Purpose of the trip
Fundamental research: I travelled to Hangzhou city in Zhejiang province to gain more insight into the high-end manufacturing leaders there, as we see them benefiting from structural demand growth owing to rising industrial automation and localisation amid the government’s self-sufficiency focus. Hangzhou, which was a key silk production hub on the ancient Silk Road trade route, is now a key internet hub and manufacturing base. It is also one of the top three cities in the Yangtze River Delta region in GDP terms, next only to Shanghai and Suzhou.
Highlights from the trip
Coming together of old and new worlds: The companies I visited are spread across industries, from renewable energy related areas such as lithium batteries and solar, to traditional sectors including petrochemical, textile and F&B. They reflect how China is transforming its economy towards going green and a high-tech focus.
Emerging innovation leaders: These companies are small to medium caps, but they are growing fast by leveraging on China’s localisation drive and demand tailwinds. They are narrowing the gap with overseas competitors and increasingly gaining global recognition.
ESG: These companies acknowledge that ESG is important and believe they are enablers towards a sustainable future. Many of them are part of the lithium battery and solar supply chains and help save energy costs through industrial automation. Disclosure is improving as part of their efforts to expand globally too.
Mood on the ground
Outlook: Confidence was in ample supply across companies, given the positive outlook driven by localisation and import substitution, reopening and recovery in demand, along with a focus on competitiveness through technology upgrades and supply chain integration.
Company A is among the leading domestic makers of servos, which are commonly used in manufacturing processes to control and rotate parts of a machine with high efficiency and great precision, such as robotic arms in assembly lines. Its product offering is expanding from servos (close to 90% of overall revenues) to encoders, programmable logic controllers and inverters, with high exposure to the new energy end markets, such as solar and lithium batteries. The company expects these areas to be key drivers of growth in the future.
In Full Control
Key differentiator: Company A’s full in-house production capabilities ensure that it is cost competitive and able to upgrade its products fast
The Fine Print
Founded in 1992, Company B is a leading industrial digital printing solution provider, with a focus on the textile industry (final printing products in picture on the right). Its main products include printing equipment (picture above) and consumables. It leads in integration and cost effectiveness among domestic peers and has better margins than foreign rivals. The prospects of digital printing are supported by increasingly stringent environmental protection policy and rising pollution costs that are pushing businesses to turn green. Digital printing saves on ink, water and electricity costs and is much less pollutive than traditional printing. It also means that Company B can respond to orders swiftly and with a shorter delivery and lower volume cost, ensuring that it is cost competitive for its downstream textile customers which tend to place cost as top priority.
"The trip to Hangzhou was fascinating and rewarding as it gave me a close glimpse of China’s high-end manufacturing progress. The small to mid-cap companies I visited were dedicating their efforts across diverse industries, from new energy related areas such as lithium batteries and solar, to traditional sectors including petrochemical, textile and F&B. Everyone was excited and hopeful about the future of manufacturing and committed to change. Visiting highly automated factories on the ground and speaking to engineers and workers by their production lines provided me with confidence in China’s next generation of manufacturing leaders."
Stephanie Li, Investment Analyst
The re-opening momentum may continue to build over the next few months. While we maintain our view that the re-opening will be gradual and that we are likely to see a material change in policy stance following the Two Sessions in March, it is possible that this could happen earlier than we expected. However, we would caution that a haphazard re-opening may bring about execution challenges, which would render the market more volatile in the near term.
Looking past the short-term volatility, we think the country is moving in the right direction. Equity valuations continue to be low. Liquidity within the system remains abundant. Key risk factors are well flushed out and acknowledged by the central government. External geopolitical tensions seems to be easing. In addition, consumer savings have increased materially over the past few years. All this gives us reason to be optimistic about a sustained recovery in Chinese equity markets.
We continue to focus on our five long-term investment themes – aspiration, digitalisation, going green, health and wealth – despite aspirational spending being battered by the slowing economy and lockdowns. The consumption upgrade is a generational shift, and one supported by the government to increase self-sufficiency.
Risk factors you should consider prior to investing:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
- Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
- The Company invests into other funds which themselves invest in assets such as bonds, company shares, cash and currencies. The objectives and risk profiles of these underlying funds may not be fully in line with those of this Company
- Past performance is not a guide to future results.
- Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
- The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
- Emerging markets or less developed countries may face more political, economic or structural challenges than developed countries. This may mean your money is at greater risk.
- The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
- As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
- There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
- Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.