Q&A Series: Capturing China’s future winners beyond the mega-caps with T. Rowe Price

About T. Rowe Price

Founded in 1937 and headquartered in Baltimore, Maryland, T. Rowe Price is a global active investment manager serving individual and institutional clients worldwide. The firm is known for its long-standing commitment to fundamental research, disciplined active management, and a collaborative investment culture. With investment professionals located across major global markets, T. Rowe Price combines deep local insights with global perspectives to identify long-term investment opportunities across asset classes.

About the China Evolution Strategy Team

The China Evolution Strategy is led by Portfolio Manager Wenli Zheng, an experienced Hong Kong-based portfolio manager with 17 years at T. Rowe Price. He is supported by nine dedicated China-focused analysts and 13 regional specialists across Hong Kong, Singapore, Sydney, London, and Shanghai. They are also backed by T. Rowe Price's broader global research platform, which includes more than 170 equity research professionals worldwide. Together, the team combines deep local market expertise with extensive on-the-ground engagements to identify underappreciated opportunities across China's evolving economy while drawing on cross-border sector expertise, rigorous bottom-up analysis, and disciplined portfolio construction to build a high-conviction portfolio focused on long-term capital appreciation.

In the article today, we are pleased to have the portfolio manager provide his insights on the T. Rowe Price Funds SICAV - China Evolution Equity Fund.

1. China has gone through multiple boom-and-bust cycles over the past three decades, each driven by a different growth engine — exports, infrastructure, then property. With property investment having nearly halved since 2021, where do you think we are in this transition, and which sectors do you currently see as offering the best opportunities?

• We believe China is moving from the end of a deleveraging cycle into the early stages of a new expansion cycle. Rather than property driving growth, we expect technology and consumption to become the economy's next structural engines.
• In technology, we're focused on AI infrastructure, industrial automation, semiconductor supply chains and companies benefiting from import substitution. Many of these businesses are still in the early stages of multi-year growth.
• In consumption, we're less interested in traditional discretionary spending and more focused on platform businesses - such as shopping malls, hotel chains and beverage franchises - that can steadily gain market share through operational excellence.
• We're also finding attractive opportunities in industries benefiting from harvest cycles, meaning they are reducing capex and enjoying higher free cashflow, where capacity discipline is improving profitability.

2. Given that China's new five-year policy blueprint laid out its ambitions to aggressively adopt artificial intelligence (AI) throughout its economy, where exactly is the fund finding investable opportunities within this space today?

• Both the public and the private sectors in China have announced big investments in AI. For our portfolio, we are focused on the receivers of AI investment rather than the spenders. Today, we see the most compelling opportunities in AI infrastructure, including printed circuit boards, chip substrates, copper-clad laminates, optical components, advanced packaging and power systems that enable AI deployment.
• Our view is that hardware currently offers greater earnings visibility than software. AI adoption is driving demand for high-performance computing, data centres and networking equipment, creating attractive opportunities across the supply chain where capacity remains tight and pricing power is improving.
• We also look beyond pure technology. AI is creating demand in industrials through areas such as backup power, grid infrastructure and energy storage, allowing us to invest in beneficiaries across multiple sectors rather than just information technology companies.

3. The strategy excludes the top 100 companies by market cap — the names that dominate most China benchmarks and peer funds. What is the rationale, and why do you believe future winners are more likely to come from the rest of the market?

• China's equity market has over 6,000 listed companies, yet benchmarks remain heavily concentrated in a relatively small group of mega-cap stocks. We believe this creates a much broader opportunity set than most passive or benchmark-aware investors can access.

• History reinforces this philosophy. Around 99% of China's top-performing stocks did not start out as mega caps. The biggest wealth creation typically occurs before companies become widely owned benchmark constituents, which is why we focus on identifying emerging leaders early in their growth journey.
• Excluding mega caps allows us to focus on businesses benefiting from long-term structural trends such as AI, industrial upgrading, new consumption, import substitution and supply-side reform, where earnings growth can be significantly higher than the broader market.

4. The fund can invest freely across A-shares, H-shares, and ADRs. Within A-shares specifically, the market is heavily retail-driven. According to data from FactSet, 70% of turnover comes from retail investors with an average holding period of just 13 days. How does the fund approach this dynamic, and does it create meaningful opportunities?

• We view the retail nature of the A-share market as an advantage for active investors. Short holding periods can create pricing inefficiencies that allow us to buy quality businesses when sentiment becomes disconnected from long-term fundamentals.
• Our investment horizon is measured in years rather than weeks. We rely on deep fundamental research, extensive company engagement and proprietary analysis to identify businesses whose long-term earnings potential is being overlooked by short-term market participants.
• Because the strategy invests across A-shares, H-shares and ADRs without structural constraints, we can compare the same investment opportunities across different listings and allocate capital where we believe the risk-reward is most attractive.

5. Walk us through the fund’s performance and what were the key contributors and detractors driving its returns?

• Since DeepSeek reignited investor interest in China's AI ecosystem, the fund has delivered strong outperformance. Stock selection has been the primary driver, particularly within Information Technology, Materials and Industrials, reflecting our focus on identifying the beneficiaries of China's AI investment cycle.
• Key contributors included AI infrastructure names such as Unimicron Technology and Kingboard Laminates, alongside materials holdings including Yunnan Aluminium and CMOC. These companies benefited from rising AI-related demand, tightening supply-demand dynamics and improving pricing power.
• Some of the strongest-performing optical leaders, such as Zhongji Innolight and Eoptolink, were detractors as they fall within our top-100 exclusion universe. However, our exposure to other optical infrastructure beneficiaries, including Hengtong Optic, helped offset much of this headwind, demonstrating that investors can gain meaningful exposure to China's AI buildout without relying solely on the largest companies.

6. With an active share of 95.7%, 62 holdings, and a projected earnings growth rate more than double the benchmark's, this is a high-conviction portfolio. Who is the right investor for this strategy, and how should it sit alongside existing China or broader emerging market allocations?

• We believe the strategy can serve as a standalone China allocation. As AI reshapes industries and disrupts existing business models, we believe a new generation of market leaders will emerge. Rather than anchoring the portfolio to today's benchmark heavyweights, we focus on identifying tomorrow's winners through structural themes such as AI, industrial upgrading, new consumption and supply-side discipline.
• It also works well alongside an existing China or emerging market allocation, providing a complementary source of alpha through exposure to a differentiated set of companies and return drivers that are typically underrepresented in benchmark-oriented portfolios.
• As AI accelerates disruption across industries, today's market leaders are not guaranteed to remain tomorrow's winners. We believe this makes a benchmark-agnostic, active approach increasingly valuable, allowing us to adapt quickly and invest in emerging leaders as China's economy continues to evolve.