ChiNext: The growth market that has defied Chinese equity trouble
Head of Equity Strategy
Summary: ChiNext is up 19% this year while the rest of the Chinese equity market is down highlighting that there is a high quality pocket in China that investors should have on the radar. The ChiNext Index comprises of leading technology companies within battery and medical technology including biotechnology. It is a closed market for most investors but luckily a Hong Kong based asset management is offering a Hong Kong listed ETF providing exposure to this interesting market in China.
China has a growth pocket nobody talks about
This year has been a rollercoaster ride for Chinese equities. It all started with blistering growth and strong momentum in Chinese equities before rising US interest rates and inflation talks temporarily ended the trade in technology stocks. While technology stocks came back in the developed equity market Chinese equities went from crisis to crisis, first in housing during the summer months and which is still ongoing, to that of an energy crunch like in Europe as energy prices have galloped higher. But there is one pocket in the Chinese equity market that has defied the negative forces of higher energy prices and housing woes, and that is the ChiNext board on the Shenzhen Stock Exchange.
ChiNext is up 19% this year highlighting a stunning comeback following a 29% drawdown during the technology correction during February and March. CSI 300, the leading benchmark index of Chinese mainland equities, is down 4% this year, and Hang Seng in Hong Kong is down 6% this year. While ChiNext is the crown jewel in terms of innovation and growth companies within key technology, it has struggled to deliver against Nasdaq 100 which is up 29% this year, and since June 2010, Nasdaq 100 is up 23.2% annualized compared to 13.1% annualized for ChiNext.
ChiNext is closed market for foreign investors
In recent years China has opened up its capital markets making it easier for foreign investors to invest directly in mainland China equities listed in Shanghai and Shenzhen, but the ChiNext board is still closed land for most investors due to prohibitive rules. In effect it is only accessible for few foreign institutional investors. Luckily the ETF market is providing an opportunity for retail investors to get access to this market through the CSOP SZSE ChiNext ETF (Saxo ticker is 03147:xhkg) managed by CSOP Asset Management which is a Chinese regulated asset management firm based in Hong Kong with $10bn in asset under management as of December 2020.
The ETF consists of 160 securities with $110mn in assets and tracking the ChiNext Index and a total expense ratio of 1.16%. The ETF uses a combination of a physical representative sampling and a synthetic representative sampling strategy (swaps), which means that the fund is not holding the underlying index 1:1, but tries minimize the tracking error through sampling. This enables the fund to minimize tracking error while getting better liquidity conditions for investors.
The 10 largest positions in the fund constitute 49.3% of the funds market value with Contemporary Amperex Technology (CATL) being the largest position with 19.1% weight and also the biggest company in our battery equity basket. CATL is one of the world’s largest manufacturers of lithium-ion batteries and is becoming China’s crown jewel within the fast-growing and emerging battery industry which will be transformational and essential to the green transformation including electric vehicles. The ETF also provides exposure to China’s largest financial and stock information provider East Money Information with $1.8bn in revenue and growing 82% over the past year. The ETF also gives exposure to some of the most interesting medical technology and biotechnology companies in China.The 10 largest holdings in the CSOP SZSE ChiNext ETF
The history of ChiNext and why it will play a major role
ChiNext was first discussed in August 1999 in the CPC Central Committee and the State Council during the height of the dot-com bubble. China was looking at the technological change in the US and especially what was going on with the Nasdaq exchange. In August 2000, China decided that the Shenzhen Stock Exchange should prepare to create a second board which should include innovative companies with key technologies in order to support growth industries. The ChiNext board was inaugurated on 23 October 2009. In 2020, more than 800 companies were listed on the ChiNext Market with the combined market capitalization approaching $1trn.