Perspective

Investing in China: A Post-Covid-19 Perspective [Part 2]

By July 28, 2020 February 17th, 2022 No Comments

Investing in China: A Post-Covid-19 Perspective [Part 2]

This is a continuation and part 2 to the series “Investing in China: A Post-Covid-19 Perspective”.  Click here to read part 1 of the story.

Chinese Leadership in 5G Technology

The ongoing US-China trade war has been casting a spotlight on China’s aspiration to become a leader in emerging technologies. In our view, the economic decoupling between the two superpowers will further encourage China to reduce its dependency on US technology and further solidify its domestic tech companies.

The shift in investments to facilitate innovation is gaining significant momentum in China. According to World Intellectual Property Organisation (“WIPO”), of the 3.3 million patent applications received in intellectual property (“IP”) offices worldwide in 2018, China had chalked up 46.4% of total applications, outpacing the US, Japan, Korea and European Patent Office (“EPO”) combined.Source: WIPO Statistic Database; as of 2018

In 2019, for the first time, applicants from China filed the most applications under the Patent Cooperation Treaty (“PCT”) – a unified procedure for patent applications. Of the 265,800 patents filed under the PCT, China had 58,990 applications, representing a growth of 10.6% compared to 2018. The US trailed closely behind at 57,840. In terms of specialisation, China filed intensively for patents related to Digital Communication, while the US filed most in computer technology. [1]

The data signifies why the US is specifically targeting China’s 5G development: On the individual firm level, Huawei Technologies led PCT applications with 4,411 filings in 2019.

Even then, with the roll out of 5G in its nascent stage, there are still debates on whether there its commercial viability, given that 4G already seems to be adequate. The main propositions for 5G are huge speed increases, free up bandwidth and increase capacity. Its ultra-low latency also means that it could potentially transform landscape.

In our view, we think China’s market would be an ideal ground to build the business case for 5G: China is home to the largest internet users in the world, estimated to be at 850 million as of May 2020.[2] Comparatively, its internet penetration rate is still relatively low at 59.3% versus the US’ 95%, suggesting further room for growth. Given its scale, the 5G case for China would mean that the investment costs for 5G per user could be significant lower.

To ride on China’s 5G story, investors can look at the technology providers, i.e telecommunication equipment makers.  Apart from Huawei which is privately held, ZTE Corporation is also one of the key players in this area. The other beneficiaries for the commercial roll-out of 5G in China would be none other than the network operators and infrastructure operators such as China Mobile, China Unicom and China Tower.

Source: Bloomberg as of 10 June 2020; compiled by Phillip Capital Management (“PCM”)

From a valuation perspective, China’s network operators are trading at significantly lower valuations in terms of price-to-earnings (“P/E”) multiple compared to the US counterparts. We think there are compelling value for the opportunities they offer.

Greater Liberalistion of Financial Market

As a rising superpower, China needs to build greater credibility and transparency with the international community. In our view, the Chinese government would see to the greater liberalisation of its financial market as a mean to build trust and strengthen its international standing. This ongoing development would bring greater prospects for investors.

One of the strongest indication of China’s commitment to progress in this direction was the unification of banking and insurance regulators to form China Banking and Regulatory Commission in 2018. Together with the China Securities and Regulatory Commission, the Chinese authorities have gradually eased up access on foreign ownership and limits, as well as simplifying the operating environment.

With total assets amounting to US$45.1 trillion in China’s financial sector institutions at end of 2019[3], China’s financial sector offers tremendous opportunities for broad-ranging prospects from retail banking to private wealth management.

One area that presents a major opportunity we like to focus on is the under-insured Chinese market. Despite China’s growing wealth and longer life expectancy[4], Chinese citizens are generally less insured as compare to other advanced markets.

Source: Swiss Re, sigma 3/2018; Compiled by PCM

Based on report by Swiss Re institute, China’s insurance penetration in 2017 was 4.6%. It trailed significantly behind other advanced economies like Korea, Germany, France, UK, Japan and US. The average insurance penetration rate for advanced markets was 7.8% in 2017. The global average was 6.1%.[5]

The direct beneficiaries of this phenomenon would be none other than the major insurers such as China Life Insurance and Ping An Insurance. On a valuation perspective, the equities of China’s insurers are not too demanding. As on 10 June 2020, China Life Insurance is trading at 7.5 times P/E while Ping An Insurance is trading at about 10.3 times P/E according to Bloomberg.

Conclusion

China’s consumer market and newfound ingenuity are a force to be reckoned with. In our long-term view, the rising income of growing Chinese middle class will continue to drive China’s economic expansion, past the current Covid-19 crisis. Its home-grown technologies, particularly in telecommunications and mobile applications, are quickly filling up gaps and transforming the landscape. As such, understanding the underlying fundamental drivers is key to attune investments to the changing tailwinds in China.


[1] https://www.wipo.int/edocs/infogdocs/en/ipfactsandfigures2019/

[2] Source: Internet World Stats

[3] China Banking News; 25 March 2020

[4] World Bank, 1960-2018: China’s life expectancy has risen from 43.7 years to 76.7 years

[5] https://www.swissre.com/institute/research/sigma-research/sigma-2018-03.html


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