Global Equity Spotlight: Travel Edition Episode 7

Debunking Preconceived Notions of China

Hello everyone and welcome to Global Equity Spotlight Travel Edition, a series where we delve into interesting topics affecting equity markets. Today, I have Jacques with me who recently returned from a trip to China. So, Jacques, what were some of the preconceived ideas that you had going into this trip, and how did you sort of see that playing out on the ground?

Yes, so I had the privilege to travel to China for two weeks at the end of last year. It was my first trip to China, so very insightful from a market perspective. I think one of the biggest preconceived ideas I had was being a very communist country, um, that was not the case at all. The people we spoke to on the ground were very entrepreneurial and very capitalistic in their thinking. I think another preconceived idea was from a social perspective that the people would be a lot more hostile to Westerners, and again, this was not the case at all. People were very friendly, very helpful everywhere we went and happy to answer questions when you chatted to them. And then, of course, everyone always talks about all of the cameras and constantly being watched, but it didn’t feel invasive at all. The locals we spoke to almost prefer it that way because it means there’s a lot less crime and we didn’t feel unsafe at all walking around some of the cities. So, it meant that the police presence was also quite a lot less than I was expecting.

Economic Landscape & Property Market Drag

Great, thank you for those on-the-ground insights. Really interesting to hear about. So, maybe from a high level, could you maybe delve into what you saw on the ground in terms of, you know, their economy, what are we seeing in terms of their property market developments, and, yeah, just give us some insights on that.

Yes, I think from an economic perspective, what really stood out was how modern the infrastructure is. From the roads, buildings, bridges, the infrastructure is just absolutely world-class and, of course, this helps the economy to be very efficient. The second was the scale of the projects and the efficiency and the speed of their execution. I think what was absolutely clear was that if the government decides they’re going into a strategic industry, the entire country backs them and the regulation supports that industry. As an example, we visited Xiaomi, a company that people know for their cell phones that they started manufacturing in 2011. Xiaomi just built their second EV factory that produces 1,300 cars per day and it’s not just the volumes—the quality of the product was exceptional, very, very well-made. So you can understand why the car export industry is doing so well and taking so much market share offshore.

Consumer Confidence and GDP

And then with regards to the property sector, what stood out was the amount of unfinished buildings still outside some of the major cities. So, property will probably continue to be a drag on GDP; at least now it’s getting smaller in the base. It does, however, mean that consumer confidence has not recovered as quickly as we would have expected, and the negative wealth effect will continue to be a drag on consumer consumption with property prices continuing to decline.

Tech Sector: AI, Robotics, and Autonomous Vehicles

Great, thank you so much. So maybe moving on from that, were there any notable sort of developments in the tech sector that pulled through from your trip?

Yes, I think high-level, what was impressive is how they’re embracing AI on both the hardware and the software side. On the hardware side, they were, of course, cut off from chips in the US and this gave them a big incentive to develop their own chips locally. Some of the companies we spoke to mentioned that they’re still behind the US on some of the leading chips, but on the inferencing chips, they are on par with some of the Western companies. What’s also quite impressive is what they’re doing in the humanoid space, companies like Xiaomi commenting that the next factories will incorporate humanoids into their production line to improve efficiencies and ultimately save on labor costs. Another example of this is what they’re achieving in the autonomous vehicle side; walking around some of the big cities, it was quite evident the amount of autonomous vehicles on the road. We actually got to experience one of these rides and it was just a very impressive experience—the amount of technology and software that they’ve developed in this industry.

Cloud Computing & Monetization Models

On the cloud side, speaking to some of the companies, some of our key takeaways are that they’re still in the process of growing their top line quite aggressively; they haven’t really started focusing on monetization, and the companies also cautioned that the monetization profile of their cloud businesses will look different to those of the West because their customers will be less inclined to follow the subscription model, so they need to monetize through the ad model.

Great, thank you for your insights today, Jacques. It sounds like you had a great trip. To the audience, please feel free to join us on the 12th of February, where Jacques will delve into some of the e-commerce names in China. Thanks so much.