Could things finally be turning around in China?
Since I wrote the article Investors are fleeing China – is it time to buy? the Hang Seng China Enterprise Index (H-shares) has gained around 9%. Recent economic data has also been more positive than expected.
So will this continue?
That’s the hope, anyway. In October, new legislation will make it easier to make cross-border investments between Hong Kong and mainland Chinese markets. Add to the fact that quarter four is usually quite strong, and it looks like a good indicator of further improvements in the Chinese markets.
But I remain cautious, and think one stock will act as the bellwether for whether this merrier China scenario has legs. Let’s have a look.
If you’re planning to invest in China, watch this stock
The company is called China Cinda Asset Management (1359 HK).
Cinda is one of the largest state-controlled asset management companies in China. The company mostly deals in acquiring distressed assets – those that are generally sold because the owner has gone bankrupt or is heavily in debt – and selling them on at a high return. And right now, as China is saddled with a pile of debt ready to be restructured and reduced, there’s a lot of work for companies like Cinda.
Cinda has 31 branches nationwide for its distressed asset business and nine subsidiaries involved in financial investment and services businesses, such as securities, trust, leasing, mutual fund, life insurance, P&C insurance, property development, etc.
Unusually though, what’s got me most interested about this company are its investors. Some of the smartest and most clued-in international financial investors have decided that Cinda is a viable way to play China. And I think we should pay attention.
Why do these guys matter?
In 2012, a handful of leading Western financial institutions – including Norges Bank (which manages Norway’s oil fund), and hedge funds such as Farallon Capital Management, Oak Tree Capital Group and Och-Ziff Capital – bought strategic stakes in Cinda.
The fact that foreign Western financial institutions are participating shows that they believe it is possible to make money from China. So far, it’s done pretty well for them. Since it listed in December 2013, Cinda has gained 22.9%.
But these are institutions that are after big gains. They didn’t invest in Cinda just to make 22%. So is there something they know that we don’t?
We’ll be able to find out soon.
Right now, Cinda is currently in a ‘lock-up’ period. A lock-up period is one where investors of a hedge fund aren’t allowed to acquire or sell shares.
I am watching closely to see what these investors will do in December when the lock-up period expires. If they stay invested, I believe they see Cinda as a ‘multi-bagger’, which would mean that the current gain for Cinda has to be followed by strong additional gains over the next few years. And more importantly, it shows that they see a light at the end of the tunnel for China.
How do we benefit?
Put simply, I believe that if these investors decide to stay invested, the merrier China scenario will become a reality. And it’s vice versa if they don’t.
We have seen events like this in the past. For instance, during the 1997-98 Asian financial crisis, American institutions including GE Capital bought up distressed assets in Thailand and made an absolute killing.
The same can be said about Abu Dhabi and Qatar’s sovereign wealth funds. They invested in Barclays in 2008 and yielded handsome returns when it sold five years later.
Great for them, but more importantly, their purchases and continued interest were, in hindsight, great buy-signals for normal investors.
I believe this could be a similar opportunity. Keep your eyes peeled!
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