Smartkarma Content

The China Medical device industry has been growing at a 20% CAGR, surpassing the Pharma sector’s 7-10%  growth in the past few years. In this insight, we analyze China Medtech industry with major sub-sectors, including market size, growth prospects, growth drivers, competitive landscape as well as the comparison with global market. In addition, we illustrate the characteristics of China Medtech industry, demonstrate industry tailwinds as well as headwinds.  More importantly, we identify the leading players (from MSCI-List) with detailed analysis of business model, investment thesis/risk and valuation as well as financial/operational matrix comparison. 

In summary, we believe China Medtech industry, especially the two biggest sub-segment Medtech equipment, high end Medtech consumables will continue to grow at >15% CAGR in the next few years, driven by import substitutions, infrastructure and consumption upgrade. Although two invoice system, GPO on high end consumables may post short term price pressure but it will accelerate industry consolidation, which will benefit leading players with dominate market position and innovative product portfolio. 

In the order of preference, we prefer Medtech equipment over high-end Medtech consumables on less policies risks. Among Medtech equipment, we like Shenzhen Mindray Bio-Medical Electronics (300760 CH) with its dominated market position in Medtech equipment/strong growth momentum (>30% CAGR)

Among high-end consumables, as the largest vascular international implants player, Lepu Medical Technology A (300003 CH) is attractively valued with solid growth outlook, but we remain cautious on its weak drug position/high goodwill and leverage ratio.

Shandong Weigao Group Medical Polymer Co (1066 HK) is the largest low-end consumables and orthopedic implants supplier in China, we believe its orthopedic/recently acquired vascular business will continue to gain market share driven by import substitutions encouraged by government, yet we remain sidelined as its slow growth outlook/price pressure on low-end consumables (70% of revenue).  

What’s original ? 

Chinese Medtech sector have drawn many investors attention recently with outstanding stock performance in A/H share market, driven by surging demand from COVID19 outbreak. Yet, Medtech sector is very complex and comprise of more than 5 sub-sectors,  is less covered than Pharma sector by the street.  In addition, recent government policies for Medtech present both opportunities and risks, which international investors need to understand more. 

With the detailed analysis and comparison with global MNCs in term of market size, growth potential, competitive landscape and key growth drivers ahead, we hope to help investor to navigate the market dynamic in China Medtech sector. Especially, our detailed analysis of major sub-sector and the nuances between the segments the major companies operate in will provide further insight for investors. 

While companies like Shenzhen Mindray Bio-Medical Electronics (300760 CH) has increasing drawing investors attentions, especially amid COVID19 outbreak, we further analyzed its competitive edges vs. MNCs in each sub-sectors and reiterate our positive view.  Also, we highlight the key risks on some domestic popular names such as Lepu Medical Technology A (300003 CH) and Shandong Weigao Group Medical Polymer Co (1066 HK). 

Notably, in this report, we did not include Microport Scientific (853 HK) as the best innovative  driven high-end Medtech consumables in China (see Microport Scientific (853.HK): Innovation Driven Medtech with Long Term Value, for more detail, as it is excluded from MSCI). Also we did not include Jiangsu Yuyue Medical Equ A (002223 CH) as its focus on household Medtech equipment. 

• Asia-ex Japan, Senior Healthcare Analyst • (Opens in a new window) ⧉

The e-Conomy SEA report is a widely cited annual study on the state of Southeast Asia’s internet economy. The resource, jointly produced by Google, Temasek, and Bain & Co, analyzes the growth of digital enablers such as internet penetration and smartphone penetration and its impact on the adoption of digital services.

Our report dives into the underlying assumptions used in the report and compares this against how other countries’ internet economies have developed to get a sense of how conservative or aggressive the forecasts are.

Despite the bullish outlook presented in the e-Conomy SEA report, we believe that Google and Temasek still underestimate the potential for Southeast Asia’s growth.

In particular, we find that if Southeast Asia even partially follows the trajectory of China’s mobile payments adoption several years ago, then the region’s digital economy can easily grow faster than currently expected. This is because e-wallets and mobile payments can serve as a gateway for consumers to more seamlessly enter into the digital economy and conveniently adopt different digital services such as e-commerce, online travel, and online media.

We argue that this scenario is more than likely given that:

1. Big Tech in China is aggressively investing in the region. Companies like Alibaba and Tencent are leveraging their past successes scaling the adoption of digital services in China and applying their playbook to Southeast Asia. Chinese tech companies, having gained maturity and experience through years of growing in the space, can now apply their know-how to capitalize on untapped opportunities in Southeast Asia. We note that out of Southeast Asia’s 11 unicorns, 10 are backed by Chinese investors. These unicorns regularly receive guidance on how best to scale adoption and build ecosystems, and often send executives to their China investors’ headquarters to learn.
2. Developing markets like Southeast Asia can more readily adopt digitalservices. Developing markets have an advantage over developed markets when it comes to digital adoption. This is because developing markets tend to have poorer infrastructure outside of capital cities creating gaps that digital services can then “plug in”. For example, e-commerce is more invaluable in tier 2 or 3 cities where brick & mortar outlets are relatively sparse given than it can take hours to reach the closest mall. 
3. Southeast Asia benefits from favorable demographics and accelerating digital enablers. The region is still relatively young with median ages ranging from the late 20s to early 30s. This is supported by rapidly improving digital enablers such as access to the internet and increasing smartphone penetration.

