Small Fund Scores Big Betting on Chinese Stocks and This Is Why You Should Follow It

Kylin Management is a small hedge fund that is flying under the radar, so to speak. The fund, which was launched and is managed by Ted Kang, a former employee of Julian Robertson’s Tiger Management, has been around since 2005 and currently has an equity portfolio worth $480 million, which is too small to capture the attention of the media, especially since it is a passive fund. Outlets like CNBC and The Wall Street Journal prefer to focus on big names like Carl Icahn, Warren Buffett, and George Soros and that’s a shame, because Kylin Management is definitely a fund worth following.

Large funds such as Berkshire Hathaway, Pershing Square and the like, have a lot of money to invest, which is why they have to adopt a more careful approach to picking stocks, which is why they often invest in big, widely-covered companies, in order to minimize their risks. In addition, many of these funds are pretty conservative and rarely make any significant changes to their portfolios. These factors lead to them earning smaller returns. On the other hand, smaller investors like Kylin can assume more risk, which in combination with thorough analysis, can lead to pretty good returns. According to our calculations, Kylin’s stock picks generated a return of nearly 27% in the first-quarter, versus the S&P 500’s gain of about 5.5%.

And Kylin is not the only fund that is scoring big returns but failing to get much attention. Another example is Alex Denner’s Sarissa Capital Management, whose stock picks earned a 200% return in the 1-year period ended March 31 (see some of its stock picks here). Following such funds and imitating some of their stock picks can be an easy way for a retail investor to beat the market. This is where our research comes in handy. We follow over 700 funds and analyze their quarterly 13F portfolios to identify their winning picks, which we share in our newsletters. Our flagship strategy has returned 44.2% since February 2016, beating the broader market by some 15 percentage points. Our previous batch of stock picks beat the market by 5 percentage points over the past three months, and we have just shared our newest batch with our subscribers, so you can still jump in. In addition, we offer a 14-day money-back guarantee for subscribers to our premium newsletters and you can also get $90 off for a limited time by accessing this link.

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Having said that, let’s discuss some of Kylin Management’s stock picks from its latest 13F filing. The investor mainly invests in China-based companies and despite some changes that the fund made to its top positions during the first-quarter, its top-3 remained the same: New Oriental Education & Tech Grp (ADR) (NYSE:EDU), Alibaba Group Holding Ltd (NYSE:BABA), and Vipshop Holdings Ltd – ADR (NYSE:VIPS). The fund also initiated three new positions between January and March, and we’ll take a look at the two largest of those, in Align Technology, Inc. (NASDAQ:ALGN) and Melco Resorts & Entertainment Ltd (ADR) (NASDAQ:MLCO).

New Oriental Education & Tech Grp (ADR) (NYSE:EDU) jumped to the top spot in Kylin Management’s 13F portfolio during the first three months of 2017 as the stock surged by 41%. At the end of March, the fund held 2.90 million shares of the company worth $175.31 million (it sold 21,000 shares during the quarter). Year-to-date, New Oriental Education & Tech Grp (ADR) (NYSE:EDU)’s stock is up by over 80%. Betting on a provider of private educational services in the most populous country on earth seems to be a no-brainer by itself, but New Oriental Education & Tech Grp (ADR) (NYSE:EDU) also has financial results to back up its success. The company reported revenue growth of 26% year-over-year for its fiscal third-quarter, to $437.85 million, while EPS jumped by 39% to $0.43. In addition, New Oriental Education & Tech Grp (ADR) (NYSE:EDU) provided upbeat guidance for its fiscal fourth-quarter, with revenue expected to be in the range of $465.15 million to $479.9 million (annual growth of 18% to 22%). Another investor bullish on New Oriental Education & Tech Grp (ADR) (NYSE:EDU) is fellow Tiger Cub Chase Coleman of Tiger Global Management, which boosted his stake by 54% to 2.43 million shares during the first quarter.

