Charlie Awdry, China portfolio manager, provides his views on how China’s rapid technology innovation is creating opportunities to invest in the country’s growing companies and industries.

Many Chinese companies are innovating and creating disruption across multiple industries. One of the areas where we believe this disruption is creating the most opportunities for investors to benefit is the technology sector – particularly large, powerful internet companies that have a huge user base, growing advertising and new products.

The greatest challenge for these companies – and risk to investors – is regulation, given that they are operating in a Communist country where the authorities can change rules and impose wide-ranging regulations on businesses. However, in our view, the level of innovation that is emerging among Chinese companies creates the potential to invest in some rapidly-growing enterprises and industries at attractive valuations.

Convenience stores go digital

In China, businesses like the local convenience store are benefiting from the digitisation capabilities offered by internet platforms that can link the stores’ inventory management to their systems. Because these online platforms are capturing real-time purchasing data, they can suggest which products the stores should stock on their shelves, effectively providing data-driven merchandising. The shops can also use the platforms’ location-based advertising tools (think text notifications promoting ice cream offers as prospective customers walk by the store during a heatwave) to attract business.

The result of this partnership is that small businesses are seeing improved efficiencies and boosting revenues, creating a large vibrant sector in China that we can invest in.

Introducing 'smart' washing machines

The internet of things (IoT; the idea of everyday physical objects being connected to the internet and able to identify themselves to other devices) is taking hold on a global scale ‒ China is arguably on the leading edge of this trend. A good example is washing machines that are connected to the internet in China. By harnessing the data generated from this connectivity, Chinese washing machine suppliers know which cycles are being used most often allowing them to focus research and development efforts in these areas to make better products. With more than a billion consumers in China, these suppliers have tremendous scale.

The gaming industry explodes

Last July, a 16-year-old American professional gamer took home US$3 million as the top-prize winner of the Fortnite World Cup. The competition, held at Arthur Ashe Stadium in Flushing Meadows, New York, boasted a total prize pool of US$30 million.

For those of us who are uninitiated in the e-sports phenomenon, it may seem far-fetched that tens of thousands of people are going to stadiums to watch people play computer games. Now consider the fact that millions of people are going online to watch people playing computer games talking about themselves playing computer games.

There are currently more than 2.5 billion gamers across the world, projected to spend a combined US$152 billion on games in 2019*. In China alone, the two platforms that distribute e-sports content, DouYu and HUYA – both of which are invested in Tencent, the world’s largest gaming company – have 255 million monthly active users.

Keeping US-China tensions in perspective

Clearly, there is a lot of turbulence in equity markets stemming from US-China friction. What started as a trade war has morphed into something bigger, where China and the US are now essentially strategic competitors, and the steady news flow around the situation will create dramatic swings in investor sentiment.

As tensions between the US and China continue to dominate headlines and rile markets, investors may need to take a step back and think about why they considered investing in Chinese equities in the first place. The rise of the consumer and the abundant opportunities for companies to generate superior profit growth through large scale disruptive innovation, are key reasons to invest and we believe will remain in the years to come.

 

*Source: Global Games Market Report, June 2019.