Emma Wall: Hello and welcome to Morningstar. I'm Emma Wall and I'm joined today by Doug Turnbull, Manager of Neptune China Fund to give his three stock picks.
Hi, Doug.
Doug Turnbull: Hi, Emma.
Wall: So what's the first stock today?
Turnbull: The first stock is HollySys (46H) and they are an industrial automation company based in China. There's two-parts to their business. The first of which is automating processes in factories, think of things like paper and plastic production and moving up the value chain to things like even car and smartphone production.
Wall: These are robots in factories essentially.
Turnbull: Kind of robots in factories, yeah. The other side of it is the control systems that are used in railway and there's a couple of good reasons why this is a really well placed company. To start with increasing automation, value-add in manufacturing, domestic IP and the kind of innovation that China has usually lacked is something that's a massive government priority and this company are really a very strong in that particular field.
Wall: This is sort of thing that maybe neighboring countries done or in the region rather better in the past things like Korea and Japan and now China is getting in on the act.
Turnbull: Exactly. And they are starting in their domestic market and they are going to follow in government priorities by expanding this into the export market as well. In the industrial automation space there's obviously a lot of room for upgrading within China.
The rail side of the story is also quite interesting in the shorter term, because as the Chinese government look to put a bit of floor underneath that growth rate one of the ways that fiscal policy can expand is by spending more on railway. So, this is a growing pie.
But actually HollySys doesn't just need the pie to grow, they can actually benefit by taking more of it, they are market share gainers. They are winning from multinational companies at a lower price point and there's a lower entry point for Chinese companies, they are managing to take market share as they move into things like subways for instance that's why which is a big priority from Beijing.
Wall: And what's the second stock today?
Turnbull: Second stock is Haier Electronics (01169), a really core consumer company. They are selling white goods and they also have a big domestic business. So they have a very strong brand within China. Their water heaters, their washing machines are really the ones which the Chinese consumer turn to first.
Wall: Are they aspiration products or are they sort of every day?
Turnbull: It's more every day, but every day has a huge amount of growth behind it, especially right now as the property market is improving. As he buy a new flat, he buy the new washing machine, the new water cooler, whatever it may be along those lines. So this is strong sort of secular and structural growth story.
This is also a company who've been beaten down a bit recently, because there has been quite a lot of inventory built up. As the property market continues to pick up, as Haier themselves clear that inventory out of their channel, I think the earnings are really going to turn around.
I will draw your attention to the second part of the business, which is actually the long-term structurally exciting part, which is their logistics. Built on a vast franchise network, with penetration deep into low tier cities. This has got a huge barriers to entry around it. And they are now starting to monetize it by distributing products other than just their own. It is actually exciting enough that it is called the eye of the ecommerce giant Alibaba, who've taken a small stake in it and are looking to cooperate with them going forward. I think this looks like a really good play on the Chinese consumer in both the short term and the longer structural term.
Wall: And what's the third and final stock?
Turnbull: Finally, it is an old favorite, it is Baidu (BIDU), the Internet search engine in China. This again is a really clean play on that new China. A lot of their advertising, in fact the vast majority comes from fields like financial services, education, health care, all massively underpenetrated in China and where the Chinese consumer is looking to spend and has a lot of money increasingly to spend. Areas where the government is pushing companies to engage more and more online. And so advertisers will pay a lot to reach Baidu's audience space.
Wall: Doug, thank you very much.
Turnbull: Great pleasure.
Wall: This is Emma Wall for Morningstar. Thank you for watching.
