
09
…balance between growth and inflation likely to remain
Source: CEIC, CLSA Asia-Pacific Markets.
6
 Growth at any cost is no longer an option
 Cost to economy and society
 5 year plan – “harmonious growth”
 Climate change commitments announced
in anticipation of Copenhagen summit
…much has changed with the shift towards ‘domestic’ growth
7
 Shift to “domestic” growth yields secular growth opportunities
Growth
Headwinds
Response
Economic
drivers
GDP growth
Infrastructure bottlenecks
Sustainable infrastructure
c. 10% p.a. over the last 20
years against a background
of mass urbanisation
Inflation
Resource and energy efficiency,
railways, technology
Environmental
drivers
Increasing resource demand
Pollution and degradation
Process engineering
Energy, water, food
Costs 8%-12% of GDP p.a.
Water treatment, waste
management, construction,
materials
Political and
social drivers
Social progress
Social tension
Investment in human capital
Creation of middle class,
improvement to social
security net
Unrest between migrant
workers and city dwellers
Healthcare and education
8
 Sectors affected by policy reform
Energy
Efficiency
Leaders
in water
treatment
Distribution &
Production
Energy &
Water
 Transport – largest build-out
in railways since US in late
19th century
Producers of
cement / building
equipment
Real Estate &
Construction
Waste
Management
Mandated with
planning consents
in special
economic zones
Harmonious
Growth
Waste
Management &
Pollution Control
Healthcare
& Education
Agriculture
Transport
Producers of
food stuffs
Logistics &
Transport
networks
…focused investment strategy
Medical &
education
supplies &
services
 Healthcare – US$110bn
programme will see over 13,000
rural clinics and reform
of service provision
 Environment – Retrofitting
of polluting industries
and implementation
of higher standards
 Energy efficiency – 20%
reduction in energy
consumption per unit of GDP
9
 Market valuation – attractive entry point
 MSCI China Trailing Price/Book Value
 Significant falls in share prices since
the onset of the global credit crisis
late in 2007
 Market has returned to more normal
levels of valuation. “Surprise” will be
that earnings revisions should
be strongly upwards
 Small and mid-cap stocks having
experienced forced selling, remain
attractively priced and remain central to
fund’s strategy
…sector selection and earnings growth will be key drivers going forward
Source: Bloomberg, JP Morgan as at 31.12.09.
 Portfolio
11
 Portfolio characteristics
 Top ten holdings
Holding
 Portfolio features
%
Number of holdings
China Insurance International
3.9
Equities
Yingde Gases
3.6
Cash
Hollysis Automation Technologies
3.2
Top 10 holdings
Anhui Tianda
3.0
Dongfang Electrical Machinery
3.0
Asian Citrus
2.9
Lonking Holdings
2.9
China Oilfield Services
2.9
China Automation Group
2.8
Zhejiang Expressway
2.8
Source: Jupiter as at 31.01.10.
 Market cap split
39
93.9%
6.1%
31.1%
12
 Model portfolio performance
 Performance review – November 2009
US Dollars
May 09
Jun 09
Jul 09
Aug 09
Sep 09
Oct 09
Nov 09
Dec 09
27.02.09-31.12.09
Jupiter China Sustainable
25.9%
2.3%
12.9%
-7.4%
3.5%
8.1%
8.8%
3.2%
117.1%
MSCI Zhong Hua
17.7%
2.3%
11.7%
-7.1%
5.8%
5.3%
1.4%
0.9%
78.0%
Difference
+8.3%
-0.1%
+1.2%
-0.4%
-2.2%
+2.8%
+7.4%
+2.3%
+39.2%
 The model portfolio was launched in the middle of February 2009 with a notional
start value of $200m. It reflects the underlying positions that we would have sought
to replicate if the investment strategy had been funded and subsequent portfolio
changes as determined by new positions or price movements.
Past performance is not a guide to future performance
Source: Jupiter as at 31.12.09.
13
 Jupiter China Sustainable Growth Fund
Summary
 Exposure to significant secular growth trends propelling
world’s most dynamic economy
 Emphasis on “new” industries and entrepreneurially
driven companies
 Positive return profile as earnings exceed expectations
and valuations remain attractive
Past performance is not a guide to future performance.
14
 Infrastructure – China’s getting on the railroads
 Macro/Policy drivers
China South Locomotive
China Automation
MSCI Zhong Hua Index
100
50

US$1.2 trillion investment in physical capital (including transport, power
and water) over the next 5 years to remove bottlenecks in the
economy.

