Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 501

Three themes and companies to play China's rise

The structural drivers for China's growth remain intact, and we expect Chinese companies to benefit from trends such as rising incomes and wealth, increasing demand for premium goods and services, and burgeoning sophistication in technology and manufacturing. There will also be opportunities for companies to innovate and move up the value curve. This, coupled with China’s increasing role in global trade, should bode well for exports as well as domestic consumption.

We highlight three examples of long-term themes and companies which are likely beneficiaries.

Industrial automation aims to offset a shrinking workforce

The impact of China’s earlier one-child policy will continue to be felt in the coming decades. Its working age population, or people between 15 and 64, will contract by 22% or 217 million people. To counter the anticipated labour shortages, the government seeks to improve manufacturing through automation and robotics, which means China’s automation market will see strong secular tailwinds. For example, the country set a record of 243,300 industrial robots in 2021, a 44 per cent increase from the previous year.

Shenzhen Inovance is an industrial automation company with leading positions in inverters, servomotors and new energy vehicle (NEV) controllers. It has repeatedly proven its capability in developing new products and entering new markets, where it can compete with multinational peers. As of March 2022, the company has generated 28% per annum shareholder returns since its IPO in 2010, with 40% compound annual growth rate (CAGR) in sales and 35% net profit CAGR*. Despite its size, our view is that Inovance can continue to generate attractive growth over the next 5-10 years as it gains market share and continues to innovate.

Healthcare companies stand to gain market share

Healthcare spending, while much lower than in developed countries, is expected to grow as China’s population ages. The population over 65 will increase from 14% of the total population in 2022 to 30% in 2050.

Shenzhen Mindray is China’s largest domestic medical devices company and a market leader in patient monitors and life support systems. Growth across categories has picked up in recent years, and Mindray’s market position for each category has been improving as well. It has gained market share from global leaders as it expands its presence overseas and has more than 40% of its sales through exports*.

In the domestic market, we expect increased hospital spending on medical equipment to contribute significantly to its revenue. There are also growth opportunities ahead, as the penetration level of medical devices in China is still low and there is a growing preference for import substitutions.

Domestic brands may benefit from premium consumption

Structural growth is expected to return to domestic spending with the recovery of consumer confidence. Amid weaker consumer demand resulting from the pandemic in the last two years, we focused on buying high-quality franchises and market leaders – those companies with above-average margins and returns, and which can increase selling prices.

One sector we looked at was China’s beer market, which is different from most other countries. It is highly consolidated with the top three companies, China Resources Beer (CR Beer), Tsingtao and Anheuser-Busch InBev, sharing 75% of the market as per our research in 2022*. Despite beer volumes declining since 2014, the improving economy and a growing middle class has seen some brands looking to develop more premium products, improving unit economics. Sales and profitability have also improved as beer companies consolidated their breweries.

CR Beer’s share of premium sales has grown with the help from a 2019 merger with Heineken China, resulting in higher average selling prices. Although the company is a state-owned enterprise, China Resources businesses have typically been well run, with returns comparable to private enterprises. Additionally, while investors were worried about higher prices of inputs like aluminium cans, historically beer companies have been able to pass on costs, while the gross profit margin of circa 40% should limit the impact on profits.

Conclusion

This year marks the 30th anniversary of the FSSA China Growth strategy. While China has changed significantly over the last three decades, the key driver of share prices over the long term remains companies’ ability to generate value by growing their earnings or net asset value. Therefore, we use bottom-up analysis and focus on quality companies, with capable leaders who are aligned with shareholders. 

 

*N.B. Source: FSSA Investment Managers, company data retrieved from company annual reports or other such investor reports. Financial metrics and valuations are from FactSet and Bloomberg. As of February 2023 or otherwise noted.

Martin Lau is a Managing Partner and Lead Portfolio Manager at FSSA Investment Managers, based in Hong Kong. FSSA is part of First Sentier Investors, which is a sponsor of Firstlinks. This article is intended for general information only.

For more articles and papers from First Sentier Investors, please click here.

 

4 Comments
Trevor Cheng
March 28, 2023

Need to be more convincing especially given the local corruption and the state ability to step in to keep money in the country.

Warren Bird
March 28, 2023

Martin is one of the most experienced investors in the world in Chinese companies (and other emerging markets), the portfolio manager for one of the most successful funds in that space, and one of the smartest people in the EM field you could ever meet. The funds he manages have always taken governance issues seriously and he would be more aware of the reality of corruption in certain places than anyone else. Full disclosure - I worked alongside Martin when I had oversight of the Asian fixed interest team for Colonial First State from 2005 to 2012. He's one of the most decent people in the industry I've met.

Peter
March 26, 2023

I would never invest in China/Russia or any authoritarian controlled country. These types of governments can change the rules overnight with investors losing their money. I believe Russia has made decisions that investors from "unfriendly countries" will no longer receive dividends and some significant investors such as international airline companies have lost their money entirely or are having difficulty getting it out of the country. Why would you risk your money when these dictators have proven to be unpredictable and untrustworthy.

Harry H
March 26, 2023

The issue with thematic investing is that the themes are normally well known and priced in.

Often it also hides complexities. I've covered Chinese healthcare and it is a minefield of regulation and bureaucratic layers and picking winners and losers is very difficulty.

 

Leave a Comment:

     

RELATED ARTICLES

China in advanced stage of demographic collapse

Is China’s regulatory reform stifling ‘animal spirits’?

China’s new model is a plan for a hostile world

banner

Most viewed in recent weeks

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 583 with weekend update

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

Warren Buffett is preparing for a bear market. Should you?

Berkshire Hathaway’s third quarter earnings update reveals Buffett is selling stocks and building record cash reserves. Here’s a look at his track record in calling market tops and whether you should follow his lead and dial down risk.

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

Latest Updates

Property

Coalition's super for housing plan is better than it looks

Housing affordability is shaping up as a major topic as we head toward the next federal election. The Coalition's proposal to allow home buyers to dip into their superannuation has merit, though misses one key feature.

Planning

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Retirement

More people want to delay retirement and continue working

A new survey suggests that most people aged 50 or over don't intend to stop work completely when they reach retirement age. And a significant proportion of those who delay retirement do so for non-financial reasons.

Economy

US debt, the weak AUD and the role of super funds

The more the US needs capital and funding, the higher its currency goes. For Australia, this has become a significant problem as the US draws our capital to sustain its growth, putting pressure on our economy and the Aussie dollar.

Investment strategies

America eats the world

As the S&P 500 rips to new highs, the US now accounts for a staggering two-thirds of the world equity index. This looks at how America came to dwarf other markets, and what could change to slow or halt its momentum.

Gold

What's next for gold?

Despite a recent pullback, gold has been one of the best performing assets this year. What are the key factors behind the rise and what's needed for the bull market in the yellow metal to continue?

Taxation

Consulting on the side? Don't fall into these tax traps

Consultants must be aware of the risks of Personal Service Income rules applying to their income. Especially if they want to split their income or work through a company.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.