A hedge-fund manager who made more than 300 percent on one stock says her next big win is a Chinese maker of swimming pool flamingos and bouncy castles.
After a two-year bet that paid off with GDS Holdings Ltd., a Beijing-based operator of data centers, Jen Lai is now doubling down on Hong Kong-listed Bestway Global Holding Inc. The Dalton Investments LLC portfolio manager has bought more of the shares this year after first discovering the stock in the second half of 2018.
Bestway fits Lai’s typical picks: a stock with little or no analyst coverage, valued at no more than $2 billion, trading at 20 times price-to-earnings or less, and with 20 percent annual revenue and profit growth. Her firm plans to launch a long-only product that focuses on Chinese companies with similar characteristics.
“These are growing companies that are taking share in good industries,” Lai said in an interview from Santa Monica, California. “They are run by good entrepreneurs who are nimble, adaptive, and have been good long-term stewards of capital.”
Bestway’s profit may increase by about 22 percent this year on adjusted basis and another 18 percent in 2020, according to Crosby Securities Ltd. With a market value of HK$3.6 billion ($459 million), average daily volume this year is about 720,000 shares. That compares to the 11 million shares that typically change hands for the smallest stock on the Hang Seng Index — AAC Technologies Holdings Inc.
Bestway traded at 11 times reported earnings and was down 0.6 percent this year through Monday, far underperforming the broader market. The stock added as much as 4.7 percent Tuesday afternoon in Hong Kong and volume was about 1.6 times the full-day average of the past three months.
In one of Lai’s best picks, GDS has returned over four times over two years — a stock Lai discovered when it was still trading below its initial public offering price with little analyst coverage. The firm has won share in a fast-growing market and is now covered by 10 brokerages tracked by Bloomberg. The long-only portion of Lai’s Greater China long/short strategy fund has outperformed the MSCI China Index by an average 20 percentage points a year in the past four years, according to the firm.
Smaller companies, under fewer watchful eyes from analysts and investors, aren’t without risks. Questions about corporate governance have triggered roller-coaster price swings in some stocks, at times dragging down other small caps as investors rushed for the exit. Earnings also tend to be less stable than larger, more established companies.
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Lai is keeping her China exposure at much higher levels compared to historical average, she said, without specifying the level. The government’s supportive policies including tax cuts, relatively inexpensive valuations, as well as a possible trade war resolution will be able to power further stock gains, she said.
Among Lai’s other picks are wealth management firm Noah Holdings Ltd. and Chinasoft International Ltd., a winner in the country’s digitalization push. Her other trading themes and ideas include:
- Smart manufacturing and automation: Han’s Laser Technology Industry Group Co.
- Leisure and lifestyle: GreenTree Hospitality Group Ltd.
- Health and wellness: China Biologic Products Holdings Inc.
“It’s somewhat a bull case for China overall,” said Lai. “China is going to be the largest economy in the world in the next 10 years, so as a long-term investor, you really can’t afford not to be invested in China.”