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KraneShares' Ahern: China's Domestic Consumption Economy(Audio) · Bloomberg Intelligence

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  Speaker 1: I'm Charlie Palett, and dat's a Bloomberg business. You're listening
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  Speaker 1: to taking stock with pin Box on Bloomberg Radio in China.
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  Speaker 1: The Shanghai Composit closed down about eight tenths of a percent.
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  Speaker 1: And in China, the Official Manufacturing Purchasing Managers Index, the
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  Speaker 1: p m I attracts the health of large and state
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  Speaker 1: owned enterprises, came in at forty nine point nine and
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  Speaker 1: that compares to fifty that was logged in June. Here
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  Speaker 1: to tell us more about investing in China is Brendan Hearn.
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  Speaker 1: He is the chief investment officer for Crane Shares and
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  Speaker 1: he brought along his wee chat and his d D,
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  Speaker 1: so he's here to tell us everything. Brendan, thanks for
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  Speaker 1: coming in. Let's start off with the bigger picture and
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  Speaker 1: the p m I report from China. What's that signaling
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  Speaker 1: to you? Well, China is certainly affected by tepid global growth.
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  Speaker 1: Their export driven manufacturing is going to be affected by
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  Speaker 1: weak demand, both here in the United States as well
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  Speaker 1: as here in Europe. So I think it's not overly
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  Speaker 1: surprised using that to your point, the official National Bureau
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  Speaker 1: Statistics p m I was a little light. At the
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  Speaker 1: same time, we did have the Shy Shin p m I,
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  Speaker 1: which covers more small medium enterprises, actually increased month over
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  Speaker 1: month as well as I think for us as investors,
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  Speaker 1: what we really want to focus on is non manufacturing
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  Speaker 1: p m I, which actually increased in the month of July. Now,
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  Speaker 1: why do you want to focus on the non manufacturing is?
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  Speaker 1: I mean, is China already so much like the United
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  Speaker 1: States were manufacturing? Is such a small park? Don't a
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  Speaker 1: lot of Chinese people still work in factories. Well of
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  Speaker 1: GDP and came from the industrial sector, Kathleen. At the
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  Speaker 1: same time, fifty of d P came from the service sector.
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  Speaker 1: So there's a lot of talk about China rebalancing. Our
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  Speaker 1: opinion is that a healthy part of the economy has rebalanced,
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  Speaker 1: and while part of China's economy faces tep and global growth,
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  Speaker 1: domestic consumption is doing quite well, and we as investors
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  Speaker 1: want to want to position ourselves in that in that
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  Speaker 1: sweet spot of the China in they's economy. How do
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  Speaker 1: you invest in Chinese technology companies when it's impossible to
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  Speaker 1: really know as an amateur, uh, what is accurate, what's
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  Speaker 1: not accurate, and how to suss out the details from
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  Speaker 1: their annual reports. Yeah, and certainly standards in both Shanghai
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  Speaker 1: and Shenzend, the two onshore markets are catching up to
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  Speaker 1: where we are here in the West. At the same time,
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  Speaker 1: Hong Kong as well as US listed Chinese companies have
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  Speaker 1: to adhere to US GAP standards, they have to adhere
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  Speaker 1: to US exchange listing standards. They're audited by the big
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  Speaker 1: four US accounting firms. So we love the internet and
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  Speaker 1: e commerce companies listed both in Hong Kong as well
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  Speaker 1: as here on the New York and NASTAC exchanges. When
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  Speaker 1: I follow on this because I don't think it's just people,
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  Speaker 1: I don't think it's just you know, the amateurs who
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  Speaker 1: have a tough time making sure they get a good
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  Speaker 1: view of UH China's books and what their companies are
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  Speaker 1: really doing. You're saying then that you trust the information
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  Speaker 1: they give to those international auditors. The international auditors actually
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  Speaker 1: go inside the companies because there's been some high profile
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  Speaker 1: short sellers, as you know, activists who have gone after
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  Speaker 1: some of the big Chinese companies. That is true, and
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  Speaker 1: I think this broader trend about domestic consumption in China.
