How the best Chinese companies navigated through COVID-19

Across Asia as well as globally, countries are going through different stages battling a common enemy. We are not medical experts so will not opine on any statistics or curves. What we do observe is the usual hubris to humility cycle – the virus’ spread is slowed by vigilance, and accelerated by complacency. We also observe incredible human resilience and strength, in business and life. 

Over the past three months, China went through a full cycle of widespread virus, hard lockdown, stabilisation, and recovery. While short term earnings for most of our portfolio companies were inevitably impacted, we are confident that their long term prospects remain positive, and in some cases strengthened.

Consistent with what we observed in 2019, proprietorial culture, where management acts and thinks like owners, proved to be an effective antidote to systemic shocks. Resilience is a core tenet to proprietorial culture. Our founders and CEOs, having built the businesses from the ground up and navigated through myriads of competitive and regulatory challenges, did not flinch in the face of crisis. They wasted no time complaining or waiting for help from the government. They worked through the Chinese New Year holidays side-by-side with frontline employees. They ensured that their employees stayed healthy, created innovative solutions to meet customer demands, and resumed business quickly when it was safe.

Two outstanding businesses navigating through the storm

Consider Shenzhou, the leading global sportswear manufacturer, as an example. Mr. Ma Jianrong, Shenzhou’s founder and CEO, started working at a Chinese textile factory at the age of 13. A few months’ national lockdown was not going to cause Mr. Ma to panic.

Shenzhou quickly ramped up its compliance and safety procedures, and was amongst the first businesses to be given a permit to re- open in mid-February. When other textile factories scrambled to find workers and face masks (a work condition requirement), Shenzhou calmly retooled its factories to manufacture masks on their own, and sent out buses to ferry its 17,000 workers from 17 provinces back to its Ningbo factory. Bear in mind that during that time, provincial borders were closed.

To be able to fetch the workers means Shenzhou had cleared bureaucratic obstacles to cross 17 provincial borders beforehand. Mr. Ma also had the foresight of building vertical supply chains within each country Shenzhou operates. As a result, its Chinese factory did not need to wait for fabric from Vietnam, and vice versa.

We are confident that the global sportswear demand will normalise over time, and companies like Shenzhou will emerge as a strong market share gainer.

Observing our portfolio companies through the crisis also enhanced our conviction in the long term thesis on investing in Asia – many Asian businesses have become truly best-in-class operators in their fields. Their maturity in managing inventory, staff and customers in times of crisis rivals any large multi-national companies.

China Mengniu, a leading dairy company, is a good example. As shops were closed during COVID- 19, Mengniu’s sales teams quickly pivoted to eCommerce and other ways of engaging with customers directly.

They set up over 90,000 Wechat groups, and sales from these community marketing efforts reached 10% of revenues in the March quarter. Mengniu is also proactive in inventory management. Its point-of-sales system identified unsold inventory in traditional small retail outlets due to store closures. It quickly bought back these inventories, and sold them via modern retail or online.

Mengniu’s ESG team also kicked in in full gear, transporting large quantities of milk and yogurts to hospitals in need.

Mengniu is emerging out of the crisis with solid inventory position, a more nimble and capable sales team, and higher brand recognition.

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