I. Southeast Asia’s Internet Benchmark: The e-Conomy SEA Report

II. Overly Conservative? The Report has Revised Forecasts Upwards Three Times Already

III. E-commerce, the Largest Driver for SE Asia’s Digital Economy, is Underestimated

IV. Southeast Asia E-commerce can Grow Much Faster Assuming it Even Partially Follows China’s Mobile Payments Trend

1. Rising Internet and Smartphone Penetration
2. Favorable & Younger Demographics

V. Developing Markets Have an Advantage Over Developed Markets When it Comes to Digital Adoption

VI. Chinese Investment is Influencing Southeast Asia’s Internet Economy to Evolve in Similar China-like Ways

1. Grab and Gojek Adopt China’s Super-App Strategy
2. Lazada and Shopee Take Notes from China E-commerce
3. Alibaba and Tencent Fight Proxy Payment Wars in Southeast Asia
4. Digital Banking Another Major Catalyst

VII. Conclusion: Southeast Asia’s Digital Economy Can Grow Much Faster than Expected

Appendix – Digitization Underway: Individual Country Snapshots

1. Indonesia
2. Singapore
3. Philippines
4. Thailand
5. Vietnam
6. Malaysia

Clearsight Systems • • (Opens in a new window) ⧉

We are launching a new monthly product designed to track regional tourism activity, with an emphasis on Chinese tourism. The objectives of this monthly product are three-fold: 

1. To track the near-term recovery in regional tourism activity
2. To track the medium-term trends in the Chinese tourism market
3. To provide context by showing the scale cross-border regional tourism flows

The new product consists of weekly, monthly, and annual data we collect and display in eleven Google Data Studio reports; many of these reports are interactive. Each report is accompanied by brief commentary on the data, which we will update regularly.

We believe the report includes timely information that describes current conditions and even a look into the near future. It also provides needed context about which tourism markets are more or less likely to ‘move the needle’ for service providers like airlines and hotel chains. In short, we think this report can help investors identify signs of a recovery in tourism activity in China and the region, hopefully later in 2020. 

Based on data from the week ending April 24th, we highlight a few takeaways. It appears air travel to and from Chinese cities is recovering gradually, while departures at most of the regional airports we track remains weak. Hotel availability is mixed, but weighted average room rates for the cities we track remain under pressure. 

Tracking Traffic • Asian Equities Analyst, Logistics & Transport • (Opens in a new window) ⧉

When you purchase bank contingent capital, you may marry it for the foreseeable future. Coronavirus contagion is challenging this contractual relationship.

With an on-going global economic and cash flow contraction, we undertake a deep dive within this Smartkarma Original report to understand which banks are better equipped to keep their vows regarding bond coupons and calls.

As such, we perform fundamental analysis, from an Additional Tier 1 (AT1) investor’s perspective, on 15 of the largest US, UK, and Asia-headquartered banks. We also assess this fundamental positioning relative to some of the largest banks in the European Union. We present our top picks and pans and provide single security recommendations based on relative value analysis wherein we consider the likelihood of continued coupon payments. The resulting handbook guides the investor through detailed analytical constructs to deliver actionable recommendations. 

The analysis is also driven by our view that a liquidity event is the Point of Non-Viability (PONV) for any financial institution. In the current operating environment of large forbearance activity, this coronavirus economy brings us closer to a liquidity event. We believe the market underappreciates this risk. As such, we go somewhat ‘mad scientist’ in considering the deposit franchise strength and cash flow composition of each banks’ liquidity towards assessing sensitivity to a payment flow contraction. This is original analysis.

With the recent passage of time and expectations of better days ahead, AT1 bond prices have recovered slightly. We are not convinced that this recovery is sustainable since much depends on the pathology of this disease. As such, we cannot rule out eventual vow renunciations via AT1 coupon suspensions, non-calls or a death do us part PONV event for certain institutions.

CreditContinuum • Financials Credit Analyst • (Opens in a new window) ⧉

China’s Gas Utilities sector will continue to present a high growth story for investors, despite their significant outperformance over the last few years, in our view. The government may accelerate the push for natural gas development in its next five-year plan as an added driver for economic growth, complementing the persistent quest for environmental improvement. Meanwhile, there are challenges from margin squeeze and rise in competition, particularly induced by the change in operating landscape following the formation of China Oil & Gas Pipeline Network Corporation (PipeChina).

The sector is highly fragmented and we analyse the individual companies by looking at the opportunities, risks, Environmental, Social and Governance (ESG), financial strength, profitability and valuation to find the winners of the game. We conclude our analysis with a ranking of our preference on the stocks in the following order: ENN Energy (2688 HK), China Resources Gas (1193 HK), China Gas Holdings (384 HK), Kunlun Energy (135 HK), Shenzhen Gas Corp Ltd A (601139 CH) and Bestsun Energy Co (600681 CH). 

What’s Original?

