The China Syndrome: Part 2

Published on 05/06/20 | Saurav Sen | 1,578 Words

The BuyGist:

  • A few months ago, we had addressed the risk of the on-again-off-again Trump-China trade war. It's on again, it seems. 
  • Last week, we added "exposure to China" as our 4th Risk dimension. 
  • In this article, we measure our China Risk, followed by specific portfolio actions.

Measuring the China Exposure

We did it manually. We sifted through the latest annual reports of each of our portfolio holdings to look for revenue coming in from China. Some companies had it neatly broken out. Many didn’t. Among ones that didn’t, some broke out “Asia Pacific” and others simply stated “Other Countries”. We used our best judgment, and in most cases, we erred on the side of over-estimating a company’s China exposure when the data wasn’t clear.

We didn’t attempt to decipher the supply-chain impact. While we know that many of our portfolio companies source components in China, we just don’t have the level of data to quantify the impact of a full-blown trade-war. We also know that, since 2018, many companies – especially in tech – have tried to diversify their supply chains as much as possible.

Let’s be clear. A full-blown trade war between US and China will be devastating for the Global Economy as well as the markets. We don’t have obvious hedges against such a calamity. But for the moment, we can reduce our exposure to sleep better at night.

Roughly 10% of the revenue in our portfolio companies come from China.  A few companies have outsized exposure – more than 20%. Two of those are especially exposed to the risk of a full-blown trade war.

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