Objective: Utilize active research to confirm a positive outlook on a potential holding, despite initial concerns.
Background: We had been closely monitoring opportunities within the Chinese manufacturing sector since 2016. In April 2017, a large Chinese cement producer looked attractive to us. We had become more positive on construction demand in China, and the cement industry’s competitive structure was also attractive. This cement company stood out against competitors, we thought, for its ability to keep production costs low while still utilizing advanced technologies. Our initial fundamental research indicated a positive outlook for the company. Our investment thesis included:
Projected Profitability Increase: The company had benefited from supply-side reform, which broadly created a better supply-demand situation by reducing production cost. The company’s profitability was projected to increase as overall operating expenses fell.
Expansion: Through its efficient cost structure, potential mergers and acquisitions could increase growth and expansion.
Shareholder Maximization: We expected an increase in shareholder return through a higher dividend payout or the company’s more efficient use of cash.
We liked the company based on these factors, but we knew that companies in this sector often ran into challenges from an environmental standpoint. We wanted to understand its ESG profile better.