Railways are central to economic development programme to
reduce bottlenecks

China’s rail network is earmarked to receive US$250bn investment
through to 2020

Rolling stock demand likely to average US$8bn annually
% Change
 Company specific

0

-50
-100
Jul 07
Jan 08
Source: Bloomberg/Jupiter as at 31.01.10.
Jul 08
Jan 09
Jul 09
Jan 10
China South Locomotive HK$5.1; Market Cap US$9.86bn;
Target price HK$6.2

Benefits from duopoly in domestic industry structure

Backlog of Rmb68bn (2 years of sales)

12/10 P/E 22X
China Automation HK$5; Target price S$6.6 ; Market Cap US$650m

Specialises in industrial safety control systems

Is one of four licensed operators in the railway signalling industry

12/10 P/E 20X
15
 Social security – Rebuild confidence & free up capital
 Macro/Policy drivers
Mind Ray
Shandong Weigao
MSCI Zhong Hua
450%
400%

Commitment to transform healthcare provision similar to 1980’s
US Medicare/Medicaid

Rmb850bn budget to be disbursed in 2010-11

Medical outsourcing and rural clinic program to benefit
equipment companies
350%
 Company specific
% Total Return
300%

250%
200%

150%
100%
50%
0%
-50%
Oct 06
Nov 07
Source: Bloomberg/Jupiter as at 31.01.10.
Dec 08
Jan 10
Mindray US$35; Market Cap US$3.9bn; Target price US$44

Patient monitor and ultrasound equipment

Growing domestic and export markets

12/10 P/E 20X
Shandong Weigao HK$28; Market Cap US$3.9bn; Target price HK$33

One of China’s leading consumables makers

Medtronic owns 19% stake and operates a J.V.

12/10 P/E 25X
16
 Urbanisation – Utilities for a new world
 Macro/Policy drivers
China Resources Gas
Xinao Gas
MSCI Zhong Hua Index
350

10-15m people moving to cities every year

Provision of clean fuel – air quality

Emphasis on piped gas and LPG

New regional development zones centred on western
and northern provinces
300
250
% Total Return
 Company specific

200
150
100

50
0
-50
Jan 05
Jan 06
Jan 07
Source: Bloomberg/Jupiter as at 31.01.10.
Jan 08
Jan 09
Jan 10
China Resourses Gas HK$10.9; Target price HK$13.5. Market Cap
US$1.9bn

Final stages of city gas build out

LPG distribution and industrial pipelines

Forecast earnings growth: 50% year on year

12/10 P/E 17x
Xinao Gas KH$18.5; Target Price HK$24.0; Market Cap US$2.5bn

Only 20-25% penetration rate

Strong management group

12/10 P/E 16x
17
 Environmental solutions – Cleaning up
China Everbright Int
MSCI Zhong Hua Index
 Macro/Policy drivers
China Water Affairs
1400%
1200%
% Total Return
1000%

China’s economic progress to no longer come at expense of its
environment

Tax exemptions and favourable tariff rates

Strict enforcement with heavy penalties

Ministry of Environmental Protection expects industry to have an
average annual growth rate of 15-17% in the next 5 years

New State Environmental Protection Agency (SEPA) with the objective
of reducing the cost and impact of environmental degradation,
established April 2008
800%
 Company specific
600%