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  Speaker 1: We would say, even look at US listed companies geared
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  Speaker 1: to the Chinese consumer. Nike, McDonald's, UH Apple, UM, who's
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  Speaker 1: who else has done very well recently. I think. I
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  Speaker 1: think Nike has been been a big, big standout Starbucks
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  Speaker 1: going from twenty five hundred to five thousand stores over
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  Speaker 1: the next few years in China, um you see it
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  Speaker 1: in the US companies doing business there. We like holding
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  Speaker 1: the Chinese companies themselves, just for the reasons that Uber
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  Speaker 1: China had a little bit of a struggle as a
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  Speaker 1: foreign company operating in China. Tell us a little bit
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  Speaker 1: about k Web. This is the Crane Shares Technology e
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  Speaker 1: t F. Largest holding there is ten Cent, followed by Ali, Baba,
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  Speaker 1: Baidu and j D dot Com. This is really have
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  Speaker 1: fun geared to the domestic consumption trend, which increasingly takes
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  Speaker 1: place online. In China, your smartphones your primary source of entertainment.
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  Speaker 1: While retail sales went up just about eleven in twift
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  Speaker 1: online retail sales went up over thirty. So not only
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  Speaker 1: in China are you using your cell phone for for
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  Speaker 1: rechat the Facebook of China, for using d D to
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  Speaker 1: order a taxi cab, but you're actually buying things as well. Now,
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  Speaker 1: in particular with this deal where d D ends up
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  Speaker 1: buying our chunk of Uber, Uber retains about of its
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  Speaker 1: company of ruising battle. You can read all the phrases
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  Speaker 1: about how Uber just couldn't quite get it done. Was
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  Speaker 1: this a fair fight or was d D favored because
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  Speaker 1: as a Chinese company. Talked to any almost any US
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  Speaker 1: company who's tried to do business in China, and they
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  Speaker 1: talk about how it is not a level playing field.
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  Speaker 1: Going alone for any Western company in China, where you're
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  Speaker 1: trying to displace a local company that employs employees tens
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  Speaker 1: of thousands of locals is going to be very difficult.
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  Speaker 1: A few weeks ago we had Walmart dot Com through
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  Speaker 1: in the Towel partnered with j D dot Com. We've
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  Speaker 1: seen Dove US part of Union Lever, tried to go
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  Speaker 1: into China alone, really struggled. Now now Dove as part
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  Speaker 1: of Ali Baba's Tabo and te Mall uh e commerce
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  Speaker 1: platforms is doing very well. So so where dee D
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  Speaker 1: had a very very strong advantages one UH the founder
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  Speaker 1: she comes from the chairman of Lenovo is her father. Uh.
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  Speaker 1: One big part of of d D success was in
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  Speaker 1: order to do an expense report in China, if you're
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  Speaker 1: an employee, Ba Piao is getting an official receipt that
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  Speaker 1: you can use to basically show that you paid for
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  Speaker 1: something Uber China never was able to get that sort
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  Speaker 1: of put them to a big disadvantage in terms of
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  Speaker 1: getting corporate clients in China. Now you brought your wee
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  Speaker 1: chat already loaded on your mobile, and I'm wondering if
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  Speaker 1: you could tell people how does we chat manage or
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  Speaker 1: organize or help you organize your life. It's more than
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  Speaker 1: just a Facebook. Now allows us to communicate friends, family,
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  Speaker 1: business partners. In China. I'm able to like a PayPal
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  Speaker 1: to pay for goods and services. It's like an auto
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  Speaker 1: pay on my bank account where I can pay my
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  Speaker 1: utility bills UM. I'm able to buy mutual funds UM.
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  Speaker 1: I can literally move money into a money market fund
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  Speaker 1: out of my bank account va F via we chat.
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  Speaker 1: There's so much more to this fintech. That's actually when
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  Speaker 1: I just got back from China about three weeks ago,
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  Speaker 1: people made fun of me for carrying a wallet. They said,
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  Speaker 1: that's so western of you to have a wallet, and
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  Speaker 1: and I do have a giant George could stands a
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  Speaker 1: like wallet. At the same time, I was deemed an
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  Speaker 1: old person because I actually had physical cash. Everything is
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  Speaker 1: being done on your smartphone QR codes. I can pay
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  Speaker 1: for Starbucks in China, but you can do that here
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  Speaker 1: in the United States. Not off on I don't think
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  Speaker 1: on one company's application, I don't think you can come
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  Speaker 1: close to doing what e chat or what we chat
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  Speaker 1: provid sides today. And if the we chat is another
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  Speaker 1: one of these Chinese companies that basically got the plicit
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  Speaker 1: backing of the government, and there's so much interplay between
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  Speaker 1: people wore powerful and government now and whose kids started companies, etcetera, etcetera.
