The dominant player in a secular growth market

There are 125 million people joining the Chinese middle class every year, and this supports long term investment opportunities. Adrian Warner, Managing Director and CIO of Avenir Capital discusses one of these when we asked him to share one of his most compelling investment ideas.

In this short transcripted video, he tells us that: “The amount of passenger travel in China has grown about 12% per year over the last 10 years. So the size of that market has tripled, and we think that will go up by about 3 or 4 times again in the next 10 or 12 years”. Adrian shares a listed stock that has the monopolisitic position in this secular growth market.

Edited transcript 

“One of the developments that we think is really interesting is the growth of the middle class in China. The middle class in China is expanding at a more rapid rate than the world has ever witnessed throughout its history.

And there is about 500 million people that would broadly qualify to be in the Chinese economic middle class to date. There are a 125 million additional people joining the Chinese middle class every year, which is quite an extraordinary number.

Over the next 10 or 12 years there will be something like 850 million new people going into that economic middle class, becoming more affluent, which is quite an extraordinary number when you think about 850 million compared to even the population of the US at about 350 or 360 million.

So quite an extraordinary number and when people become more affluent, not only do they spend more, their spending patterns change. And so different parts of the economy can benefit disproportionately from this change.

And we think one area that has historically benefited very disproportionately is air travel. And we think that the long-term growth for air travel in China is tremendous.

At the moment, there's about 0.4 flights taken for every person in China compared to more developed markets like Australia, like the US where it's more like 2 and a half flights per person. So we think there's going to be a lot of growth as there's 850 million people come into the economic middle class. China is building about 9 to 10 new airports a year. They've done it for the last 5 years and beyond and they'll do it for the next 5 to 10 years.

According to Boeing there are 100 million new first time flyers in Asia every year. 100 million new first time travellers and a big chunk of those are in China.

So we are seeing this huge secular growth in air travel. The Chinese, the amount of passenger travel in China has grown about 12% per year over the last 10 years, so the size of that market has tripled. We think that will go up by about 3 or 4 times again in the next 10 or 12 years. So we see this very strong secular growth story in Chinese air travel which we think is very attractive.

A monopolistic player in a secular growth market

And one way we think is quite interesting to capture the benefits of that growth is a company called TravelSky (0696.HK).

TravelSky is a Chinese company, it's listed in Hong Kong. It provides the IT infrastructure on which the airlines and the travel agents and the like book their flights, and manage the inventory of seats amongst those airlines. So every time someone books a flight in China, it goes through TravelSky's IT system and they benefit from that organic growth that we expect to see.

They've got about 95% market share so it's a monopoly like situation. We like situations with very few competitors. It’s a very strong organic growth story. It's partly owned by the 13 major airlines in China, it's party owned by the Chinese government so we have a quite a nice alignment of interests with their major customer base and the Chinese government which will help from a regulatory point of view.

And they charge about 6 Renminbi per ticket. So every time someone buys a flight in China, TravelSky makes 6 Renminbi, which is very low compared to the price of the ticket and very low compared to other similar companies globally. So we think they're starting from a very attractive position.

The share price has come down about 36% so far this year. So we think it offers an attractive way to be exposed to this secular growth story in Chinese air travel, which we think will come from the economic growth of the country. And it's got a monopoly like position which we really like, and at the moment it's trading at about 16 times forward P/E. It's got quite a bit of cash on the balance sheets, if you net the cash off it's more like 13 or 14 times P/E.

And that compares to a company like Amadeus (AMS.MC), which is the global leader, a European company in a very similar space and they're trading at about 26 times P/E. So we just think it's quite an attractive way to get exposed to a very strong quite predictable growth dynamic in the Chinese market”.

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Avenir Capital is an Australian based investment manager, specialising in value-oriented global equity investments. Find out more here