2019 CHAINSIGHTS | Panel Discussion About Investment Opportunities in China

Abstract : At the 2019 CHAINSIGHTS Fintech and Blockchain Summit hosted by ChainDD on October 10 in New York, six investors have shared their opinions about the investment opportunities in China on a panel from various perspectives, which include education, medicine and movie industry, ect.


Oct 27

At the 2019 CHAINSIGHTS Fintech and Blockchain Summit hosted by ChainDD on October 10 in New York, six investors have shared their opinions about the investment opportunities in China on a panel from various perspectives, which include education, medicine and movie industry, ect.

CHAINSIGHTS is a global platform to connect the blockchain and fintech innovators with the supporters and investors from East and West and carry the critical mission to unlock our community's potential, to empower revolutionaries to challenge the status quo and to create a better digital future of our financial life.

The following is the transcript of the panel:

>> MIA HUANG: (Chief Reporter and Director of Global Media department at NBDP)

It's really a great honor for me to be the moderator and our topic today is "Investment Opportunities in China". First of all, please let me introduce our speakers on the stage. They are Lihong Wang, the Managing Director of Bain Capital Private Equity (Asia), LLC; Yang Xu, the Partner of Tiger Brokers and CEO of UP Fintech Asset Management; Carol Cheow, the Founder of Cactus Botanics Limited; Jun Li, the Vice-president and CEO of Junhe Media; Bruce Liu, Co-founder and CEO of Esoterica Capital; and last but not least, Rob Li, Partner and Managing Director at Stone Forest Capital. Thanks for coming.

These distinguished guests present here have long been concerned about the investment opportunities in China and globally at large. So they will share their insightful views and I believe this panel will be very fruitful.

So as an investor, Miss Wang, how do you think of the investment in China, like what are the factors playing mostly when searching for investment cases or targets, and what the Bain's future investment focus is?

>> Lihong WANG:

I think the growth still comes as the first thing when we talk about China. There are plenty of growth opportunities in China. As I mentioned, we of course very much focus on service-related industry, business financial services and health care services and education as well.

At the same time, I also feel China has built two very strong infrastructures. One is the physical infrastructure, like airports, highways and high speed trains. Those really make the labor and the goods can flow very efficiently. The second infrastructure is the Internet, the telecommunications and going forward, 5G. Mobile payments, for example, are very developed in China. Fintech also based on the big data, giving people more experience in the financial services. These two infrastructures, if you look globally, are already leading. Therefore, building on these two infrastructures, there will be a lot of new business models. I do think investing in those infrastructure-enabled business models will also be very interested in China. The other thing I do believe is for Chinese companies, they are already global, going forward you will see a lot of national champions have become multinational companies and global champions. For Bain capital, we have a global team, and global resources can help the Chinese company to grow globally, also bring some foreign companies into China even under today the equalization still is a valid theme. So these are the themes that we are spending a lot of time.


Many thanks to Miss Wang. Yang, we know last year you asked Warren Buffett a question that why American investors are investing less in China. Is that right?

>> YANG XU:  

Yeah. I got the opportunity to ask Warren and Charlie a question that we really believed by marketing capital from different countries. Why there are so many people not investing enough in Asia or specifically in China?


Okay. Now a year has passed, and I obtained the new data that shows the US investment in China rose 7.5% year over year in the first five months in this year. What do you make of this? Will Americans continue missing out on China?

>> YANG XU:  

There's no way we can fight against the market trend. There is definitely some turbulence in the space of international trade. However, China is the second largest foreign direct recipient by world bank report, ranking just after US. There are so many countries investing in China right now, and the government is taking steps to loosen up the restrictions and limitations, canceling the QFII, and they are welcoming more ownerships in the domestic financial sectors in China. They are taking more steps to make the international trade flows into China. But the question is that how do we invest into China, and how can we participate in this trend?

