Lin Bo, a top-performing Chinese fund manager, has outpaced 97% of his peers in 2024 by focusing his investments on state-owned enterprises (SOEs), particularly those listed in Hong Kong. His Fuying Gunxueqiu No. 1 Fund has surged 66% this year, significantly outperforming China’s benchmark CSI 300 Index, which has risen by 14% over the same period. Lin attributes his success to the low valuations of state-owned companies, which he believes have substantial upside potential.
Why It’s Happening:
Undervalued State-Owned Firms: Lin compares the valuation of Chinese state-owned enterprises to property prices in the year 2000, describing them as “outrageously low” and highlighting their “large upside potential.” This perception of undervaluation has led him to focus heavily on SOEs, particularly those listed in Hong Kong, which he believes are poised for significant price appreciation.
Targeted Government Support: Lin’s fund has benefitted from Beijing’s stimulus measures aimed at stabilizing the Chinese economy, particularly in the aftermath of the global economic slowdown. State-owned enterprises have been a major beneficiary of these policies, with the government providing high-quality asset injections and valuation-boosting guidelines, which have further enhanced their appeal to investors.
Performance and Strategy:
Lin’s Fuying Gunxueqiu No. 1 Fund has achieved a 66% return in 2024, putting it in the top 3% of 1,203 private fund products over the past 12 months. This is a notable achievement given the volatile nature of China’s equity markets in recent years.
The fund’s strong performance is linked to its heavy exposure to Hong Kong-listed state-owned enterprises. These companies have been a focal point due to their relative undervaluation and the targeted government support they receive, which includes measures aimed at improving their valuations.
Market Context:
Strong Performance of SOEs: The Hang Seng China Central SOEs Index—a gauge tracking Chinese state-owned enterprises—has rallied by 18% year-to-date, outperforming the Hang Seng Index, which is up by 15%. Despite these gains, the SOE index trades at a much lower one-year forward price-to-earnings (P/E) ratio of 6.1, compared to the main equity index’s 8.9, indicating further room for growth.
Positive Policy Environment: Lin’s optimism about state-owned firms is shared by other influential investors, such as Shanghai Banxia Investment Management Center, which has also concentrated its investments in state-owned enterprises. The Chinese government’s focus on stabilizing the property sector and promoting growth in state-owned sectors is seen as a key driver for further appreciation in SOE stocks.
Lin’s Outlook:
Lin predicts that the price-earnings multiples of state-owned companies will rise to around 15, up from their current low levels. He believes that the upward trend in SOE stocks will continue, and the recent rally was just the beginning, accelerated by government policies.
While Lin does not favor any particular sector within the state-owned category, he points out that infrastructure firms and banks are currently “attractive” in terms of valuation, with H-share SOEs (those listed in Hong Kong) offering more upside potential than their A-share counterparts due to their significantly lower valuations.
Conclusion:
Lin Bo’s focus on state-owned enterprises has paid off handsomely in 2024, positioning his Fuying Gunxueqiu No. 1 Fund as one of the top-performing funds in China. His strategy is based on the belief that SOEs are undervalued, offering substantial potential for future growth, especially as government policies continue to support the sector. With state-owned companies benefiting from targeted government support and attractive valuations, Lin’s fund remains optimistic about the long-term prospects of this segment. As the Hang Seng China Central SOEs Index continues to outperform broader equity indices, investors may increasingly turn to SOEs for attractive returns in China’s evolving economic landscape.
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