Purpose of the trip
I wanted to check on progress at leading Chinese companies in advanced materials that help to drive technological innovation and optimise costs and efficiencies. I also wanted to take a pulse of the recovery in diverse downstream industries where we also have an interest, such as in renewable energy and consumer electronics. More broadly, I wanted to get a feel for sector conditions as well as the longer-term outlook for the advanced materials supply chain in general.
Sinocera - Material insights
A clear vision: Sinocera produces honeycomb catalytic filters that help to purify auto emissions to meet national standards. The company’s senior management team has a passion and industry expertise that came across strongly during my trip, which included meeting its chairman and chief technology officer. I also gained insights into the electronic materials business in a briefing by the company CEO for that segment (see picture below).
I took a day trip to the headquarters of Shandong Sinocera Functional Materials in Dongying city, Shandong province. Sinocera is China’s leading producer of advanced materials in six segments: electronics; catalytic filters for automobiles; dental crown implants; new energy coatings in batteries; precision parts in electric vehicle (EV) bearings and semiconductor components; and ink for ceramic tiles.
In total I visited five major product factories for advanced materials and met most of Sinocera’s founding team and next-generation executives. My interactions reaffirmed my confidence in the management team’s capabilities and prudence. The senior leaders demonstrated a clear understanding of the field for advanced materials. They have well-defined mid- and long-term strategies with internal targets by segment that seek to expand the business via both research and development and mergers and acquisitions.
Highlights from the trip
Commitment towards R&D: all of the companies I visited have been dedicated to materials research and development or supply chain services for over a decade. But this longevity has not dulled their enthusiasm. They remain passionate about the potential of new applications in line to benefit from rising incomes and appetite for electronics, health care and green investing. They retain confidence in China’s rebound post-Covid and remain positive on the outlook for the advanced materials sector and its supply chain. We tend to agree on the outlook, given a healthy pick-up in client orders as well as forward earnings and revenues.
Strategic industry for China: The materials sector is fundamental to daily lives and forms the backbone of China’s economy. It’s also critical to domestic self-sufficiency and security in materials. We have seen that supply chain disruption for raw materials can cause market volatility. We believe this sector is key to China’s economy and will remain well supported by the government. As such, we expect continued industry growth.
Improving ESG efforts: The companies I met acknowledged ESG as important operationally. Carbon emissions, waste treatment, labour management and governance are key priorities, given the nature of the business and potential for environmental impact and reputational damage. Most work in lithium battery and solar energy supply chains as enablers of a sustainable future. In general, industry disclosures are also improving as they seek to grow their global client base.
MILKYWAY - Moving in motion
One-stop shop: Logistics provider Milkyway aims to be a one-stop provider with integrated warehousing and distribution, supported by 35 terminals across seven countries worldwide, more than 1,500 vehicles and four shipping tankers. I met companies in the advanced materials supply chain, too. These included Milkyway Chemical Supply Chain, which owns and runs about 80% of new hazardous chemical warehouse areas in China. This reflects its best-in-class warehousing capability for hazardous chemicals that enable it to comply with increasingly strict regulations.
I was glad to speak to Milkyway and I gained confidence in its safety provisions and standards and clarity on its strategies for different segments in chemical distribution, logistics and warehousing. The management has maintained its track record of delivering on its strategy and hitting its targets since listing in Shanghai in 2018. Its team is well incentivised, supporting talent retention. We see growth potential given its competitive edge in chemical handling and clear strategy. A focus on safety leaves it well placed amid increasingly stringent regulations, especially given the potential for development and growth in China’s chemicals industry.
“On this trip I learned a surprising R&D fact about the advanced materials sector from Sinocera. R&D has four stages – basis, application, experiment and mass production. The most difficult step is from basis to application. On average, small projects need 22 months, while big projects need double that amount of time at 44 months to progress to mass production, when the product is eventually used in daily life. This level of dedication and preparation time behind the R&D breakthroughs that these advanced materials companies are working on impresses me, and I am encouraged to keep exploring the next generation of advanced materials leaders.”
Stephanie Li, Investment Analyst
Outlook
With China’s economic recovery yet to gain momentum, it’s likely that policy guidance will remain supportive. In addition, liquidity in the system is strong which is conducive to a rapid market rebound. We recognise that restoring consumer confidence is a gradual process, and we remain sanguine about its likelihood as all conditions are supportive of a sustained recovery.
We continue to believe in the long-term growth potential of our five core investment themes (aspiration, digital, health, wealth and green) and we believe that the current low-valuation environment is ripe for picking up high-quality assets at attractive prices.