CLSA comes to Chengdu

Chengdu is the land of the panda.  In case you had forgotten there is a display of some rather moth eaten specimens in the arrival hall at the airport.  That was as close as I got on this trip.  The airport is new, but already expanding and still on the small side for a growing city which when including its catchment area numbers around 14 million.  I would compare the airport to Birmingham, yet Chengdu’s population broadly defined is roughly 11x larger than that of Birmingham.

The CLSA China Conference is a serious event while their annual Hong Kong jamboree is more of a party.  Sadly I had to miss the sublime Chris Wood due to an appointment with Hong listed CC Land that owns a huge development close to a massive Flower and Horticultural Centre.  Nothing is small in China.  Chris is arguably the most respected regional strategist.  His Greed and Fear publication is widely followed.  Old Etonians seem to be doing well everywhere at the moment.  He is also an outstanding speaker and if you are ever invited to one of his appearances, it is worth blocking off the time.

Turning to the formal presentations, I was disappointed with Professor Mao Zhenhua of CCX Group, a Chinese credit rating agency.  He seemed to wander round issues rather than say anything concrete, though possibly the simultaneous translation let him down.  Still he did say one thing that caught my attention.  He said the government owns R100 trillion of assets that could be privatised – or presumably used in debt to equity swaps?  If that is true why are we worrying about the R4 trillion debt in local government SPVs?  Indeed it was not obvious from his talk why you needed to bother with a credit rating service in China – except of course things are different over in the private sector as holders of Kaisa and Winsway now understand.    

The new normal got a lot of attention, but was of greatest relevance in a session led by Ben Simpfendorfer of Silk Road Associates.  He made a point many people tend to forget.  If you are sourcing some item in size, especially if you are a large Western retailer, there really is only one place to go : China.  And if you are a leading MNC wanting a global footprint there is one market you have to be in like it or not, and that is China.  You cannot ignore a country with a GDP greater than all the other BRICS put together, a country whose incremental GDP growth for the two years of 2013 and 2014, exceeded the total GDP of Nigeria, South Africa and Sweden combined.  You just have to be there.  That goes for investors and global asset allocators as well. 

As a shortage of labour starts to bite, there are plenty of productivity gains to be had especially from automation.  Serious sourcing companies think a 50% improvement is not out of reach – in 2 to 3 years!  Some shift.  Our own experience with holdings such as Skyworth, the largest TV manufacturer in China and Welling, the world leader in micro motors would be not inconsistent with that sort of leap, but I might want to be more conservative about the time it will take to achieve such a step change.  I do agree with the speaker that it is happening and it will be fast.

As for other options, Cambodia and Laos are tiny and would be nowhere without tax preferences.  Bangladesh is cheap but has some of the world’s worst infrastructure.  India and Indonesia come with a lot of baggage so it is hard to know where to start.  Vietnam and the Philippines can cope with a degree of migration, but truthfully how much?  China has the scale and the supply chain clusters.  As my friend, the world’s largest button manufacturer, points out - it is all there.  The cost of moving and multiple potential problems at the other end negate any advantages.  Even if wages go up 10% so what.  Figure out a way to cut 20% from the workforce; and that is what is going on : or if you are an SOE, spin off a unit and leave them to it.

The Conference contained a nice mix of formal presentations, sessions with CLSA’s excellent team of sector specialists and meetings with a large range of China corporates.  There was a wide spectrum of sectors represented from utilities both traditional and renewable to internet verticals.  On the corporate side the encounter that registered most with me was Autohome, one of two leaders in the auto space and according to the CLSA research the one with by far the most comprehensive database and most consumer usage.  What caught my attention was the range of monetisation possibilities waiting in the wings, so plenty of revenue upside.  One challenge in China is getting people to pay for internet services.  B to B can work but consumers prefer things to be free, so B to C only works when some business in the chain can see a clear benefit for which they will pay.  Leads on people who might buy a car are worth something to a dealer.  A potential purchaser looking for a quote is more valuable, and someone ready to buy today is best of all, especially if they also want a loan and insurance package. 

