Good morning, ladies and gentlemen.
So first of all, thank you very much for coming to the AGM
in person.
So just a few words to introduce myself.
I don't know.
Yeah, this is much better now, OK.
So you didn't miss much.
So I'm about to introduce myself.
So I am Simmy Qi, a portfolio manager of the greater China
equities team.
So I joined JP Morgan in 2010 as a graduate
in the commercial and investment banking
actually based in London.
So I joined the emerging market and Asia-Pacific equities team
in 2014, initially, as a sector analyst
covering the industrial and manufacturing companies.
I relocated to Shanghai in 2019 and became a portfolio manager
of the company.
So while 2023 has been a very challenging year
for Chinese equities, the performance of the company
is certainly very, very disappointing.
We understand your frustration or perhaps even anger.
And we are not happy about the performance ourselves.
Thank you for coming here today to give me an opportunity
to explain what has happened, also mistakes we've made,
and at this point, everything feels
so desperate and pessimistic, where we still
see opportunities in the asset class.
So the first slide, I think, many of you
probably puzzled that we were waiting for China to reopen.
Now it reopen.
So what?
Why the performance has been so poor?
So I think on the first slide, it's
worthwhile to just recap what has happened.
So China abruptly entered the COVID lockdown
at the end of 2022.
So in 2023, initially, the enthusiasm
was very strong in China on recovery and also the pick up
of consumption.
So that hope was somehow realized in the first quarter,
but from the second quarter, data points
start a weakening trend, especially
on sentiment and consumption.
Policy responses to the slowdown in economy,
initially, was a little bit slow because for a very long time,
the government's priority was to contain the debt level
and to deflate the asset bubble in the property market.
But as economic growth the trend keeps weakening,
the response has been geared up to be more proactive.
The company underperformed the market
both in stock selection and sector allocation
in this decline market.
Unfortunately, the use of [INAUDIBLE] also
contributed negatively.
So we believe, at this moment, valuation
is extremely supportive.
There is a lot of pessimism pricing
in the valuation, which we will discuss later in the slides.
Personally I question whether all of those pessimism
is fully justified.
At this point in time, we acknowledge
that the share price of the asset class and the company
could be very, very sensitive to incremental policy
support and also perhaps improvement
in the fundamental economic performance.
Let's get into the details.
I think even in this challenging period of time,
it's still worthwhile to restate what we are trying to do here.
First of all, we acknowledge the Chinese market
is very volatile, but it is also very broad
and with a lot of depth of companies.
We believe in this market an active and longer-term
bottom-up investment approach should work.
We are predominantly growth-oriented investors,
and we invest in companies with higher quality.
We focus on fundamental bottom-up stock selection
leveraging on our comprehensive research.
There may be questions on macro and geopolitical risk.
Just want to say here, the way we address it,
is we try to incorporate those considerations in the valuation
and the forecast, but predominantly, our approach
is bottom up.
Just to give you a few examples of where
we see long-term sustainable opportunities in China,
they are in areas such as technology, carbon neutrality,
and consumption.
For example, in technology, we see
China continue to automate its industrial capability.
We also see in companies are developing their enterprise
digitalization capability.
In carbon neutrality, as many of you probably already read
on the newspaper, China is the leader
in battery and also electric vehicles.
In consumption, we still firmly believe
that as household disposable income keep growing,
people will demand better products, better services,
and especially better health care.
All those good opportunities will not
be realized without the support of our research team.
At the moment, I believe we have one
of the biggest dedicated China research team on the street.
We have 15 dedicated China research analysts.
On average, they have over 15 years of experience.
And our research is further supported
by our sector analysts.
There are five of them.
So for example, in some sectors, such as tech hardware,
our analysts covers companies in mainland China,
in Taiwan, and in Korea.
So this allows him to provide international and holistic view
on the entire supply chain.
We are also pleased to inform our shareholders that in 2023,
we complete the acquisition of our China JV partner, China
International Fund Management.
This is a fully licensed China domestic mutual fund,
which we funded as a JV, back in 2004,
and we completed the acquisition.
Integration, of course, is still a work in progress.
But we are glad to have 34 experienced investors joining
us.
Many of them have very long working experience
in the Asia market.
