Mark Webber, Lead Portfolio Manager of the Scout Emerging Markets Fund for Scout Investments, says he has long seen an opportunity in Haier Electronics Group Co., Ltd. (HKG:1169) that the market wasn’t recognizing. He says Haier is a leading home appliance company in China, but also has a large logistics business.
“They have really deep logistics coverage of interior China — down to small towns, villages, places in interior China where there’s just not very much competition at all,” Webber says. “What attracted us to them is that logistics operation.”
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Webber says Haier has been one of his largest positions since his fund’s inception. When he first researched the company, he says that in valuation terms, investors were paying for the appliance business alone. Meanwhile, companies like Amazon and Alibaba needed to distribute products in interior China, and Haier was building a valuable logistics network which offered attractive growth at very high returns on capital and, again, very competitively advantaged.
“This company has been building that distribution network for two decades. It’s going to be very hard for anybody else to duplicate it in any kind of reasonable time frame,” Webber says. “We saw a company that we thought had durable competitive advantages and excellent growth opportunities, trading at a shockingly low free cash flow multiple when you thought about where the business’ growth was coming from. So that’s what attracted us to it.”