April 13, 2021
In June 2021, CI Emerging Markets Fund will celebrate it’s 10-year anniversary. As is often the case, reaching important milestones prompts introspection – what worked, what didn’t work and what could be improved? Rather than labouring on all three of these questions, I wanted to focus on a core differentiator in our investment process – a “what worked” perspective to our approach to due diligence and how it’s given us a competitive advantage.
Investing in emerging markets without the willingness to roll up one’s sleeves and look under the hood is a recipe for disaster and underperformance. You might get away with a light-touch approach for a while, but it’s an unlikely model for long-term investment success. This is because investing in emerging markets brings unique challenges, such as:
As a result, due diligence for an emerging market company has to go beyond analyzing its balance sheet and reading a few broker reports. What’s needed is a process for building trust and familiarity with the industry and the company. This can only be achieved through active networking techniques, for example:
Even if all these steps are not always possible, networking and building trust form a core part of our investment philosophy and stock selection process.
Instead of trudging through the points of due diligence, we’d like to share three examples of how we’ve built trust and familiarity with companies and industries in emerging markets through networking, and the resulting impact on our investment decisions.
Banco Bradesco is one of the top three financial institutions in Brazil with a presence in banking, insurance, asset management and brokerage. Our relationship with Bradesco spans almost 10 years and in that time, like other top financial banks in Brazil, we’ve gotten to know the management team well and interact with them on a regular basis. In fact, Bradesco’s management team will typically reach out to us directly for a quarterly check in. Through our relationship with Bradesco’s investment bank, we also get regular updates from business heads, which helps us better understand the individual business lines, and the strategies employed by these different businesses under the Bradesco umbrella.
Luckin Coffee is China’s largest coffeehouse chain and is often referred to as the home-grown equivalent of Starbucks. We were already familiar with the company’s founder Jenny Zhiya Qian, who is also the founder of Car Inc., a Chinese car rental company that we’ve been following since 2014. When Luckin announced in 2019 that it planned to go public, we made a trip to Beijing and Shanghai to visit its stores, order coffee from its app and talk with the management of its main competitors – Starbucks China and Yum China. We even spoke to Luckin’s dairy providers.
We had concerns about the company’s aggressive store expansion while balancing the quality of service and products, as well as its opaque reporting disclosures. Our due diligence led us to the decision to not participate in the initial public offering (IPO), even though it was considered a very “hot” IPO. The stock price closed 20% higher on the first day of trading – it traded much higher intra-day – but less than a year later, the company confessed publicly that it had fabricated hundreds of millions (US$) in sales through 2019. The price plummeted to near zero.
Xpeng is a leading smart electric vehicle (EV) manufacturer in China, and its autonomous driving system can compete with the best in class. Like other EV manufacturers, Xpeng is an emerging company that was little known to investors before its IPO in August 2020. We managed to get three one-on-one meetings with founder Xiaopeng He, Vice-Chairman Brian Gu, and head of strategy Charles Zhang, in the six months before the IPO. These meetings provided valuable insight into Xpeng’s culture, strategy and autonomous driving capabilities.
In addition to speaking with management, we checked out Xpeng’s product in person to gain first-hand experience of the premium model. Before the IPO we also met with various sell-side analysts, participated in calls with Xpeng’s local competitors NIO and Li Auto, and our Toronto office provided insight into developments at Tesla. Since the IPO, we’ve maintained regular dialogue with company management, including He. This close interaction with management helps us maintain up-to-date information about the company, the industry and the fast-evolving EV technologies.
At CI GAM, we continue to see great long-term potential in emerging market economies. Through both our global equity and dedicated Hong Kong teams, we’ve maintained our robust due diligence processes despite pandemic-related travel constrains. The Hong Kong office is already taking advantage of the fact that in-person company visits are once again allowed within China.
We want to thank our partners for their continued support over the last decade. If you’re interested in learning more about the CI Emerging Markets Fund, please visit ci.com or reach out to your CI GAM Sales Team.
*Associated with CI Global Investments Asia Limited, a firm registered with the Securities and Futures Commission of Hong Kong and an affiliate of CI Global Asset Management.
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Published April 7, 2021.