Morningstar - Q3 2021 - 75

China Is Unique
Daniels: China's been an ever-growing part of the
MSCI ACWI ex-US Index, rising from about 5%
to 11% in the last five years. Can an international equity
manager afford to ignore China anymore?
Weiss: I don't know that any investor was
able to ever ignore China, in the sense
that it's always been an important consumption
end market, a supplier, and a competitor.
But investment opportunities have grown over
time, and now A-shares are increasingly
accessible to investors.
Another significant shift is that 10 or 15 years
ago, there were a lot of me-too type of companies
in China-the " Facebook of China " or the
" Amazon of China. " Now China is arguably ahead
of the curve in areas such as payments,
delivery, mobile messaging, short-form video, and
electric vehicles. The U.S. and Europe and
Japan are playing catch-up. You go to a supermarket
in Beijing, and you can pay with your face.
That's still not an option available to me
here in Boston. The short-form video business
model was innovated by a Chinese company
and then adapted for the overseas market in the
form of TikTok.
Desmond: I focus primarily on developed
equity markets, but you still need to know what
is happening in China as a marketplace and
as a competitor. We're looking for companies that
are accessing business in China while staying
aware of the risks posed by competitors that are
based in China.
Chakrabortty: We've been investing in Chinese
equities for more than 20 years now, but with the
opening up of the A-share market-the
Shanghai and Shenzhen Stock Connect program-
we've increased our coverage of Chinese
stocks. China has grown into a giant among
emerging markets: It's close to 38% of
the emerging-market index. We are constantly
seeing more client interest there, and we launched
a dedicated Chinese equities fund last year.
Daniels: Jed and Pradipta, you both own the two
largest Chinese companies by market cap,
Alibaba BABA and Tencent TCEHY. What's the case
for these stocks?
Chakrabortty: It's not difficult to figure out
Alibaba's competitive advantage. They're market
leaders in e-commerce, with several other
rapidly growing online businesses, like cloud
services. The scale and the network
effects of these businesses translate into
significant cost advantages; rivals have much
higher customer acquisition costs. They
also have partnerships with [grocery retailers]
Freshippo and Sun Art, so they are combining the
strength and the muscle they have online with
these capabilities offline.
This is a high-quality company delivering
about 25% cash flow return on investments year
on year. It is also one of the most durable
growth companies in the online space. They're
investing in the next legs of growth, such
as in lower-tier markets with Taobao Deals and
community grocery shopping, competing
against Meituan 3690:HK, which is backed by
Tencent. It ticks all our criteria and is at attractive
Vietnam is a very attractive
frontier market.
Pradipta Chakrabortty
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75
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Morningstar - Q3 2021

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