This Smartkarma Original takes a deep look into the key revenue and margin drivers of the Chinese gas utilities companies and compares their respective strengths and weaknesses, in addition to the discussion of the key drivers and challenges of the sector’s outlook. We also analyse the impact of PipeChina on the sector and how individual companies will be affected. 

We attempt to assess the ESG performance of the gas utilities companies, given its rising importance in today’s investment decisions, and see how they are doing. Besides the Hong Kong-listed gas companies, we investigate the fundamentals and investment thesis of two A-shares, namely, Shenzhen Gas Corp Ltd A (601139 CH) and Bestsun Energy Co (600681 CH). We will also briefly discuss ENN Ecological Holdings (600803 CH), an A-share listed in Shanghai currently under a proposed transaction to acquire a controlling 32.83% stake in ENN Energy (2688 HK). 

• China Analyst – Onshore Credit, Equity Long-Short • (Opens in a new window) ⧉

Digital banking is at a tipping point in Asia as many countries are issuing or will in the future issue virtual banking licenses to promote innovation in the financial sector. Many incumbent traditional banks are also making significant strides to try and prevent being disrupted by technology.

In developed markets with established banking services, digital banks can offer hyper-personalized value propositions such as instant-approved loans and lifestyle products through intensive data collection and analysis of purchasing behaviors. Meanwhile, in developing markets, digital banks have the opportunity to introduce the unbanked to formal financial services as the dual catalysts of smartphone and internet penetration rise over time. In both markets, digital banking can not only deliver better products to customers but is also dramatically more efficient in terms of operational costs. 

In this report, we highlight major digital banking players across both developed and developing markets in  Asia and identify their strategies. Four of the major digital banking strategies across Asia are 1) banking the unbanked, 2) shifting traditional banking to digital, 3) banking-as-a-service, and 4) super-app strategies.

Beyond analyzing upcoming digital banking tech companies, we also look at the strategies of some incumbent banks adapting to the coming changes. Broadly speaking, we see more opportunities for partnerships and collaboration than outright competition. While traditional banks lack technology as a core competency, innovative tech players equally need the domain expertise, regulatory cover, and well-established customer footprints of traditional financial institutions.

We’ve included our table of contents below to guide you through this report.

The Current Landscape of Digital Banking in Asia

1. Digital banking in Asian developed markets
2. Digital banking in Asian developing markets
3. Incumbent banks digitization strategy
4. Tech entering banking

Digital Banking Overview

1. What is digital banking
2. Benefits of digital banking
3. Catalysts driving adoption

Individual Country Snapshots

1. Singapore
2. Hong Kong
3. Taiwan
4. South Korea
5. Japan
6. China
7. India
8. Vietnam
9. Thailand
10. Philippines
11. Indonesia

Conclusion: Winners and Losers

Clearsight Systems • • (Opens in a new window) ⧉

China has been the fastest growing auto market in the world. Over the last 2-3 years China’s auto component industry is going through a tumultuous period – not only due to the volatility in demand (due to the auto downturn last year and corona-related lockdowns this year), but also due to two mega-trends that are providing risks and opportunities to the industry – NEVs and autonomous driving. In addition, there are 3 other less-discussed drivers of change in the industry   (emerging localization requirements, junior JV partners becoming leaders in their own right, international expansion). We look at the key A-share (MSCI A-share) listed players in the industry through the lens of these five trends/drivers of change. 

We prefer Passenger vehicle(PV) part suppliers over commercial vehicle (CV)part suppliers.  Among PV parts suppliers, our top buy is Changzhou Xingyu (601799.CH), followed by Ningbo Joyson Electronic(600699.CH),Fuyao Glass (600660.CH/3606.HK) and Huayu Auto (600741.CH). Our main underweight Wanfeng Auto Wheel (002085.CH). In Commercial vehicle (CV) part segment, we prefer Wanxiang Qianchao (000559.CH) and Linglong Tyre (601966.CH). We suggest investors to avoid  Weifu High-Tech (000581.CH).

What’s Original?

The recent tumult in the auto sector creates significant opportunities and risks for the companies involved – however companies/equities that are driving these trends are largely listed in the A-share market.  Lack of market communication, limited financial and operational disclosure and low breadth of analyst coverage in these markets has meant that there are quite a few underappreciated companies in these markets which have been overlooked by international investors.

While companies like Ningbo Joyson and Fuyao Glass enjoy some international investor recognition, we believe under-appreciated stocks like Wanxiang Qianchao and Linglong tyres are not well-covered by the market and this report provides a rationale for investors to look further into those names. We also highlight the risks to (relatively) popular names like Weifu Hi-tech (due to structural issues in the industry) and Wanfeng Auto wheel (due to management pursuing non-core acquisitions).

Note that in this report, we do not include the possible impact from Coronavirus on the industry and companies. This is because 1) it’s difficult to quantify the impact at current moment; 2) even if coronavirus impact might last for months, it’s still a relative short period compared to the 5-year time horizon we focus on. In addition, once coronavirus is gone, market demand on autos and auto parts would rebound quickly. 

• China specialist, Auto and Industrial specialist • (Opens in a new window) ⧉