Alpha Manager interview: Martin Lau

First State's Martin Lau, is keen to point out that the returns China gave last year may not be repeatable in 2010. "Last year, was a year of the government throwing in everything it could to stimulate the economy. This year will be a year of bailing companies out," he says.  "Another big change for the country will be a shift from investment to domestic consumption." The consumer is reflected in Lau's Greater China Growth fund. 

Portfolio breakdown - Table showing largest holdings

Largest holdings % CHEUNG KONG(HLDGS) 4.60 YANTAI CHANGYU PIONEER WINE 4.20 DELTA ELECTRONICS INC 3.80 TAIWAN SEMICONDUCTOR CO 3.50 HENGAN INTERNATIONAL 3.50 JARDINE MATHESON HLDGS 3.20 CHINA RESOURCES ENTERPRISE 2.70 LI NING CO LTD 2.70 CHINA RESOURCES POWER HLDGS CO 2.50 CHUNGHWA TELECOM 2.40   Total 33.10

Source: Trustnet.com

One of Lau's top picks – and the fifth largest holding in the Greater China Growth fund – is Hengan International, the tissue paper and nappy company.

"It's a strong brand in China – up along side Kimberly Clarke – and has strong distribution power. Penetration of nappies is still very low compared to the West, but as consumer spending power increases, and income rises, people are turning away from cloth nappies and towards disposable – it’s a symbol of the rising middle class in the country," he says.

Another favourite, which also reflects the changing face of China, is the privately owned Yantai Changyu Pioneer Wine. He says he picks private rather than state-owned companies for his portfolio, as the management have more of a personal incentive to see the company perform well, and get good growth.

Chinese consumption of wine is very low, but appetite is growing. "There is a real potential for growth in the red wine market," Lau states.

Besides the domestic consumer, Lau is also keen on franchises and the management of these, and not only for the China Growth fund but also his First State Asia Pacific fund.

"People often look at China top down, but what you should look at is the over-arching economy in developing countries, and the potential for companies to become strong franchises, despite blips in the country’s economic strength."

Lau says most of his returns come from having a conviction on a stock over the long term, and by keeping to his valuation discipline.

"By the time people are talking about a sector or an area being good or bad for investment, the trend has passed."

What worries lie ahead for the region?

Lau says he is monitoring inflation. "It's a genuine concern for the country. In mortgages, for example, people can get a mortgage at 4 per cent, but house prices are rising – up 10 per cent, 20 per cent – really quickly."

Still, there seems to be no dent in the China story, to the extent Lau notes Anthony Bolton’s entry into the China fund market as a recognition of the importance of the country.

"His launching of an investment trust in the region is a symbol that China's economy is still growing, and there is still fertile ground for people to pick stocks," Lau says.