In Alibaba Group Holding Ltd (NYSE:BABA), Kylin Management raised its stake by 31% to 1.21 million shares worth $130.65 million during the first-quarter. The investment initiated during the fourth quarter is paying off, as Alibaba Group Holding Ltd (NYSE:BABA)’s stock has advanced by over 40% since the beginning of the year. Aside from better-than-expected results, Alibaba has been growing at a very fast rate, with its revenue having surged to $15.7 billion in 2016 from just $3 billion in 2012. Out of its fiscal 2016 revenue, $13.08 billion was generated by the China e-commerce segment. It’s interesting to point out that at $13 billion, Alibaba amasses only a tiny portion of China’s e-commerce market, which was estimated at around $900 billion in 2016, so it’s easy to assume that Alibaba still has plenty of room to grow and that it’s likely to do so. Stephen Mandel‘s Lone Pine Capital increased its stake in Alibaba Group Holding Ltd (NYSE:BABA) by 2.28 million shares to 9.90 million shares held at the end of March.

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Another one of Kylin Management’s bets on Chinese e-commerce is on Vipshop Holdings Ltd – ADR (NYSE:VIPS), in which it cut its stake by 59% to 5.18 million shares worth $69.11 million during the first quarter. The reduction is not surprising, since Vipshop Holdings Ltd – ADR (NYSE:VIPS) represents Kylin’s oldest investment, having been in its equity portfolio since the third-quarter of 2013 and the stock has surged by over 130% since then. On the other hand, billionaire Ken Griffin’s Citadel Advisors added 1.09 million shares to its stake in the company during the first-quarter, reporting ownership of 1.48 million shares in its latest 13F.

Vipshop Holdings Ltd – ADR (NYSE:VIPS) has also been recording substantial revenue growth for the last couple of years. In addition, its number of active customers has more than doubled between 2014 to 2016 (to 52.10 million from 24.29 million). For the first-quarter of 2016, Vipshop Holdings Ltd – ADR (NYSE:VIPS) posted revenue of $2.32 billion (up by 32% on the year) and EPS of $0.19, beating estimates by some $60 million and $0.01 respectively. The company also reported having 26 million active customers at the end of the quarter (an increase of 32% on the year) and a 23% jump in total orders to 72.10 million. For the current quarter, Vipshop Holdings expects revenue in the range of $2.47 billion to $2.54 billion, which would represent an increase of between 26% and 30% on the year.

On the final page of this article, we’ll take a look at two of Kylin Management’s new positions.

In Align Technology, Inc. (NASDAQ:ALGN), Kylin Management initiated a stake containing 311,800 shares worth $35.77 million at the end of March. The position represents Kylin’s only investment in a U.S-based company and its only healthcare bet. The fund previously held a stake in Align Technology, Inc. (NASDAQ:ALGN), but that position of some 375,000 shares was unloaded during the second-quarter of 2016. The stock of Align Technology, a maker of scanners used in dentistry, has gained 21% since the beginning of April and is 41% in the green year-to-date. Shares received a boost at the end of April after Align Technology reported revenue of $310.34 million, beating estimates by $13 million. Even though the company’s EPS of $0.59 was lower than the expected $0.67, investors were pleased by its 30% revenue growth. Align Technology has been consistently reporting double-digit revenue growth for the past several years, and the stock’s growth story may not be over yet, with the dental products & materials market in the U.S currently estimated at around $12 billion. Other investors with large stakes in Align Technologies include Lone Pine Capital and Jim Simons’ Renaissance Technologies.

Melco Resorts & Entertainment Ltd (ADR) (NASDAQ:MLCO) is represented in Kylin Management’s 13F portfolio by a $29.40 million stake that contains 1.58 million shares as of the end of the first quarter. The stock of the Hong-Kong-based operator of casinos and casino resorts in Macau and the Philippines has appreciated by 40% since the beginning of the year. Kylin’s entrance in Melco Resorts & Entertainment Ltd (ADR) (NASDAQ:MLCO) is not surprising. The stock is still down by 50% from its 2014 highs, dragged down by a decline in the Macau gambling industry on the back of the Chinese government’s crackdown on graft. However, in the last several months, the numbers have shown a positive trend. In April, Macau’s casino receipts rose by 16% to $2.50 billion, showing the ninth-straight month of growth and the third-straight month of double-digit growth. Lei Zhang‘s Hillhouse Capital Management owned 10.25 million shares of Melco Resorts & Entertainment Ltd (ADR) (NASDAQ:MLCO) at the end of March, up by 40% on the quarter.

Disclosure: None