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1、Investment in China Winter ofDespair or Spring of Hope?ResearchReinventedSmartkarma is a globalinvestment research networkthat brings togetherindependent Insight Providers,institutional investors,andcorporate investor relationsprofessionals and management.At Smartkarma,We Do Things DifferentlyWe lev
2、erage the online economy,applying this innovative mindset to capitalmarkets.For a single subscription,Smartkarma users can consume all theresearch they need,just like Netflix enables viewers to watch unlimited hoursof content on its platform.At the same time,we address a growing need fora modern app
3、roach to corporate access.In 2019,we launched CorporateSolutions,which allows company executives and investor relations personnelto connect seamlessly to investors and analysts,all within a single network.In this effort,we work closely with global exchanges such as SingaporeExchange,which became our
4、 investor,to provide such services to listedcompanies worldwide.Our model ensures that the research on our platform is objective andunbiased,independent and free from conflicts of interest.The platformdetermines appropriate pricing according to the quality and value of eachresearch piece.This helps
5、independent Insight Providers monetise theirresearch and incentivises them to produce truly quality,differentiated workthat stands out from the rest of the market.A commitment to quality is alsowhy we carefully vet and select our Insight Providers.Less than 10 percent ofthe independent analysts who
6、apply are approved as Insight Providers onSmartkarma.We currently have over 100 such curated Insight Providerspublishing on the platform,ranging from one-person operations to teams ofmultiple members around the world.In the following pages,you will be able to see for yourself the result of oureffort
7、s.In the meantime,we will be busy bringing you more excitingdevelopments over the course of the year!2Table of Contents1.How Semiconductor Supply Chain in China Stands to Benefit from Ukraine Crisis.42.Chinas Evolving EV Industry.83.China Consumer Discretionary:Darkness Before Dawn.284.Chinas State
8、Capitalism Created Real Estate Excesses and Limits Remedial Options to Reduce Stress.345.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well Invested.393Evelyn ZhangResearch on Tech CompaniesThematic(Sector/Industry)How SemiconductorSupply Chain in ChinaStands to Benefit fromUkraine Crisis
9、By Evelyn Zhang|21 Feb 2022EXECUTIVE SUMMARYPrices for Neon have been rising rapidly recently,in the short term,global semiconductor companies have 6 months inventory of the noblegas.China,as a major steel producer,has mature purification technologyand production process for these noble gases,around
10、 30%of noblegases for wafers above 8-inch are Chinese suppliers.It takes 3 to 6 months to find replacement due to the complex processof chip lithography;this crisis will accelerate the domestic substitutionof Chinese semiconductor material manufacturers.DETAILThe current geopolitical crisis in Russi
11、a and Ukraine has directly affected thesupply of semiconductor materials represented by neon gas.According to ICSmart,Ukraine supplies about 70%of the worlds neon gas,40%of krypton and 30%xenon.These three noble gases are by-products of the iron and steel industry andare separated and produced by ai
12、r separation plants.Former Soviet Unionhad huge scale in heavy industries such as iron and steel production,so theseparation of noble gases has always been a relatively strong subsidiaryindustry.After the disintegration of the former Soviet Union,it evolved intoa situation in which Russia mainly car
13、ried out crude gas separation,andcompanies in Ukraine were responsible for refining and exporting to theworld.The purification of these rare gases requires a certain technicalthreshold and is deeply bound to the scale of the steel industry.Neon gas is widely used in chip lithography.The light source
14、 commonly usedin image lithography is based on gas-phase lasers:a small amount offluorine,chlorine,hydrogen chloride,argon,and xenon mixed with a largeamount of neon as the balance gas are used to form plasma after beingexcited by high pressure.A fixed wavelength of light is excited,and the lightHow
15、 Semiconductor Supply Chain in China Stands to Benefit from Ukraine CrisisEvelyn Zhang4is subjected to polymerization,filtering and other processes to generate thelight source of the lithography machine.Both neon gas and krypton gas canbe used for KrF laser,and this process is mainly used for 8-inch
16、 wafer250130nm mature process.250130nm process products include powermanagement chips(PMIC),micro-electromechanical systems(MEMS),MOSFET components,IGBTs and other power semiconductor components.These electronic noble gases cost 5%-6%of the total IC material cost.Although neon,krypton and xenon are
17、necessary for the production of thesemiconductor industry,their absolute usage is not high,the global marketvolume is not very large.Neon price rising rapidly recentlyThe price of neon gas has been stable at RMB 450 yuan/cubic meter before2014,and rapidly increased to RMB 25,000 yuan/cubic meter by
18、the end ofJune 2015 due to the Crimea crisis,then down to RMB 3000/cubic meters inOct 2015.According to Baiinfo,the price of neon gas(with a content of 99.99%)inChina has risen rapidly from RMB 300 yuan/cubic meter in early October2021 to the current 1700-1800 yuan/cubic meter.Neon Price(99.999%)RMB
