Global Equity Spotlight: Travel Edition Episode 9

Hello everyone and welcome back to Global Equity Spotlight Travel Edition, a series where we unpack on-the-ground insights from our analysts who have recently returned from their travels. Today I have our analyst with me, who’s just back from a two-week trip to China. So let’s kick off. What are some of the high-level takeaways from the trip, and any notable experiences you can share with us?

Thanks. Just to give an overview: it was a two-week trip and really interesting. I started down south in Shenzhen, where I spent a week with Bank of America. They ran a three-day conference followed by a two-day field trip. The week after that I was in Shanghai. You’ll see a photo of me going for a run along the Bund with the spectacular Shanghai skyline behind it. It’s a fun emerging tradition in our team to go for city runs when we visit these interesting, exotic places. It’s a great way to get some exercise and a feel for the local culture. It’s amazing how much you experience just running around the city. So I spent a further week in Shanghai, that one with JP Morgan, who hosted an excellent China summit, as they call it. There was also a two-day field trip and a three-day conference. A really excellent time. I met a very wide variety of companies, around 30 meetings in total, across a broad range of sectors. This was an interesting little gift I came back with, and I’m still trying to figure out what it is. It was from Tencent when I met them, so one of my follow-ups is to work out what it means. A cool little memory from the trip.

Fantastic, thank you. It sounds like a wonderful trip with some really interesting takeaways. Let’s delve into the scale of infrastructure we’re seeing coming out of China at the moment.

Yeah. The beauty of these trips is being on the ground and experiencing it firsthand, and the quality of the infrastructure was one of the most positive impressions from the trip. Maybe three experiences to share. First was taking a fast train on a day out over the weekend. I went from Shanghai to Suzhou, 100 kilometers away, and it took only 25 minutes. It maxed out at about 290 km an hour, very smooth, very efficient, perfectly on time.
Secondly, getting around Shanghai, I used the metro and travelled with the locals. You can see on the photo of the time board how the timing is measured to the second, and the train pretty much arrives to the second. Again, it shows the efficiency of the Chinese system.
And thirdly, during the trip I got to go up two of the five highest buildings in the world. You’ll see a photo of the Ping An Finance Center in Shenzhen, the fifth highest building in the world at about 600 meters. It was literally going into the clouds that day, which reminded me of reading Jack and the Beanstalk growing up. This was a modern version of that. Really cool infrastructure experiences.

Brilliant, thank you. That sounds incredible, especially seeing those buildings up in the clouds. Maybe now we can touch on what we’re seeing coming out of some of the EV manufacturers. I know you met with a couple of them while you were there. Can you give us some insights on the technology trends you’re seeing on the ground?

Yeah, both on the ground and from the meetings. One of the biggest impressions was the abundance of EVs. Particularly in tier-one cities like Shenzhen and Shanghai, I hardly saw a combustion car on the road. It was pretty much all EVs, completely dominating, which I thought was fascinating. There was also an abundance of local brands. I saw only a handful of Teslas but many local brands, and the quality was amazing. I’ll show a picture of a premium model from a local brand that shows the quality of these Chinese EVs. I think that has global implications, because a lot of these brands will be expanding overseas in time, and the whole global market is going to become a lot more competitive as they do.
Within China, it’s already highly competitive. That was one of the mega themes from the trip: competition. China is inherently competitive, but it feels very elevated at the moment. Early in my career, a consumer goods CEO said that when the growth stops, the fighting starts. In these macro situations you often get a double whammy: when there’s less of a macro tailwind, companies have to fight a lot harder to grow. That’s what we’re seeing in China now. So in many respects I came away thinking this is more of a stock-pickers’ market going forward, partly because of competition. You need to navigate it very carefully. The EV industry is a good example: it’s clearly a very strong secular growth theme, but it’s also highly competitive. I think only two or three of the EV companies are actually making money at the moment. One of them is BYD, who I met, and I think it’s a very interesting business. It highlights that theme of competition, which wasn’t confined to one or two industries. It was very much across the board, a major issue in China.

Brilliant, thank you. And last but not least, maybe we can spend some time on the property bubble and what you saw on the ground. That’s a big theme playing out. Can you give us your insights?

Sure. This is a really interesting topic, because the million-dollar question in China is what’s happening to the property market. Historically it accounted for as much as 30% of GDP, so it’s a very big driver of the economy. What I came away with was that, despite a major correction already, the outlook remains cautious, and that’s for structural reasons. Firstly, you continue to have excess supply. I saw an interesting stat: unsold inventory is equivalent to six years’ worth of supply, which shows how much there still is to clear. Secondly, a major long-term headwind is the aging demographics. Over time the population is going to decline in China, so you’ll structurally have lower demand for property while sitting on this excess supply.

I had quite a few expert meetings on the topic and came away a lot more informed. One of the experts put it well: it’s not the darkest, but it’s still dark. Maybe the worst is over for the property market, but it doesn’t mean we’ll get any strong recovery. It’s starting to moderate. Another interesting theme was divergence, and we’re seeing it in the property market. The cities I went to, Shanghai and Shenzhen, are starting to see some green shoots. The caveat is that today it’s stimulus-driven, and one of the experts commented that when the stimulus is reduced, property tends to weaken again. The bigger problem is in the lower-tier cities, where you’re typically seeing net outmigration as part of the urbanization theme. There, there are no green shoots. So that increasing divergence is going to be an interesting theme going forward: tier one doing better, the lower tiers struggling. That feeds through into a muted outlook for the consumer. On top of the property headwind, there’s very high uncertainty around job security. Interestingly, they say that uncertainty right now is even higher than during Covid, which I think is a combination of the weaker macro and the uncertainty around AI, a big theme globally. We’re really seeing that hit consumer confidence. It’s driving the ongoing high savings and low spend rates in China, which looks likely to continue.

Fantastic, thank you so much. It’s been really interesting hearing your macro takeaways alongside what you actually saw on the ground. And to the audience, thank you so much for attending. We look forward to seeing you next time.