The China Opportunity

CHINA

Most great investments begin in discomfort.– “The things most people feel good about –  investments where the

underlying premise is widely accepted, the recent performance has been positive and the outlook is rosy – are unlikely to be available at bargain prices. 

Rather, bargains are usually found among things that are controversial,

that people are pessimistic about, and that have been performing badly

of late.”

CHINA MARKET UPDATE

Wind Bloomberg

2005200520062006200620062007200720072008200820082009200920092010201020102011201120112012201220122013201320132014700

1700

2700

3700

4700

5700

6700

Scary Bubble

Where we are now

CHINA MARKET UPDATE

4/1/

2005

9/1/

2005

2/1/

2006

7/1/

2006

12/1

/200

6

5/1/

2007

10/1

/200

7

3/1/

2008

8/1/

2008

1/1/

2009

6/1/

2009

11/1

/200

9

4/1/

2010

9/1/

2010

2/1/

2011

7/1/

2011

12/1

/201

1

5/1/

2012

10/1

/201

2

3/1/

2013

8/1/

2013

1/1/

2014

6/1/

2014

11/1

/201

4

4/1/

2015

9/1/

2015

2/1/

2016

0

50

100

150

200

250

300

350

400

0

1000

2000

3000

4000

5000

6000

7000

Earnings

Est Earning

Est Max

Est Min

CSI300 Index

CHINA MARKET UPDATE

Wind Bloomberg

2005 2006 2007 2008 2009 2010 2011 2012 2013 20140

1

2

3

4

5

6

7

8

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

China USA

Great Recession

Fear?Risk Premium?

CHINA MARKET UPDATE

Bloomberg Estimates End if Mayt

2007 October Today0

5

10

15

20

25

30

35

40

45

Top40 index

DAX index

MSCI World

S&P 500

FTSE 100

CSI 300 (China)

CHINA SECTOR UPDATE

Inet, Wind

Financ

ials

Indu

stria

ls

Mat

erial

s

Consu

mer

Disc

retio

nary

Info

rmat

ion T

echn

ology

Utilitie

s

Energ

y

Consu

mer

Sta

ples

Health

Car

e

Teleco

mm

unica

tion

Servic

es0

5

10

15

20

25

30

35

China South Africa

1960 AND MODERN CHINA

  Born in 1960 Born in 2009

Life Expectancy 47 73

Per Capita consumption at birth $102 $1429

Per Capita consumption at Death $1129 $21400

Lifetime Consumption $16443 $632024 (38x)

CHINESE AND INDIAN CONSUMERS IN THE NEXT DECADE

2010 Income Distribution 2020 income distribution

Number of Households (Millions)

Share of households (%)Number of Households

(Millions)Share of households (%)

ChinaUpper 24 6 91 21Middle 109 28 202 47Lower 260 66 138 32

IndiaUpper 9 4 32 12Middle 63 28 117 45Lower 152 68 110 43

Billionaire’s 1 in 2004, 115 today

Movies total spend 17.6Billion RMB, up 40% a year compounded since 2006, 7x the market size, 2013 3Q growth up another 36%

Holiday makers, 20 Million in 2004, today 90 Million!

Chinese entrepreneurs believe in a 10 x 10 strategy, 10x the size in 10 years

COMPANY SPOTLIGHTS

Wind

Haier

2007 Now -

10

20

30

40

50

60

PE Ratio

Earnings Growth Revenue Growth0%2%4%6%8%

10%12%14%16%18%20%

Growth

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 -

5

10

15

20

25

30

35

40 ROENet Profit Margin

COMPANY SPOTLIGHTS

Wind

Huayu

2007 Now - 5

10 15 20 25 30 35 40 45 50

PE Ratio

Earnings Growth Revenue Growth0%

5%

10%

15%

20%

25%

30%

35%

40%

Growth

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 (5.00)

-

5.00

10.00

15.00

20.00

25.00 ROE

Net Margin

COMPANY SPOTLIGHTSMaoTai

2007 Now -

20

40

60

80

100

120

PE Ratio

Earnings Growth Revenue Growth0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