19、 yuan/cubic meterSource:BaiinfoIn the short term,suppliers of semiconductor materials such as neon,krypton,and xenon that are not directly affected;the noble gas inventory ofglobal semiconductor companies is enough for 6 months.Due to the complex process of chip lithography and the need for expensiv
20、eequipment,fab producers generally have strict and complex supplier vettingprocesses,it takes 3 to 6 months to find replacement.How Semiconductor Supply Chain in China Stands to Benefit from Ukraine CrisisEvelyn Zhang5Because of the high technical threshold of electronic noble gases,six majorforeign
21、 manufacturers,including Air Products&Chemicals,Inc(APD US),Praxair(US),Showa Denko K.K.(4004 JP),and Linde PLC(LIN US),accountfor 80%of the noble gas market share in China in 2018.Asia China can be self-sufficient in Neon gas,Japan/Korea need largeimportAccording to Gas Ecosphere,in 2021,China impo
22、rted 4,783 cubic meters ofneon gas,127.87%increase YoY.South Korea imported 1,128,673 cubic meters of neon gas,634.11%increaseYoY in 2021.South Korea used to import all neon gas and relied on foreigntechnology,and just realized nationalized production in early 2022.Theplant built by Posco(005490 KS)
23、in Korea can produce about 22,000 cubicmeters of high-purity neon gas per year,which is expected to meet only 16%of South Koreas demand.Japan can only produce a very small amount of noble gas domestically,andimport most from Ukraine and China.China is a major steel producer in the world.It has purif
24、ication technologyfor these noble gases,and the production process is relatively mature.Currently the Chinese suppliers of noble gases for wafers above 8-inch hasreached more than 30%.If the geopolitical tension between Russia andUkraine continues to rise,this will accelerate the process of domestic
25、substitution for the semiconductor materials.In the medium and long term,more domestic semiconductor material manufacturers get a chance tobecome qualified suppliers.Companies may be benefited from the crisis:Hunan Kaimeite Gases Co A(002549 CH)has RMB 550K Neon gas contractin 2021,Neon production l
26、icenses 68,000 Nm3/yearGuangdong Huate Gas Co Ltd(688268 CH)supplies krypton-neon mixture,fluorine-neon mixture and other gases for lithographyMost A share investors believe in world peace.How Semiconductor Supply Chain in China Stands to Benefit from Ukraine CrisisEvelyn Zhang6Disclosure&Certificat
27、ionI/We have no position(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-
28、public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced the
29、reinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Evelyn Zhang(20 Feb 2022)How Semiconductor Supply Chain in China Stands to Benefit from Ukraine CrisisEvelyn Zhang7Mio KatoJapan/Asia Long-ShortThematic(Sector/Industry)Chinas Evo
30、lving EVIndustryBy Mio Kato|13 Jun 2022EXECUTIVE SUMMARYThe EV market offers bright long term prospects supported bytechnological progress and government incentives,particularly inChina.In the short term,surging raw material costs and supply bottlenecks aresignificant risks and could take longer to
31、resolve than many suspect.We believe the high-end performance segment and low-end mini/cityvehicle segments are most suitable for rapid EV penetration.DETAILExecutive SummaryThe electric vehicle(EV)market offers bright prospects in the long termsupported by technological progress and strong incentiv
32、es offered by manygovernments and Chinas in particular.Opportunities to accelerate growth come from a variety of areas:Infrastructure development continues to progress with not just thenumber of charging stations but also charging speeds continuing toimprove.Increased battery ranges and declining co
33、sts per kwh continue toimprove EV competitiveness compared to traditional gasoline vehicles.EVs are also often associated with better software and digitaltechnology,featuring large information screens and strong connectivityoptions.Government incentive schemes also continue to be favourable.Risks in
34、clude:Surging raw material costs driven by a supply-demand gap for batteriesand battery materials which could be difficult to close due to long leadtimes for raw material capacity expansion and accelerating enddemand.Fire risks for certain battery chemistries,the need to develop recyclinginfrastruct
35、ure and an increasing impact on energy grids as EVpenetration grows present technical challenges to be overcome.Chinas Evolving EV IndustryMio Kato8The need to drive consumer acceptance still exists as while chargingtimes have improved noticeably,they still exceed refuelling times forgasoline vehicl
36、es.Competing technologies such as fuel cells,hydrogen engines,biofuelsetc.Overall prospects for continued EV penetration growth remain strongthough in the short to medium term risks of disappointing volume growthare significant due to bottlenecks in the supply chain and surging rawmaterials prices w
37、hich could reduce consumer affordability.By segment we believe prospects for EVs are most promising in the premiumsegment where performance advantages can be significant and costcompetitiveness is not as much of a priority.In addition,at the lower end,we believe EVs can be competitive as small,limit
38、ed-range,city vehicles assmaller battery sizes negate many of the traditional disadvantages of EVs.Inthe mass market segment,cost,recharging times and intensifyingcompetition with the entry of traditional automakers could makeprofitability a challenging prospect even without surging material prices.