Asia's inclusion gives us a good example of passively investing, and that is pretty much what everybody does right now. The question is that are we missing out on China? Yes. We all suffer from home bias. That means as an investor you have over allocated to your domestic markets. We definitely see this trend not just in mass affluent investors, but also in pension funds and institutional investors. Personally, we are in asset management business, and we thought some ideas. Last year we took a research project to NASDAQ, and they helped us to create a new index called NASDAQ China US Internet Titans index. It's a straightforward index that add 10 names into the Internet firms, and 10 largest Internet firms listed in the US. Twenty names, it's easy to understand the key is that if you want to invest in the long term, you have got to believe in the story. There's nothing more than stick to the plans. Find some ways to do passive investing through the channel, ETF, I think Bruce is also in the business for ETFs. These are definitely ways to help us invest better in China.


Actually I came from the institutional background, and I served in a large corporate pension for a couple of years. I think there are two things. First of all, institutional investors are the ones that get into China exposure and most of them followed MSA China. I think the index design is flawed. You look at MSA China, not only China, Australia for example, too much in the financial sector which is a very traditional sector. But what's the real story about China is the new economy, the e-commerce and the new generation of consumer brands. Those are the things people want to get in, but the index gives you the really flawed exposure. That's one thing. So people never feel comfortable. I don't want to own that much of Chinese banks, which is understandable.

I think that is one reason that institutional investor in US under-invests in China. On the other hand, China is tough. If you look at the Chinese market, today it doesn't deliver much.

The staple story goes to Japan and those Asian markets. For one reason, the market in the US maybe the best market that can give you the robust premium.

You invest, and you stay on, and you get paid. China is more like a trading market, and it takes a lot to improve the market condition, and to give people more confidence to have some stable exposures to that. Like new players come into the picture, like Tiger Security which is trying to do and many other smaller firm, they are trying to provide better exposure to China and to the U.S. investors. We get opportunities to talk to a lot of people, and they talk about institutional investors, and they like the T2 story. Two countries join together to account for so much GDP and growth. But which way, and what kind of exposure you want to have? Those are questions for who can help US investors navigate those turbulent times, and I guess they are the winners eventually.


Okay. Thank you. Actually, there is a phenomenon that the way that invests in China mostly through the private equity or security investments. So does anyone want to share some views, like do you agree or disagree with this statement?

>> ROB LI:  

I guess I can share some views from the public equity perspective. I used to work in private equity, which has been booming in China for the last more than a decade. For a US investor who wants to get exposure in the Chinese market, it has been rather difficult until recently, the currency controls obviously an issue.

The other issue now is that you have got to be qualified for an investor. Now the great thing, the good news is that the Chinese government decides to remove that, and now that we have the Hong Kong connect, which makes it best for foreign-US based investor to invest each year. I would say that there are few caveats to the Americans are still looking for, from a perspective of institutional investment as us, as a hedge fund. For each year there's still lack of tools on the hedging or shorting side, but we do hear that Beijing is very active, talking with a lot of institutional investors, foreign investors about how to improve that mechanism. So I think once they announce the tool is available, such as single stock futures or in short-term borrowing mechanism, I think that would be a massively encouraging for a foreign investor to invest in the Chinese market.


Because I work for a private equity side, I also see pros and cons in investing through private equity. A fund like most of what we do controls transactions. The reason being given the volatility of the economy, sometimes more volatile than you can imagine even in China with circular growth in the last 30, 40 years. Therefore, the ability to change is important. For us, the reason we want to control, really because we want to be able to make changes, the first thing of course is the strategy. I don't think one strategy can fit all, and can fit the longer period. Therefore, as controlling shareholder, you can really lead that thinking to find the right strategy to implement. The second thing is really you need to be able to upgrade the management team, sometimes even to change the management team. I personally don't believe one management team will be able to lead a company forever. Therefore, certain structure right now implemented in China, I do think going forward will be issues more than stability for private equity to come in, we need that control to make that changes and up grades. The third thing of course is that we don't have liquidity as the secondary market fund. Therefore, controlling also gives us ability to choose the exit path, instead of as a minority, most of the minority investment waiting for the company to go public. We do have a lot of exiting trade sales, sell to strategic investors or sell to other funds. Private equity allows for the history should be able to generate higher returns than public equity. However, like all public equity, only the top quartile really delivers that return. Therefore, to invest in China, you need to pick the right fund, for the right team.