400%
200%

0%
-200%
Jan 05
Jan 06
Source: Bloomberg/Jupiter as at 31.01.10.
Jan 07
Jan 08
Jan 09
Jan 10
China Everbright Int’l HK$3.9; Target Price HK$5.2.
Market Cap US$1.8bn

Focused management

Water sewage, waste-to-energy, industrial solid waste disposal

Cluster approach to service provision

12/10 P/E 25X
China Water Affairs HK$3.0; Target price HK$4.2; Market Cap
US$525m

Water supply to second tier cities

Return to core business

12/10 P/E 7.3x
 Appendices
19
 Key terms & conditions
 Investment objective
 To achieve long term capital growth by
investing in companies that are considered
by the Investment Manager to be well
positioned to benefit from secular trends
associated with the environmentally,
social and economically sustainable
development of Greater China
 The Fund will seek to derive its returns
through a portfolio of companies that
conduct a materials proportion of their
business in Greater China or derive a
material proportion of their earnings in
Greater China
 Investment policy
 The Investment Manager will seek to identify
the secular trends related to important
developments in Greater China’s economy.
The Investment Manager will, as a result,
target long term growth characteristics
of their sectors and which are able
to withstand competitive pressure
on their operating margins.
 The Fund is not a screened ‘green’ or
socially responsible fund. Nevertheless,
the Investment Manager considers that the
environmentally, social and economically
sustainable attributes of investee companies
will be key economic indicators in the
research and stock selection process.
Greater China: PRC, HK, Macau, & Taiwan.
The manager is not obliged to invest or sell a stock based on the SRI team recommendations and the overriding objective is capital growth.
20
 Key terms & conditions
Form
Open ended Luxembourg SICAV (UCITS III), a sub-fund of the Jupiter Global Fund
Share classes available
USD, GBP & EUR
The GBP fund will be managed with the intention of applying for “distributor status”
for the purposes of UK tax legislation.
Issue price & dealing
USD10 / GBP10 / EUR10
Daily dealing, single price
Permitted investments
China A, B and H shares, red chips, China related companies and money market and
other short-term debt securities and cash equivalents, which may be denominated in
Renminbi. A shares to be accessed via Participation Notes pending QFII approval
Gearing
No structural gearing. The Manager will nevertheless have the maximum
investment flexibility permitted under UCITS III
Fees and expenses
1.5% management fee
Initial charge of up to 5% and renewal commission available to distributors
Benchmark
MSCI Zhong Hua Index / MXZH
Reporting
Annual audited accounts, 6-monthly interim reports, monthly fact sheets, weekly NAVs
www.jupiterinternational.com
Supervision
Independent board + CSSF (as financial regulator in Luxembourg)
21
 Minth – sustainability research
 Sustainability opportunities
 Chinese fiscal support for fuel efficient cars: The Chinese government
announced in November 2009 that it will extend the 2009 sales tax cuts on
passenger cars in 2010 to support the country's auto industry. The Ministry
of Finance and the National Development and Reform Commission agreed
to extend auto sales tax cuts deeper for cars with fuel efficient engines
or engines less than 1.6 litres
 Research and Development: Lighter, aerodynamic component design will be
important to meet increasingly stringent environmental standards for
passenger vehicles. Minth continues to put great efforts in enhancing its
Research & Development capabilities. Research expenditures increased
by approximately 45.1% in 2008 compared to 2007
Source: http://www.reuters.com/article/idUSSHA5037220091130, Company Annual Report 2008.
 Minth supplies trims,
decorative parts and
body structural parts
to the Chinese
automotive passenger
car market
 MINTH is primarily
engaged in designing,
manufacturing and
marketing these three
categories of products
22
 Minth – sustainability research
 Sustainability Management
 Corporate website provides details of quality
standards and management systems
including ISO 14001 at some sites
 In general there is limited information
although the group is likely to have good
practices in place to qualify
as a supplier to companies such as Honda,
BMW, and Toyota
 Minth points to its consistent low cost
advantage, good customer relationships,
reliable delivery and high quality assurance,
