Please note that the Board of Asia Dragon Trust is conducting a strategic review, initiated on 21st May 2024. The outcome is pending.

Overall take – a timely reminder of the exceptional quality in China:

During a recent visit to China, we met a range of companies across multiple sectors, with the stand-out meetings being with internet giant Tencent and electric vehicle (EV) battery maker CATL, both of which are impressive and a reminder of the exceptional quality that can still be found in China, with strong competitive edges and sustainable long-term growth prospects despite the challenging macro backdrop. Insurer AIA is solid, too. Aier Eye Hospital, Shenzhen Mindray Bio-Medical Electronics and Yum China are all fine and China Resources Land (CR Land) is fighting a good fight in the property corner. Hong Kong Exchanges & Clearing, meanwhile, remains an excellent proxy for the offshore China market. We also touched base with two companies that Asia Dragon Trust does not currently own, China Merchants Bank (CMB) and Fuyao Glass.

We highlight our key takeaways from these meetings below:

AIA: We received a solid update from the chief financial officer, who talked us through the decision-making on its recent additional US$2 billion buyback programme. We welcomed the announcement and took comfort on hearing that this will not compromise continued investment in new business where the opportunity remains undimmed despite China’s slowdown. AIA retains its expectations around new business growth, with continued solid demand in the near term and a long runway in China and beyond. It is expanding to more provinces that are growing well, and it plans to secure new licences and add more geographies. It has also added the bancassurance channel that will support further growth. So fundamentally, the investment thesis remains intact.

Aier Eye Hospital: We toured one of this company’s Shanghai facilities, which was in the higher-end segment, replete with VIP suites. The company has a clear strategy in a comprehensive offering, domain expertise with a focus on academic research, an emphasis on safety and quality of health-care and customer experience, with doctors able to own a stake in the hospital. While near-term headwinds persist, such as the deferral of discretionary surgeries, Aier remains optimistic about the long term, given the underlying drivers with incidences of myopia still rising in China.

CATL: We visited CATL’s new “Super Line” at its Ningde facility, which was impressive. This line doubles its production efficiency and greatly improves product quality (now down to 1 cell defect per 5 million cars). It is also more energy efficient and so speaks to the clear manufacturing edge that CATL has over its rivals. The line has been in place for a year now, but its peers have not been able to replicate it. Its investment density is lower, so returns are better. This, along with CATL’s positioning towards less price-sensitive, higher-performance Electric Vehicles in the mid- and high-end segments, has helped insulate its margins from pricing pressures. Geopolitics is a risk, but for now seem to be well managed and well contained.

China Merchants Bank: CMB is a well-run bank that has been nimble in managing its risk exposure through difficult periods. Its management is institutionalised with risk management at its core and the headquarters in control. We continue to monitor it closely.

China Resources Land: The property developer is fighting the good fight amid a challenging backdrop. In our meeting, CR Land talked us through the various policy levers, highlighting issues around who funds what, what inventory gets purchased and at what price. The government is consulting with the property companies and other experts, so it is not making policy prescriptions in a vacuum.

Despite the very challenging backdrop, CR Land has been remarkably resilient thanks to its tier 1 city positioning where upgrading and premium demand remains strong, its product differentiation, and efforts to increase recurring income. The malls business has also held up well, partly thanks to a “winner takes all” industry structure in certain markets where CR Land has gained the first mover advantage in the best locations. Meanwhile, CR Land is ramping up its asset management platforms business into which it will continue to inject assets and recycle capital.

Fuyao Glass: The global automotive glass manufacturer places innovation at the core of its business, with multiple research and development projects running at any point in time with three to five years’ development, or even longer based on customer feedback. So, this makes it hard for new entrants to enter the race. The bar gets higher as technological complexity increases and one needs higher scale to justify returns, which is positive for a market leader like Fuyao. Innovation fuels higher-end product mix penetration, which in turn drives price increases and margins. What came across multiple times during the meeting was the reference to getting reasonable returns in monetising its technology and scale. Like CATL, the key to geopolitical risk mitigation is by localisation overseas.

Shenzhen Mindray: We enjoyed a tour of the Shenzhen headquarters, where the company, China’s largest medical equipment maker, showcased its latest product ranges. The 3D minimally invasive surgery product had the wow factor, as did its latest ultrasound product with market-leading visual displays and is an area where it is partnering with Tencent to incorporate AI capabilities into its products.

The medium-term growth opportunity within China remains large and growing with the continued build-out of intensive care unit beds post-pandemic. This will support growth in the patient monitoring and lift support segment, but also cardiovascular ultrasound solutions.

Within in-vitro-diagnostics, Mindray is excited about the growth in the immunoassay segment where it has low market share. But it is investing heavily and believes that it can replicate the success already achieved in the haematology segment.

Overseas, Mindray has had to pivot away from the US in light of geopolitics but will remain present there and offset this with growth in other markets. Overall it remains confident of becoming a top 20 global medical devices player by 2025 and a top 10 player within 10 years.

Please note that the Board of Asia Dragon Trust is conducting a strategic review, initiated on 21st May 2024. The outcome is pending.

Market-leading products: We enjoyed a tour of Mindray’s Shenzhen headquarters, where the company showcased its latest product ranges. Mindray is looking ahead and teaming up with Tencent to incorporate AI capabilities into its products.

Tencent: We had a solid meeting with the internet giant, a core holding, that reaffirmed the sustainability of its moat and the longevity of its growth runway. We came away convinced that Tencent has many levers to pull in order to generate growth from its ecosystem, which still has significant monetisation potential, especially its WeChat app platform. Another key growth driver will be advertising, also its fastest growing business. This is underpinned by video ads, with its short video product taking market share away from incumbents and Tencent deploying AI to improve the click-through rate and enhance revenues. For its online gaming business, the focus is on increasing the quality, variety and authenticity of content that the company believes would lead to more users and greater revenues.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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The Trust's Key Information Document (KID) can be found at www.asiadragontrust.co.uk/literature