Evolution of the China Opportunity Set

 In Market and Investment Insights

Our latest podcast from Janus Henderson Radio: Investment Manager Charlie Awdry discusses the rapidly evolving Chinese consumer and opportunities for investors.

Key Takeaways

  • The Chinese consumer remains vibrant, driven by rising income, evolving tastes and dynamic Chinese companies.
  • Chinese tourists are discerning consumers both at home and abroad.
  • A confluence of factors is helping China become a world leader in the digital economy.

Charlie Awdry: We all know that the Chinese economy is evolving and is dynamic. The great thing for me and for my clients and for us is that always gives us fascinating and interesting companies to invest in. And, I am going to develop some of those themes and tell you that many of them are in the technology space.

We were reminded by this, about this only last week, when the papers and on TV we saw that the Chinese landed a mission on the dark side of the moon. I am not a physicist, but apparently this is very, very technically difficult, very scientifically difficult, and NASA described it as a huge step for mankind. What is really interesting is China only put an astronaut into orbit in 2003. That is almost 50 years after the U.S. and Russia. That is the kind of fast-forward development you have in the Chinese economy to invest in.

But before we go more into technology, let’s zoom over or zoom back to 2007. That was when I was first asked to present at a client Chinese New Year event. At that time, yes, we thought technology companies were interesting, but actually what we really thought was interesting was consumer companies. Why? Because Chinese consumers in China were educated, began to be outward looking, brand conscious and confident. And we sit there in a dark office up on (inaudible) Street, trying to figure out how to enliven this concept for our clients. And we found a YouTube video and we put it on and it raised some laughs. It was two Chinese university students in their dormitory somewhere in China wearing Houston Rockets NBA vests, lip syncing, incredibly passionately to a Backstreet Boys’ song. I showed it to my kids last night, they thought it was absolutely hilarious. But the point was, “Wow, look at these consumers, look at the potential that they have to grow and for us to invest in.” And we spent the last 12 years tracking this Chinese consumer. And they are still driven by the same three factors, rising incomes, evolving tastes and thirdly, and very importantly, by some Chinese companies, such as Alibaba and Tencent.

These companies, have single handedly created a thumb economy at the confluence of eCommerce and social media. But it is not just eCommerce to focus on for the consumer. Think about tourism. I used to live in Hong Kong and we used to see big groups of Mainland Chinese tourists all together following one person with a flag going to Causeway Bay to the Sogo Department Store, because he was Japanese and that was cool. But in the last 12 years, those Chinese consumers and Chinese tourists have started to travel on their own. If you are in Asia, you will see them taking in the scenery and beauty and breathing the fresh air of New Zealand. You will see them in Japan skiing and drinking excellent whiskey. And here, of course, in London, we see them buying luxury goods and apartments.

But also, back in China, the domestic consumer has changed a lot. Twelve years ago, the Chinese wine drinker was being ripped off by companies like Great Wall China, Dynasty Wines, Changyu Wines, who were selling frankly bad products at high prices. But now I can assure you that the wine drinker in China is drinking the same, reasonably-priced, decent Australian red wine that you or I drink after a hard day in the office.

Richard has already talked a little bit about eSports and I want to talk about sports too in China. And if you go back to 2005 when I was in China and Hong Kong and you said, “China and sports,” those two didn’t really sit together very well. Maybe badminton, maybe table tennis. But then in 2008, I don’t know if you remember, but Beijing hosted the summer Olympics, and suddenly won all sorts of medals and became this sporting force. And now we have Xi Jinping, who is sort of a Populist I guess, but in a sporting framework, I say he is a Populist, because basically he said, “I hate golf, it is an inefficient use of resources, the bourgeois play it, it consumes a lot of water, but I love football. All you need is a football.” So now what do we have? We have Chinese businessmen buying British football teams. I think they own almost all of them in and around Birmingham. But we also have Chinese football teams in China paying fading premier leagues stars hundreds of thousands of pounds per week to go to a place they have never heard of before. And next time you are watching the premier league, whatever, Sky, Match of the Day, just take a minute not to look at the ball, take a minute to look at the advertising hoardings around the pitch. You will be surprised how much the advertising is actually in Mandarin characters. It is not for you or me, it is for billions of people over there who are consuming those sports.

Those Chinese consumers are alive and well. And I only got out a very short bit about eSports. But all I am going to tell you is that in 2022, when China hosts the Asian games, eSports is a medal event. So if your teenage son is spending hours playing League of Legends and not going out in the sunlight very much, don’t worry, he may well be a millionaire and massively successful sportsman in the future.

China is a world leader in the digital economy. I don’t think that is a controversial thing to say. But let me give you a little bit of context around that and why that is the case. It is because contrary to a lot of the popular belief, China is an economy where there are huge amounts of risk takers. The Communist party are not risk takers, they are on the other end of the spectrum. But Chinese entrepreneurs and technology people are risk takers and they are surrounded by software engineers. And this is an ecosystem that creates a huge amount of opportunity, investment and new businesses.

Hangzhou Hikvision. I am just going to spend a minute talking about that company for you. Hangzhou is quite a beautiful city in the East of China, it is also the home of Alibaba, so maybe there is something in the water there. Many people in China don’t like companies owned by the State, this is a company that is an example of mixed ownership. Yes, there is a State entity that owns shares, but management owns shares too, and increasingly foreign investors. It is a company that makes surveillance cameras, systems, CCTV. And I can tell you, that as China becomes a police state, even more than it was in the past, they have strong business growth. Just like any other Chinese company, they started with hardware, the cameras, they moved into the software, customized systems, they can charge more to the customer, and now they are going to move into artificial intelligence and machine learning. So you take a walk out of your Shangri-La in any major Chinese city, boom, you are on their system. You are breaking the law in China, bing, you are on their system. When you are actually in their office, people in their office don’t need a pass to go to work. They walk to the front of the building, the cameras recognize them, swish, the gate is open and off you go. And, of course, Hangzhou was the place where KFC opened their first restaurant where you walk in, you press on a menu what you want to eat, it scans your face and you have literally paid with your face.

So these are all examples of great Chinese technology companies. So this year, when I am asked to talk about China and how the country is evolving for Chinese New Year, yes, I am going to talk about the consumer, because that is still vibrant, but I am really going to talk about technology, and that doesn’t matter what Mr. Trump is saying. I am going to talk about technology, I am going to talk about Hangzhou Hikvision, because that really is truly exciting part of the Chinese economy right now. Thank you very much.

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0219-22415 12-30-20

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