Soufun, one of the online leaders in real estate faces a tougher task.  Correctly they recognised that their traditional business model has a limited shelf life so are moving to transaction based revenue; but in doing so of course they are alienating their legacy customer base.  While their plan is potentially disruptive to the entire industry much higher costs will come before higher revenues.  It is no mean feat to capture 30% of the Shanghai rental market in a few months, but what does it mean if you do this only by not charging either tenant or landlord?  What will happen when you start to charge?  Equally if your strategy to go after a big slice of the second hand volume in Beijing is by accepting 50 bps when the standard fee is 200 bps you will get listings, but will anyone make any money?  They are on the right track, but it will be a bumpy ride : one to watch from the sidelines. 

Most other meetings were less interesting, but Qingdao Port is making several sensible changes expanding the role of grain and reducing coal and iron ore, reflecting the likely change in traffic mix into China.  They are also investing in a significant expansion of refrigerated capacity that is in tune with an economy repositioning from production to consumption.  Management seem to understand their business and anticipate market demand.  Other port operators seem reactive by comparison.                  

One thing Chengdu is not short of is land.  There is lots of it : in every direction; so not likely to be any shortage nor much price appreciation if any.  Only downtown could there be any pressure, and even there, there appears to be plenty of space.  Several satellite areas are developing.  I have neither the vision nor local knowledge to predict which will succeed and which will end up as white elephants.  Suspect there will be both.  Hard therefore to say which developers to back.

There is quite a lot of construction visible, but the quantum does not suggest massive overbuilding (unlike Changsha).  As usual there are too many hotels and more on the way.  Not sure how any of them can earn a reasonable return on either capital or equity.  I do not understand the fascination of local planners for hotels.  They do not employ many people.  One point of difference : I noted a number of hospitals, dental centres, and related university departments.  Chengdu is trying to be a regional centre for healthcare.

On the one hand, the city centre could be said to have been completed with all available space taken.  On the other while certain parts are modern in every sense of the word, plenty of plots contain legacy buildings, by which I mean structures that may only be 8-10 years old, but look double that or older.  These need to be and will be replaced or at the least upgraded.  I could see some of exactly this sort of activity going on out of my 33^rd floor hotel room.  Upgrading means appearance and quality of material, as well as home buyers wanting larger space with better aircon. 

I had a wander around downtown Chengdu during a break.  A couple of things struck me.  The pace of life appears slower than in almost every other city I have visited in China.  Of course a warm day could have had something to do with that as the temperature was close to what it was when I left Singapore.  The second was the composition of the traffic.  There were plenty of cars but a lot more motorcycles and not a few pedicabs and cyclists.  I struggled to understand the etiquette for crossing a road, particularly when there were four intersections connecting to a circle.  After some study I concluded that pray and go appeared to be the best if not the only approach, along with staying alert; though that did not always work as I witnessed a city bus rear end a motorcycle.  The bus got a dent; the motorcycle came off worse, and the rider did not look so great either.  Impressively an ambulance arrived in minutes.  

I walked through a couple of department stores.  The ground floors contained some of the usual international offerings that are getting overexposed and an annoying number of cosmetic counters.  Ladies in Shanghai do not want to be seen with the same bag as ladies in Chengdu; and certainly not at the same time.  So is the massive new Miu Miu outlet such a good idea? 

Ascending you find a dizzying assortment of local offerings with Western names, several carefully pitched to be as close as possible to well-known global brands.  Miyu, Miyu for example.  The building operated by Renhe was almost devoid of traffic.  On the men’s floor (4^th) I was the only customer, except I was merely window shopping.  The salespeople, almost all women, seemed desperate or perhaps just bored.  Based on this admittedly limited sample I would not be a long term bull of Renhe.  Hopefully if you are a bond or equity holder here the other operations are doing better.  They must be based on the recent run- up in Renhe’s share price.  I do not know who operated the second one but at least there I was not alone.  Even so salespeople in menswear must have outnumbered potential buyers by 20 to 1.  The busiest place was Starbucks on the ground floor, though the jewellery section had customers and in the shoe department I did witness someone making a purchase.

There were more shopping bags in the street so my experience may not have been typical.  As another indicator of economic activity, I mention the monthly sales volume of the large property project I visited in a suburb where unit prices for apartments ranged from below US$50,000 to around US$90,000.  When the first phase was launched in the second half of 2013 the manager told me they were selling 100 units a month.  During 2014, that tailed off until by early 2015, the monthly tally was down to 30.  But post the latest set of QE China style activity shot up along with looser bank requirements.  April was back above 100.

