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How GAM's AAA-rated Cortesi is tapping into traditional China

How GAM's AAA-rated Cortesi is tapping into traditional China

The rapid modernisation of China has come at a cost, with many citizens embracing Western culture at the expense of their own traditions.

As an investment theme, this trend has not gone unnoticed by Citywire AAA-rated Jian Shi Cortesi, who says the tide is turning.

‘Recently, maybe in the last 10 years, we have seen a resurgence in terms of the appreciation of Chinese culture or things specifically related to China,’ she said.

‘If you look at how people dress just now, people appreciate very traditional Chinese style whereas maybe around the year 2000 everybody wanted the Western-style look.’

However, from an investment point of view, Cortesi (pictured) highlighted this thesis can be tricky to play because the companies producing traditional Chinese goods tend to be too small for the fund.

Despite these challenges, she has managed to find some interesting and investible opportunities, which are held in her GAM Multistock – China Evolution fund.

In fact, one of her top holdings Kweichow Moutai, which comprises around 4% of her fund, fits into this theme.

‘This is a company that makes Chinese liquor,’ she said. ‘Chinese liquor is consumed in very large quantities. I believe it is the most consumed alcoholic beverage or liquor in the world.’

This clearly demonstrates the power of the domestic China consumer, as Cortesi points out that Kweichow Moutai is not drunk outside of the country.

‘This company has been basically producing the same liquor for the last 20 or 30 years using the same formula and just increasing the price from time to time,’ she said.

‘Around 90% of the revenue of the company is driven by the flagship product, so it is a company that is very easy to understand and you don’t have to make a lot of predictions as to what happens to the volume or the margin or cost.’


Hotpot hot tip

The other way Cortesi is breaking into the changing values of the Chinese consumer is through their stomachs and one cuisine in particular.

‘In China, a very popular restaurant style is the hotpot, which I would say is a very Chinese domestic specific cuisine,’ she said.

Cortesi notes that the data she has seen suggests hotpot restaurants account for over 20% of all restaurants in China, a country with just shy of 1.4 billion people.

She currently has a small position in a hotpot chain called Xiabu Xiabu.

What she finds most attractive about the business is its high margins, which she believes are akin to those of pizza companies in the west. 

‘Western-style pizza has really high margins because the steps are quite standard and you do not need a lot of different ingredients, and those ingredients are quite cheap,’ she said.

‘In China, hotpot it is very similar, because you have a part of the soup and you need to provide ingredients for people to put in it. But you do not necessarily have to provide chefs, all you need to do is provide the product to be put on the table and there are also a lot of economies of scale.’


Heading online

Continuing her theme of playing companies that have a focus on China’s interior, Cortesi has a large allocation to information technology in her fund.

‘All of the internet companies that we have in China are really just China plays,’ she explained.

‘They have very little business exposure outside of China. They are basically just serving Chinese consumers and these are the kind of companies that we like.

‘We buy Chinese companies that make products or provide services to Chinese consumers – even with Tencent and Alibaba, lots of people outside of China are not too familiar with them.’

She is clearly committed to this theme as she holds just over 36% in information technology, which is by far her largest sector allocation. Tencent, Alibaba, and Baidu make up three of her top four holdings.

Cortesi’s GAM Multistock – China Evolution fund has delivered bumper returns of 93% over three years to the end of January. She has easily outpaced her peers in the China sector, who on average returned 66% to investors over the same period. Over one year the fund is up 39.4% versus 35.2%.  

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