Growth

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 -

10

20

30

40

50

60

ROE

Net Margin

COMPANY SPOTLIGHTSPingan

2007 Now -

10

20

30

40

50

60

PE Ratio

Earnings Growth Revenue Growth0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

Growth

2,007 2,008 2,009 2,010 2,011 2,012 2,013 2,014 -

5.00

10.00

15.00

20.00

25.00

ROE

Net Profit Margin

CHINA RISK MAP

Government Directed Lending

Commercial Banks

Low Deposit Rates

Private Households

Shadow Banking

Unlisted SOEs / Policy

Banks

Private SMMEs

Government

Tight Lending Standards

GOVERNMENT

Huge Reserves Low debt to GDP Good government balance sheets with very small deficits Avenue to further develop taxation in China

– Capital Gains– Dividends– Benefit restructuring

Exports continue to be strong, although imports catching up

PRIVATE HOUSEHOLDS

Housing is a store of wealth Huge deposits for housing EXTREMELY low debt levels

– Still not used to debt – Consumption very low

20% of residential housing un-occupied– A 30% drop in prices will result in around 11% of these houses to be

underwater– A 30% drop in prices in occupied housing will only result in 2% of these

homes to be underwater– High level of deposit

Rules and regulation against speculation

HOUSE PRICE GROWTHY-o-Y change

-5%

0%

5%

10%

15%

20%

25%

01/0

7/20

05

01/1

0/20

05

01/0

1/20

06

01/0

4/20

06

01/0

7/20

06

01/1

0/20

06

01/0

1/20

07

01/0

4/20

07

01/0

7/20

07

01/1

0/20

07

01/0

1/20

08

01/0

4/20

08

01/0

7/20

08

01/1

0/20

08

01/0

1/20

09

01/0

4/20

09

01/0

7/20

09

01/1

0/20

09

01/0

1/20

10

01/0

4/20

10

01/0

7/20

10

01/1

0/20

10

01/0

1/20

11

01/0

4/20

11

01/0

7/20

11

01/1

0/20

11

01/0

1/20

12

01/0

4/20

12

01/0

7/20

12

01/1

0/20

12

01/0

1/20

13

01/0

4/20

13

01/0

7/20

13

01/1

0/20

13

01/0

1/20

14

01/0

4/20

14

Tier1 Cities (CNSB) 70 Cities (CNSB)

SMMES

Very difficult to get access to credit– Get expensive credit through shadow banking signal

Shadow banking actually works like a real bank / corporate bond market– Depositors get higher yield with higher risk– SMMEs get access to credit although expensive credit

Trusts make up only 7-10% of GDP HSBC research that 90% of products issued by trusts are issued by

companies with huge financial backing and profitability, will have no problems in making investors whole

In general trust credit spreads are around 5%, which implies a default rate of around 33% over 5 years for investors to still be better off invested in them, current default rates are tiny around 1%

UNLISTED SOES

Listed SOEs have some of the lowest debt levels across all companies– Makes sense as the privatisation / listing process started with the ones

that was best managed Unlisted SOE

– GOD HELP THEM…– Restructuring– Government bail out– Local access

Government reform plans shows that those with polluting, excess capacity and low productivity will be allowed to default and close– Myth that Government do not fire people– Civil service reforms in early 1990s resulted in around 50 million people

losing jobs before rehired in more efficient industry

FINANCIAL STABILITY REPORT2014

The Chinese Central Bank ran a stress test on the banks using the following scenario:– 4% GDP growth– Top 3 clients of each bank renege on their contracts– 30% default in developers– 15% default in private residential– Interest rate spread lowers by 100bps – Bad loans rises to 15%

CONCLUSION

Very Cheap Risky, growth slows down, new consumption model, reforms

– In the price already? Good Diversification Long term picture more stable

Equity Process [Client Logo]