Let me close with a comment on the famed Local cruise : famous that is for its spice.  I used to think I liked Sichuan style cooking, but that was before I went to Chengdu.  Prior to that I had clearly only experienced watered down imitations of the fiery food.  Unfortunately as is too often the case in Chinese restaurants the hottest food comes out first.  If you have ordered a steamed fish, this delicate dish invariably arrives just after whatever contains the most chillies.  Tofu with minced pork, beef noodles and vegetables may all have been delicious but following some sort of fried chicken submerged in chillies, and covered in peppercorns I could not taste a thing until breakfast the next day.  Even an extra bowl of steamed rice did not do the trick, nor did two pots of Jasmine tea, as at least I suppose it was Jasmine.  After the chillied, peppered chicken it was impossible to be sure.  Order carefully in Chengdu, or better yet get your dining companion to go first!  If they are still smiling it is probably safe to follow, unless they are smiling because they know you are about to suffer.     

Two cities with snow still on the mountain tops and one with more sun than rain

April was a client focused month involving a road-trip to Geneva and Madrid.  Not much new to say about Geneva except that it has gone from wildly expensive to insanely expensive since the Swiss Franc/Euro peg broke.  For the average office worker the answer must be to live in France while commuting across the border.  For those lucky enough to own a large Swiss Franc bank account the rest of the world is now on offer at a discount. 

One sign of the times came at breakfast, a strong point of the Bristol Hotel.  Apart from an excellent buffet, the Bristol must be one of the last hotels left that features a live harpist starting from 7.30 am.  In any case my point relates to the composition of the crowd : almost all Asians; by which I mean over 80%.  Most of them from what I could tell were Thais.  So here we are in the centre of Geneva, a place since the last currency turmoil where almost no one can afford to go, and the hotel is full.  Yet the visitors have a very different make up from the composition one would have seen just a year or two ago.  That chimes with what I saw in Panzano the week before.  It is no longer a case of the Asians are coming.  They are here; and thank goodness as Europe needs every single tourist dollar.  

In Madrid the weather was beautiful - like May except it was April.  I got there on a Sunday in time to spend a couple of hours in the Prado, truly one of the world’s great museums: a visit made that much better by the lack of the other visitors.  So I was able to stand at just the right distance from Tiepolo’s Madonna to appreciate her sublime beauty and with not one other person around.  Even the room containing Goya’s masterpieces, the duo of May 2nd and May 3^rd, was almost empty.

I had forgotten what a truly magnificent collection of Titian portraits had found their way here.  The other surprise was that the Prado owns the most extensive collection of Rubens in the world.  One can only speculate as to quite why his most Catholic Majesty Philip IV was such a fan.  It would be hard to find more of a contrast between the voluptuous nudes that populate so many of these colourful canvases, and the austere clerical dominated Spain of the mid C17th. 

As a bonus there was a special showing of Picasso on loan from their home in Basle.  Picasso is not really my cup of tea, but it was fascinating to track the progression from early traditional to most coveted cubist artist.  Picasso led and others followed, but I have to wonder why these works are worth so much money, or indeed whether they will attract quite so much reverence a hundred years from now.  Master or con-artist, or perhaps a bit of both?

After Geneva, Madrid was a bargain basement.  My hotel, the Catalonia, was first class, with twice the size of room at half the price, along with free breakfast versus $38 and friendly staff.  A location in the old town, just a couple of blocks from the Prado was convenient.  Its bed was among the most comfortable I have encountered on my travels.  If voyaging takes you to Madrid you should give it a try.

A huge hot chocolate at an outside café cost the equivalent of around $3, versus over $7 for a smaller less luxurious cup in Geneva.  Dinner ditto.  My excellent bottle from the Priorat was less than one third the price of a comparable quality Portuguese wine drunk in the Swiss capital at a similar style of establishment.  I so enjoyed dining at the Fuente La Fama that I feel compelled to recommend a visit.  Located on an unpromising and busy street, just two doors down from a sex shop, I thought at first I might have got the address mixed up; but inside was an unpretentious old style Spanish restaurant.  No dainty amuse bouche; rather a Madrid speciality of meat and chickpeas, the most delicious Jamon Iberico, and then roast suckling pig that melted in the mouth along with skin that crackled.  The ambience and décor may not have matched world famous Botin, but in a blind tasting you could not slip a piece of fine paper between the quality of the food; yet the price here was around 60% of the more esteemed establishment and the service pitched just right.  I need to find good reason to go back to Madrid.

