China equity investing: Understanding the drivers of opportunities
Global Investment Insights
with Colin Liang, RWC China Equity Fund, RWC Partners
Colin is the Portfolio Manager for the RWC China Equity Fund at RWC Partners. He also leads the China research effort and is a member of the investment committee for the RWC Emerging and Frontier Markets strategies.
Colin shared with us his unique insights on some of the macroeconomic and market developments taking place in China that are driving investment opportunities for global investors.
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As China transforms into a consumption-based economy, consumption will continue to be the overriding growth engine fueling the country’s economy going forward.
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Between 2015 and 2019 China grew strongly, averaging 6.5% growth per annum. In 2020, China’s economy recovered much faster than other major economies from the initial COVID-19 shock, much of its success being attributable to the quick actions taken in the early days of the outbreak that enabled the country to better contain it and limit its spread.
China is estimated to have grown its economy by 2.5% in 2020, making it one of the few nations around the world to achieve growth, in what was an unprecedentedly challenging year.
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Premiumisation is a growing phenomenon in the China market within the consumer goods space.
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China’s GDP per capita has risen substantially in the last 20 years and reached US$10,300 in 2019. As China transforms into a consumption-based economy, consumption will continue to be the overriding growth engine fueling the country’s economy going forward. Premiumisation is a growing phenomenon in the China market within the consumer goods space. Private consumption growth looks promising in the post COVID-19 era, well-supported by the government’s focus on and promotion of “domestic circulation” in the 14th Five-Year Plan.
China is entering a new stage of development for innovation. China’s investment in talent and R&D innovation continues to rise. Today, it has the second most unicorns in the world and in 2019 it ranked second globally in terms of patent filings, only behind the US.
Investment opportunities are abundant among innovative Chinese corporates as they leapfrog conventional industry growth patterns and take market share from peers.
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China not only ranked second in terms of patent filings in the world after the US in 2019, but also has the second most unicorns in the world.
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With the aforementioned macroeconomic tailwinds and market developments in mind, there are a number of key investment themes playing out in China that investors may seek to capture in their portfolios, namely:
Technology disruption: Technology disruption is occurring widely across the Chinese economy today, from daily consumption activities through to smart manufacturing, from healthcare to software. For example, e-commerce giants like Alibaba, JD.com, Pinduoduo and Meituan are pioneering the use of new technologies such as AI and speech recognition while extending their reach into and disrupting other sectors such as food delivery, healthcare, logistics etc., all of which should ultimately lead to a better user experience and further market penetration.
Electric Vehicles (EVs): China is both the largest manufacturer of and buyer of electric vehicles in the world and over half of EVs globally are either made or sold in China. China’s EV sales reached 1.3 million units in 2020 and are estimated to reach 6 million units by 2025. The positive outlook for EV sales and batteries is expected to boost growth of original equipment manufacturers (OEMs) and companies providing battery materials such as lithium and cobalt.
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China’s electric vehicle sales reached 1.3 million units in 2020 and are estimated to reach 6 million units by 2025.
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Travel: The travel sector has been through a torrid time, being one of the most hard-hit sectors during the COVID-19 pandemic. However, with effective control measures initiated by the Chinese government, domestic travel has experienced a strong rebound. Moreover, stimulated by government policies, overseas luxury and travel spending has quickly re-shored back to China in 2020. As the virus situation stabilises and vaccine rollouts progress, global travel is expected to resume. Leading companies in travel-related segments are expected to outperform their respective segment growth rates, driven by industry consolidation.
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As the virus situation stabilises, global travel is expected to resume. Leading companies in travel-related segments are expected to outperform their respective segment growth rates, driven by industry consolidation.
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Colin elaborated further, in the next 12 months, travel-related names are expected to outperform the market significantly. Domestic travel has recovered and the recovery will eventually extend to overseas travel. Leaders in the travel industry will not only rebound consistent with the wider industry but will also consolidate their respective markets as smaller players exit. To play this theme, investors could take positions in hotel operators, entertainment operators and airlines.
Separately, Colin is confident that names within the technology disruption theme described will continue to lead market performance. Internet giants and technology leaders in software and hardware will continue to demonstrate secular growth in their respective fields.
On a five-year horizon, Colin is positive on both the consumption and healthcare sectors in China. Disposable income growth drives consumption of higher value products and services, while an aging society fosters an excellent market environment for the healthcare industry. Furthermore, COVID-19 has impacted peoples’ daily lives, forcing changes in their consumption behaviors and creating new opportunities. For example, online healthcare is one segment set to enjoy healthy growth in the years to come.
Looking at the distribution of historical returns in Chinese stocks over the past ten years, the median return was only 3%, with a positively skewed distribution to the right. This indicates that there are significant under-discovered investment opportunities with extraordinary returns available for investors to capitalise on.
To capture these opportunities, Colin advocates applying a top-down, thematic and bottom-up investment process, whilst also incorporating fundamental ESG analysis into primary stock research. In short, an investment thesis that seeks out high growth businesses at cyclical troughs, ie buying growth stocks at reasonable prices.
There are two distinct matters investors ought to be aware of when participating in China equity markets which Colin often addresses with existing and potential clients.
ESG: Albeit improving, most Chinese companies are not yet as rigorous in ESG related matters as their counterparts in developed markets. To account for this in the investment process; company ESG analysis, which incorporates a local understanding of the market, and due diligence through expert networks; coupled with proactive ESG engagement, is vital.
Behavioural biases in different exchanges: Chinese equities mostly trade on the onshore A-share, Hong Kong and US ADR markets. These markets have different investors and therefore interpretation of information and investment attractiveness can vary. Colin invests across all three markets and highlighted that the behavioural biases of investors in these markets create investment opportunities on a relative basis.
Colin Liang, Portfolio Manager, RWC China Equity Fund, RWC Partners
Colin is the Portfolio Manager for the RWC China Equity Fund. He also leads the China research effort and is a member of the investment committee for the RWC Emerging and Frontier Markets strategies.
He has 15 years of experience in investment and financial analysis, most recently at NN Investment Partners (ING Investments) where he was a portfolio manager responsible for investments in Greater China. Previously, Colin was an investment analyst at SeaTown Holdings and an equity research analyst at Bank of America Merrill Lynch. He holds a Master of Finance degree from Lancaster University in the UK and a Bachelor of Economics degree from Tongji University in China. Colin is a native Mandarin speaker.
Disclaimer
All information contained within this publication is general advice only, as the knowledge levels and needs of all individual and corporate investors vary greatly this publication should not be used solely as a decision-making tool, further opinions and information should be sought before making an investment decision. It is the recommendation of Global Investment Institute (GII) that you seek the opinions of a fee-for-service, independent investment adviser before making any investment decision.
The authors, directors or guest writers may have a financial interest as investors, trustees or directors in investments discussed or recommended in this document. It has been assessed by the editors that these financial interests have not had an impact on the material contained here within.
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