Despite the delay in A-shares inclusion into MSCI, selected companies in the space already offer value.
‘Yet, we remain highly selective in the space trying to focus on leading companies which generate high return on invested capital and which trade at a fair valuation. Zhengzhou Yutong Bus is such an example,’ said Schaffner.
He said the company is producing electric buses, which have higher entrance barriers than a traditional bus industry.
‘The air quality is not very good in China and as a result the government is encouraging the development of the electric buses production,’ said Schaffner.
Through the lens
The second biggest sector in the fund at the moment is IT. However such giants like a search engine Baidu are not among the biggest exposures.
Schaffner said a company Sunny Optical, which produces lenses, is set to benefit from the next hot feature in the smartphones – dual cameras.
‘Some Chinese brands have already launched phones with dual cameras and we believe that adoption rate will rise in the second half of the year.'
'Sunny Optical will benefit from the trend as it produces lenses and camera modules for the leading Chinese mobile phone brands’
The fund manager also sees a growth potential for the company in the automobile industry.
‘If you have a back camera on your car, it the lenses are probably made by Sunny Optical. Change in regulation in the US for mandatory rear cameras and adoption of autonomous car driving systems will drive demand.’
‘The entry barriers to the car-parts supply chain is quite high, as you need several years to obtain necessary strict certifications for production,’ Schaffner said.
Another big sectoral exposure in the fund is financials. However the fund manager says there is much more to it than only Chinese national banks.
The sectors the fund manager invests in include property and insurance.
‘The real estate market is turning around, especially in Tier1 and Tier 2 cities, yet valuations for many companies are still cheap.'
'We invest in market leaders with strong management and high return on capital, for instance China Overseas Land and China Vanke,’ said Schaffner.
He added that the insurance companies are a good long-term growth story, as insurance penetration in China is still low both for life and property types of insurance.