I am not sure if it was the weather but the mood in Madrid seemed a tad more upbeat than a year ago; though there is still plenty of room for improvement.  Conversations – and realtor indices – both suggest house prices are at last rising again.  Salaries too are starting to creep back up; but employment for the young remains problematic, and wages for many in work came a long way down from peak - 25% for some in the private sector; naturally a lot less for those in government jobs – only around a 5% haircut for those funded by the tax payers.  Yet these are the very same people who protest most about austerity.

The mess in Greece has taken a little air out of the Podemos balloon, but yet another bribery and fraud scandal involving a former economy minister makes depressing reading for the government.  Politics and graft just do seem to go together, like tapas and sherry.  Provided politicians do not get in the way, recovery in Spain is underway : something the stock market has already spotted.  Thus earnings growth for the next three years seems largely baked into current share prices.  That does not leave much for a value investor to do: slim pickings in equity land and fixed income options may be even less attractive.  So forget the financial markets.  Go to Madrid for the culture and the food.

Over in England and trying to talk about financial markets was a lost cause as the only thing anyone wanted to discuss was the forthcoming election.  Of course we now know the result and it delivered one surprise and one nasty.  The nasty of course is the deluge of SNP parasites who may be in Westminster as temporary visitors but seem certain to disrupt proceedings.  The Scots sadly seem to plunge themselves into self-destructive actions periodically throughout history.  Becoming a one party state is one such example, especially when the philosophy of that party is Tartan-Marxism.  If the Scots ever opt for full independence, it would be an interesting bet as to how long it would take for the country to get into the same sort of mess as Greece.  The financial policies of the SNP are nothing if not a massive sinkhole. 

In addition to SEXIT, an outcome that an increasing number of people in London seem to favour, we now also have to consider BREXIT.  The establishment will be out in force to support whatever fig leaf David Cameron comes back with from Brussels to pretend that the EU made sufficient concessions that the UK should stay.  The campaign will be nasty.  Facts will disappear into a welter of propaganda and scare mongering.  There is no established group that supports exit and you can come up with frightening scenarios about what might happen to the UK if it leaves.  Of course we should all be petrified of having an economy like Norway or Switzerland. 

The best analysis and possibly the only well researched and balanced piece on the impact of the BREXIT can be found in recent book by Roger Bootle of Capital Economics titled the Trouble with Europe.  This book is worth reading or you can look up the recent Money Week interview.  He concludes that exit would be messy and disruptive, and probably cause problems in the short run; but in the long run whether it is a success or not depends upon what sort of government you get in the UK (or possibly England).  If it is a sensible administration with an understanding of business and wealth creation, then England outside the EU would be better off in the medium and long term.  If you get a self-destructive nihilist left wing government a la Ed Miliband, an outcome fortunately we have avoided for now, it is conceivable that being outside the EU could actually be worse because even the bureaucrats in Brussels are one step up from someone who may well be intelligent, but who is economically illiterate and exceptionally naive. 

After avoiding one potential disaster let us hope the electorate finds the right answer to the next big problem confronting the country.  In the meantime as you would expect, UK asset values moved up a bit post the election as did the currency.  I think we can expect more positive moves from the UK Stock Market, but wonder about the next move for the currency.  Of course if Greece goes, or is pushed, then the Euro is likely to rise, if perhaps after a brief hiccough : and that is precisely why Germany does not want them to leave.  Of all the currency manipulators in the world today, Germany is by far the biggest; and the clever part of their cunning plan is that they do not even get blamed for doing it!  All you have to do is link your strong currency to a bunch of losers and lo and behold you become a global export powerhouse.  I know it is more complicated than that, but Greece being part of the Euro helps German industry.

