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Greater China Equities: Identifying megatrends with structural opportunities

21 December 2023

Kai Kong Chay, Senior Portfolio Manager, Greater China Equities

Wenlin Li, Senior Portfolio Manager, Greater China Equities

Ben Yu, Head of Equities, Taiwan Region

The mainland China economy has improved throughout 2023 as a result of the government’s positive, pro-growth stance – which should continue to support the country’s economic growth and propel investment opportunities in 2024. Crossing the strait, the Taiwan Region should benefit from major driving forces for the global tech industry.

This 2024 outlook piece highlights four key megatrends (we call them the “4As”) to help investors navigate the evolving Greater China’s investment landscape.

1) Acceleration: Consumption may further improve with mainland China’s pro-growth policy stance.

2) Abroad: Leading mainland Chinese companies are going abroad – another growth engine!

3) Advancement: The artificial intelligence (A.I) supply chain in Greater China (especially the Taiwan Region) should continue to see robust growth in 2024.

4) Automation: Mainland China’s aged population1 should present higher demand for automation.

From a sector perspective, we believe that mainland China should benefit from the following key areas despite macro and geopolitical headwinds:

1)     Traditional tech:

The global smartphone market is expected to recover in 2024, which could trigger more A.I applications. With the adoption of edge A.I2 expected by 2025, smartphone original equipment manufacturers (OEMs), memory manufacturers, and system-on-a-chip (SoC) component makers will be the key beneficiaries.

2)     A.I

Mainland China’s internet platform companies remain active with computing technology and A.I investments. We believe mainland China is well-positioned to capture opportunities from the upstream to the downstream semiconductor supply chains (especially packaging and testing) amid central government support3.

3)     Advanced manufacturing

We are positive on the expected capital expenditure recovery in the industrial general equipment in early 2024, domestic substitution of industrial advanced manufacturing (from auto-related segments, automation, industrial robotics, and rotary vector reducers to X-ray machines), and overseas expansion of domestic industrial component companies (OEMs and electric vehicle (EV) component manufacturers).

4)     EV

The export growth of EV models is a bright spot while building the EV supply chain overseas is also generating cost efficiencies for leading mainland Chinese EV players. EV component manufacturers could be side beneficiaries, riding on their “technical know-how” and supply-chain experience.

5)     Healthcare

Negative factors related to the anti-corruption campaign in 2023 have largely been priced in. For 2024, we believe the sector should see brighter upside on the back of (1) mainland China’s pursuit of innovation ranging from high-tech to healthcare, (2) strong innovative pipelines of domestic biotech companies and (3) potential recovery in global biotech investments as interest rates decline. We favour pharma companies with (1) strong future pipelines, (2) global opportunities and (3) in-licensing opportunities with global players.

For the Taiwan Region, the next things in global tech industry for the new year would include (1) continued growth of A.I development, (2) recovery of the global smartphone market and (3) recovery of the PC market. We believe its domestic companies will benefit the most in the following areas:

1)     Foundries

The growth of foundries could ride on the recovery of the consumer electronics market and A.I development. Going into 2024, foundries may benefit from (1) growing localisation trend and increased demand from domestic suppliers and (2) A.I demand as more advanced node capacity is required.

2)     Integrated circuit (IC) design services4

We favour IC design service providers that are third-party, one-stop-shop design “consultants” who assist with front-end/back-end design and manage the fabrication process on the foundry side, given Taiwanese companies’ marketing-leading position and potential growth of customed IC design.

3)     Server hardware supply chain

The Taiwan Region has major hardware companies exposed to various parts of the server hardware supply chain. We believe that server market growth will further improve in 2024, driven by growth recovery of regular servers and ongoing strength of A.I servers. Over the longer term, various sub-sectors of the A.I server market should see the fastest growth among all components.

4)     Networking switches

The ongoing migration from 100G to 400G should continue in the coming years as cloud customers look to reduce costs. Globally, there are only a handful of white box switch vendors, and the leading players should benefit from this trend.

 

Download the full version (16 pages)

 


1 14.9% of mainland China’s population comprises people aged 65 and above.

2 Edge A.I is the deployment of AI applications in devices throughout the physical world. It’s called Edge A.I because the A.I computation occurs near the user at the edge of the network, close to where the data is located, rather than centrally in a cloud computing facility or private data centre. February 17, 2022. Nvidia.

3 The China Integrated Circuit Industry Investment Fund, known as the Big Fund, is set to launch a US$40 billion investment fund backed by the Chinese government to support the manufacturing strategies of domestic semiconductor companies. China to double down on push to be self-reliant in tech. Reuters, 5 March 2023.

4 HSBC Report, November 2023

 

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