Chinese Companies Secretly Holding Global Leadership Positions


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.


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.

Is There Still Investment Value in Chinese Healthcare Companies Amid US-China Decoupling?


Under the cloud of tense US-China relations, the US has repeatedly introduced legislation targeting Chinese pharmaceutical companies. President Biden signed an executive order urging the reshoring of biotech manufacturing. Additionally, the “Biosafety Act” was introduced to protect American genetic and personal health data, prohibiting US pharmaceutical companies from outsourcing production to Chinese contract manufacturers.

The stock prices of relevant pharmaceutical companies have plummeted, spreading pessimism across the sector.

In such a political environment, do Chinese pharmaceutical stocks still hold investment value?

To answer this question, we can start by examining the potential impacts of the US legislation. First, the president’s executive order on reshoring biotech manufacturing is relatively mild, aiming to regain control over the pharmaceutical supply chain. Companies engaged in manufacturing for US clients might face some risks but could circumvent policy sanctions through supply chain relocations or building factories abroad. The “Biosafety Act,” however, specifically targets pharmaceutical outsourcing companies, including CROs (Contract Research Organizations), CMOs (Contract Manufacturing Organizations), CDMOs (Contract Development and Manufacturing Organizations), and CSOs (Contract Sales Organizations). The Act has named several pharmaceutical companies, with WuXi AppTec being notably impacted, having previously been a favorite among investors.

WuXi AppTec primarily undertakes drug development, testing, and mass production for global pharmaceutical companies. American biotech firms, especially smaller ones, rely on experienced and well-staffed companies like WuXi AppTec for drug development and manufacturing. While WuXi AppTec has generated significant profits for these companies and improved the health conditions of many Americans, its business inevitably involves accessing US public health data and drug patents. Currently, this seems to be an unsolvable issue. Although the Act provisionally allows existing contracts to be extended to 2032, giving WuXi eight years for soft landing, the challenges facing the CXO business amid US-China decoupling appear to lack clear short-term solutions.

As of the end of 2023, there are 26 CXO companies listed on A-shares and H-shares, comprising a small portion of the pharmaceutical sector. The sector also includes many other companies engaged in medical services, medical devices, traditional Chinese medicine, chemical pharmaceuticals, and biotech. These companies, if focused on domestic business, are naturally less affected by US-China conflicts. Even those involved in exports, such as leading medical device companies and innovative biotech companies, may not be as significantly impacted by geopolitical tensions as one might think.

The reason is that top-tier medical device and original biotech companies mainly rely on their own R&D capabilities and innovation to compete internationally, unlike outsourcing companies that depend on foreign orders. The US has little incentive to suppress Chinese innovative drug companies due to the significant gap between the two countries’ strengths in this field. US innovative drug development is highly advanced, with many treatments for cancer and critical illness originating from US patents. Currently, the number of innovative drugs exported by China is minimal. The US government barely has any reason to stifle such a small competitor, especially that China is its major export market for innovative drugs. Even if China’s technological advancement rapidly improves in the coming years, the healthcare industry is fundamentally based on patent protection, which means it’s improbable for the US to deny Chinese innovative drug patents without undermining its own. The pharmaceutical sector accounts for over 17% of US GDP, and dismissing Chinese patents would have unimaginable repercussions for US pharmaceutical companies and the economy.

Therefore, we remain optimistic about domestic innovative drug companies with strong original research capabilities. A recent phenomenon shows Chinese innovative drug companies selling their developmental drugs to small American pharmaceutical firms, acquiring equity in these companies. When large multinational pharmaceutical companies acquire these American firms for their drugs, Chinese innovators benefit from equity transactions. While preclinical drug trading among pharmaceutical companies is common, Chinese-developed drugs in the US market often cost less than similar drugs developed by Japanese and Korean companies. This method helps secure fairer prices for good drugs.

Of course, for pharmaceutical companies, the ideal model is to directly export patented innovative drugs. China’s R&D investment as a percentage of GDP has been soaring through the past years. Against this backdrop, it is promising for Chinese innovative drug companies to play an increasingly important role in the international market.


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.