Making Money in "Old" China - An article about Golden Pine issued by AsiaHedge in May 2018

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We are delighted to share with you an article about Golden Pine Capital — Making Money in "Old" China. It introduces the background of Golden Pine's CIO, Dr. She Peng and his market views, published by AsiaHedge on its monthly Newsletter of May 2018.

The majority of China-focused long/short equity fund managers have endured a difficult first quarter. AsiaHedge data put the median return of these hedge funds at -0.1% for Q1, a setback when considering that January returns were at 6.5%.

Sudden drops in share prices saw the MSCI China Index slump more than 6% in February, with technology giants such as Baidu, Tencent and Alibaba notable victims.

Yet, while many hedge fund managers focused on China continue to wax lyrical about the nation’s TMT sector and look to ‘buy the dip’ others have taken a more contrarian view and are finding returns in China’s ‘old’ economies.

One such hedge fund manager is Golden Pine Capital. Founded in June 2016 by ex-Greenwoods Asset Management analyst She Peng, the firm’s China-focused long/short strategy returned 16.4% against 2.2% for the MSCI China index for the year to date.

“In 2018 we have earned most from cyclicals, mainly on coal and chemicals, as well as consumers,” explained Peng. “The contributing sectors are largely consistent with those in 2017. In Q1, cyclicals contributed almost half of the earnings, consumers contributed around 40%, industrials and other sectors contributed the remaining 10%. Last year, we earned around 36% from cyclicals, 31% from consumers and 33% from other sectors, such as industrials and financials. As a growing company, we keep seeking talents to expand the team and further enhance our analysing edge.”The strategy is a combination of topdown analysis at the industrial level, plus a bottom-up analysis of individual companies, according to Peng, who added that the firm has a view at the macro level in order to understand its positions as part of a bigger economic cycle.

“Once we have this big picture we will be able to formulate a top-down strategy on sector configuration. Then we will look bottom-up at companies to create a pool of key companies where we will get very thorough and granular on their value assessment,” said Peng.

“We mainly trade equities but we also keep an eye on other large-class assets like commodities and debt. This effort really helps us understand how the current economic environment is and which sectors and industries will benefit the most.”

Right now, for instance, Peng said he sees a rising trend in commodities over the long term.

“The balance between supply and demand is important. In the long run, the supply side has a more important impact. In the short term, the demand could be more volatile and easily affected by factors such as government spending and the seasonal effect,” he said.

“Based on the economic data, we see there is obvious contraction in production since March for commodities like coal and steel. So, the supplies are still pretty disciplined. I normally won’t worry too much about the longer-term return in these sectors unless I see a risk that overcapacity may happen.”

Peng can trace his preference for China’s traditional industries back to his university days where he received a doctorate in chemical engineering. After five years working for chemical giants BASF and Dow Chemical, Peng said he was able to build up good working relationships with experts involved at the cutting edge of technology in the chemical and material science industries, as well as renewable energy.

The call then came from China-focused investment manager Greenwoods. “At the time it was expanding its analyst team and the company was looking for industrial experts who might not have much financial experience at the time but possessed good understanding of the industry. This is why I got this opportunity,” said Peng.

“I started as a senior analyst of the chemical industry and gradually expanded my coverage to also include other areas including commodities and utilities and other manufacturing companies. I was covering the so-called ‘old’ economies and traditional industries,” he added.

Peng then went out on his own after five years at Greenwoods with good wishes from George Jiang, the founder and chief investment officer (CIO) at Greenwoods.

“I talked to George and said I wanted to make a try, and at the time I had a partner to support me with seed money for a fund, so the timing worked to start the fund,” said Peng.

“Honestly, I didn’t pay that much attention to the timing, but today looking back it was actually a really good moment. At the time I was thinking more longer term because when we decided to do this we had 10 years or longer time span so the short-term windows for launching were less important.

“It’s true that the valuation of these stocks was bearish when we started and that changed in recent times. But, I’m still more inspired by the longer term perspective for the strategy.”

Golden Pine’s current assets under management sit at $147m, which has grown from $40m last March. Peng said he is confident of more inflows as overseas investors are interested in China strategies, despite that overall, China fund managers have underwhelmed so far this year.

“Regarding our current strategy, I think the opportunity this year will be more structural, and the volatility will benefit the performance of hedge funds like us. Starting from February, we’ve gradually reduced the net exposure by utilising more shorts and pair trades than in 2017, because we are facing more economic fluctuation and policy uncertainties in this year,” said Peng.

“However, this doesn’t mean the current market valuation is not attractive. For some sectors, the market certainly underestimates the long-term return before of the short-term headwinds. At some moment in this year, I believe we will have a very good chance to buy high-quality companies at a pretty cheap price.”

This article has been approved by AsiaHedge. For reprint, please contact AsiaHedge.