Bolton warns on fallout from ‘land trading’ profits

Fidelity manager fears company profits inflated by land sales, not rising revenues

Fidelity’s Anthony Bolton has suggested some Chinese companies may have “fudged” profits to reflect gains made on land sales rather than underlying revenues.

Speaking at Investment Week’s Senate Investment Conference in Bedfordshire last week, Bolton said prices will come down over the next 12 to 18 months, adding equities could be hit as land trading has inflated returns.

“I am sure some of the profits out there have come from land trading and land dealing. Much more so in the case of some state-owned enterprises, but I am sure some private companies have done this too,” he said.

Bolton, the manager of the Fidelity China Special Situations fund, pointed to the case of a consumer medical company whose management claimed it was growing at 30% per annum, only for research performed on behalf of his trust to indicate a real figure of 5% to 10%.

“I wondered if they were doing land sales to fudge figures. So if I am right about the property market there will be some negative surprises coming out of this practice”.

The manager said the “vast majority” of companies in China are legitimate businesses, and he remains more bullish on opportunities outside the property sector. He said Chinese equity markets are capable of performing well even when the property sector struggles.

Elsewhere in the market, Bolton sees short-term headwinds for healthcare companies, one of his favoured sectors, involving drug prices that “have to come down”, but said this presents an opportunity to invest on a longer-term basis.

“Healthcare is one of my favourite areas; 90% of the population in China now has some sort of free heathcare, though it is capped. The target is to spread that to rural areas, and the authorities have very ambitious plans.”

Capital spending is a less attractive area for the future given its unsustainably high levels, said Bolton, who pointed to Chinese companies outsourcing production to other parts of Asia as a sign a manufacturing slowdown is  already underway.

The manager added the financial crisis is in part responsible for the Chinese government’s attempt to drive up domestic consumption levels, suggesting the country “got a big shock when it saw exports fall off a cliff and realised how reliant it was on the rest of the world”.

“There have been some fantastic areas to invest in China over the past five to ten years, but I do not think they will be the same areas over the next 10 years,” he said.