as the foundations which helped it to
weather the market down turn.
Source: Company website/Annual Report 2008.
 Employees and Engagement
 The Group provides employees with
competitive remuneration and social benefits
such as medical insurance and a pension
according to its human resources policy
 Minth had 3,492 employees (2008). Total
employee costs in 2008 accounted for
approximately 10.0% of total turnover
 Engagement with the company should
prioritize details of quality assurance and
environmental management systems
 Also further detail on costs/pricing of water
and energy use
23
 Long-term track record
 Performance since launch
Jupiter - China Unit Trust TR 76.74
MSCI ZHONG HUA TR in GB 61.34
IMA Asia Pacific Excluding Japan TR in GB 42.22
2004
%
2005
%
31.12.05 to
31.05.06
%
01.12.02 to
31.05.06
%
120
Gartmore China Opps
76.33
8.27
14.78
16.40
139.66
100
MSCI Zhong Hua
37.04
8.11
26.18
3.61
72.94
Outperformance
+39.29
+0.16
-11.40
+12.79
+66.72
80
% Growth
2003
%
60
2007
%
2008
%
2009
%
20.10.06 to
31.12.09
%
Jupiter China Fund Unit Trust
66.62
-45.03
76.04
89.31
MSCI Zhong Hua
52.68
-32.16
44.48
74.14
Outperformance
+13.94
-12.87
+31.56
+15.17
40
20
0
-20
-40
Oct 06
Oct 07
Oct 08
Oct 09
Source: Financial Express, bid to bid, net income reinvested t0 31.01.10. Philip Ehrmann managed Gartmore China Opportunities from 01.12.02 to 31.05.06.
Philip Ehrmann has managed Jupiter China Fund since 20.10.06. Past performance is not a guide to future performance. The above funds’ track records are
shown to demonstrate the fund manager’s performance and have different objectives to the Jupiter China Sustainable SICAV.
24
 Disclosure
The Fund which is the subject of this presentation is a sub fund of the Jupiter Global Fund (the Company) which is an open
ended SICAV incorporated in Luxembourg whose Manager has appointed Jupiter Asset Management Limited (Jupiter) of
1 Grosvenor Place, London, United Kingdom, SW1X 7 JJ to act as Investment Adviser. Jupiter is authorised and regulated
within the United Kingdom by the Financial Services Authority.
The Company is a UCITS scheme for the purpose of the UCITS Directive. Details of jurisdictions where distribution
arrangements have either been established or where there is the intention for them to be established can be found in the
Company's Prospectus which is available from Jupiter on request.
This fund invests in a single developing geographic area and there is greater risk of volatility and lower liquidity than in
western markets. The performance of the fund will also be affected by exchange rate fluctuations. Potential investors are
advised to read the specific risks related to this fund contained within the Simplified Prospectus.
This document contains information based on the MSCI Zhong Hua Index. Neither MSCI nor any other party involved in or
related to compiling, computing or creating the MSCI data makes any express or implied warranties or representations with
respect to such data (or the results to be obtained by the use thereof), and all such parties hereby expressly disclaim all
warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of
such data. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in or
related to compiling, computing or creating the data have any liability for any direct, indirect, special, punitive,
consequential or any other damages (including lost profits) even if notified of the possibility of such damages. No further
distribution or dissemination of the MSCI data is permitted without MSCI’s express written consent.
This presentation is intended for investment professionals and is not for the use or benefit of other persons. Those viewing
the slides should bear in mind the risks associated with equity based investments generally as well as any which are
specific to the funds featured in the presentation. Investors may not get back the value of their original investment and
returns may be affected by exchange rate fluctuations. Also initial charges are likely to have a greater proportionate effect if
investments are liquidated in the shorter term. Past performance should not be seen as a guide to future performance.
Any data or views given should not be interpreted as investment advice and while every effort is made to ensure the
accuracy of the information no assurances or warranties are given. For your security we may monitor or randomly monitor
telephone calls.
3413_CHINA SUS_PE