And their capability comprehend with us,
especially in the small and mid-cap space
in Chinese A-shares, and also in some of the new growth
areas such as EV, and solar, they
have been positioned in these sectors for a very long time.
So in this picture, the research team, myself and Rebecca,
we joined them for combined research offset.
In the offset, we discussed and debate
on the key structure themes in each
of the sectors we invested in.
So now let's dig into the details of the portfolio
and performance.
On this slide, first of all, I'd like to just demonstrate
what kind of environment we have been in in 2023,
so on the left-hand side chart, what
we show here is the relative valuation of China growth
and China value stocks.
So as you can see, in 2023, the relative valuation
of the MSCI China growth has done quite a lot.
In other words, the growth companies
were de-rated more than the value companies.
On the right-hand chart, is basically the same thing,
but this is illustrated in the way of relative performance.
As you can see, there is a very sharp fall of the performance
of the growth companies.
But there is actually a piece of additional information
in this chart, which is if you look at the longer term,
the trend is still upward.
We believe that in the longer term, growth companies
in China, will still post a better performance
than the value companies.
So step back.
Why value companies outperformed in China?
It is because in 2023, there is people have uncertainty
on the growth outlook.
Some of the high-growth companies
that we used to believe will grow very fast,
actually reduce their guidance.
And in this uncertain time, people
seeking safety and certainty in some of the high yield
and low growth companies such as coal mines, large SOE
banks, and utilities in China.
We do not tend to invest heavily in these sectors with very
little growth, and these factors contributed
to the underperformance.
Let's move to the next slide.
So this is another background, which
is that since the second quarter of 2023,
as the incremental economic prints become weaker,
money flew out of both the domestic A-share market,
as well as the offshore Chinese listed companies.
So this fund outflow hits the valuation
of some of the growth companies.
And on the right-hand side, it basically
tells you that for a manager with a global mandate,
or emerging market mandate, or Asia-Pacific mandate,
for all of them the weighting in China in Asia is very, very low
and perhaps has been even reduced in 2023.
So this is the performance in calendar year.
This is probably my least favorite slide in this deck.
I think the point we are trying to make
is, the performance is certainly very disappointing,
but China being China, it has always
been very, very volatile.
And fundamentally, we believe there are still
a lot of good companies in China.
And at this valuation at this moment of the cycle,
actually, we do find some of the attractive business
are selling at a discount.
So what we do is we continue to fortify our forecast
and rotating our fund into companies
we see greater opportunities.
This is a detail of the sectors that has underperformed
and the top contributors and detractors.
So perhaps our focus on the bottom two,
which is information technology and consumer discretionary.
I'll give you a bit more details on where we underperformed
and why we think the performance will come back.
So for example, in information technology,
there were two groups of companies that detracted.
One is anything semiconductor related.
The other is things not related to solar and the solar panel.
So for example, in semiconductor,
as we may know, the companies, they actually
have great growth potential.
But in any time, semiconductor can be a very volatile--
the industry has its own cycle.
So what happened here, is that the inventory destocking
cycle of semiconductor came a few quarters later
than we expected.
Share price reacted very negatively,
but actually, in the fourth quarter of 2023,
and in the first quarter of 2024,
because the inventory has finally cleared out,
share price actually rebounded very strongly.
So being a long-term shareholder,
we think we should have the capability to see through it
and invest through the cycle.
In the solar industry, China has been a global leader in this.
But this industry, for a very short period of time,
suffered from oversupply.
We foresaw this coming, but the degree of oversupply
was bigger than we expected.
So at the moment, we are still invested in this sector
because we believe the long-term growth
opportunity will eventually digest the overcapacity.
We are just making some preference changes
within the sector to position in the components that
have the best supply and the demand dynamic.
So on this slide, it shows you the portfolio characteristics.
Basically, in short sentence, we remain a growth investor.
The expected growth of our portfolio
remains higher than the benchmark.
Of course, we pay a bit more for it than the benchmark level,
but the quality of our companies are also higher.
This is supported by the higher ROE, as well as the lower debt
level.
So our companies combined is in a net cash position.
On the right-hand side, this is our investment distribution
by market cap.
To illustrate what I said earlier,
we see opportunities in technology
in industrial and manufacturing.
Many of those companies are what we
would consider as small and mid-cap,
basically, with market cap below $10 billion.