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  Speaker 1: You're you're sort of buying into this whole Chinese model
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  Speaker 1: of you know, if you're the dominant company, you're going
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  Speaker 1: to be supported. Not real true competition likely understand the
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  Speaker 1: United States. I think there's instances where certainly Bad, Ali
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  Speaker 1: Baba and ten Cent are very very fierce rivals. A
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  Speaker 1: lot of what we're speaking about with with we chat
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  Speaker 1: is available on both bad as well as Ali Baba,
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  Speaker 1: so so they do compete very, very fiercely. It's very
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  Speaker 1: difficult for smaller players to compete about these could buy
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  Speaker 1: to compete with Facebook, No, not today, not here in
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  Speaker 1: the US. And we Chat, just to give you the detail,
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  Speaker 1: has over a billion accounts and seven hundred million active users,
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  Speaker 1: in China. They've got seventy more million outside of China
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  Speaker 1: who are also using we chat. So is we chat
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  Speaker 1: going to be a global business? Dey, well, I think
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  Speaker 1: him first forces. Only half a Chinese population has access
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  Speaker 1: to the Internet today. That's an internet that's an opportunity, right,
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  Speaker 1: So there it's going to go into the rural areas. Uh.
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  Speaker 1: The Tier one cities have a high utilization rate, but
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  Speaker 1: Tier three, tier four cities, it's a very low internet
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  Speaker 1: penetration rate. UM. China just past the US pass a
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  Speaker 1: fifty percent utilization rate in two thousand two UM, so
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  Speaker 1: it shows the upside to these companies. At the same time,
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  Speaker 1: A ten Cent did just by super Cell the finished
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  Speaker 1: GameMaker that's the provider of the Clash of Clans, and
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  Speaker 1: ten Cents is the creator of we chat correct correct
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  Speaker 1: um wach ten Cents founders were really in online gaming
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  Speaker 1: and got into social media like Facebook. UM. At the
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  Speaker 1: same time, they just by buying Clash Clans, they have
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  Speaker 1: twenty five million global users outside of China, so they
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  Speaker 1: just picked up a healthy footprint for going global. In
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  Speaker 1: turn of your E t F, what what can we expect?
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  Speaker 1: How's it done over the past few years. I'm thinking
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  Speaker 1: you're wedding a lot of people's appetite for some kind
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  Speaker 1: of investment vehicle in China. What takes advantage of some
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  Speaker 1: of these big names you just mentioned. Well, Kathleen, I
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  Speaker 1: think people will be surprised that today is actually the
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  Speaker 1: three year anniversary of of k Web being listed on
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  Speaker 1: the Nastack Exchange. We've actually beaten the S and P
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  Speaker 1: five hundred solely holding Chinese companies UM. At the same time,
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  Speaker 1: we're beating the largest China et F by about hundred
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  Speaker 1: basis points. So it's really about orientating ourselves to this
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  Speaker 1: domestic consumption trend that's the sweet spot of China that
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  Speaker 1: we want to hold. Export dam manufacturer will come back,
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  Speaker 1: but probably not in the short term. As a matter
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  Speaker 1: of fact, I was just looking at my Bloomberger at
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  Speaker 1: China retail sales. You can go to your eco page
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  Speaker 1: brows for China, get right to those retail sales numbers
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  Speaker 1: coming up next week. They were as hot as thirteen percent.
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  Speaker 1: Now they're down to about ten percent, still a very
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  Speaker 1: impressive number. Betta to her, and thanks so much for
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  Speaker 1: joining us. Chief investment officer at Crane cheers joining us
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  Speaker 1: right here in our New York studio Kathleen Hayes, along
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  Speaker 1: with Pim Fox, this is Bloomberg.