Investing in China’s digitalised economy, November 2020

Chinese Singles Day on 11 November started out as a kind of “anti-Valentine’s Day”. Nowadays it’s a major shopping holiday for all - similar to Black Friday… but much, much bigger.

While American’s spent some $28.4bn over the entire Thanksgiving weekend last year, Singles Day last week attracted around $51bn in sales on Alibaba alone*. If you include the extra three days that were added to the event for a “post-pandemic boost”, the number rose to $75bn.

Online retail firms such as Amazon and Alibaba obviously do well during these events, but other companies also benefit. For example, on Singles’ Day last year, ZTO the delivery company received more than 200 million orders and collected 113 million parcels on the same day. In comparison, Australia shipped 934 million parcels in the whole of 2019**.

With Chinese consumers obviously willing to spend, we asked four managers about their thoughts on the online retail sector.

Jerry Wu, Polar Capital China Stars

“Unshackled by entrenched offline industry incumbents, in many aspects it is fair to claim that the Chinese economy digitised before it industrialised. Its phenomenal e-commerce growth happened before we had the chance to see the emergence of the Chinese equivalent of Tesco, Walmart and Costco. Alibaba and JD.com, two dominant e-commerce platforms, grew without much resistance from offline competitors and consumers. Similarly, digital payment and mobile wallets appeared before most Chinese consumers had the chance to develop the habit of using credit cards. Now Alipay (Alibaba) and Tenpay (Tencent) are ubiquitous and dominant.

“COVID-19 not only accelerated the secular digitisation trend that was already well underway but also tested the resilience of these digital business models. Economies with a robust digital infrastructure, a high proportion of tech-savvy consumers and a large group of innovative technology companies navigated and adapted to the new world quickly and successfully. With its excellent internet infrastructure, 830 million active internet users, 600 million mobile payment users and a sophisticated and burgeoning digital and technology industry, China’s massive digital economy already accounts for more than one-third of its GDP. This is a critical reason for its resilience and potential.”

Lorraine Kuo, Invesco China Equity 

“China is now a digital society with more than 900 million internet users. It has pledged to invest more than US$3.78 trillion in new digital infrastructure over the next 5 years and, in 2020 alone, as much as US$423 billion has already been allocated to projects including 5G base stations, data centres and artificial intelligence.

“A Chinese consumer’s daily life involves frequent engagements with different types of online platforms offering both products and services. And the importance of the digital trend can be seen in the make-up of the MSCI China index where the communication services and consumer discretionary sectors constitute more than 20% of the index. The large companies in these sectors are mainly in the internet space.

“The Covid-19 outbreak is accelerating this trend and has led to the emergence of new markets such as telemedicine. During the crisis, e-commerce platforms, which had previously just delivered drugs or booked appointments, began to provide treatment and advice. For example WeDoctor, an app backed by a leading internet conglomerate, mobilised 20,000 physicians to work online during the epidemic thereby encouraging the use of its platform going forward.”

Martin Lau, FSSA Greater China Growth

“China’s e-commerce and online services were among the few bright spots against the dismal economic backdrop this year, particularly with Covid-19 accelerating the change in consumer behaviour and lifestyle choices. Even pre-pandemic, technology platforms and e-commerce had been growing rapidly in China, driven by a large population of digital natives – particularly the cohort of Chinese millennials with steady jobs and significant disposable income.

“Until fairly recently – and with the exception of Tencent which we have owned for more than a decade - we had followed the rise of China’s technology giants mostly from the sidelines, as we had concerns about governance standards, transparency levels and high valuations. However, many of these issues have diminished and in some cases have improved.

“As a result, earlier this year we purchased Alibaba Group. We believe that the core franchise is strong, with steady growth potential over the next few years, while the cloud and fintech businesses could provide additional optionality. While we have long debated Alibaba’s historical governance issues, with events like the Alipay deal in 2011 causing a stain on Alibaba’s history, we believe such behaviour is not likely to be repeated.

“We also purchased JD.com, a Chinese e-commerce retailer that owns the bulk of its own infrastructure (rather than just facilitating third-party sales). The company is still growing strongly at 30% per annum top-line with ongoing investment, and profitability should continue to improve with economies of scale.”

Mark Hammonds, Guinness Asian Equity Income

“China’s response to the pandemic, and steps taken to control the coronavirus, have allowed the country to reopen its economy more rapidly than others. In many areas, levels of activity have returned to normal and, in some industries, activity is booming as shutdowns elsewhere mean China has effectively become the only supplier. We view domestic Chinese exposure as favourable and likely to prove more resilient under different economic scenarios, as we expect consumers to continue to spend money, for example, on homewares and home improvements.

“In the online category, NetEase is a Chinese game developer and so has fared well this year as consumer habits have changed. The company saw increased trading over the Chinese New Year as consumers sought entertainment at home. Netease’s legacy games continue to do well, while the company has a strong pipeline of both domestic and foreign games which should further drive sales. Recent results have also shown strong demand in its Cloud Music businesses.”