Breaking ground: Joseph Lai's first portfolio additions

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Setting up a new fund is a time of joy and nervous anticipation. There's deciding on a new name, hiring talented investors and putting your own capital into the fund, but nothing quite beats breaking ground with the first few additions to your portfolio.

Dr Joseph Lai, Chief Investment Officer at Ox Capital, is in such a place after more than 17 years managing the Asian strategy at Platinum Asset Management.

“When I scan the market, most of the emerging markets are cheap so there are a lot of interesting ideas," he says. "The only market that is expensive is India… What we look for are good long-term themes at attractive prices.”

In this Expert Insights video, Lai runs through his investment theses for two emerging markets' stocks with massive potential. The first capitalises on healthcare trends in the well-regulated nuclear imaging and therapy market, while the second leverages increasing consumption habits for luxury goods in domestic China. 

“The price of luxury goods has traditionally been 30% cheaper offshore compared to mainland China…But that has changed and the price difference is much less now.”

Getting off to a strong start is pivotal for any fund, and Lai is sticking to his guns with an approach that prioritises well-managed businesses, a quality growth runway driven by long term thematics and not having to "pay-up".


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Transcript edited for clarity

James Marlay: You're in the unique situation of starting a portfolio from scratch, which I'm sure a lot of people would love to do. What are the first couple of stocks that have made their way into your portfolio and could you give me a quick pitch on the thesis for each of them?

Joseph Lai: Everything is fresh and the way I like it. In terms of ideas, when I scan the market, most of the emerging markets are cheap. So there's actually a lot of interesting ideas that we've generated that are all worked through.

The only market that is expensive currently is India, so we're not doing a lot of work there at the moment, but that may change. What we look for are good long-term themes and an attractive price.

Stock 1: China Isotope & Radiation Corp (HKG:1763)

The first company I'll talk about relates to healthcare. It's a company in China, which we own called China Isotope & Radiation Corp (HKG:1763).

It makes radionucleotide isotopes for medical diagnostic and therapeutic use. You may know that there's a lot of scanning machines and radiotherapy that use isotopes to look for thyroid or cancer problems and conditions like that. It's widely used in the West and being a nuclear isotope, the industry is highly regulated in China.

There are only two main players there and China Isotopes are one of them. What we are seeing is that in the next 5-10 years, there will be a lot of spending on health devices in China. The penetration rates of these in China is currently very low. And as you can appreciate, the market is huge.

This company is supplying the nucleotides for these machines. As the installation base grows, they will make better sales. This company is growing earnings at 25% and is trading on 15 times price to earnings multiple.

It was more expensive before the market sold off recently, so now it's 15 times but going up a few percentage points. There's not much debt on the balance sheet. It is a steady pick as it's going to grow. 

It's got a nice story, but it doesn't end there because we are not just looking at Chinese stocks, we are scanning the world for the best opportunities. If we need to, we can actually buy some portion of the fund outside of strict EM to capture those opportunities.

There's a company in the US, which has formed a joint venture (JV) with China Isotopes, and that is the world's third-biggest radiation machine manufacturer and linear accelerator. The problem for these guys is that the linear accelerator market is effectively a duopoly - and they're number three.

So they don't currently have a huge market share, but they do have the technology. Accordingly, they formed a 50-50 JV and built the factory in Tianjin. In the past two years, the central government tendering for these radiation therapy machines.

The JV has  won 80% of the tendering. So I think that's a nice option for them to have and a huge market that's untapped. That's one that we are very happy to own.

STOCK 2: Hang LUng Properties (HKG:0101)

The next stock is a typical Chinese consumption play, because a lot of stocks in China are cheap. This company is called Hang Lung Properties. It's actually Hong Kong company. 

I will start by posing a few questions. We have all seen the Chinese desire to buy luxury goods, right? But would you know that until recently, two-thirds of the luxury goods purchased had been taking place outside of mainland China? 

Most people wouldn't - it is quite surprising. Why go out when you can buy in China? But the real problem - and that's been the case until recently - has been the price. The price for luxury goods has been traditionally been literally 30% cheaper offshore compared to mainland China. 

