Issue date: 2019-10-31
Magdalene Miller, Portfolio Manager, China Equities
Standard Life Investments
This has been an eventful year for China, geopolitically. With the US appearing to cede its global leadership on international trade and climate change, China seems poised to fill the gap as a new champion of globalisation and cleaner energy.
For example, the Chinese government has already signalled a plan1 to phase out vehicle using gasoline and diesel. That will be a boon to electric vehicles makers and their component suppliers. And what about power companies? Indeed, more electric vehicles would mean a greater demand for electricity, which is largely generated by burning coal.
So while there are increasing opportunities for investors to put their money into cleaner energy in China, I still see value in the good oldschool industries. More specifically, power companies that run coalfired power plants. And Huaneng Power International, China’s largest power producer, is a company that comes to mind.
Although China is slowing approvals2 of new coal-fired power projects, and concerns over pollution prompted a move towards cleaner and renewable energy, the country remains dependent on coal.
China is gradually controlling the pace of additional coal-fired capacity, shelving and cancelling projects. And though coal prices have rebounded recently, they are expected to remain on a long-term decline – this should benefit Huaneng Power as it is the least diversified and most leveraged to coal price movements and tariff increases. A less competitive market and coal prices on the decline are positive trends for power companies.
Coal supply cannot be turned on and off like a switch, and demand remains on the wane. Industry reforms, including the potential consolidation of thermal and nuclear power companies, and a new fuel cost pricing mechanism are also positive trends.
Another old-school industry that is benefiting from government-driven reforms is transport infrastructure. Railway spending in China is rebounding from the recent trough. It is also worth bearing in mind the railway industry is one of the key links in Xi’s ‘One Belt, One Road’ initiative.
Zhuzhou CRRC Times Electric, a rail equipment technology leader that we believe is under-valued by the market, stands to benefit as replacement demand for locomotives kicks in. Although some investors are sceptical about the sustainability of a rebound in Chinese railway spending, growing rail investment and maintenance, an ever-expanding urban subway network, non-rail business options and potential overseas ventures are all positive trends.
Interestingly, high-speed trains in China enjoy high capacity utilisation and the government’s five-year plan is looking at RMB3.5 trillion in railway investment3 between 2016 and 2020. The bottom line is – China needs more trains!
Despite the bumpy ride and a firewall, China’s information superhighway has opened up new opportunities for global investors. Interestingly, what binds the Chinese consumer to the internet is entertainment, where gaming, online chats, shopping, streaming, learning and travel services dominate.
Today, the Chinese are the biggest players of video games, playing on three platforms – console, personal computer and mobile phone – with game revenues forecast to reach $27.5 billion4 this year. And China’s internet users now total 751 million5, with a penetration rate of 54.3%.
NetEase, a pioneer in online gaming, and internet services provider Kingsoft are among the Chinese game developers that are building a stronger entertainment eco-system to make gaming a favourite pastime among Chinese consumers.
China has a dynamic online games industry and companies such as NetEase enjoy a loyal client base. With ever-changing client interest, they have to continuously introduce new game content and adopt innovative technology.
Chinese game companies are also cultivating a new segment of the population that could be users of their games in the foreseeable future.
Currently, online games are targeted at teens to adults. New products in the works will target younger players with interactive lessons and educational games. In addition, game developers are also looking to launch their products in markets outside China.
Still, investing in China’s online gaming market is not without its risks. Tighter regulatory controls, the limited life span of games and evolving technology are among some of the concerns. But as seasoned investors, we incorporate these risks in our assessment of the companies. For now, we’re riding on the fast lane of Chinese online entertainment.
1 ‘China fossil fuel deadline shifts focus to electric car race’, Bloomberg News, 11 September 2017
2 ‘China coal power plant approvals fall by 85%’, Greenpeace’s EnergyDesk article, 2 March 2017
3 ‘China plans 2.6 trillion yuan of transport investment in 2017’, Xinhua News Agency, 27 February 2017
4 The 2017 Global Games Market Report, Newzoo, June 2017
5 The 40th Statistical Report on Internet Development in China, China Internet Network Information Center, August 2017
This material is for informational purposes only and does not constitute an offer to sell, or solicitation of an offer to purchase any security, nor does it constitute investment advice or an endorsement with respect to any investment vehicle.
All information, opinions and estimates in this document are those of Standard Life Investments, and constitute our best judgement as of the date indicated and may be superseded by subsequent market events or other reasons.
Standard Life Investments (Hong Kong) Limited is licensed with and regulated by the Securities and Futures Commission in Hong Kong and is a wholly-owned subsidiary of Standard Life Investments Limited.
Standard Life Investments Limited is registered in Scotland (SC123321) at 1 George Street, Edinburgh EH2 2LL. Standard Life Investments are authorised and regulated by the Financial Conduct Authority.