Chinese equities have displayed severe volatility in recent weeks, as regulatory crackdowns across a number of sectors sent markets sharply lower. While strong quarterly earnings from e-commerce group JD.com helped to somewhat settle investor jitters, sentiment remains fragile.
With most of the investor spotlight firmly fixed on dominant index constituents Alibaba and Tencent, five professionals highlight some lesser-known Chinese companies well-positioned to generate outsized growth in the months and years ahead.
Centre Testing International
Rahul Desai, portfolio manager at Aikya Investment Management
With the imposition of government crackdowns casting uncertainty on large parts of the Chinese market, investing in businesses with a meaningful social purpose has never been more crucial. Governance considerations must also be high on investors’ agendas given the current market environment.
One Chinese stock we are particularly interested in is Centre Testing International, which carries out testing and inspection services across a wide range of applications, from food safety to environmental standards. European investors may be familiar with SGS in this space, but Centre Testing is well placed to emerge as the market leader in China, having attracted a strong management team – including notable SGS executives – in recent years.
As investors, we are also drawn to Centre Testing’s strong governance and the fact the business is providing valuable social benefits. While the testing and inspection market is currently highly fragmented and underdeveloped, environmental inspections – a growing part of Centre Testing’s business model – are set to become more prominent across the Chinese economy over the coming years, as the country continues to develop its environmental standards.
Raj Shant, client portfolio manager at Jennison Associates
Consumers are increasingly gravitating to electric vehicles. The industry is now nearing an inflection point, moving from a relatively small group of early adopters toward mass adoption. While electric vehicles are more environmentally friendly than internal combustion engine counterparts, the recent reduction in lithium-ion battery costs makes electric vehicle production more economically viable.
The average volume-weighted cost of lithium-ion battery packs was $1,160 per kilowatt hour (kWh) in 2010, but the cost has dropped more than seven-fold to $156/kWh over the last decade and is expected to fall below $100/kWh by 2024. Global battery demand for electric vehicles is predicted to grow 17-fold by 2030, with the lithium-ion battery cell market expected to nearly triple to $137bn by then.
China’s Contemporary Amperex Technology is the world’s top electric battery producer, with the group holding almost a third of the global market share. It has performed strongly over the course of the year, and we continue to be bullish on its industry-leading position in battery technology, particularly as global demand for electric vehicles grows at a rapid pace.
Sunny Bangia, portfolio manager at Antipodes Partners
The intense investor focus on Chinese regulatory risk, particularly in the tech sector, will pass in time. There is no question Chinese regulators have acted in a blunt fashion recently, but is it unusual for regulators globally to regulate lenders, protect consumers from anti-monopolistic behaviour, or have concerns around data security?
I feel strongly that Beijing is not anti private enterprise and leaders understand the nation’s economic growth is dependent on a vibrant private sector. Valuations of Chinese tech, compared to similar business in the US over a long period of time, would imply any additional regulatory risk in China is well priced in. We have used the recent sell-down to increase exposure to Chinese domestic businesses, which pass our extensive regulatory stress testing.
Meituan is a dominant business with a very interesting secular growth opportunity. It is China’s largest food delivery business, the Uber Eats of China, and has used its dominance in food delivery to quickly take the lead in community group buying and we think it will be hard to dislodge. Ultimately, community group buying can take 10% of China’s grocery market over the next five years.