We never subscribed to the theory China would succumb to a hard landing, which is why we kept a large relative exposure to the country. For many years we have consistently said we saw two Chinas – the ‘new China’ and the ‘old China’.
Our view was that old China would keep on slowing and its importance to the overall economy would reduce. As long as the major state owned ‘zombie’ companies did not collapse, we believed the banking system could muddle through and there would be no economic crash.
On the other hand, services companies in the ‘new China’ are continually delivering strong growth. This is the exciting part of the market from the perspective of an equity investor. The growing consumer-focused area of the economy has delivered on our expectations, while ‘old China’ has actually held up a little better than expected. Together, China’s economy now suddenly appears relatively strong.
‘The multi-year opportunity in healthcare’
We are seeing a particular value in the healthcare space. China’s demographics and its aging society is a major part of our narrative, but there is also the growing middle class that are demanding improved services. We currently like a number of stocks in this space – such as China Resources Pharmaceutical Group, Sinopharm and China Medical System Holdings.
The government is listening to the people and is willing to spend more and increase budgets to meet growing costs for treatments. This spending goes hand in hand with the rise of insurance take up. The insurance industry is growing rapidly and individuals paying the costs of this are demanding quality healthcare. Insurance companies are also ensuring patient treatments are of a high quality. Ping An is one name we like in insurance – which has a strong position in a number of markets.
There are also opportunities across the healthcare value chain, as the services and equipment market is highly fragmented. There is a major drive to consolidate this market – as smaller operators struggle to keep up with requirements like quality control and compliance. This is a strong structural growth area and for the right positioned companies this could mean a potential doubling or tripling of share prices over the next five or so years.
‘We remain bullish on cutting-edge tech’
We remain extremely optimistic on the Chinese tech sector – across a number of areas. Firstly, there is Alibaba. The first leg of Alibaba’s growth, in terms of consumer e-commerce penetration, seems to be slowing – but there is a lot more Alibaba can do with its product and services mix. It has a great franchise to monetise a number of other areas – like we have seen in Alibaba Cloud, its cloud operating system.
Disruption of financial services is another area of growth for Alibaba. Ant Financial, which operates the Alipay payment platform, offers a lot of value in our view – with a huge amount of operational leverage because of the scalability of the business model. Another positive driver for Alibaba is on network side. While Tencent has been the big winner in this space, Alibaba is establishing its own footing from a social-commerce angle. This, combined with its payment system, is creating a considerably stickier user base.
We also have a position in cutting edge optical instrument and lens manufacturer Sunny Optical. Despite extremely strong recent performance, we remain invested for the long term as its fundamentals are strong and the company is well positioned for the future trends in the technology sector. One such area of excitement for Sunny Optical is in the early stage development of improved virtual reality headsets. This could be a major area of growth for the company, as the gaming community increasingly moves towards virtual reality.
Jorry Rask Nøddekær, manager of the Nordea 1 – Emerging Stars Equity Fund