Buffett Acolyte Zhao Returns to China Stocks

Zhao Danyang, the Chinese investor who won a charity lunch with billionaire Warren Buffett in 2008, led his hedge funds to post returns three times more than their Asian peers this year by shifting assets back to Chinese stocks.

Zhao’s Hong Kong-based Pureheart Capital Asia Ltd. has more than 80 percent of its $217 million in Chinese stocks traded in Hong Kong, Singapore, the U.S. and at home from 50 percent at the start of 2013, said Jerrie Huang, its business development manager. The $162 million Pure Heart Value Investment Fund returned 24 percent this year through July, Huang said. The Eurekahedge Asian Hedge Fund Index rose 8 percent in the first seven months.

Pureheart is returning to Chinese stocks after six years of corrections cut their valuation close to historical lows, Huang said. It decided in January 2008 to liquidate all five funds that specialized in yuan shares, with combined assets of about $200 million, because it could no longer find any attractive investment opportunities, it said in statements then.

“There is no doubt that the China stock market is still in a bear market,” Pureheart said in a July newsletter to investors, adding it marks a “good time for optimists” like itself. “The falling share prices will provide a very good opportunity for us to buy the carefully selected shares at a bargain.”

The benchmark Shanghai Composite Index shed 61 percent of its value from late December 2007 through the end of last week and the Hang Seng China Enterprises Index tracking Chinese companies listed in the city fell 40 percent.

China Risks

The Shanghai gauge, valued at 48 times earnings on Oct. 31, 2007, touched a 10-year-low of 11 times earnings on June 28, according to data compiled by Bloomberg. The Hang Seng China Enterprises Index reached a 10-year-low of 7.6 times earnings on June 30, after hitting 31 times on Oct. 31, 2007.

Pureheart’s move pits it against investors such as Jim Chanos, founder of the $6 billion-hedge fund Kynikos Associates Ltd., who has warned since at least February 2010 of a pending property market slump putting China on a “treadmill to hell” and has bet the country’s bank shares would fall.

China equity funds saw investor redemptions in 20 of the last 22 weeks, EPFR Global, which tracks funds with $19.6 trillion of combined assets, said in an e-mailed statement dated Aug. 5.

‘Major Bubble’

Pureheart started buying Chinese stocks listed in Hong Kong and China in March 2009, seeing a rebound, only to depart again in June the following year.

It sold in 2010 because “no country will see a new bull market just two or three years after a major bubble” in 2007, Zhao said during a teleconference with investors on June 25, a transcript of which was seen by Bloomberg.

Pureheart shifted the bulk of its investment back to Chinese stocks this year, he told investors. The price-to-book and earnings multiples of both the Shanghai and Hong Kong indexes declined to about half of their 10-year averages this year, according to Bloomberg data.

Pureheart is most bullish about Chinese consumer goods and pharmaceutical stocks, because of rapid income growth of low-income households in the last five years and an aging population, its latest newsletter said. Among its holdings is Tong Ren Tang Technologies Co., a unit of the Chinese traditional medicine maker whose Hong Kong share price jumped 54 percent this year.

It has sold almost all of its Indian stock holdings and plans to further cut its Vietnam investments, it said in the July newsletter.

Buying China

The $55 million Pure Heart Natural Selection Fund, set up in March 2009 to invest in stocks with at least $1 billion in market value, returned 26 percent in the first seven months, Huang said. The Value Investment Fund focuses on smaller companies.

Much of the 7 percent July returns in both funds came from adding Chinese stocks during the June sell-offs, said Huang. The Shanghai index retreated 14 percent that month on concerns of an economic slowdown as money-market rates rose to records. The Hong Kong gauge fell 12 percent.

Zhao in 2004 set up the first “sunshine private fund” in China, a lightly regulated fund that raised money from wealthy Chinese individuals to invest in domestic markets. The oldest of the five such funds Pureheart closed in 2008 returned 192 percent over its life, including dividends, Huang said.

The closures left Pureheart with the Value Investment Fund managed out of Hong Kong and previously focused on overseas-listed Chinese stocks. It scouted for opportunities in the U.S., India, Vietnam and Greece after 2008, according to Pureheart’s annual letters to investors for the years of 2011 and 2012.

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