That has changed for a few reasons. The price difference is much less now - about 10% sometimes - for the first time in the last 15 years. This has happened about a year ago.

We are starting to see queues of people lining up outside of Louis Vuitton, Gucci and Cartier in China. All these shops have been in China for a while and they used to be basically showrooms, where people look at the items. Some of them buy it but a majority would go outside and go overseas to buy them.

But there's a problem because the business is so good. These luxury companies want to open new stores, but there are not enough places where they can open. And you may ask me, "Well, I thought that China builds a lot of retail malls, right? I mean construction is certainly not a problem."

Marlay: They seem like they can't just build a new one rapidly. One of the things the Chinese are famous for is building quickly.

Lai: That's right, using so much cement and steel. But the reality is that these brand companies, the Louis Vuittons and the Guccis of the world are good companies and very careful about the brand image. In order for them to open a store, they have to make sure that the location and the shopping mall do not degrade their brand image.

Even for a good mall, if only one luxury store opens there, it's a bit funny, right? For example, if there was just a single Louis Vuitton shop and next to it were mid-tier sports brands, it would degrade their image. These boutiques also have to make sure the shopping malls are well managed, which is difficult in most countries, let alone China.

We've got a solution. And the solution is the stock I told you about: Hang Lung Properties. They have spent the last 15 years building up a portfolio of luxury malls in China - admittedly, a little bit too early.

The two Shanghai malls are just printing money and have been doing so for literally 10 years. But the ones outside of that have been a bit slow because of the price disparity.

But this is changing rapidly and all the luxury brands are moving in. They're one of the few landlords people want to deal with because they're serious and everything is above board and great.

There are a few levers here. One is that as the luxury brands move in, the sales per square metre literally goes up 10 fold. I mean, an Hermès bag, I have the unfortunate experience of knowing, can cost literally $10,000 or more. Try comparing that to the likes of UNIQLO or Zara, I mean, there is no comparison. So sales per square metre goes up, rent would go up.

And the second thing is just that more stores are open, so they'll benefit. The third thing is if we look at the number of stores per capita for Louis Vuitton or for all the brands basically, Gucci, Hermès, Cartier. China has one-tenth or even less of stores per capita for those brands compared to the likes of more developed countries such as Japan, Taiwan or Korea.

The number of stores in China is actually similar to the number of stores in Japan, despite vastly different populations. So that's a huge opportunity. This stock is trading on 0.6 times book, 13.5 times forward P/E and growing at 15%. 

It may even grow faster because people, I think haven't come around to this drastic change. They have been suffering a bit because of the Hong Kong protests a few years ago.

So that may turn around as well and in fact I think it'll do better than 15%. It's got a 4.5% dividend yield, not much debt on the balance sheet, fully legit business, old Hong Kong money- overall a very good company. 

I've also seen some of the senior people in the company buying shares and also the parent company. The parent company is called Hang Lung Group (HKG: 0010), who owns Hang Lung Property has been buying back shares for a long time.

It's very interesting to us to be able to get into these well-managed businesses. Not growing at 50%, but instead growing nicely with a good long-term theme, well managed and not having to pay up.


Take advantage of the rapid growth in Asia and emerging markets

Lai's investment approach is to identify the immense changes taking place in Asia and other key emerging markets to find investment opportunities. To learn more, visit the Ox Capital website, or see the Fund Profile below.

Managed Fund
Ox Capital Dynamic Emerging Markets Fund
Global Shares
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Ox Capital currently owns shares in both companies mentioned Livewire gives readers access to information and educational content provided by financial services professionals and companies ("Livewire Contributors"). Livewire does not operate under an Australian financial services licence and relies on the exemption available under section 911A(2)(eb) of the Corporations Act 2001 (Cth) in respect of any advice given. Any advice on this site is general in nature and does not take into consideration your objectives, financial situation or needs. Before making a decision please consider these and any relevant Product Disclosure Statement. Livewire has commercial relationships with some Livewire Contributors.

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