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Summary: Edinburgh, Scotland-based hedge fund Martin Currie, with $19.1 billion in assets under management, including $2.5 billion in U.S. equity assets, offers many China and Asia-focused hedge funds, including, for example, Martin Currie China and Martin Currie Asia Pacific hedge funds. These two have returned 10%-11% annualized over the last ten years, significantly ahead of the 1.3% annualized return of the S&P 500. Five attractive buys from their portfolio of Chinese equities include China Lodging Group ADS (NASDAQ:HTHT), E-house Holdings Ltd. ADS (NYSE:EJ), Focus Media Holdings Ltd. (NASDAQ:FMCN), Perfect World Company Ltd. (NASDAQ:PWRD), and Mindray Medical Intl. Ltd. (NYSE:MR).
Martin Currie was founded as an investment management company in 1881 and incorporated as Martin Currie Ltd. in 1985. It serves institutions and individual investors through multiple global strategies from its Scottish headquarters and an office in New York City.
The fund holds a diversified portfolio of 163 positions, including 32 Chinese equities that account for $320 million of its portfolio. Its portfolio turnover is 50%, implying an average holding period of two years. The following summarizes its largest new buys and sells among its Chinese holdings based on the most recent SEC 13-F filing for the March 2011 quarter, and updated based on any 13-G filings since the end of the quarter:

Services sector: Buy China Lodging Group (HTHT), E-house Holdings (EJ) and Focus Media Holdings Ltd. (FMCN). Martin Currie dropped the following holdings:

  • its $19 million position in Ctrip.com International ADR (NASDAQ:CTRP), a China-based consolidator of hotel accommodations and airline tickets targeting individual business and leisure travelers;
  • its $6 million position in E-house Holdings Ltd. ADS (EJ), a provider of real estate agency, secondary real estate brokerage, consulting and information services for the Chinese market;
  • its $4 million position in Autochina Intl. Ltd. (NASDAQ:AUTC), a Chinese operator of 310 new and used commercial truck dealerships in the Hebei, Shanxi, Shandong and Henan provinces;
  • its $3 million position in China Lodging Group ADS (HTHT), an operator and franchisor of 438 lodging properties with 50,438 rooms in 65 cities in China;
  • $1 million from its $26 million position in Focus Media Holdings Ltd. (FMCN), a Chinese provider of audio-visual digital advertising through 131,006 flat-panel and 324,364 poster frame displays.

The position in CTRP was opened in the mid-$30s in early 2010, so the selling in the $40s last quarter was at a slight profit. CTRP trades at a high forward price-to-earnings (P/E) ratio of 28, near the top of its historic P/E range while earnings are projected to grow at only a nine percent annual rate from $1.26 in 2010 to $1.49 in the 2012 fiscal year. We believe the stock is fully valued based on current fundamentals, and the company faces significant competition limiting earnings growth going forward.

The position in EJ was opened in the high-teens in early 2010, so the selling out of this position in the last quarter in the low- to mid-teens is a high conviction sell by Martin Currie. However, the stock has been under significant pressure recently, dipping as low as below $8, as news from the Chinese property sector has continued to be negative, with homes sales and prices in both Beijing and Shanghai reporting steep declines this year. Of the eight analysts covering the company, four rate it a buy, three a hold, and only one a sell. Analyst price targets are in the mid-teens, a significant upside from current $8-$9 levels. The stock has $570 million, or over $7 in net cash available, and is trading at $8-$9. We consider it attractive and would buy it at these levels. The stock is also a favorite among leading hedge and mutual fund gurus, including SAC Capital Advisors LP, Royce & Associates LLC and Platinum Investment Management Ltd.

The position in HTHT was opened in the mid-teens in early 2010, so the selling in the low-$20s last quarter was profit taking. HTHT trades at a forward 20 P/E, at the bottom of its historic P/E range. Of the nine analysts covering the company, eight rate it at a buy / strong buy, and the remaining one rates it at a hold. Analyst price targets are in the mid-$20s, giving it a significant upside above current levels. The stock is also a favorite among leading hedge and mutual fund gurus, including Maverick Capital, SAC Capital Advisors LP, Royce & Associates LLC and Gotham Asset Management LLC.

The position in FMCN was opened in the mid-teens in early 2010, so the sale of only $1 million last quarter from its $26 million position, as the stock rocketed up to the $30s, is high conviction holding. FMCN trades at a forward 17 P/E, still in the lower third of its historic P/E range and well below its growth rate in the 25%-30% range, giving it an attractive PEG ratio of well below 1.0. Furthermore, fundamentally, the Chinese advertising market continues to be attractive as both domestic and global corporations seek ways to reach Chinese customers out of their home. The company continues to perform well, beating analyst revenue and earnings estimates for the most recent March 2011 quarter. Of the eleven analysts covering the company nine rate it a buy / strong buy and the remaining two rate it a hold. Analyst price targets are in the $40-$45 range, a significant upside from current levels. We would start accumulating at these levels, and buy more if the price dips once again near $25, testing the lows of last week.

