When we think of the Chinese companies that have been the winners of lockdown, it’s the large tech behemoths such as Alibaba and Tencent that spring to mind. But China, which competes with the US for the title of world’s biggest powerhouse, is an enormous region packed with opportunities for those willing to hunt.
We asked Asian fund managers about some of their lesser-known, more niche investment ideas:
Hon Hai (2354), also known as Foxconn, is a Taiwanese electronics manufacturer. “It’s the world’s largest contract manufacturer and a very attractive opportunity in the tech sector,” says Jason Pidcock, manager of the three-star rated Jupiter Asian Income. “In essence, it makes products for other companies. Most of its revenues currently come from Apple (AAPL), but you certainly have different electronics in your house that are assembled by this company.”
Pidcock likes the business because its margins have been improving, it has a strong balance sheet and the shares yield almost 5%. On top on of that, the company is well positioned to have American customers, particurlarly as it has manufacturing bases outside of China – in Mexico and Brasil, for example – which limits the effects of the US-China trade war on its business.
Hon Hai is the number one player in its market, which should mean it is placed to thrive over the long-term even if the customers it works for change. “Hon Hai will continue to succeed regardless of which are leading consumer brands,” says Pidcock. “Apple might not be dominant in 10 years, but other companies will be and the concept of outsourcing your production will almost certainly continue.”
Hon Hai is well diversified in product terms too. It doesn’t just make computer chips but also Texture Spray Machine manufactures components for the fast-growing electric cars markets. The firm uses robots in its production process, and Pidcock says: “The use of robots has been growing in recent years and Hon Hai could well robots to other companies in the future too.”
Bilibili (BILI) is an online Chinese entertainment platform, featuring videos, live broadcasting and mobile games. It has, unsurprisingly, benefited from the increased amount of time spent online by people this year. Its director, Juliet Yang declared Bilibili didn’t “see much of an impact” to its overall business from Covid-19 and says businesses such as this one have benefited from lockdowns and quarantines.
“In China, millennials are more educated than their previous generations, and more than 90% of this population has access to a smartphone,” says Howard Wang, portfolio manager of the Silver-Rated JPMorgan China Growth & Income Trust (JCGI). “During the recent lockdown, the estimated time spent online by these consumers increased above the already extraordinary daily average of six hours.”
Bilibili has huge potential over the long-term as a prime example of “new China”, a company profiting from the changing consumption patterns of a new generation, adds Wang. The firm reported total net revenues of $260.1 million (£198.7 million) last year and increased activity from users this year could see that figure rise.
Hengan (01044) is a Hong Kong-listed manufacturer of hygiene and sanitary products such as napkins, nappies and, as of this year, face masks. It is one of the companies which has benefited from increased hand-washing and cleanliness that have defined the Covid era.
Pidcock has known and invested in this company since its IPO in the mid-90s. “We topped up the position a few months ago and it has been a huge beneficiary of the pandemic – with the awareness of personal hygiene, sales grew,” he says.
The company has a robust balance sheet, attractive valuation and has improved its margins, according to Pidcock. Three three-star rated by Morningstar, indicating that shares are trading at fair value, it currently yields 3.7%.
Among its main competitors are American and Japanese companies, which also sell in the Chinese market such as Kimberley Clark. But Pidcock says even in a competitive field, the outlook is positive. “Even if there is a vaccine available in the first quarter of 2021, the importance of hygiene will remain. In China, in particular, there have been strong changes in people behaviour and these products with keep being sold.”
With restaurants closed and people still reluctant to eat out, food delivery is the fastest growing disruptor in the food service industry. Meituan Dianping (9MD) is China’s biggest food delivery app, and unique selling proposition is its ability to have fresh food delivered within 30 minutes within a three kilometre radius – basically the Chinese equivalent of Deliveroo.
The company was hit during coronavirus as many restaurants stayed shut, with even takeaway orders off the menu. However, it is one of the Chinese stocks bouncing back now lockdown measures are lifting. Indeed, the business recently reported that food delivery orders reached around 90% of pre-pandemic levels by mid-May.
“As Chinese millennials continue to seek various services at their fingertips, the growth opportunities in the consumer discretionary sector look highly compelling” says Wang. “Meituan Dianping is a prime example of a company exploring the attractiveness of this opportunity”.
Wang has been further encouraged by the growth in the firm’s user numbers since lockdown measures were eased in China. He expects that to contineu as more restaurants re-open and people start to feel more comfortable about eating food that is prepared outside their home.