The worst nightmare of any worker is perhaps having a horrible boss: ａspineless one does nothing to drive growth in the company, or in its employees’ salaries; equally, an egotistical one is no better if he feels he is too good for any advice coming from his subordinates.

As for investors over the course of stock picking, much like all company workers, we think identifying the right CEO is just as important as putting the capital in the right industry. Granted, even the greatest CEO will find his hands tied in an industry subject to a particularly difficult operating environment, which diminishes the effect of whatever business strategies that have been put into place. The global banking industry, for example, has not only been under much tighter supervision since the 2008 financial turmoil, it has also struggled with ultra-low interest rates, which put a dent in their profitability. Under such circumstances, these institutions’ heads could probably do no more than ease the hardship their companies have been confronting with.

But in the tech field, the differences between good and horrible bosses are much more pronounced. The reason being, with the rapid advent of technologies, just a couple of slip-ups will cost a company years for it to be able to catch up with its competitors again. Intel’s Brian Krzanich, a.k.a. BK, is perhaps one of the most relevant examples.

In the high-tech space, the upside to being a larger player is that, the more profit it makes, the better placed it is to allocate more resources to research and development, and explore new product lines and technologies, thereby maintaining its leading edge, while making it difficult for successors to catch up. This explains why Intel was – for a long time – the leader in the semiconductor industry, where it once commanded the largest market capitalization. But its lead in the semiconductor space was overtaken last year and the year before that, once by Nvidia and again by TSMC respectively[1]. So, how did Intel lose its grip on semiconductor production? What lessons can investors learn from its descent?

Some attribute Intel’s pain points to its IDM business model. IDM, Integrated Device Manufacturer, is a business model in which a company straddles both semiconductor design and manufacturing. Intel operates differently from its peers in this respect. TSMC, for example, only makes chips without being involved in designing them. But such an argument can hardly explain why, just a few years ago, Intel’s scale and manufacturing technology were still ahead of TSMC. If it had been an issue with its business model, Intel would have lost to the Taiwanese company long ago.

The crux of the issue might have been its CEO.

The biggest challenge for semiconductor foundries is keeping the production yield high throughout the entire manufacturing process, which can easily run to hundreds of steps. Even if that of each step reaches 99.9%, half of the overall output may still turn out to be defective. Only when 99.99% of the units coming out of each step pass relevant quality checks, can we consider the production line efficient. But given that the crystals in a chip may just be a few nanometers apart – amounting to just one ten-thousandth of the width of a human hair – the efforts it requires to sustain a high production yield in each ultra-high-precision step are simply unimaginable.

Hence every single employee in the entire company must ensure seamless collaboration to make this goal a reality: resources have to be directed to where an issue arises, immediately. In Intel’s case, former employees have spoken of BK as being egotistical, and his management style tyrannical. He was said to dislike communicating with employees, in addition to having the habit of humiliating them in public. He was also said to have turned a blind eye to warnings from his employees that there might have been issues with Intel’s 10-nanometer production, which led to his failure in deploying a timely solution. A sense of being underappreciated also led to an exodus of staff members in Intel. BK had to step down eventually in 2018, with the position succeeded by Intel’s Chief Financial Officer, Bob Swan.

As a company welcomes its new CEO, it’ll also likely herald a turning point in its performance. For example, under the reign of Steven Ballmer, Microsoft’s stock price had stood strong for many years, but since the appointment of Satya Nadella in 2014, its share price has risen sevenfold[2]. At the beginning of this year, Intel brought on board company veteran Patrick Gelsinger, a.k.a. PG, as CEO. Having been with Intel for three decades, doubtless PG knows its success story like the back of his hand; but what is yet to be known is whether he will steer Intel back on track to see its heyday again.

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[1] Source: Companiesmarketcap.com, as of Oct 2021

[2] Source: Google Finance, as of Oct 2021

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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.

Over the last few months, the Chinese government unleashed a deluge of tightening measures on various industries. From imposing the “three red lines” on the property sector, reining in internet companies over data security issues, to banning for-profit tutoring in core school subjects, the rationales behind their introduction vary. In today’s article, we will be focusing primarily on the policies’ impact on Chinese technology stocks.

Before we delve into how the measures hit these companies, let’s take a step back and tease out the logic on which they are built. Judging from multiple sources, we think it comes down to three main reasons. First, to prevent leakage of confidential national data and state secrets, and to protect national security. Second, to prevent monopoly and encourage competition. Third, to prevent large corporates from exploiting employees. To the entire tech industry, the changes these reasons will potentially set off will be tremendous.

Jack Ma once said that, data is to the modern world what oil was in the previous century. User data allows companies a glimpse into users’ preferences and habits, enabling them to recommend services and products more accurately suited for target customers. Naturally, the critical role data plays becomes increasingly clear to China. But the question is: how will the country stop the data from leaking abroad and putting national security at risk?

On June 10 this year, China passed a new data security law, yet concrete details in implementing it are still unclear[1]. What we can infer from Didi Chuxing’s debacle in its attempt to go public in the US is that, China will likely take a cautious stance towards foreign investments in domestic internet companies and hence curb the willingness of those foreign funds to put money into China’s internet sector. The law also poses a hurdle to venture capital funds wishing to exit existing investments through IPOs. But on the flip side, weaker investment inflows also translate to better access to potentially attractive start-ups for existing investors.

Moreover, the monopoly power once in the firm grip of large tech groups will perhaps come to an end. While internet behemoths have had an enormous advantage over small companies in data, recent developments will likely turn the table around. Discussions have also emerged over whether the state will step in to take over these data. Provided that sharing the data will not put national security in jeopardy, with a small fee, small companies and non-tech companies may also be allowed access to a wealth of data previously only available to large technology companies. But the idea of data being a gold mine is premised on a thorough understanding of its nature and the ability to conduct analysis with it, so a mere broadened access has no bearing on whether every company will be able to benefit from it.

Another point worth noting is that China’s internet industry is primarily dominated by two local giants, with their respective payment systems all but incompatible with each other’s ecosystem. But this will likely change as an increase in competition will put a dent in the profitability of their payment businesses.

Finally, what would result from the measures aimed at stopping large companies from exploiting their employees? Most delivery workers or taxi drivers relying on existing gig economy platforms for income are independent contractors, meaning that they are not employed by these companies, which under such arrangement have no obligation to bear the workers’ social security expenses. However, if relevant laws are revamped to require these platforms to do so, the total annual expenditure on social benefits will cost the largest food delivery company China as much as RMB40 billion according to an estimate by a local media outlet[2]. While this may be a rough estimate, it sheds light on how big of a shakeup it could bring about.

But this is not to say that these factors will strip tech stocks of all investment value. While technology companies may see a decline in their data advantage, they can still count on the benefits of economies of scale and networking effects. Having said that, the days where their valuations stood at elevated levels may have been gone.

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[1] Source: The National People’s Congress of the People’s Republic of China, as of June 2021

[2] Source: Sina Finance, as of July 2021

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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.