Now would it not be a wonderful coincidence for the pro-EU lobby in the UK if somehow a sterling currency crisis could be engineered and blamed on the possibility that Britain might leave the EU as a warning shot across the bow of voters tempted to support exit.  Anyone who is intrigued by this scenario should go to Amazon and buy my book, The Yo-Yo Conspiracy.  This is a work of fiction but does seem to be rather relevant to the current situation, albeit written 11 years ago.  I would be interested in comments from any of my followers after they have read it.  Much more fun than Bootle.                             

Early Easter helps Panzano

Chinese New Year was late in 2015 but Easter was early.  Does it mean anything?  Probably not.  Personally I like an early Easter.  As someone who has a birthday in April, there have been several occasions growing up when Easter coincided with the day when I was supposed to be special.  Being offered a chocolate egg instead of a toy was a real let-down.

That aside Easter brings back happy memories.  Whatever the Archbishop of York says on the subject, our Easter egg hunt in the garden was always a joyous occasion even if we did unearth the odd soggy relic from the year before.  Watching my mother boil eggs in coloured water to turn the shells blue or pink is one of my earliest memories.  So in spite of getting short changed in the gift department, Easter has always been one of my favourite times of the year.

God must agree.  He blessed us this year with the most wonderful weather.  The first proper sun of the year brought out the crowds.  All the local restaurants in our village were full.  That happy state carried on for most of the week and into the following weekend.  Takings and tips were up on last year; and spending spilled over into the shops.  We were looking at a few hand stitched dresses for baby girls to buy as gifts for my wife’s niece.  There is a small shop on the main square of Greve that has the most lovely clothes, table settings and lace.  By the time we had taken photos, sent them over to New York, and debated over which we liked most, two days had elapsed.  When we went back three out of the four dresses we had our eyes on had gone.  Thus the choice was down to one making the final decision a lot easier.  And this at a shop that did not even bother to keep regular hours for much of last year (and where the price points are not low even if the value for its hand stitched creations is compelling, especially when compared to department or specialty stores in cities).

Greve in Chianti - Main Square

In our little corner of Italy, the economy appears to be picking up.  You see a lot more smiles this year than last : plus a sense that things really will be better over the balance of the year.  The atmosphere too feels changed.  It needs to.  Last year was terrible : no olive oil at all and the wine not so great, and then ending with those earthquakes.  Perhaps they really did clear the bad energy as some locals were suggesting.

I suspect a lot of the improvement comes down to the Euro.  At $ = €1.07 the cost of everything – except the airfare – is a lot less than when the rate was Euro 1.35.  Brits are better placed too, as are almost all Asians; and it is starting to show.  There were many more visitors in evidence.  More broadly both official statistics, the numbers one needs to take with a hefty dose of scepticism, and anecdotal evidence from local tradespeople align to paint a picture of a country crawling back and finally achieving real growth : albeit not much, but a whole lot better than the negative number of 2014.  Renzi helps.  His positive approach and can do attitude is infusing a belief in people that even in Italy things could get better.  

Regardless of other demands it is essential to find time for relaxation and reflection.  Making investment decisions – as opposed to trading – requires a clear mind.  In my case nothing clears the mind more effectively than listening to classical music – live.

Back in London once again the voyageur is spoilt for choice.  One of my favourite venues is St Martin in the Fields.  For starters this church provides precisely the right atmosphere; most especially when the concert is for example English choral classics as it was when I was there recently.  In this case the Barts Chamber Choir were conducted by Ivor Satterfield; and very good they were too.  Nicely paced, balanced and pitched at just the right level, with the parts definitely adding up.  Byrd's Civitas Sancti Tui was particularly beautiful from circa 1580 but the surprise package was a much more contemporary entrant : Taverner’s Hymn to the Mother of God : surprising because while I recognise Taverner’s exceptional talent I am not normally a fan.  This piece though was suitably ethereal.

St Martin-in-the-Fields

Then it was back the following week for Handel and Bach, perhaps a more populist offering.  The focus was on the flute and Martin Feinstein is a master of this instrument.  Vivaldi snuck in at the start but my favourite of the evening was the Brandenburg Concerto No.5.  You just have to let the music carry you away.  Here hats off to Robin Bigwood for a truly marvellous performance on the harpsichord.  You do not often find music where the harpsichord takes centre stage, but there is one passage here that is breathless stuff, and worth a detour.  The Handel was not half bad either.  All of this lifts the spirits when one is on the road, and hopefully puts one in the right frame of mind to make better investment decisions.