Holly Black: Welcome to Morningstar's 3 Stock Picks. I'm Holly Black. With me is Roderick Snell. He is Manager of the Baillie Gifford China Growth Fund. Hello.
Roderick Snell: Hi, there.
Black: So, you've got three stock picks for us today. I think it would be no surprise that they are all China focused. Where would you like to start?
Snell: Well, it plays into a scene that we've been getting increasingly interested in over the past few years, which is Gen Z, you know, those born after the mid-90s and they are very different from the older generation in China. The old generation were used to the struggles of China and often looked towards foreign brands that were of better quality. And what we're seeing with younger people in China is actually a perception of, you know, China is really great, they have only really experienced success, and they want to buy local brands. And Li Ning has arguably tapped into that better than many other companies in the country. It was established back in 90s by the eponymous gymnast Mr. Li Ning. He won three gold medals and he has really tapped into the rising China pride and spending power of the younger generations. So, they've got about a 5% market share at the moment in the country. It's been growing rapidly. And we think there's probably – it has a very good chance of overtaking the likes of Nike and Adidas over the next few years.
Black: Now, are they online-focused in their sales or do they have a bricks and mortar presence?
Snell: So, they have a bricks and mortar presence, but part of the attraction is that they've really come about in the last three or four years to have an incredibly successful online presence. So, it's really an omni-channel strategy that they've got. And arguably, in the fashion space, they've been one if not the best in terms of moving online, which has been very, very good for their margins.
Black: Okay. What's stock number two?
Snell: So, I'd probably go for Burning Rock which is a biotechnology company, and which is a really strong growth area in China when you consider the aging population. And they specialise in cancer screening. They've got some great talent in from the likes of Novartis and Illumina a few years ago and seven years later, they are now the leaders in liquid biopsy tests for many cancers. They've got the first mover advantage, the best database for improving treatments. But I think what's really exciting is that they're also involved in early stage cancer detection, so essentially you take a blood sample and from that you can screen it for all cancers. It's really the Holy Grail, if you like, of cancer screening. And all the data that we've seen and been able to gather shows that they are equivalent with leading Western players. So, we think this could be the leading cancer diagnostics company in China over the next decade and possibly globally.
Black: And will their therapies be focused on the Chinese population, or do tie-ups with the likes of Novartis mean they'll be global?
Snell: So, currently, they very much focus on the Chinese domestic market, which is obviously a huge market and that's where they will be focusing for the foreseeable future. But given the quality of the products that we're seeing, I think there's a chance – and it's not guaranteed – but there's a chance that they might be able to go global and be a leading player on the global stage.
Black: Okay. What's our final stock?
Snell: So, the final stock I'd probably go for CATL, which is the world's leader in electric vehicle batteries. And here, the story I think is quite simple. China is already the leading EV market in the world with about 50% market share. But over the next five to six years it will go from maybe a 5% EV penetration to 25%. And I think CATL is going to be the dominant player within that. As I say, it's already got half the market share in China. That gives it a massive scale advantage, which means it's cheaper than everyone else and as subsidies are removed in China, that competitive advantage will become even more important.
And I think that, we take a decades long view, the real upside is whether the company can then expand outside China. It already supplies to the likes of BMW and Tesla. So, we know it's got a fantastic product. So, I think this could be one of those companies that gets out of China and competes on the global stage.
Black: Fantastic. Roderick, thank you so much for your time. For Morningstar, I'm Holly Black.
