Taking a Long-Term View on China Equities

China’s post-Covid reopening has revived investor interest in the world’s second-largest economy. As the recovery continues to take shape, we prefer to take a long-term view on Chinese equities.

Despite the recent headwinds, we expect China’s growth path to continue over the longer term. The structural drivers underpinning this growth remain intact, and we expect Chinese companies to benefit from trends such as rising incomes and wealth, increasing demand for premium goods and services, and burgeoning sophistication in technology and manufacturing. We believe there will also be opportunities for companies to innovate and move up the value curve. This, coupled with China’s increasing role in global trade, should bode well for exports as well as domestic consumption.

Below, we highlight three sectors that are likely beneficiaries.

Industrial automation aims to offset a shrinking workforce

The impact of China’s earlier one-child policy will continue to be felt in the coming decades. Its working age population, or people between 15 and 64, will contract by 22% or 217 million people. To counter the anticipated labour shortages, the government seeks to improve manufacturing through automation and robotics, which means China’s automation market will see strong secular tailwinds. For example, the country set a record of 243,300 industrial robots in 2021, a 44 per cent increase from the previous year.

Shenzhen Inovance is an industrial automation company with leading positions in inverters, servomotors and new energy vehicle (NEV) controllers. It has repeatedly proven its capability in developing new products and entering new markets, where it can compete with multinational peers. By March 2022, the company had generated 28% per annum shareholder returns since its IPO in 2010, with 40% compound annual growth rate (CAGR) in sales and 35% net profit CAGR*. Despite its size, our view is that Inovance can continue to generate attractive growth over the next 5-10 years as it gains market share and continues to innovate.