Valuations have corrected significantly within the Chinese tech sector and the A-shares market. The valuation premium for Chinese tech is now the lowest since 2012 (see above graph) which may present an opportunity for long.term investors. As Garnry notes, it’s often when others hesitate that one should act. When China’s stimulus begins to halt the weakness, the market will likely reprice the A-shares market as there remains attractive opportunities and even more so now at the current low valuation compared to developed markets.
Overall, the Chinese technology sector remains exciting in the longer term. The ecosystem contains a variety of interesting businesses with significant opportunities with the ability to drive growth and increase profitability for investors. Demographic shifts, with the rapid rise of the Chinese middle class and a burgeoning economy, have unleashed a wave of consumer engagement in China resulting in a decade of hyper-digitisation from which the tech sector can benefit from.
According to the China Internet Network Information Center, China’s online user base has increased to 800 million as at August 2018, double the population of the US – and it still has room to grow. According to Internet World Stats, only 54.6% of the population in China is online compared with 89% in the US.
We expect internet penetration and sector revenues to continue rising in the coming years due to the following:
1. China has a similar proportion of city dwellers as the US did in 1940 with a population approximately five times the size of the US, illustrating that there are still decades of above-average growth and urbanisation to come.
2. According to McKinsey & Company
, China’s mobile payments ecosystem is already 11 times larger than the US; as these trends continue to emerge it will be critical for Chinese consumers to be online.
Besides the three tech gaints – Baidu, Alibaba, and Tencent – there is an abundance of technology companies listed on Chinese, Hong Kong, and US exchanges who benefit from state support due to Beijing's plans for the Chinese economy as well as demographic trends in the country. But despite government support, these firms operate with entrepreneurial drive in what Baidu's chief scientist described as a “permanent state of war”, driving consistent growth within China’s tech sector.