Holly Black: 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.
David Raper: Absolutely.
Black: Where would you like to start?
Raper: 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.
Black: And I'm guessing with quite an ageing population, that's the big opportunity set as well?
Raper: 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.
Black: Super. What is stock number two?
Raper: 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.
Black: I don't tend to associate China with biotech.
Raper: 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.
Black: And where are we finishing up?
Raper: 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.
Black: And I'm guessing that all benefits from the urbanisation trends.
Raper: 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.
Black: Super. Well, thank you so much for your time.
Raper: Thank you.
Black: And thanks for joining us.