They are listed in Asia, and this is a very rich ground
where we find opportunities.
And that's how we positioned.
So this shows our sector active bet.
So as I mentioned earlier, the way we invest
is consistent with what we tell investors how we invest.
For example, we have always been overweighting the information
technology and health care industry.
On the other hand, we tend to underweight old economy
industries with very little growth, such as financials,
especially large SOE banks and energies and even utilities.
Unfortunately, in 2023, all those value
sectors outperformed and combined,
they detracted performance.
So this slide shows the biggest holding of our companies
and also the relative holdings by active bets.
I think we've discussed a lot.
Perhaps it's best to give you some stock examples of what
we are investing in China.
I guess some of them, you may never heard of.
But in a way, is try to illustrate that China
isn't just about property.
It is not just about internet companies.
There are a lot of companies we find
good opportunities that are under-covered
by the Western media.
So the first one is called Foxconn Industrial Internet.
This is actually a subset of assets from Hon Hai, which
is a Taiwan listed company.
It has been Apple assembler.
You may have read it on the newspaper.
But for this specific company, the good assets
we like not owned by them, is they actually make
the data center and the high power computing.
So in this AI era, you can't just have an Nvidia chip.
You have to have an Nvidia chip via high-power computing.
And those equipment made by Foxconn.
They have good relationships with American clients
such as Microsoft and also Nvidia.
So they are very well positioned to capture the capacity build
up of generative AI computing.
So this company actually have factories
around the world in mainland China,
in Taiwan, even in Czech Republic.
What does it mean is that they can make things
as their clients requested them without being
trapped in geopolitics.
If US want them to make things out of China or even
out of Taiwan, they can totally supply it.
A more near-term driver is that this company also
makes the new titanium enclosure for the new iPhone,
so this component is much harder to make
than previous enclosure.
Therefore, the current Apple promised to Foxconn
is also higher.
So the next example, is Asia material company with a market
cap of around three billion.
The company is called Sunresin.
What it makes is a type of resin that is used in purification.
It is called ion-exchange resin.
For some of you, if you have a background in science
and engineering, this is basically
a resin filled into a column.
And you flow a fluid over it.
Either the resin captures the substance that is desired,
or it captures things that you want to get rid of,
so the end result is purification.
So why this is a good product?
Because a lot of the products are customized for clients
depending on what clients want to purify and the purity level
they required.
The cost of this material actually
accounts for a very small percentage of the manufacturing
cost of the end product.
And because it's so important to purity,
so client tend to be very, very loyal.
And this is a product involves a lot of scientific R&D and also
engineering solution.
And so in the near term, two of the biggest--
and application area is first of all,
to extract the lithium, which is used in electric vehicle
batteries.
The second, they are also onboarded
to purify peptide, which eventually
turned into very popular drug nowadays, which
is the weight loss drug.
So they are already a supplier to Eli Lilly's weight loss
drug.
And there are also new areas they could potentially
gain market share.
For example, they are trying to gain market share
in ultrapure water purification.
This type of ultrapure water is used
in the semiconductor industry.
So the technology can be used in many applications,
and we think there is a very long way for this company
to grow by getting into new applications
and also growing their shares in existing applications.
Finally, I'd like to just illustrate a property company.
Some of you may notice that actually we
do have investment in the sector called real estate,
but we are not investing in developers.
So this company is an example of even in this industry in China,
there was so much bad news.
There are still companies we can find have strong balance sheet
and keeps growing.
China Resources MixC is a facility management company.
It has two core business.
One is to manage the residential properties.
Basically, that's the facility management fee
you pay to the management company.
This is a very cash generative business.
And household tend to have very short payment terms.
Another part of the business is they manage the shopping malls
for the property owners.
They help them with the cleaning, the security,
and they also help them finding leases.
And in return, they get a slice of the sales generated
by these shopping malls.
So this industry is actually a capital like industry.
This company has always been in net-net cash position.
And ROE has been around 25%.
So the shopping malls it operated
are all luxury shopping malls.
It operates 88 malls in China.
And out of them, 37 ranked number one in terms of sales
in the cities.
And so the trust in the data on the left,
was trying to say that the company keeps
growing its revenue, and most importantly, it's free cash
flow across the COVID time.
