What are investors to do?
Setting the scene, Bing Yuan, Managing Director at Hony Capital, speaks of the trends he has observed in the Chinese market.
“I think the whole macro scenario is definitely slowing down, whether you look at GDP numbers or PMI numbers," he said. "But within that, what we see as sustainable is that China is already becoming a large consumption market that is still growing.”
He added that the Chinese consumption market was worth around US$5 trillion and was still expanding at around 7% to 8% a year. So, where are the opportunities?
Despite the overall slowdown, the panel said there were sectors that offered interesting opportunities to investors.
Min Ding, Director of SL Capital, said: “In the manufacturing sector there are still markets that are growing at double-digits, semi-conductors is one of them.” He added that related businesses, such as semi-conductor equipment and materials, were also growing at a high rate. “The overall development levels of businesses in this sector are still low. We think they have a great future,” he said.
Yuan thinks opportunities will be created through consolidation in more mature sectors, such as hospitals and restaurant chains, while he is also focusing on disruption in certain sectors, including new media, such as through streaming companies.
Wei Zhou, Founding Managing Partner at CCV, is looking at companies that are able to help consumers and enterprises that have not yet been able to benefit from the internet. He pointed out that China was an extremely diverse country and around 600 million to 700 million consumers, who he dubbed the ‘forgotten half’, were not yet able to benefit from being online because products and services had not been designed for them. He added that there were also a lot of small businesses, such as hotels, clinics and restaurants, that were in the same position.
Another investment theme that he is exploring is the way new technologies, such as artificial intelligence, are being used in areas like education and finance to reduce the cost of services for consumers who were not previously able to afford them. “This new technology can really solve some problems and help to address the supply and demand imbalance,” he said.
Zhou said that while 15 years ago it had been possible to take a ‘shotgun approach’ to investing in China because there was so much low-hanging fruit, this was no longer the case.
He added that venture capital had also become significantly more competitive. As a result, he said investors needed to specialise in order to make good returns. “We have always been very focused in our investment portfolio,” he said.
Yuan agreed: “You have to specialise.” He added that making money through value-creation at companies was also key. “Our portfolio is not just about putting money in and sitting on the board and talking about strategic issues, sometimes you really have to put your skill-set to work in your portfolios,” he said.
Ding added that because of the nature of the specialist semi-conductor businesses in which it invested, it was reliant on specialists such as engineers and scientists, but these people did not always have the business ability to grow their enterprises, so it had to look at management teams very carefully before deciding where to invest.
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Zhou said it was currently a very good time for Chinese companies to go into the global market, but despite this fact, he said it was not a key investment thesis for him.
“We have an advantage here and we have less of an advantage in other regions, so I am still paying more attention to Mainland China and those companies that are serving the forgotten half. Most of the opportunities are in China right now,” he said.
Yuan agreed. He said that while they had helped their portfolio companies expand overseas and move their manufacturing closer to their markets, they had not yet developed a pan-Asia strategy. “China still presents so many opportunities, we don’t want to overstretch,” he said.
He added that South East Asia was not one big market, but rather several different ones, and they would need to have expertise in each of them to be successful.
But Ding said he had looked at opportunities in Korea, Japan, Taiwan and Singapore due to the experienced teams in the semi-conductor industry in these countries.
He said: “These teams have saturated their local markets and are looking for ways to expand into new markets.” But he agreed that the markets were very different, and there were issues with cross-border regulations.
Overall, the panel felt that despite the slowdown in China there were still enough opportunities for investors there without them having to look further afield – but to stand out from the crowd, the key is specialisation.