Contrarian who bet on China stocks amid selloff sees more gains

When investors were fleeing Chinese shares at the start of the year, Samir Mehta, a senior fund manager at JO Hambro Capital Management, was heading in the opposite direction.
The self-described “contrarian” investor added to holdings of companies including casino operator Sands China and technology firm Tencent Holdings amid the selloff. Mehta took the share of his portfolio invested in China to 32 percent at the end of last month from 20.5 percent a year earlier. The strategy paid off as Hong Kong’s Hang Seng Index, where many of the stocks are listed, has gained 6.5 percent year to date. Mehta’s Asia Ex-Japan Equity Fund has returned 15 percent, beating 88 percent of its peers.
“People were very pessimistic and remain pessimistic on China,” the 49-year-old Mehta said in an interview at the Fullerton Hotel in Singapore after meeting with clients. “That’s usually the best time to buy.”
Mehta jumped into the market early this year when economic growth slowed and a surprise devaluation of the yuan rattled investors. While Asia’s largest economy has since stabilized and the hard landing anticipated by many hasn’t occurred, many investors remain cautious about the outlook. Gross domestic product rose 6.7 percent in the third quarter, data released yesterday showed, the same as in the previous two periods and in line with analysts’ forecasts.
The country’s technology stocks “remain hot” and the worst is over for Macau casinos, Mehta said before China detained 18 Crown Resorts Ltd. employees. He said he’s unlikely to increase his Chinese holdings further as he’s now heavily invested there. Mehta said he also bought Weibo Corp. and Beijing Capital International Airport Co. amid the selloff, as well as cyclical stocks in property, insurance, oil, steel and cement.
After falling 36 percent from a high in April 2015 to a low on Feb. 12, the Hang Seng Index has since rallied 28 percent. The Hang Seng China Enterprises Index of mainland companies listed in Hong Kong is up 29 percent from this year’s low, also on Feb. 12.
More than a quarter century of living through several financial and economic rises has helped Mehta, who was chief investment officer at Lloyd George Management from 1998 to 2007, and his co-fund manager,  Cho Yu Kooi, refine their approach, he said.
In the core part of his portfolio, which makes up 75 to 80 percent of the fund, the aim is to own long-term sustainable growth businesses with good cash flows and high and sustainable margins, said Mehta. “Patience is an important ingredient. If we don’t make a mistake, we would like to own the business for three to five years or longer.”
The rest of the portfolio is allocated to cyclical stocks, where Mehta said he tries to adopt a contrarian approach to risk perceptions. He looks for companies with low valuations and little or no debt. “If we’re wrong on the cyclical risks when we buy the stocks, they are trading at such low multiples that the risk of losses, although real, is not extreme.”
His winning picks haven’t been restricted to China, with data compiled by Bloomberg showing him starting to buy Thai Beverage Pcl in the first quarter. Mehta said in July that he bought the brewer, whose share price has surged 34 percent since the end of March, because of its decent cash flows and restructuring prospects that could benefit minority shareholders.
Mehta started adding to his stake in Sands China Ltd. amid a slump in gambling driven by President Xi Jinping’s crackdown on graft. JO Hambro owns 7.4 million shares in the casino operator controlled by billionaire Sheldon Adelson from 466,000 a year ago, according to data compiled by Bloomberg.
Macau reported its first monthly gain in gaming revenue since 2014 in August and Sands China is up 30 percent this year, the third-best performance of the six companies on the Bloomberg Intelligence Macau Gaming Index.
The Macau casinos have become more focused on recreational gamblers and are broadening their appeal to families after the anti-corruption campaign deterred high-rollers, said Mehta. “We picked Sands China over other casinos because the company’s management is very experienced. Their balance sheet is decent and the dividends are high.”
While acknowledging risks such as the buildup of debt and deflationary tendencies in China, Mehta says things are now starting to look up for the world’s largest economy.
“I’m not saying China is growing fast and furious and back to the glory days,” he said. “But relative from where we were last year, things are better.” Bloomberg