And even in 2022, when China was subject to severe lockdowns,
revenue sales of its shopping malls still grew 6%.
And in the first half of 2023, as traffic and demand
recovered quite quickly, the growth was 41%.
Part of that is same store sales, but part of that
is also opening new shopping malls.
Finally, I'd like to give you an example of how
we engage with company on the ESG front,
which is fully incorporated in the research and investment
process.
So the example here is called Silergy.
The example here is called Silergy Corp. It is actually
a Chinese semiconductor design house but is listed in Taiwan.
Collectively, JP Morgan Asset Management
owns over 5% of the company.
Given our large shareholding, we think
we have a good chance to impart positive impact to the company.
So our research analysts and our dedicated sustainable
investment team, have been engaging with the company.
We identified issues that are specific to the company.
For example, we like to see more independent directors
and perhaps also more female directors.
We like the company to strengthen
their cybersecurity risk review.
And we set specific targets for our actions.
We don't just impose those targets to them.
We also help them to achieve them.
For example, our sustainable investment research team,
they recommended best practice and global standards on supply
chain audit to the company.
We also shared incidents we learned
from other companies what could happen if you don't take
cybersecurity risk seriously.
The engagement is ongoing.
I think next, I'm going to turn it to Rebecca.
She is going to cheer us up by discussing the market outlook.
Thank you, Simmy and a very warm welcome to all our shareholders
who joined the AGM, either in person or via Zoom.
Now, I'll just spend a few minutes
to talk about how we think about market, the Chinese equities.
And I want to address both the structural challenges,
as well as highlighting some of the positive incremental
changes and opportunities.
But let me start with the hard one first, the key challenges.
Now, we think the biggest and most structural challenge
that China faces is its property market, which
has been in a downcycle for about three years now.
And if we go to the next page, the chart
there will give you a bit of flavor
on how bad things have looked.
Next page, please.
Now, what has started as a self-inflicted correction, i.e.
a government imposed deleveraging campaign
on the property developers, has really
turned into a full-scale property downcycle in China.
Just let me just give you a couple of numbers.
Property prices in China has fallen 20% from the peak.
Property sales were down 40% from the peak,
and property new starts were down 60%.
So as you could imagine, this has
had a very significant impact on both economic growth,
as well as consumer sentiment, which
in turn, impacted a lot of the companies that the trust owns.
Now, while China, in our view, is still
going through the property downturn,
we are seeing some light at the end of the tunnel.
Now, first of all, China is no longer
adding to its problem, I.e. it is no longer building
properties that is more than what people need.
So what China is currently dealing with,
is to digest the inventories that it has built out
over the last five years, instead of adding on
to the problem.
Secondly, we've seen government policies, although, have been
slow to react, has finally turned more supportive
six months ago.
Now, the most important policy, in our view,
is a government-led investment program
that in the form of urban village renovation
and affordable housing projects.
We're talking about a scale of over a trillion
in the next 12 to 18 months, which
we think should provide enough cushion to the private demand.
So instead of looking for a double digit
in property-related investment demand decline this year,
we're expecting a more modest decline.
Potentially, no decline this year.
And again, moving forward, a smaller decline in 2025.
Last but not least, we think there is very little likelihood
that the current property market downcycle will trigger
a systemic financial risk as the bank's balance sheet is well
provided on property related lendings.
So if I could wrap that up, China is in a property down
market for some time and is still
working through some of the problems that
has accumulated in the past.
However, we think we probably seen the worst impact already
and things are going to moderate going forward.
Now moving on, in our view, China
is still a growing economy with a lot of opportunities.
And they continue to gain importance on a global scale.
If we move to the next page, this
shows you the China's importance to the world.
As shown in the chart on the left,
China has been continuously gaining
market share in the global trades
even with all the talks around decoupling and deglobalization.
What's more important, is what's behind the numbers, i.e.
what China is exporting now versus 10,
20 years ago, is totally different.
So while China is still exporting
a lot of textiles and toys to the rest of the world,
China is also exporting much more
higher value added products.
So for example, China has overtaken Japan this year
as the world's largest auto exporter.
So in our view, this is very important
because it really boils down to company
specific investment opportunities for us.
We have seen very convincing increased competitiveness
of Chinese companies, which not only comes
from competitive cost structure but increasingly,
from better product quality and more advanced technologies.
