- Michael Oh, manager of the Matthews Asia Innovators Fund, shared 3 firms he likes over 5-10 years.
- Oh also broke down for Insider the 4 pillars of his investing strategy.
- He highlighted some of the structural trends that will fuel growth in Asia going forward.
- Visit the Business section of Insider for more stories.
Benchmark indexes tracking Asian markets are inefficient, according to Michael Oh. With their allocations to big banks and industrials firms, the indices look backwards and don’t generate the returns a future-focused strategy can, the manager of the Matthews Asia Innovators Fund told Insider on Monday.
To be sure, the same is said of Western indices. Talk with a US-focused growth manager and — as expected of a stock picker — they’re likely to rail against the concept of buying the index.
But Oh said that this is more so the case in emerging markets like Asia. Further, the disparity in opportunity going forward between index and growth investing is also greater in Asian markets, Oh argues.
Just look at the macro structural trends. Oh cites statistics like the fact that by 2030, China’s population is set to surpass the population of the United States and Europe combined. Or that China’s middle class, with its disposable income, is also growing rapidly. Or that Asia is producing more doctoral graduates and engineers than its Western counterparts. And that Asian firms have access to one of the world’s largest venture capital markets.
He said the current innovation timeline in Asia is comparable to the 1970s and 1980s in the US, when companies like Nike and Microsoft saw big growth.
“I absolutely believe that we’re still in the early innings of the innovation-driven growth era in Asia,” Oh said.
There may in fact be no one more qualified to weigh in on the topic than Oh. Over the last 10 years, Oh’s fund is up nearly 200%, beating 99% of similar funds.
But how can investors capitalize on these trends like Oh has? Earlier this week, he talked to us about the strategy he employs to identify and take advantage of the growth opportunities in the region.
4-part model for assessing companies
When analyzing firms, Oh said he said he uses a model to evaluate a company based on four categories. The first is secular growth opportunity.
In addition to the macro trends above, Oh tries to identify more specific structural growth opportunities in individual countries. For example, half of India’s population is unbanked, Oh said, which is a massive opportunity for small banking services companies there.
When they are interested in investing in a company, Oh and his team also visit a firm’s headquarters and factories to get a feel for management, and interview suppliers and customers.
Second, Oh focuses on innovation. To measure innovativeness, he looks at things like research and development spending, sales generated from new products, the margins on these sales, organizational structure, and employee incentives.
Then Oh looks at quality, meaning a firm’s corporate governance structure, the sustainability of its business model, and its management’s trustworthiness and spending history.
And most importantly, Oh said, is a firm’s valuation and potential to grow market cap, by looking at its total addressable market. All of the above three factors may be impressive, he said, but if a firm is valued too highly, it may not be a good investment.
3 stocks poised to see explosive growth over the next 5-10 years
Now, some of the process that Oh outlines above might be admittedly more difficult for individual investors to carry out than it is for a firm that managers more than $30 billion. So we asked him for examples of companies that have met the above criteria and that he sees having strong growth potential over the next 5-10 years.
He shared three with us. The first is Bilibili (BILI), which trades on the Nasdaq exchange. A video-sharing platform, Oh said he believes it could be the next YouTube in China.
He said Gen Z’s appetite for sharing and consuming user-created content relative to older generations is a positive tailwind for the firm. He also said the middle class’s growing disposable income is allowing them more free time to spend on platforms like Bilibili.
“Even though at $10 billion the company didn’t have earnings and looked very expensive by using the traditional metrics like price-to-book or even price-to-sales, because we believe the user base that they have was kind of an intangible asset,” Oh said.
Though it has seen appreciation since his fund bought in, he said his team decided at their December meeting to keep Bilibili as a holding because they think it still has a long way to go from its current market cap above $47 billion.
Second, Oh said he likes Sea (SE), an online gaming and e-commerce platform that trades on the New York Stock Exchange.
Oh said he thinks that its popularity during the pandemic won’t dwindle going forward.
“Even if this pandemic is over, I still can see very strong growth ahead of them in those two areas,” he said, referring to gaming and e-commerce. “Recently they just got a license for digital banking, so I think that could be another option that this company still has.”
Finally, Oh is bullish on Wuxi Biologics (2269), a healthcare technology company that trades on the Hong Kong Stock Exchange.
He said that because China’s total addressable market is the only one outside of the US that provides profit incentives large enough to invest in creating new drugs, there are strong growth prospects for biopharma and biotech firms in the country.
Wuxi Biologics stands to benefit from that growth, he said, because they provide drug-making biopharma firms with resources they don’t have.
“[Biopharma and biotech companies] don’t have the research labs or manufacturing facilities. This is where Wuxi Bio comes in,” Oh said. “They provide research outsourcing and some of the initial manufacturing. So this is one of the biggest beneficiaries of this biotech boom that we’re seeing in China.”
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