CHINA BALANCED FUNDEquity Factor Allocation

Arbitrage; 6%Behavioural,

19%

Quality; 19%Historical Earn-

ings; 28%

Forecasted Earnings; 28%

Factor Allocation

FACTOR PERFORMANCE

  Month Since Inception  Value Behavioural Quality Value Behavioural Quality2013-04-23 -0.08% 1.52% 1.97% -0.08% 1.52% 1.97%2013-05-27 -3.22% 0.65% 1.69% -3.30% 2.19% 3.70%2013-06-26 0.65% -1.64% 2.79% -2.67% 0.51% 6.59%2013-07-25 -0.56% -1.92% -0.14% -3.21% -1.41% 6.44%2013-08-23 1.30% 2.58% -1.50% -1.96% 1.13% 4.85%2013-09-18 0.53% 2.05% -4.50% -1.43% 3.20% 0.13%2013-10-29 0.63% 1.09% -1.87% -0.81% 4.32% -1.74%2013-11-27 0.73% 1.26% -2.14% -0.09% 5.64% -3.84%2013-12-27 0.39% 1.96% 2.36% 0.30% 7.71% -1.58%2014-01-28 -0.02% 0.15% 0.11% 0.28% 7.87% -1.47%2014-02-26 0.38% 5.62% -1.04% 0.66% 13.94% -2.49%2014-03-26 1.70% 4.02% 0.91% 2.37% 18.52% -1.61%2014-04-24 0.20% -3.21% -0.60% 2.57% 14.71% -2.19%2014-05-27 0.45% -0.38% -0.34% 3.04% 14.28% -2.53%

ALPHA DISTRIBUTION

~-0.3

%

-0.3

%~-0

.25%

-0.2

5%~-0

.2%

-0.2

%~-0

.15%

-0.1

5%~-0

.1%

-0.1

%~-0

.05%

-0.0

5%~0%

0%~0.

05%

0.05

%~0.

1%

0.1%

~0.15

%

0.15

%~0.

2%

0.2%

~0.25

%

0.25

%~0.

