Focus on China's Future Winners Early in their Cycle

Our aim is to identify outlier companies, beyond the widely owned mega-cap stocks, that potentially offer durable growth that can compound over multiple years, accelerating growth from a new product or industry cycle, or special situation opportunities, as we look beyond short-term challenges to the longer-term prospects of the company. Simply put, we aim to invest in China's future winners early in their cycle.

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As a result of this bottom-up stock selection, the fund's largest overweight positions are in the industrials and business services and consumer discretionary sectors. Conversely, the biggest sector underweights are in financials and communication services.

Industrials and Business Services

We are significantly overweight industrials and business services with positions across a wide variety of areas. Here, we have unearthed what we believe to be good business models and/or opportunities in industries with strong growth tailwinds.

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• We bought Shenzhen Megmeet Electrical, a supplier of industrial power sources, industrial automation products, and electric control products for smart home appliances. The firm has accelerated its production capacity expansion, R&D, and team building with the aim of realizing its 2025 revenue target of RMB 12 billion. We believe Megmeet new product launches are the start of a new chapter of long-term and steady growth for the company.
• We bought Arctech Solar, which we view as a play on the solar theme as well as a penetration story. The company is a market leader in its field in China and one of the world's leading manufacturers and solution providers of solar tracking and racking systems. In our view, its differentiated technology and pricing power also gives the company lots of room to increase its penetration in the solar space.
• We initiated a position in Yangzijiang Shipbuilding. We believe this is a value play on a global demand recovery; both shipping orders as well as the current idle fleet ratio are at record lows since the global financial crisis (GFC). Combined with a record-high freight rate, shipping lines could potentially accelerate their replacement processes and start a big order upswing cycle. Meanwhile, we believe the supply side has also improved tremendously after a decade-long consolidation process. With both strong demand and a disciplined supply, we could potentially be looking at one of the longest upswings since the GFC.

Consumer Discretionary

The portfolio has a sizable absolute position in the consumer discretionary sector and is overweight versus the benchmark. We have exposure to companies that we think are well placed to gain from powerful long-term themes, such as educational services and increasing household disposable income. We found some compelling investment opportunities in this space.

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• We bought Autel Intelligent Technology as a play on China's automotive aftermarket, which in our view has significant growth potential. The company is a leading supplier in China's high-profitability automotive intelligent diagnosis and detection industry. It launched a new product last year with a higher price point that is proving very popular, and further new product launches with large opportunity sets are anticipated. We also expect increased software revenue given requirements for updates post purchase.
• We own a large position in JS Global Lifestyle, a leading producer of small household appliances, and continued to add to our exposure over the quarter. We believe that new product cycles, combined with deleveraging, can drive gains following several years of modest growth.
• In contrast, we trimmed our position in Bafang Electric Suzhou, which is a leading manufacturer and distributor of electric bicycle driving components. During the quarter, we took advantage of share price strength to manage our exposure; however, we still find the business attractive long term given increasing penetration of e-bikes globally.