As Simmy alluded to in some of her stock examples,
we are actually finding a lot of interesting Chinese companies
that can leverage on this increased global
competitiveness.
Now, moving on to the market itself,
I just want to highlight two incremental positives
for the market.
Now, the first one is on Chinese policies.
Chinese policies, as we have lived
through the ups and downs, can be quite volatile and tricky.
Now, over the last 12 months, there
are three key important policy changes, in my view.
So first of all is, on a holistic level,
the central government of China has made it clear
that it wants to introduce more policies
to help stabilize expectation and help to improve growth
and employment.
Now, this is reflected in both monetary and fiscal policies,
including a more expansionary and accommodative
monetary policies with rate cuts and injected liquidity,
but also on the fiscal side, with raised fiscal budgets,
both last year, and we are expecting a similar increase
in this year, as well.
Last but not least, there are more supportive policies
related to capital markets, i.e.
stock market, both onshore and offshore.
And really, this also let the way to my last page
here on market, which is stock market valuation.
If we look at the next page, this
shows you the current PE and PB valuation for Chinese equities.
As you could see, they are at historical low.
The most interesting bit, for me,
is the price-to-book ratio for China is now at 1.2 times.
And historically, there are only three times
when Chinese equities have hit a valuation that low.
And every time, the stock return on a 18-month basis
have always been positive.
So really, as Simmy mentioned, we
are seeing valuation becoming extremely attractive.
So all in all, despite a lot of the challenges
that fundamentally China is facing,
particularly property market downturn,
we think the longer-term perspective
for Chinese equities is still very attractive, particularly,
given the valuations that you see here.
Now, let me hand it back to Simmy, who will wrap us up
before we open the floor for questions.
Thank you, Rebecca.
Actually this slide illustrates Rebecca's point perfectly,
which is unfortunately, the Chinese market
remained quite volatile historically.
But luckily, the market do bounce back.
And if you ask me what is going to trigger that point
or when it is going to happen precisely,
the answer is, honestly, I don't really know.
But what I know is that although things timing is very difficult
to predict, but the bounce, initially,
can be very quick and very abrupt.
We have seen it multiple times in history.
So the next slide is, this is trying
to answer, OK, where the money is going to come from.
First of all, I think, on the left-hand side,
this shows how household allocate their wealth
in different countries.
The data is, by the end of 2022, in China,
on average household only allocate
10% of their wealth in equity and mutual funds.
I bet by now, this ratio is even lower.
So as we know, property going forward,
is unlikely to be a place people are
going to put more invested in.
And therefore, that money has to rotate into equities
sooner or later.
On the left-hand chart, what we're trying to show here is,
we try to compare the dividend yield of CSI 300,
which is the onshore Asia index with the 10-year government
bond also onshore.
At the moment, the 10-year government bond
is around a 2.7%.
This level may even go lower in the longer future,
and therefore, for household, for pension,
for insurance to meet their liability requirement
and to support their living standard,
they will have to invest more in equities.
So finally, I'd like to wrap up of all the things we
have discussed today.
So in China, the economy recovery
has been disappointing, but the economy is recovering.
And it's just not as strong and not as widespread
as people originally anticipate.
In response to all of those challenges,
luckily, the government has turned more proactive
in stimulating demand and growth.
Hopefully, we will see more policies coming in 2024
and especially on consumption.
Valuation is extremely supportive.
I think that is itself a very strong support
of long-term return.
Given how dire the situation is, a lot of the companies
they are responding to it themselves.
For example, some of the very cash
generative internet companies, such as Tencent
has been buying back shares in the Hong Kong market.
And the shares will be canceled.
There is also a growing focus on quality, not just
on size by the Chinese company.
This is a positive change we'd like to see.
And finally, I think, the consensus
is that US Fed has finally completed with rate hikes.
In general, this is helpful to emerging market assets.
We also acknowledge there are still risks
and not all the problems are perfectly resolved yet.
Property market weakness may continue
to weight on GDP growth and also we
expect some geopolitical tension between US and China
is here to stay.
But our view is that all of the high-level discussion
has reduced tail risks and also miscalculation risks.
I conclude the presentation of today,
and now I'm going to turn back to Ali.