China Market

Lion-OCBC Securities China Leaders ETF (SGX:YYY) – Quick Analysis and Thoughts

Calvin Lo

Another brand new ETF focused on the China market will be coming online on the Singapore Exchange (SGX) this coming Monday 2nd August 2021. Lion Global Investors and OCBC Securities have jointly created the China Leaders ETF which tracks the Hang Seng Stock Connect China 80 Index. This is a pretty new index only launched on 3rd May 2021.

Source: OCBC Securities website

Watch my video below reviewing this ETF:

Hang Seng Stock Connect China 80 Index

This index tracks the performance of the 80 largest Chinese companies by market capitalisation that are eligible for the northbound and/or southbound Stock Connect scheme. To find out more about the index methodology, visit the Hang Seng Indexes website.

The Good

  • Size and growth of China’s economy: China is the 2nd largest economy, 2nd largest stock market in the world, and has one of the fastest GDP growth rates among large economies. Besides reasons to be optimistic about China as a country, there are also many things about this ETF to like.
  • Targeted exposure to Chinese companies listed in HK and mainland China: US-listed American Depository Receipts (ADR) are excluded, allowing investors to sidestep the risk of delisting from US exchanges as US-China tensions continue to simmer.
  • Dividend-paying: The fund manager intends to pay distributions since many of the constituent companies pay dividends. However, the annual distribution rate has not yet been determined. By my own estimates based on the dividend yields of the top 10 constituents, the distribution yield might be around 1.5-2.0%.
  • Diversification: China A-shares have shown pretty low correlations with US and Japan equities. So investors can potentially diversify their portfolio if they are already heavy on US or Japan exposure. Also, exposure to any particular stock is capped at 8% to reduce concentration risk.
  • Well-balanced sector exposure: The top 10 constituents are well spread out between Financials (29.5%), Technology (17.3%), Consumer Staples (14.4%) and Industrials (10.4%). In addition, exposure to any one industry is capped at 40%.
  • Accessibility: This ETF makes it easier for Singapore-based investors to gain exposure to Chinese equities, due to its low unit price ($2/share) and low minimum board lot size (10 units). This ETF is also listed as an Excluded Investment Product (EIP) so no additional qualification is required to invest. Also, investors can use funds from their Supplementary Retirement Scheme (SRS) to invest in this ETF.
  • Currency: The ETF base currency is renminbi (RMB), which is on a gradual appreciation path against SGD. US especially has always complained that RMB is undervalued providing Chinese companies a distinct advantage in global trade, so I think RMB is unlikely to face downward pressure. China is also keen to increase RMB use in international transactions so that should be positive for the currency. USD on the other hand might continue to slide the longer the Fed feats tapering and interest rate hikes.

The Bad

  • Excludes important Chinese companies with main listing in the US: Since US-listed ADRs are excluded from this ETF, investors might be missing out on growth from these stocks. Some notable names missing from the ETF roster are Alibaba, JD.com, Baidu, Pinduoduo, Nio. That said, if these companies lost more of their free float shares in HK or mainland China, they might be included into this ETF in future.
  • Lack of real historical price performance data: Since this index was only launched on 3rd May 2021, any historical price performance of the index is only hypothetical and obtained through back-testing.
  • Underperformed the S&P 500: The Hang Seng Stock Connect China 80 index returned +56% in the past 5 years, which significantly lags the S&P 500 return of +101% over the same period. Investing into this ETF would be on the basis that Chinese companies are undervalued vs US counterparts with the view that in the long-term, valuations might catch up to US peers.
  • Distribution payout unknown: Investing into this ETF purely for its dividend isn’t a good idea, since we don’t even know roughly how much the dividend yield might be. The fund manager didn’t even provide an estimate.

The Ugly

  • Regulatory crackdown: The biggest risk and wildcard to Chinese stocks as a whole is whether the regulatory crackdown will continue and how hard Chinese authorities will come down on Chinese companies. So far, the crackdown has been centred around breaking up monopolies, improving data security and privacy safeguards, and reducing financial risk. The ban on after-hours tutoring seems to be a separate issue for now aimed at arresting China’s declining birth rates. Nobody knows for sure what the Chinese government will do next, but things could turn ugly and investors need to be prepared.

Closing Thoughts

At least in the short-term, Chinese stocks are in a clear downtrend because there’s still a lot of fear and uncertainty about what the Chinese government will do next. So although valuations are attractive for many Chinese companies and this appears to be a good entry point, Chinese stocks are likely to continue to trend downwards for some time until the situation clearly and sustainably improves.

Don’t expect to make a quick buck by buying low, since low can definitely go lower. If you choose to invest in China through this ETF or other vehicles, you must be prepared to stick it out for at least a decade. If you do decide to pull the trigger, you must keep a close eye for signs of growth stalling in China or its companies.

Personally, I’m taking a wait and see approach on this ETF. I see no reason to rush to buy now. I would prefer to see a sustained reversal in price trend and overall sentiment towards Chinese stocks improve. Also, I’m already invested in the Lion-OCBC Securities Hang Seng Tech ETF (SGX:HST) so investing into this ETF might not offer me as much of a diversification benefit.

Since I have a long runway until retirement, HST can potentially provide higher growth to grow my capital. As I get closer to retirement, I might consider transitioning my China exposure into YYY instead. For now, I will reduce my risk through position sizing, only allocating 5-10% of my portfolio to China exposure.

This ETF is definitely an interesting one to watch as China continues to open up its capital markets and tries to be more self-reliant. So, I will be watching this ETF closely after start of trading.

Disclaimer: This is not financial advice. I am not professional financial advisor nor do I work in the finance industry. Anything I write here is purely my personal opinion. Please do your own research and due diligence before investing into anything. All investments come with associated risks. Best to consult a financial advisor if you’re still unsure.

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