The Paris Olympics have begun, and Hong Kong’s athletes have shone in fencing, quickly securing two gold medals. The fencing craze ignited by Cheung Ka-long’s victory at the Tokyo Olympics three years ago may reach new heights after the victories in Paris.

Fencing, originating in Renaissance Europe, is an ancient sport. Delving into the history of fencing reveals that it is also the sport in which the host country France has won the most Olympic medals. It’s one of the few sports in international competitions where the official officiating language is French.

Another surprising discovery is China’s significant presence on the contemporary fencing medal table. Despite not having the historical, cultural, talent, or training infrastructure advantages of European countries, China’s Olympic results are impressive. Chinese athletes won 1 silver and 1 bronze at the 2000 Sydney Olympics, 3 silvers at the 2004 Athens Olympics, 1 gold and 1 silver at the 2008 Beijing Olympics, 2 golds and 1 bronze at the 2012 London Olympics, 1 silver and 1 bronze at the 2016 Rio Olympics, and 1 gold at the 2020 Tokyo Olympics. Among the world’s top 100 male and female fencers, China has 29 athletes across épée, foil, and sabre events, compared to France’s 52. This is a surprise to many.

Fencing was formally introduced to China only in 1955. A pivotal moment was when female fencer Luan Jujie won gold at the 1984 Los Angeles Olympics. Since then, fencing has gradually gained popularity in China. To cultivate better fencers, the Chinese fencing team implemented several reforms, such as hiring European coaches. Unlike athletics and swimming, where athletes are primarily sourced from specialized sports schools, fencing mainly relies on clubs to train potential athletes. Outstanding fencers can be selected for the national team. Moreover, the success of Chinese athletes in international competitions has inspired more children to participate in the sport, which in turn, trains more talent reserves for the sport.

In the Chinese stock market, there are industries and companies that, much like Chinese fencing, have quietly risen over the past 10-20 years and held global leadership positions unbeknownst to outsiders.

For example, the global smartphone market is very competitive, yet the general public often only sees the competition among well-known brands, paying little attention to components providers. Microphones and speakers are essential components of smartphones. In this field, Chinese companies hold a near-monopoly position, with more than one highly competitive company. One company in Jiangsu, having risen early, opened up the global market with its advanced technology and product quality, with its products found in one out of every three smartphones worldwide. Another emerging company is not only catching up in the field of miniature speakers and microphones but also actively developing wearable smart devices. Its acoustic components currently hold a 70% market share in high-end virtual reality headsets globally.

Similarly, many people know China’s leading position in electric vehicles (EV), but few are aware of China’s strength in automotive lenses. One of our investment cases is an optical product manufacturer founded in the 1980s, which has ventured into smartphone lenses, automotive lenses, AR, and VR over the past 30 years. As the world’s largest supplier of automotive lenses, it holds over a 30% market share. Its rival company, a camera module manufacturer founded in the early 2000s, has also become an industry leader within just 10 years. Beyond smartphone and tablet lenses, this company has increased its focus on automotive lenses in response to changing industry dynamics. Major EV companies are diving into the development of autonomous driving, in which automotive cameras are indispensable. New cars with smart driving features are equipped with at least five cameras, with leading Chinese EV companies like NIO, Li Auto, and Xpeng equipping over ten cameras for their autonomous driving systems. Under such circumstances, the demand for automotive lenses is expected to rise.

These companies, though in different industries, can generally be categorized under consumer electronics. China’s rapid urbanization and growth in per capita disposable income over the past few decades have driven the demand for consumer electronics, supporting the industry’s rapid expansion. Facing the intense competition in the domestic market, companies are willing to increase their R&D investment, making Chinese consumer electronics products more diverse, competitive, and faster in iteration.

In fact, besides consumer electronics, China has quietly caught up in many other advanced manufacturing areas, such as EVs, solar panels, lithium batteries, semiconductors, and biotech. China’s position in the global industrial chain is steadily rising. This trend is evident in export structures over the past ten years: the proportion of labor-intensive goods in total exports has declined, while capital- and technology-intensive products have meaningfully increased. With the Chinese government’s continued emphasis on economic restructuring, industries driven by technology, R&D, and consumption are expected to have greater development opportunities.

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Disclaimer

This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

In respect of any discrepancy between the English and Chinese version, the English version shall prevail.

In the late 1980s and 1990s, China began attracting significant foreign investment and developing its manufacturing industry, gradually emerging as the world’s factory for various low-cost manufactured goods. Today, after two to three decades, while low-end industry chains are shifting to countries with even lower production costs like Southeast Asia, Chinese manufacturing still dominates many light industry manufacturing sectors, with toys serving as a typical example.

More than 70% of the world’s toys are produced in China. Yet, can you name one or two Chinese toy brands or manufacturers? Most people probably cannot. If you can name any Chinese toy manufacturers, you are likely working in the procurement department of an international toy brand. The world’s most famous toy brands mostly hail from the United States, followed by Denmark, Japan, and others. It is believed that most of them have factories in China or source toys from China. To those who procure toys, it doesn’t matter whether the toy manufacturers are well-known; they care most about the products’ quality, price, safety, production capacity, reputation, and the workers’ working conditions. If these criteria are met, they are willing to purchase from the manufacturer. This indicates that many Chinese companies are excelling in these aspects, enabling China to become a toy powerhouse.

