China equities: Investing with conviction, Part 1
Bin Shi, our Head of China Equities, talks about the importance of looking for opportunities in future leaders and a willingness to invest with conviction for the long run.
Identifying future leaders in China equities
Hot pot restaurants are everywhere in China. For the uninitiated, it’s like Chinese fondue but instead of cheese, you add meat and vegetables to a boiling broth at the table.
Do these ubiquitous dining places, where barriers to entry are low and competition is keen, make for sensible investing?
Bin Shi, our Head of China Equities at UBS Asset Management told investors over lunch in Singapore that there’s “nothing fancy” about the hotpot dining business.
However, he has been investing in the segment for the last three years mainly through a hot pot condiment manufacturer, Yihai International (Yihai).
That special sauce
Yihai is the exclusive supplier to Haidilao, one of the most popular hotpot chains in China.
Bin told investors over lunch in Singapore that Haidilao did not create something “people did not have before.” However, it’s not rare for customers to queue for two to three hours for a meal there. This has allowed the restaurant chain to expand quickly and continue to stay profitable. Bin and team attributes this to the creativity and strength of the management team – they have remodeled the business and put through incentive staff schemes to manage the restaurant more efficiently. What makes the long wait for a table bearable at Haidilao is the extra services provided - from free pedicures to photo printing. In China, these complimentary services are well appreciated.
For Bin, Yihai has been an excellent proxy to tap into Haidilao’s expansion, both locally and overseas. Yihai is partly owned by Haidilao’s founder.
“Yihai is a stock that fits perfectly with our investment criteria,” Bin told the audience. He explained that Yihai can tap into Haidilao’s very strong brand name without having to pay royalty fees. The company is not just growing alongside the famous hotpot chain. It is also expanding into other channels and currently sales to third parties are already contribute around 60% of its revenue.
Finding growth potential in consumer staples
But given food is a consumer staple, will we see Yihai's growth stagnate?
Bin is not worried. “We do not need to see the (condiment) industry grow 20-30% a year. Yihai is leading company in a very fragmented market. At the moment, Yihai despite its strong growth and association with Haidilao it only has 5% market share. We only need Yihai to gain more market share, which it has been doing.”
Yihai's strong and steady growth
Source: Yihai International Ltd 2018 Annual Report
Investment conviction is important
When you do your research and are willing to invest with conviction for the long run, the profits will come,
Bin adds that when Yihai was first publicly listed, its business model was not well understood and its share price tanked after the IPO. Bin and team had researched the company thoroughly and believed it fitted their investment thesis “perfectly” and participated in the offer. “Our team is constantly looking for future leaders and Yihai was a good opportunity.”
Over time, they have built up their positions and today is UBS Asset Management is the one of the largest institutional shareholders of the stock.
References to securities are not buy or sell recommendations.
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