39、Inaddition,hydrogen-based technologies could eventually enjoy infrastructureadvantages due to stronger synergies with renewable and green transitiontechnologies that make them more suitable for the mass market.Industry OverviewEV technology has existed for over a century but EVs have only recentlybe
40、gun to challenge the dominance of the internal combustion engine.Improved battery technology has increased driving range and rapidlyexpanding production scale has driven significant reductions in batterycosts resulting in lower production costs for EVs.In addition,increased environmental awareness g
41、lobally among bothgovernments and consumers has led to the implementation of everstricter emission standards with the goals to achieve zero emissions forpassenger vehicles generally being pulled forward.In 2012,only around 130k EVs were sold globally,which is roughly equal tocurrent weekly sales.Glo
42、bal EV demand during the last three years has beenimpressive.Even during the covid pandemic,global EV sales continued togrow while the demand for conventional cars declined mainly due to supplychain bottlenecks.In 2019,EV sales were 2.2m(2.5%of the global car market)and in 2020 theygrew by 36%YoY to
43、 3m representing 4.1%of the total global car market.Further,EV sales volume more than doubled in 2021 to 6.6m unitsrepresenting close to 9%of the global car market.According to the IEA,globally there are around 16.5m electric cars on the road today.Chinas Evolving EV IndustryMio Kato9In 2021,EV sale
44、s in China were 3.3m units which was more than double thenumber of EV sales in 2020.EV sales volume represented 16%of totalvehicle sales in China in 2021 compared to 11%in 2020.The proportion ofelectric cars sales in China continues to rise and hit 20%in December 2021.The Chinese government had exte
45、nded subsidies for electric cars fortwo years during the pandemic and this helped to grow EV sales volumedespite declines in the sales of conventional vehicles.The government revised its original plan to eliminate EV subsidies anddecided to continue offering subsidies for EVs instead reducing theval
46、ue of subsidies by 10%in 2020,20%in 2021 and 30%in 2022.In addition to that,Chinas government opened the domestic marketwider to foreign companies by abolishing investment restrictions onforeign auto companies.As a result,foreign companies making electric vehicles can nowmanufacture vehicles in Chin
47、a without first forming a joint venturewith a domestic counterpart,and this unlocks greater investmentpotential which should further benefit the evolving EV supply chain.Therefore,we expect Chinese EV production capacity to expand furtherin 2022 and beyond,as investments from previous years ramp up.
48、Chinas Evolving EV IndustryMio Kato10Key Industry DriversFavourable Government Policies on EVIndustryThe Chinese governments initial strategy regarding EVs was to offersubsidies only until the end of 2020 but due to the negative impact of thecoronavirus the government eventually extended its subsidi
49、es program foranother 3 years by cutting subsidies by 10%in 2020,20%in 2021 and 30%in2022 instead of a complete removal.Based on unofficial sources,the Chinesegovernment is now considering a further extension of the subsidies beyond2022.Alongside its subsidy program the Chinese government is pushing
50、 toimprove the quality of EVs by implementing stricter quality supervision andhigher standards.According to the Xinhua News Agency,the Ministry of Industry,andInformation Technology plans to strengthen the supervision of NewEnergy Vehicle(NEV)quality and promote the integration of EVs withintelligen
51、t networking,and other technologies.The Chinese government also recently announced a goal to developsufficient charging infrastructure to meet the needs of 20m NEVs by 2025.Currently,there are 810k public charging piles in China and the scale ofpublic charging piles in the top ten regions such as Gu
52、angdong andShanghai account for more than 70%of the total.On the other hand,there are 13,800 charging piles on highways inChina,mainly concentrated in Beijing-Tianjin-Hebei-Shandong,Yangtze River Delta,Pearl River Delta and other regions.Therefore,the country needs to improve infrastructure developm
53、entrelated to charging stations to support EV demand growth and inflationof the installed base.The governments New Energy VehicleDevelopment Plan(2021-2031)and Energy Conservation and NewEnergy Vehicle Technology Roadmap 2.0 released in October both aimto shift support to the construction of chargin
54、g infrastructure.The government has set guidelines to strengthen the management of itsrapidly expanding lithium-ion battery industry and to promote high-qualitydevelopment of its sodium-ion battery industry during 2021-25.The government plans to include standards to get quality products bysetting up