Actually for that question, it's not about China. These days you saw the reports from Bloomberg and the institution, and DOW pulling money into private equities. Private equities are hot. Nobody else is raising money these days. They are the only ones. It's psychology things, because they have the capability to dodge this like a market. To market things, they look like safe, which it's not.

We did the research back, then over time in my previous job we used R2G as a benchmark over time, and private equity was actually under preferring R2G. R2G is very volatile. But if you can't afford to hold it through the cycles, R2G might be a better one. But if you get a chance to go to those guys, you're getting it. But not many people get opportunities. Also, in China particularly, in the past like a decade before, even more than that, there is too much bubble in the primary market in my opinions. And the secondary market doesn't get a chance for themselves. How you look at the risk is volatility, and it is the permanent loss of capital. If you think of permanent loss of capital, that's how we build the risk. I think getting into the private equity may not be the wise choice. On the other side, particularly in China, you get a much better opportunities to look at secondary markets. Besides, you have the liquidity, which is very important.

>> YANG XU:  

Can I chime a little? I'm in the asset management, and I think it's actually the lock-up, the lock you are in five years to ten years. In the last 10 years, the SP500 index on average on individual basis is 15% return. I would like you to manage my money. Rare, right? That's because the ETF index, the public investment vehicle, is easy to buy and easy to sale. We all have investment biases, accounting biases and behavior bias. Hopefully you want to buy low sell high. For private equity there's no way to do that. Internally it has leverage. If you were an investor who can spend quite some time on the due diligence process for every fund. For individuals, definitely go with some vehicles that have transparency. Tax efficiency that often we find them in ETF, that's my $0.02 on how we should do that and where to find those investment products.


Can I chime a little? I'm in the asset management, and I think it's actually the lock-up, the lock you are in five years to ten years. In the last 10 years, the SP500 index on average on individual basis is 15% return. I would like you to manage my money. Rare, right? That's because the ETF index, the public investment vehicle, is easy to buy and easy to sale. We all have investment biases, accounting biases and behavior bias. Hopefully you want to buy low sell high. For private equity there's no way to do that. Internally it has leverage. If you were an investor who can spend quite some time on the due diligence process for every fund. For individuals, definitely go with some vehicles that have transparency. One more point that you have mentioned is the performance. We did similar research, and we looked at the QQ versus private equity real estate. QQ almost likes a 22% annualize, and US private equity real estate funds changes overall 8% every year. You see the difference. Sometimes it feels like the no-brainer. Especially for the guys who can afford the volatility, earning the risk premium. The beta plus the alpha, that's the right choice.


Thanks. Actually besides finance industry, we also have a guest from the health care industry, Carol. So we would like to hear your thoughts on the investment opportunities in China in the health care industries or sectors.


The most important thing you must invest is your health. Now I see a lot of investors help people to live longer. So because I have already been in this industry for almost 20 years, and I know China has a lot of very smart professors and students who focus on the research for a very long time about the new ingredients to fight against nature, and they are not synthetic. So it's very good for people's health. I think China now is not only base for supply chains, but also it has a very good consumer market. Now, Chinese people are thinking about how to keep healthy. They spend a lot of money on their health. However, people don't want to buy medicine only after they get sick. So the dietary supplement is a very big market. It's not about medical but about health care. So if anybody wants to invest in that, I think it's a very big market, because a part of the regulation, maybe it is not so strict as medicine, and because we have a lot of scientific papers to say that the ingredients are effective, and the people want to try, and they see results, and they want to buy it. So now a lot of Americans big brands of dietary supplements produce it to capsules and tablets. They tell me that their biggest market now is for American market to Chinese market. I think American investors should look at the Chinese market, and it will not only be your supplier in the future, but they will be the biggest customers. So I think if an American investor can consider investing in China, they can make more benefits to them. Thank you.


