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How One Hedge Fund Ignored The China Bears And Made A 65% Gain
October 19th, 2017 | 09:28 AM | 955 views
CHINA
Betting against the short-sellers helped Gloria Lu’s fledgling hedge fund establish itself among Asia’s biggest stars of 2017.
Parantoux Capital’s fund, which manages about $55 million, returned 65 percent this year through September on investments including hardware company AAC Technologies Holdings Inc., which plunged in the wake of a short-seller report in May, said Lu, a Hong Kong-based founding partner. Going long on property developers China Evergrande Group and Sunac China Holdings Ltd. -- whose shares have soared sixfold this year -- also paid off for the fund, which wagers on rising and falling stocks globally.
Lu’s Parantoux is one of China’s homegrown hedge funds profiting from taking the opposite view of bears who are betting on a hard landing for Asia’s biggest economy, a credit crisis and the bursting of a property bubble. Soaring stocks in China and Hong Kong have helped equity hedge funds in the Greater China region climb 24 percent this year on average, almost triple the return of global peers, according to Singapore-based Eurekahedge Pte. Parantoux is among the five best-performing Asia-based hedge funds.
AAC, a Shenzhen-based supplier of miniature speakers and microphones for smartphones including those made by Apple Inc., could see its share price double in a year, said Lu, citing its heavy investment in research as well as expansion into mobile camera lens making.
"It is the strongest manufacturer in the smartphone supply chain," she said in an interview. "It’s very much a deep technology-driven company. But obviously the market didn’t see that."
AAC’s share price plunged nearly 26 percent in the week after shortseller Gotham City Research on May 11 questioned its accounting. Parantoux started buying after the shares dropped below HK$100, until they were suspended from trading on May 18, Lu said.
The stock has jumped 70 percent to above HK$140 a share since trading resumed June 5, after rival short-focused research firm Anonymous Analytics called Gotham’s report "misleading," and AAC obtained a $1.5 billion credit line and announced it would consider a share buyback. It remains one of Parantoux’s three largest holdings, Lu said. Short interest in AAC spiked earlier this year to 7.6 percent of free float before falling to 1.3 percent, according to data from IHS Markit Ltd.
Lu headed global equities at China Renaissance Group, known for advising Chinese technology companies on fundraising including initial public offerings, mergers and acquisitions. Its clients included e-commerce website JD.com and car-hailing service Didi Chuxing. She founded Parantoux last year with China Renaissance colleague and former JPMorgan Chase & Co. technology investment banker Diao Yang.
Parantoux’s hedge fund started trading on Oct. 10, 2016, focusing on technology and new economy stocks, such as online consumption and travel companies, electric carmakers and their suppliers, she said.
On Chinese property stocks, Lu said investors wary of further government curbs meant to cool the market have undervalued and are underweight such companies. Parantoux this year bought shares in Evergrande and Sunac, which were among the the most popular bearish bets on the Hong Kong stock exchange. Outstanding short interest shot above 20 percent of freely traded shares for Evergrande and 15 percent for Sunac earlier this year, according to data from IHS Markit, before subsiding amid a relentless share rally. Evergrande and Sunac shares are both up more than 500 percent in 2017.
"People are still too affected by the policy noises rather than looking into the companies themselves," Lu said. "It’s an easy dollar for me to make."
Investors looking at Evergrande’s balance sheet might be alarmed by its high leverage, but Parantoux sees a company that is shifting its focus to profitability from scale, Lu said. The company is paying back loans and buying back perpetual bonds to reduce leverage, she said. Sunac has been favored by mainland Chinese investors, who can now buy Hong Kong-listed stocks through exchange links. Parantoux is also encouraged by a declining inventory of unsold homes and falling interest rates on debt at property developers, Lu said.
Parantoux also advises companies on issues such as private capital raising and where to seek public listing of their shares. Its hedge fund can invest up to 20 percent of assets in one of its share classes in private deals, Lu said. In June, it invested in RYB Education Inc., a Chinese operator of kindergartens and pre-schools, at a valuation 20 percent cheaper than its September initial public offering, she said. Its share price has surged 55 percent.
In the technology industry, Lu favors hardware companies this year over Internet giants such as Facebook Inc., Amazon.com Inc., saying they’ll perform better at this stage in the market cycle. The fund owns shares in Nvidia Corp., which this month said it built a powerful new computer than can turn semi-autonomous cars into fully driverless ones and has seen a 85 percent share price rally this year.
Source:
courtesy of BLOOMBERG
by Bei Hu
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