Baillie Gifford has defended its investment in under-pressure Chinese technology stocks such as Alibaba, Tencent and Meituan following the recent sell-off caused by ongoing regulatory concerns.
In its interim report, Roderick Snell and Sophie Earnshaw, co-managers of the £237m Baillie Gifford China Growth Trust – formerly Witan Pacific – said that they remain happy to invest in these names with “modest overweight” positions.
Earlier this year, the Chinese government effectively forced education companies using what it deemed to be inappropriate advertising to restructure their businesses. This panicked investors, who thought that similar regulations could be applied to other sectors, such as the big internet stocks.
So far this year, shares in the trust’s largest holding Tencent have fallen 15.6%, while shares in Alibaba – its second-largest holding – are down 28.5%.
Total return of trust vs sector and benchmark since manager start
Source: FE Analytics
“The government continues to work through anti-monopoly probes at a number of these businesses whilst trying to tackle what it terms the 'disorderly expansion of capital',” the managers said.
“The market has largely taken these regulatory moves as an attack on the private sector. We disagree and would note that the vast majority of regulation in the internet space has been remarkably sensible.”
As a result, they said that they were happy to own these firms. Although there are whisperings about greater regulation of Tencent to tackle gambling among under 18s, the managers pointed out this would affect less than 10% of the business, while its WeChat app remains a go-to for Chinese consumers.
Turning to Alibaba, they said it has created millions of jobs through its e-commerce platform, adding that because online sales only account for 30% of the total in China, there is more room to grow.
Meituan is an online marketplace for the local service industry in China, similar to apps such as Uber Eats, but it is also involved in other areas such as hotel bookings.
Mick Gilligan, a partner at Killik & Co, said the regulator is pushing for greater protection of workers, with a focus on expanding social security benefits and minimum wage requirements. However, he claimed this is unlikely to have a substantial impact on Meituan's costs as its full-time delivery drivers earn substantially more than the minimum wage.
“Meituan is not yet profitable, so valuation is difficult to pin down. However, Alibaba is currently priced as though it will be challenged for years to come. It trades on a 2024 consensus P/E of 12.4x, which looks incredibly cheap for a company that is expected to grow profits by 20% a year between now and then,” he said.
“Tencent is also priced as though it will be challenged for years to come. It trades on a 2023 consensus P/E of 19.4x, which looks cheap for a company that is expected to grow profits by 21% a year.”
Baillie Gifford China Growth Trust has had a poor six months to the end of July, as the technology stocks have struggled. At a net asset value (NAV) level, the trust lost 14.2%, in line with the MSCI China All Shares index’s 14.8% loss. However, the share price dropped a total of 21% as the trust moved from an 11% premium to 3%.
Ewan Lovett-Turner, head of the investment companies research team at Numis Securities, said that the trust is different from other China portfolios as it has a focus on high-growth companies, with a time horizon of between five and 10 years.
It also has the ability to invest up to 20% in unlisted stocks. Currently, the trust has one unlisted holding in ByteDance, representing 4.8% of net assets.
“Baillie Gifford was appointed on 16 September last year following the change in mandate from Asia inc Japan.
“Since then, the NAV is up 2.3%, versus a 2% rise for the index, although this masks significant volatility driven by an unfavourable regulatory and macroeconomic backdrop,” he said.