Welcome to the Morningstar series, "3 Stock Picks." I'm Holly Black. With me in the studio
today is David Raper. He is Manager of the Comgest Growth China Fund. And you are going
to tell us about three stocks in the portfolio that you are excited about at the moment.
Absolutely. Where would you like to start?
Well, let's start with the biggest holding. The biggest holding in our portfolio today
is a company called Ping An Insurance. Ping An is the largest strongest player in the
Chinese insurance market, life insurance more particularly. They are also very strong in
auto insurance. Basically, this is a very interesting company for a few reasons. First
and foremost, their market position. They are the largest player in the market. They've
got about 1.3 million agents active in the market today.
It's a massive scale of operations that they are running. And they are well-positioned
to continue to tap into the long-term structural demand for life insurance products in the
Chinese market. Now, life insurance penetration actually still has significant room to grow
multiple times in the next decade as the Chinese population – as middle-income consumers
are starting to look at how they can protect their lifestyle and their children's lifestyle
in the future. So, Ping An very well-positioned with the scale, the brand and the capability
to sell product into this market. And I'm guessing with quite an ageing population,
that's the big opportunity set as well? Absolutely. It's interesting from that perspective,
but what's actually also interesting about Ping An is the other side of this coin, which
is, one of the big risks for insurance company is the FinTech side of things and people worry
about FinTech development. In the case of Ping An and China, actually, Ping An is one
of the disruptors. They have a lot of excellent divisions in their company running various
FinTech solutions. So, you get the demographic side of things and you get the FinTech bonus
rather than penalty in the case of Ping An. Very exciting company and one that's massively
underappreciated by the market in terms of how sustainable this growth opportunity is
in the longer term. Super. What is stock number two?
Well, change of pace, we'll talk perhaps about a company called 3SBio. 3SBio is a biosimilar
company and they are basically one of the leaders in China in three particular drugs
at the moment. I won't bore you with all the details of each drug, but primarily, they
are focused on oncology-related which is a drug used during chemotherapy recovery to
help patients through that period and another one that helps deal with anaemia in particular.
I don't tend to associate China with biotech. So, it's unusual. This is one of the changing
faces of China. If we go back to China 10 years ago, it was all about labour arbitrage.
So, taking advantage of the cheap labour force that was available, the export environment
and sending products overseas. But increasingly, the intellectual property that's developing
in China is greater and greater. And pharma is one of the tougher areas to develop intellectual
property. And I don't want to oversell it. 3SBio is not the most – the world-leading
biosimilar company, but their technology is getting better and better and as a result,
they are being noticed by more and more international players looking for partners in China as well
as their internal developed products. So, it taps into that demographic profile again
and it gives us excellent barriers to entry against new players coming to this market.
So, we expect to see about 19% earnings growth from this company over the next five or six
years which is very respectable growth. And where are we finishing up?
Well, to finish up, just to change topics again slightly, let's look at the more basic
consumption item and talk about a company called China Resources Gas. China Resources
Gas is a gas distribution company. So, they are not taking out of the ground, but simply
doing city-level gas distribution. If we think about Chinese consumption, again, that middle
income consumer is demanding more energy and they and the government is demanding cleaner
energy. So, gas stacks very well into that. The consumption patterns for Chinese gas consumption
still have significant room to grow. They have very strong barriers to entry. Once you
become the dominant gas distributor in a city, it's very hard for someone to come and compete
with you. So, significant barriers to entry and significant growth profile from the underlying
consumers. And I'm guessing that all benefits from the
urbanisation trends. Absolutely. So, the urbanisation is an underlying
tailwind that this company faces as do other players, but this is – the tricky part with
urbanisation is finding people who can really sustain their position. It's wonderful to
see urbanisation, but the question is, what do you do that's differentiated from your
peer next door. And if you've got the strongest gas distribution network in that city, then
you're going to be able to very well protect your moats as other players try and compete
with you. Super. Well, thank you so much for your time.
Thank you. And thanks for joining us.