By Alison Savas, investment director and member of the senior investment team at Antipodes Partners
It was the reopening many investors thought could bring a spectacular stock market resurgence, but the interest in Chinese equities following the end of Covid lockdowns has faded. However, while many market participants were expecting a ‘hockey stick’ economic recovery, this was likely never achievable in the absence of the US-style stimulus.
Therefore, the domestic recovery has been slower than expected in China and exports continue to be weighed down by economic deterioration in the West.
Local and global challenges
Domestically, the problem of excess inventory in the Chinese property market has been well documented. Combined with issues such as demographics and its ageing population, the days of Chinese GDP growth of 8% are likely well and truly over. Over the longer-term, investors should be expecting outcomes of 4-5% from here – which is still well above many advanced economies.
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Aside from its internal challenges, growing China and US tensions have been likened to a new cold war due to the potential scale of the conflict and the economic heft of the players. But in contrast to the US-Soviet era, the global economy is more integrated than ever, with China contributing circa 15% of global trade.
The US and the West have rarely allowed ideology to stand in the way of mutual self-interest in external relationships, including its relationship with China. The key difference today is that the West is now threatened by the rise of China’s mercantile and political power. While the tail-risk of dislocation is growing, there remains a powerful incentive for the two superpowers to co-exist for the sake of shared economic prosperity.
China increasingly looks East
After three years of lockdowns, China has re-engaged with the rest of the world and is positioned to take trade market share in an increasingly multipolar world.
While the US continues to push toward reshoring manufacturing locally and to nearby countries such as Mexico – in place of China – the developing world has been the focus of China’s foreign policy. China has looked across Asia, LatAm, Africa, Russia and the Middle East for geopolitically aligned partners – historically by offering outward foreign direct investment relating to infrastructure, such as the Belt and Road initiative, as well as via direct lending.
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China’s strategy to align with the developing world – which represents 46% of global GDP and 86% of the population – provides a significant demand base for its emerging multinational champions to thrive and advance the evolution from ‘Made in China’ by foreign companies to ‘Made by China’.
Value solutions ideal for EM
An example of a thriving ‘Made by China’ entity can be seen in electrical appliance manufacturer Midea Group. The group made its entry into household appliances in the 1980s, initially as the manufacturing partner of the Toshiba brand, which it acquired in 1998. It has since developed to be one of the largest air conditioning manufacturers in the world, with circa 11% of total industry revenue.
An efficient cost structure and investment in distribution has allowed Midea to price competitively and grow market share both domestically and overseas. Over half of exports are to emerging markets, which are suited to its value-oriented products and will exhibit structural growth from higher penetration and upgrades to lower energy-intensive units.
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The company is also not ignoring advanced economies, where it is a sponsor of Manchester City, for example. Building on its success in air conditioning, the acquisition of German robotics business Kuka in 2017 for $5bn leverages Midea’s mega-scale manufacturing experience and extends its addressable market opportunity to industrial automation technologies. The company currently trades at a P/E of 12x, and its high RoCE compares favourably at almost half the multiple of Japanese competitor Daikin.
Capitalising on rise of EVs
Elsewhere, electrification is the largest reset in the manufacturing of automobiles since the emergence of mass-production, enabling China to quickly gain a foothold in the $2.9trn per year industry. China’s target of EVs accounting for 20% of new vehicle sales was achieved in mid-2022, more than three years ahead of schedule.
China’s Contemporary Amperex Technology (CATL) has grown to be the world’s largest EV battery company, with more than a third global market share. Through scale, efficient manufacturing techniques and continued heavy investment in R&D, a CATL battery pack displays at least 10% higher energy density versus its competitors. This performance gap has widened in each of the last three years, despite aggressive competition. CATL boasts more auto OEM customers than any other battery producer and has recently expanded to licensing deals in the USA with Ford and Tesla.
CATL’s ability to maintain a performance gap should see the company able to defend its position in this large and growing industry. At a FY23 P/E of 23x, with earnings growth of 30% into 2024, CATL looks attractively priced versus inferior peers on higher multiples.
