Delivering strong earnings growth: abrdn China

abrdn China (ACIC) takes a traditional quality growth approach to investing in the deep and diverse Chinese equity market. The hallmarks of the abrdn approach to stock selection are to focus on companies which can deliver sustainable earnings over the long term, are well-governed and are bought at reasonable valuations.

Nicholas Yeo, Head of China/Hong Kong Equities at abrdn, and Elizabeth Kwik, bring this approach to bear on Chinese equities. abrdn has deep expertise in Asian equities and has a large team of analysts based in Hong Kong, Shanghai and Singapore who scour the quickly developing Chinese equity markets for ideas.

ACIC changed its mandate to All China in late October 2021. The managers have built a portfolio which holds companies benefitting from rising consumer aspiration, growing demand for healthcare, the digitalisation of services and the development of green technology, as well as the growing wealth of the Chinese middle class.

Currently quite large-cap focussed, the recent award of a Qualified Foreign Investor (QFI) licence has seen the managers start to add more onshore China small and mid-caps to the portfolio, bringing extra growth potential (see Portfolio).

The last 18 months have been tough for investors in China, and ACIC has not escaped unscathed. However, the managers tell us that after such a significant sell-off, they are seeing value in many stocks.

While the impact of the removal of almost all of the Covid restrictions by the Chinese authorities in November 2022 has disappointed, they note that earnings of many large-cap companies look very strong, even while valuations are at pre-reopening levels.

While they are cautious on the short-term outlook, this could prove promising in the medium to long term and the managers have been happy to take out Gearing to invest in long-term growth opportunities. ACIC’s shares trade at a 14.4% Discount, at the time of writing.

We think ACIC could be an appealing way to take long-term, core exposure to China. The focus on quality and good governance should, in theory, provide some downside resilience and potentially could limit the volatility in the market over the long run.

The portfolio is large-cap tilted, which brings liquidity, and the modest level of gearing seems potentially appropriate for a long-term fire-and-forget allocation. It could be that this is a good time to invest for those with a long-term horizon, given the low valuations in the market and the wide discount of ACIC’s shares.

The trust has a performance-conditional tender offer scheduled for 2026 and a continuation vote for 2027, which should provide some support to the discount as those dates near, notwithstanding any potential for the discount to narrow if performance improves.

It is true, though, that in the short term there are plenty of risks. China’s recovery has been weak, and there are ongoing political tensions which complicate investing in certain sectors. Investors need to have a stomach for volatility and risk to invest in China at this point.

However, we think it remains a deep and diversified market with many exciting growth stories, which may reward handsomely the decision to allocate.