Key Takeaways

Gabriel Sacks
Investment Manager, abrdn Asia Focus plc

Property: Issues in the market require political will for a resolution. We could be near a bottom with the raft of supportive measures, but this could still be a drawn out process and Beijing needs to tackle the crisis of confidence with more fiscal support to households and local governments.

Payments: Conversations with small-cap companies in the diagnostics space highlighted issues with payments in the government sector.

Japan, not: The comparison with Japan in the 1990s is overstated. There are key differences: (i) the yen rose significantly in the early 1990s hurting the export sector, (ii) banks continued to lend aggressively resulting in multiple asset bubbles and (iii) policymakers were slow to identify and react to the issues. Finally, fiscal and monetary policy did not act in concert, which holds a lesson here for Chinese policymakers.

Transition risks: The government is trying to transition the economy towards advanced manufacturing, such as electric vehicles (EVs), semiconductors and robotics, though this risks overcapacity as capital floods in. We are seeing this in EVs and possibly in semiconductors at the 28nm level.

Geopolitics: An optimist would view the recent US moves to restrict China’s access to advanced tech (14nm and below) as drawing a line on export controls, with the situation unlikely to worsen further from here.

The conflict in the Middle East might be another reason why the Biden administration will be less inclined to provoke China. This could change if there is a new US administration next year.

Pruksa Iamthongthong
Investment Manager, Asia Dragon Trust plc

The crowds are out: We could see that people are out and about. Domestic tourism is strong, trains are very full and  restaurants are crowded. Spending, however, is said to be more subdued.

Local governments: The weak macro environment and struggling property sector have had an impact on the local governments, and the companies that do business with them. We are seeing a greater effort by the local governments to raise funds and improve liquidity and finances, such as the sale of assets.

Consumer: The government has not done much to support consumption but the Chinese consumer is in very good shape with significant accumulated savings and a low propensity to borrow over the last few years, which leaves room for a meaningful recovery in spending once confidence returns. Sentiment in solar and new energy remains weak. We are seeing green shoots of a recovery in automation, albeit whether this is sustainable remains to be seen. Over the longer term, we still believe in the structural growth of these areas, while current valuations reflect lower growth expectations over the near term. Elsewhere, there is some hope that the anti-corruption campaign in the healthcare sector might have peaked and that the situation will improve from here, although the official timeframe for the end of the campaign is a year from August 2023.

Convenience: A local phone number is all one needs to get around, pay for food and drinks among other things in China, and all this is on WeChat. We took the high-speed train from Hangzhou and reached Beijing in 4.5 hours, travelling at a maximum speed of 350km per hour. With WeChat, we could scan menus, order fruits and even get hot Starbucks drinks delivered to our seats in the train. WeChat is very much a part of the everyday life in China.

Chacha Food: Seeds of growth

Gabriel and Pruksa at Chacha

Quality edge: Gabriel and Pruksa at Chacha, among China’s leading nuts makers with strong brands, including the largest roasted seeds brand locally. This reflects its stringent quality control of its production line and supply chain.

We had a positive meeting with Chacha Food’s chairman that focused on softer issues around management processes and succession. We liked how the chairman talked about the company being focused on branding and product quality which should position it well for a recovery in consumption. Among other observations, the chairman was impressive and decisive in terms of taking correction actions with regard to operational matters. The chairman appears to be long-term in how he wants to build a sustainable business and how he is willing to try new ways of managing business to make things work. He is also receptive to feedback. We continue to maintain our view of Chacha being a core small-cap holding.

Shuanghuan Driveline: All geared up for expansion  

Our meeting with the Chinese gear maker was among the best ones of the trip. The company’s industry positioning is strong with over 50% share in China EVs, including Tesla, and there appears to be a lot of know-how involved in developing gears with 30 different processes. The company has a strong culture with relatively low staff attrition, a high percentage of female employees and a desire to align staff via the employee stock option scheme. The company is targeting to grow revenues at a 20% annual rate over the next three years and does not see geopolitics affecting the auto parts segment, with its expansion in Hungary supported by encouraging conversations with clients. The IPO of the humanoid robotics division could be another catalyst for growth. 


Despite the continuously supportive tone and initiatives from the government in recent months, market sentiment has remained cautious. However, we see the recent policy initiatives as sending a strong signal to the market that the government is intensifying its effort to prop up the economy. This bodes well for the economy and stock market in the year ahead. We remain positive on China’s market recovery and continue to believe in the long-term growth potential of the five themes (aspiration, digital, health, wealth, green), and think that the current low-valuation environment is ripe for picking high-quality assets at an attractive price.

Companies selected for illustrative purposes only to demonstrate the investment management style described herein and not as an investment recommendation or indication of future performance.

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