Constant innovation is driving earnings growth for China’s big tech companies, according to GAM’s Jian Shi Cortesi.
‘The upside has certainly narrowed from a year ago, as these stocks have really rallied. But at the end of the day what is driving the earnings growth for companies like Alibaba and Tencent is innovation,’ she told Citywire Selector.
AAA-rated Cortesi currently has 9.16% allocated to Tencent and 8.87% to Alibaba in the GAM Multistock China Evolution Equity fund, and said the reason companies like this continue to deliver good performance is that they continue to add new features to their current offerings.
‘With Tencent, the core business is probably already priced into the stock price but there could be very significant upside coming from a new initiative implemented by the company called a mini programme.
‘Instead of downloading and installing any app on your phone, for example, if you want to book a plane ticket, you need to download an app to do that. But now with Tencent’s app, within the app, they have a lot of little apps that you can just click on and you don’t need to download or install that individual app. You can just book the flight ticket, which makes it even more convenient for the user.’
At the same time, Cortesi said Tencent is also becoming a gatekeeper for many other things as it continues to capitalise on its huge user base.
‘At the moment Tencent is offering these mini programmes for free, with no charge to the user. I do think though, that when the company reaches a certain scale then they could certainly start to charge for all of the services that go through this channel.’
Over the three years to the end of January 2018 Cortesi’s China Evolution fund returned 82.73% in US dollar terms, while its Citywire-assigned benchmark, the MSCI China TR USD, returned 58.56%. Coresti puts this outperformance down to two things.
‘We focus on the attractive part of the Chinese economy, which is the consumer-driven part. This part has faster growth and also has lower debt – I would say it’s the best place to be in the region.
‘In addition to that we like to focus in on these sectors in order to make sure we are correctly pricing the stories, and that has led to allocations in growth stocks like Tencent and Alibaba as well as companies that may have a cyclical downturn within the consumer sector, we will then buy these stocks as turnaround stories,’ she added.