Technology sector: Buy Perfect World Co. Ltd. (PWRD).
Martin Currie dropped the following holdings:
  • Martin Currie cut $12 million from its $36 million position in Perfect World Co. Ltd (PWRD), a Chinese developer of 3-D online games;
  • it cut $5 million from its $22 million position in Sina Corp. (NASDAQ:SINA), a Chinese internet portal offering media content and services for China and global Chinese communities;
  • it cut $3 million from its $6 million position in Vanceinfo Tech ADS (NYSE:VIT), a Chinese provider of outsourced software research and development, maintenance, testing and IT services.

The position in PWRD was opened in the $40 range in early 2010, so the selling of a portion in the low-$20s last quarter was at a significant loss; but Martin Currie retains three-quarters of their position, which is indicative of their still having faith in this position. PWRD trades at a forward 6 P/E, at the bottom of its historic P/E range, while revenue and earnings are projected to be flat for 2011 but then resume growth at 15% growth for fiscal year 2012. Furthermore, the company has $270 million or $5.40 in net cash available, so adjusted for cash the stock trades at a very attractive forward P/E of just over four. Of the 19 analysts covering the company, eleven rate it a buy / strong buy, six at a hold and only two at underperform. We would be buyers at this level.

Healthcare sector: Buy Mindray Medical Intl. Ltd. (MR). Martin Currie cut $6 million of its $52 million position in Mindray Medical Intl. Ltd. (MR), a Chinese developer of patient monitoring, life support and in-vitro diagnostic products and medical imaging systems. The position in MR was opened in the mid-$30s in early 2010, so the cutting of that position in the last quarter was at a loss; but Martin Currie still maintains a large $46 million position in MR that is indicative of their bullishness on this stock.
MR trades at a forward 15 P/E, in the bottom one-third of its historic P/E range. Of the 21 analysts covering the stock, twelve rate it a buy / strong buy, six a hold, and only one rates it underperform. Analyst targets for the stock are in the mid-$30s to $40, a significant upside from current $27 levels. Long-term, the prospects are good for the company as China faces an aging population, and the government is keen on spending more on healthcare going forward. MR is the largest provider of medical equipment to Chinese hospitals, and should continue growing at high double-digit rates. We believe that the stock is attractively priced at current levels. The stock is also a favorite among leading hedge and mutual fund gurus, including SAC Capital Advisors LP, Eton Park Capital Management LP and Joho Capital.
Table
Company
Ticker
Action
Market Value at end of March 2011 Quarter
Change in Value from Prior Quarter
Percent of Chinese Portfolio
Percent Shares Owned
New 13G 5% Ownership Filing Since End of March 2011 Quarter
None
Top Buys and Sells
Ctrip.com Intl. Ltd.
CTRP
Drop
$ 0 million
($ 19) million
0.00%
0.00%
Perfect World Co. Ltd.
PWRD
Cut
$ 24 million
($ 12) million
7.47%
0.62%
E House China Holdings Ltd.
EJ
Drop
$ 0 million
($ 6) million
0.00%
0.00%
Mindray Medical Intl. Ltd.
MR
Cut
$ 46 million
($ 6) million
14.35%
2.01%
Sina Corp.
SINA
Cut
$ 17 million
($ 5) million
5.32%
0.29%
Autochina Intl. Ltd.
AUTC
Drop
$ 0 million
($ 4) million
0.00%
0.00%
Daqo New Energy Corp.
DQ
New
$ 4 million
$ 4 million
1.14%
0.27%
JA Solar Holdings Co. Ltd.
JASO
Add
$ 13 million
$ 3 million
4.18%
1.38%
VanceInfo Technologies Inc.
VIT
Cut
$ 3 million
($ 3) million
1.03%
0.38%
China Lodging Group Ltd.
HTHT
Drop
$ 0 million
($ 3) million
0.00%
0.00%
Netease.com Inc.
NTES
Cut
$ 1 million
($ 2) million
0.42%
0.03%
ATA Inc.
ATAI
Cut
$ 2 million
($ 2) million
0.75%
0.59%
China New Borun Corp.
BORN
Add
$ 5 million
$ 2 million
1.44%
3.84%
China Biologic Products Inc.
CBPO
Cut
$ 1 million
($ 1) million
0.31%
0.40%
Spreadtrum
SPRD
Add
$ 6 million
$ 1 million
1.78%
0.30%
Top Holdings
Wuxi Pharmatech
WX
Same
$ 66 million
$ 66 million
20.65%
0.68%
Focus Media Holdings Ltd.
FMCN
Cut
$ 25 million
($ 1) million
8.11%
0.12%
Cninsure Inc.
CISG
Add
$ 23 million
$ 1 million
7.16%
0.14%
Autonavi Hldgs. Ltd.
AMAP
Cut
$ 11 million
($ 1) million
3.50%
0.42%
Hollysys Automation Tech.
HOLI
Cut
$ 12 million
($ 1) million
3.46%
2.01%
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Source: 5 Buys From Martin Currie's China Focused Hedge Fund