The export of manufacturing goods like toys has indeed created a large number of employment opportunities in China, greatly driving economic growth in the early stages of opening up. However, with changes in China’s socioeconomic and demographic structure, the Chinese manufacturing industry needs to continue transforming and upgrading to better adapt to the new environment. In fact, in some relatively complex industrial manufacturing sectors, China has already become one of the world’s best. Though due to the nature of these industries, China’s prevalence is not necessarily known to the general public.

One such area is engineering machinery. One Chinese company we’ve been following is the world’s leading manufacturer of excavators and concrete machinery. While most of China’s toy factories are original equipment manufacturers (OEM) for international brands, this engineering machinery company has become an international brand itself. Many years ago, when this company was founded, the domestic engineering machinery market was dominated by American and Japanese brands. However, as this company gradually produced products that were cheaper, of good quality, and fully functional compared to its competitors, coupled with its excellent customer service, its market share in China continued to rise until it became the industry leader. Since then, it has expanded beyond China and penetrated overseas markets. According to its 2022 annual report, the company’s products are exported to more than 50 countries and regions worldwide, with the fastest-growing regions being the United States and Europe. Overseas sales account for 27.2% of its total revenue, and the gross profit margin in overseas markets is higher than in China. This indicates that the company is not merely dumping its products overseas; its products have a considerable competitive edge to increase market share in foreign markets. For investors who are somewhat pessimistic about demand in China but find Hong Kong stocks attractive in terms of valuation, it may be worth paying attention to these companies that achieved certain success in expanding overseas. It’s not just the engineering machinery industry; there are also such companies in the medical equipment sector.

Overall, these companies that have successfully ventured abroad with their own brands undoubtedly have more investment value than toy factories that only engage in OEM manufacturing for others. Ordinary consumers won’t know which Chinese manufacturer produces the toys they own. Consumers only pay attention to toy brands, and brands can easily switch to another Chinese or even Vietnamese supplier without customers noticing, as long as the quality and price are maintained. However, those brands with the name of a Chinese company printed on engineering machinery and concrete machinery need to maintain product quality for many years to gradually gain the trust of industry professionals and then expand overseas. However, these brands are only recognized by industry insiders and may not yet be considered “internationally renowned brands.” Is China capable of nurturing such internationally renowned brands?

Recently, a fund manager representing a large asset management company in Ireland came to Hong Kong to search for Chinese fund managers. During our office conversation, we talked about how he was about to welcome a child, so he needed to buy a new car. Like many people, he mostly considered electric cars when buying a new car. After careful research on American, European, and Chinese brands sold locally in Ireland, he believed that Chinese cars offered the best value for money. At the same price point, Chinese cars had better endurance and were not inferior in appearance or other features. Although he eventually chose an American car due to considerations about rear trunk space, he now views Chinese cars in a different light.

Indeed, many consumers worldwide have invested real money in Chinese electric cars. Taking one company as an example, in its mid-year report for 2023, it revealed that its market had expanded to more than 50 countries and regions globally, with sales ranking among the top in some regions. For example, one of its models ranked first in sales for seven consecutive months among all models (not limited to electric cars) in Israel; in Thailand, this model’s market share reached 39% from January to May; in Australia, this model ranked third in national electric car sales in April 2023, only behind Tesla’s Model 3 and Model Y. In other regions such as Singapore and New Zealand, the brand also achieved good sales performance. As automobiles are one of the largest consumer expenditures for most people, purchases are usually made after detailed analysis, comparison, and collection of user feedback. Therefore, achieving such overseas performance is not easy.

In the past few decades, the development of the Chinese economy and Chinese companies can be described as unstoppable. However, companies with the potential to become international brands are still few and far between. Therefore, investors should pay more attention to finding these companies with unique capabilities and scarcity.

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Disclaimer

This document is based on management forecasts and reflects prevailing conditions and our views as of this date, all of which are accordingly subject to change. In preparing this document, we have relied upon and assumed without independent verification, the accuracy and completeness of all information available from public sources. All opinions or estimates contained in this document are entirely Zeal Asset Management Limited’s judgment as of the date of this document and are subject to change without notice.

Investments involve risks. Past performance is not indicative of future performance. You may lose part or all of your investment. You should not make an investment decision solely based on this information. Each Fund may have different underlying investments and be exposed to a number of different risk, prior to investing, please read the offering documents of the respective funds for details, including risk factors. If you have any queries, please contact your financial advisor and seek professional advice. This material is issued by Zeal Asset Management Limited and has not been reviewed by the Securities and Futures Commission in Hong Kong.

There can be no assurance that any estimates of future performance of any industry, security or security class discussed in this presentation can be achieved. The portfolio may or may not have current investments in the industry, security or security class discussed. Any reference or inference to a specific industry or company listed herein does not constitute a recommendation to buy, sell, or hold securities of such industry or company. Please be advised that any estimates of future performance of any industry, security or security class discussed are subject to change at any time and are current as of the date of this presentation only. Targets are objectives only and should not be construed as providing any assurance or guarantee as to the results that may be realized in the future from investments in any industry, asset or asset class described herein.

In respect of any discrepancy between the English and Chinese version, the English version shall prevail.