3~

0.3%

~

0

100

200

300

400

500

600

700

800

900

Alpha Distribution

EQUITY CARVE-OUT ALPHA

2013

-03-

26

2013

-04-

09

2013

-04-

19

2013

-05-

06

2013

-05-

16

2013

-05-

28

2013

-06-

07

2013

-06-

24

2013

-07-

04

2013

-07-

16

2013

-07-

26

2013

-08-

07

2013

-08-

19

2013

-08-

29

2013

-09-

10

2013

-09-

24

2013

-10-

11

2013

-10-

23

2013

-11-

04

2013

-11-

14

2013

-11-

26

2013

-12-

06

2013

-12-

18

2013

-12-

30

2014

-01-

10

2014

-01-

22

2014

-02-

10

2014

-02-

20

2014

/03/

04

2014

/03/

14

2014

-03-

26

2014

-04-

07

2014

-04-

17

2014

-04-

29

2014

-05-

09

2014

-05-

21-2.00%

-1.00%

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

Cumulative Alpha

MAY PORTFOLIO

Fin; 35%

Mat; 7%Ind; 13%

Util; 4%Tel; 0%

IT; 5%Eng; 5%

Con Dis; 11%

Con Stap; 7%

HC; 8%

Sectors

Fin Mat Ind Util Tel IT Eng Con Dis

Con Stap

HC-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

-4.09%

-0.86%-1.41%

0.86%

-0.45%

0.71%

-0.12%

-1.05%-0.29%

1.62%

Sector Under/Overweight

Great Wall Motor Co LtdHuadian Power International Corp Ltd

Hong Yuan Securities Co LtdQingdao Haier Co Ltd

Bank of Beijing Co LtdDashang Group Co Ltd

Anhui Gujing Distillery Co LtdAvic Capital Co LtdXiamen C & D Inc

Changjiang Securities Co LtdHuaxia Bank Co Ltd

0.0% 1.0% 2.0% 3.0% 4.0% 5.0%

Top 10 Over Weight

Industrial Bank Co Ltd

China Merchants Bank Co Ltd

Ping An Insurance Group Co of China Ltd

Gree Electric Appliances Inc

Haitong Securities Co Ltd

CITIC Securities Co Ltd

China Everbright Bank Co Ltd

China Pacific Insurance Group Co Ltd

Anhui Conch Cement Co Ltd

Kweichow Moutai Co Ltd

-3.0% -2.0% -1.0% 0.0% 1.0% 2.0% 3.0%

Top 10 Under Weight

FUND TILL END OF MAY

Prescient

2014 YTD Since Inception

Fund Gross of Fees in USD -7.38% -10.76%

CSI300 Total Return in USD -9.97% -14.32%

China CPI+3 in USD -0.71% 5.47%

-17.50%

-12.50%

-7.50%

-2.50%

2.50%

7.50%

-7.38%

-10.76%-9.97%

-14.32%

-0.71%

5.47%

Fund Performance

Fund Gross of Fees in USD CSI300 Total Return in USD China CPI+3 in USD

FUND AVAILABILITY

UCITS regulated fund in Ireland

Feeder fund structure in South Africa

China Debt Fund Opportunity

[Client Logo]

CHINA CONSERVATIVE FUND

As of Wednesday the 17th June – CNYZAR exchange rate is 1.62 ZAR per CNY– CNYZAR 1 year forward rate is 1.73 ZAR per CNY– Start with 100 rands buy CNY at 1.62 at the same time sell CNY forward

at 1.73 for 1 year ahead– 100 / 1.62 = 61.66 CNY– We earn 4.3% in CNY = 64.31 CNY– We sell CNY back to ZAR at 1.73– 111.07 ZAR– We make 11.07% in 1 year

This has no currency risk, assets invested in money market instruments in China– No duration risk

Arbitrage

CHINA CONSERVATIVE FUND

The biggest opportunity in China ATM comes from the mispricing of the forwards

Arbitrage

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

23-A

ug-0

9

23-O

ct-0

9

23-D

ec-0

9

23-F

eb-1

0

23-A

pr-1

0

23-J

un-1

0

23-A

ug-1

0

23-O

ct-1

0

23-D

ec-1

0

23-F

eb-1

1

23-A

pr-1

1

23-J

un-1

1

23-A

ug-1

1

23-O

ct-1

1

23-D

ec-1

1

23-F

eb-1

2

23-A

pr-1

2

23-J

un-1

2

23-A

ug-1

2

23-O

ct-1

2

23-D

ec-1

2

23-F

eb-1

3

23-A

pr-1

3

23-J

un-1

3

23-A

ug-1

3

23-O

ct-1

3

23-D

ec-1

3

23-F

eb-1

4

23-A

pr-1

4

EUR assets CNY assets

CHINA CONSERVATIVE FUNDPotential Fund Asset Allocation

 

CSI Short Term Bond Index (1 year) Portfolio

Weighting Return Weighting Return

0 - 3 months 21% 4.2% 25% 4.7%

3 - 6 months 30% 4.3% 25% 4.3%

6 - 12 months 49% 4.6% 50% 5.2%

Weighted Return   4.4%   4.7%

CHINA CONSERVATIVE FUNDArbitrage

CHINA CONSERVATIVE FUNDArbitrage

CHINA CONSERVATIVE FUND

Fixed income fund with less than 2 year maturity– Average 1 year– Maximise yield– Avoid defaults– Building block

3 classes– CNY– USD– ZAR– Segregated

Official benchmark – Chinese CPI – Chosen also because China lacks a proper short term fixed income

benchmark

Thank you

Regulatory InformationThis presentation has been compiled to provide factual information on the product offered and does not constitute advice. A copy of this presentation is available from Prescient upon request.

Prescient Investment Management is a Financial Services Provider authorised under the Financial Advisory and Intermediary Services Act of 2002 (FSP 612).

Business address:

Prescient House, Westlake Business Park, Otto Close,

Westlake, Cape Town, 7945

Tel: 021 700 3600

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