Purpose of the trip
Fundamental research: I recently travelled to Hangzhou city in Zhejiang province to gain more insight into the high-end manufacturing leaders there. Many of these companies are benefiting from structural demand growth owing to rising industrial automation and localisation amid the government’s self-sufficiency focus. Hangzhou, which was a key silk production hub on the ancient Silk Road trade route, is now a key internet hub and manufacturing base. It’s also one of the top three cities in the Yangtze River Delta region in GDP terms, next only to Shanghai and Suzhou.
Highlights from the trip
Coming together of old and new worlds: the companies I visited are spread across industries, from renewable energy-related areas such as lithium batteries and solar, to traditional sectors including petrochemical, textiles and food & beverage. They reflect how China is transforming its economy towards ‘going green’ and a high-tech focus.
Emerging innovation leaders: many of these companies are small to medium caps, but they are growing fast by leveraging China’s localisation drive and growing demand. They’re also narrowing the gap with overseas competitors and increasingly gaining global recognition.
ESG (environmental, social and governance): management teams I met acknowledged that ESG is important and believe they are enablers towards a sustainable future. Many companies are part of the lithium battery and solar supply chains. They also help save energy costs through industrial automation. Disclosure is improving as part of their efforts to expand globally too.
The mood on the ground
Outlook: confidence was in ample supply across companies. Many have a positive outlook driven by localisation and import substitution, reopening, and recovery in demand. A focus on competitiveness through technology upgrades and supply-chain integration are also positives.
Trip stats
Case Studies
In Full Control
Zhejiang Hechuan Technology is among the leading domestic makers of servos. These are commonly used in manufacturing processes to control and rotate parts of a machine with high efficiency and great precision, such as robotic arms in assembly lines. Its product offering is expanding from servos (close to 90% of overall revenues) to encoders, programmable logic controllers and inverters. These areas have high exposure to the new energy end-markets, such as solar and lithium batteries – key drivers of future growth.
Key differentiator
The company's full in-house production capabilities ensure that it’s cost-competitive and able to upgrade its products fast.
IN FULL CONTROL
Key differentiator: Company A’s full in-house production capabilities ensure that it is cost competitive and able to upgrade its products fast
THE FINE PRINT
Founded in 1992, Company B is a leading industrial digital printing solution provider, with a focus on the textile industry (final printing products in picture on the right). Its main products include printing equipment (picture above) and consumables. It leads in integration and cost effectiveness among domestic peers and has better margins than foreign rivals. The prospects of digital printing are supported by increasingly stringent environmental protection policy and rising pollution costs that are pushing businesses to turn green. Digital printing saves on ink, water and electricity costs and is much less pollutive than traditional printing. It also means that Company B can respond to orders swiftly and with a shorter delivery and lower volume cost, ensuring that it is cost competitive for its downstream textile customers which tend to place cost as top priority.
The trip to Hangzhou was fascinating and rewarding, giving me a close glimpse of China’s high-end manufacturing progress. Everyone was excited and hopeful about the future of manufacturing and committed to change. Visiting highly automated factories on the ground and speaking to engineers and workers by their production lines provided me with confidence in China’s next generation of manufacturing leaders.
Stephanie Li, Investment Analyst
Outlook
In a sharp and surprising reversal, China recently announced measures to roll back some of the country’s strictest zero-Covid rules. These measures reflect the government’s concerns over the state of the economy as a result of its Covid strategy. We believe the consequent direction of travel is one of continued reopening and economic recovery.
Longer term, we think the country is moving in the right direction. Equity valuations remain low. Liquidity within the system is abundant. Additionally, consumer savings have increased materially over the past few years. All this gives us reason to be optimistic about a sustained recovery in Chinese equity markets. That said, we remain mindful of any geopolitical tensions that might flare up.
We continue to focus on our five long-term investment themes – aspiration, digitalisation, going green, health and wealth – despite a slowing economy and lockdowns weighing on aspirational spending. Meanwhile, domestic consumer demand continues to strengthen, thanks to a generational change in attitudes, and the government's drive to increase self-sufficiency.
Companies are selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance. Past performance is not a guide to future results