Article

A focus on private enterprises

2 May 2021
Mike Shiao
Mike Shiao
Chief Investment Officer, Asia ex Japan
A focus on private enterprises

Our investment strategy favours private enterprises. They are highly competitive and innovative, constantly utilising new technologies to deliver market leading products and services. We are positive about their growth as they continue to improve efficiency and productivity. From a corporate governance perspective, we believe that the interests of private enterprises are more aligned with our interests, as investors.

A private company that is moving online to stay relevant to customers

A good example that showcases private enterprises’ agility is a long term holding in a hypermarket. As one of the largest hypermarkets, it’s management reacts timely to capitalise on opportunities within its online operations, in our view. Following an investment by a leading e-commerce platform (late 2017), the company began a digital transformation that ensured that during Covid-19, the company achieved stable revenue thanks to its rising online presence. Meanwhile, we saw similar investment by this e-commerce platform in state-owned enterprises (SOEs) and changes are generally not as fast in these businesses.

Private enterprises are managed in line with investors’ interests unlike many SOEs

In our view, private enterprises are more likely to manage their businesses in the interest of shareholders, and in doing so, take corporate governance seriously. Within our bottom-up stock selection process, we attach a high level of importance to ESG factors.*

Our view has been reflected in our lack of exposure to a leading liquor producer in China. Although the company has achieved strong earnings growth, we were concerned about its corporate governance. The company is indirectly owned by the local government and there have been several high-profile cases that involved senior managers being removed from their posts by the local watchdog. We believe a lack of transparency in distributor selection is an issue for the company.

Conclusion

In conclusion, we are positive towards the domestic economy in China. We like the rising digital trend that is being accelerated by the recent outbreak of Covid-19. In particular, we favour private enterprises thanks to their agility and sound corporate governance. We are positioning the Invesco China Focus Equity Fund to capitalise on our views.

We believe it is important for investors to adopt an all share approach to capture the best opportunities in China. We define this as searching for the best investment ideas across all China‘s share classes irrespective of listing locations. We believe offshore equity markets provide a large selection of opportunities with growth potential, particularly among the consumer, services and technology companies. These are mostly large private enterprises, which were listed offshore as a result of their entrepreneurship and financial strengths. In addition, we see increasing opportunities within the onshore market, particularly among the consumer and healthcare companies, as it continues to mature.

* Whilst the fund manager considers ESG aspects they are not bound by any specific ESG criteria and have the flexibility to invest across the ESG spectrum from best to worst in class.

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