- US ban on some of the Chinese companies will have little impact given that i) most of them are unlisted and ii) listed Chinese internet companies have very minimal revenue exposure to international markets.
- US-China trade relation is one area that has not worsened lately and is unlikely to in the near-term due to i) strong commitments to the phase-one deal, ii) economic drag by Covid-19, iii) economic-political cost for the US election and iv) China current economic leverage over the US.
- The world is still highly dependent on China given its deeply embedded supply chain and high import of intermediate goods (from China). The Covid-19 situation is making it tougher for countries to untangle with China, without a huge cost.
- A Biden win is likely to represent a positive shift to a multilateralism approach, improvement in overall trade backdrop and less aggressive trade policy . This is likely to bode well for China.
- Tensions may hurt sentiment for
Chinese plays, which could push the stock prices lower. Given limited
fundamental impact and supported by a robust recovering domestic economy, this
may create a buying opportunity.
Tech war’s impact on Chinese corporate fundamentals limited
Table 1: Revenue exposure to international markets dramatically small for digital companies
|
Sector |
Domestic Revenue Exposure |
International Revenue Exposure |
|
IT |
68.20% |
31.80% |
|
Energy |
71.60% |
28.40% |
|
Health Care |
79.10% |
20.90% |
|
Materials |
86.00% |
14.00% |
|
Industrials |
86.90% |
13.10% |
|
Financials |
95.00% |
5.00% |
|
Comm. Srv |
96.80% |
3.20% |
|
Cons. Staples |
96.30% |
3.70% |
|
Cons. Disc. |
98.20% |
1.80% |
|
Utilities |
98.50% |
1.50% |
|
Real Estate |
99.00% |
1.00% |
Table 2: Top 10 constituents within MSCI China has miniscule revenue exposure to international markets
|
MSCI China Top 10 Constituents |
International Revenue Exposure |
Weight |
|
Alibaba group Holdings |
6.7% |
19.8% |
|
Tencent Holdings |
4.4% |
14.4% |
|
Meituan Dianping |
0.0% |
4.3% |
|
China Construction Bank |
3.3% |
2.5% |
|
JD.com |
0.0% |
2.5% |
|
Ping An Insurance |
0.0% |
2.3% |
|
China Mobile |
0.0% |
1.6% |
|
NetEase |
0.0% |
1.5% |
|
Baidu |
0.0% |
1.3% |
|
ICBC |
0.0% |
1.3% |
Is trade war still a major concern for investors?
Chart 1: Significance of the US with regards to China’s trade has declined over the last year…
Chart 2: …readings from exports, imports and trade balance further reinforces
Is the decoupling of China by the US (and the World) a reality or a pipe dream?
Chart 3: China has become closely integrated with global value chains in the last two decade
Possibility that US-China trade situation can improve
China equities to benefit from the improving economic fundamentals
Chart 4: Digital economy and consumption-oriented sectors are key to China’s outperformance against global equities this year.
Tensions may affect sentiments, but not a major cause for concern
Recommended products for exposure to China
|
Category |
Products |
|
Actively Managed Fund | UBS (Lux) Equity Fund - Greater China P Acc SGD |
|
Passive Tracking ETF |
Table 3: Forecasts for MSCI China
|
China Market (MSCI China Index) |
FY2019 |
FY2020 |
FY2021 |
FY2022 |
|
PE Ratio (X) |
13.6 |
16.8 |
13.5 |
11.3 |
|
Expected Earnings Growth (YoY %) |
1.0% |
-6.9% |
24.0% |
20.5% |
|
Earnings Per Share (EPS) |
6.3 |
5.8 |
7.2 |
8.7 |
|
Projected Fair Price (Based on 13.5X historical average PE Ratio) |
- |
- |
- |
118 |
|
Potential Upside from Today (%) |
- |
- |
- |
24% |
|
Source: Bloomberg Finance L.P., iFAST estimates. Data as of Sep 2020. |
||||
Chart 5: Valuation trading around fair level using forward PE ratio
Chart 6: MSCI China price performance vs EPS
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