With the changing of concepts in China, not only the health care industry, but also the culture and the creativity and production services also attract a lot of investment. I'm wondering that, Mr. Li, what is your view right now in that field?

>> JUN LI:

In short, the market of the film and the TV industry in China is enormous. For example, during the national holiday, which is the first week in October, there are three films on in theater right now. One is made by me with my Chinese pilot, and the income has already exceeded 7 billion RMB, which is headed towards a billion. So basically the market for the film, the TV series and the web series in Chinese market is huge. This is not an opportunity for domestic TV and film professional, but also for international professionals as well. That's why Junhe is building this collaboration platform, because in the future it's going to be a global market. However, China will have a huge role that weights heavy duty in that market. From the point of view of Junhe, we don't take ourselves as just the player. We think we are also the leader. So that's why through the Asian-American alliance and Euro-Asian culture tourism TV alliance, we build a platform, and we help capital to seek for high quality projects to invest in, because we have decades of experience in the industry. So we can help to make sure the investment is going to get the desirable result by connecting the investor with quality projects. Junhe has achieved a closed loop and a self-sustainable model for the international TV film ecosystem with both scale and influence. In the past 10 years, Junhe has built up expertise and resources within the industry and in the future, Junhe will keep striving to make the seamless progression for financing, production, distribution, broadcasting and marketing and international promotion.


I have one more question for Rob. Right now that quants as well as passive are occupying volume shares. As focusing on fundamental and secondary markets the bottom-up investors, I'm just wondering that how do you think or compare to the passive and quants, do you think there is any age in the fundamental field and how should we apply that age in investing in China?

>> ROB LI:

That's a question I ask myself every day. We are alpha seekers. We have two group of panelists here on the ETF side, and they're providing the beta exposure for investors. We provide alpha. If he takes a step back and thinks about what is the source alpha, for us it comes down to information from running. I would say over the last 60 or 70 years, you can see a constant shift or transition, with information running from the down stream formation to the up stream formation.Let me give an example. About 60 years ago, anyone who would get delivered hard copies of a company, let's say IBM, nobody else has that. And a couple of years later, there's Internet, and everybody begins to access the same information, so there's no edge there. So the front running moves up to subscribing to industry, high frequency industry sector company operating data.That's how you can edge over everybody else. Everybody subscribes to the data and now people continue to move up stream, and now you see the proliferation of alternative data. You see credit card data, and you see satellite images and tracking the likes on your Instagram account. Let's think about 10 years from now. All of these eventually become the commodity. As a fundamental investor, where do you maintain your edge. Our answer is that you have got to go where there is not a data, or there are incomplete data or ignored data, or there are data but people misunderstand those data. I'll give you one example, which is the investment. If you follow the New York Times, and I'm sure you guys know the company. This is the second largest security camera maker globally. The stock is down 50% since probably March 2018. Ever since the trade war has been going on. And the stock was down almost 10% last night because it got put on the black list by the commerce department. We believe that the market failed to understand, and the data really not showing three different things. Number one is that for the critical components that need to source America, they already have 12 months worse inventory. No problem. Number two, and the company has been quiet about this, don't want to talk about this, but has been actively replacing their American suppliers since second half 2018, and have been doing this for a year. Replace a lot of US suppliers with domestic suppliers. And number three, this is number 2 company globally. They always had like 5% margin difference versus the top guy, the leader of the industry. And the company are implementing efficiency game program from 2019, and they have been doing that for three quarters. Now those efforts have not showed up the data. Not in the financial, not in the KPIs, but eventually they will show up. And when they do show up, the market perception of the company will be changed and you can make a fantastic return on the stock.


Thanks for sharing. Thanks everyone. That's all of our panel. It's been instructive, and thank you for your attention. Thank you.  

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