55、 minimum production requirements prior to expandingcapacity,minimum technical battery performance standards,plantoperating conditions and land development requirements related to thelithium-ion battery industry.Chinas Evolving EV IndustryMio Kato11Contemporary Amperex Technology Co.Ltd.(CATL)is inve
56、sting heavilyin new sodium-ion battery technology as the technology offers benefitssuch as high-energy density,fast-charging capability,strong thermalstability,and low-temperature performance,as well as high-integrationefficiency.The company expects to build an industrial supply chain by2023.The gov
57、ernment is promoting high-quality development of its sodium-ion battery industry during 2021-25.The Ministry of Industry andInformation Technology,will formulate product and industry standardsfor sodium-ion batteries in due course to achieve scale,lower costs andimprove the performance of sodium-ion
58、 batteries.Resurgence of LFP Battery TechnologyCurrent battery technologies can broadly be divided into three broadcategories namely,lithium nickel manganese cobalt oxide(NMC);lithiumnickel cobalt aluminium oxide(NCA);and lithium iron phosphate(LFP).NMC and NCA cathodes are heavily used technologies
59、 in the automotivesector over the years due to the technologies having high energy densitybased on higher nickel content in the cathode.However,LFP is a lower cost and more stable chemistry,with lower risk ofcatching fire and a longer cycle life.In addition,it does not require cobalt.One of the main
60、 drawbacks of LFP technology is that it has 65-75%of theenergy density compared with a high-nickel NMC and NMC811.However,recent technology innovations have significantly improved their energydensity.Source:IEAChinas Evolving EV IndustryMio Kato12Recent increases in the material cost of cobalt have
61、driven increases in thecost of NMC and NCA technologies and cobalt mining is associated withseveral humanitarian issues.Therefore,LFP has become more attractive as itcontains no cobalt or nickel and instead uses abundant and low-cost ironand phosphorous.Recent developments in LFP bring it much close
62、r to substituting for NMCand NCA technologies even in longer range vehicles.The recent innovationof cell-to-pack(CTP)technology which eliminates the need for modules tohouse cells in the battery pack reduces the dead weight in the pack andimproves the energy density of LFP batteries.CTP technology w
63、as introduced by BYD and it continues to be improved.CATL also released their third-generation CTP battery increasing the LFPpack energy density to around 85%of a conventional NMC811 battery.Currently,LFP batteries are used in key high-volume models such as theTesla Model 3/Y,the Wuling Hongguang Mi
64、ni,and by BYDs line-up withBYD also supplying Toyota.EV Growth Aligns with Broader ClimateGoalsChina has made a commitment to achieve carbon neutrality by 2060,andEVs will also become one of the strategic industries to help China achieve itsclimate goals.Therefore,the Chinese government will continu
65、e to support electrificationdue to EVs ability to reduce Chinas dependence on imported oil,reduce airpollution and help the country to become carbon neutral.It should be noted,however,that recent regulatory shifts point to China nowmoving the industry to the consolidation phase with greater scrutiny
66、 ofproduction quality and technological capability throughout the supplychain.Key Industry Outlook and TrendsNEV Market Overview in ChinaChinas New Energy Vehicle(NEV)volume was around 3.5m units in 2021which is equivalent to a penetration rate of 14.5%(double that of 2020).NEVs include battery-powe
67、red electric vehicles(BEV),plug-in gasoline-Chinas Evolving EV IndustryMio Kato13electric hybrids(PHEVs)and hydrogen fuel cell vehicles(FCEVs).In 2021,EVs represented 82.7%of total NEV sales volume while PHEVs accounted for17.2%.According to the China Association of Automobile Manufacturers(CAAM),sa
68、les of New Energy Vehicles in December 2021 increased by18.1%MoM to 529k units.Lowering Battery Cost Will Help toReduce the Price Gap Between EVs andConventional VehiclesThe electric battery is a core component of electric vehicles and typicallyaccounts for 30%to 50%of the EVs cost.Since 2014,batter
69、y costs havefallen by more than 70%and this has resulted in the closing of the price gapbetween electric and conventional gasoline vehicles.Chinas Evolving EV IndustryMio Kato14Recently,there have been some significant improvements in batterytechnology like CTP(module-free battery pack),and BYDs adv
70、ancedblade battery technology which uses for LFP technology but improvesrange and efficiency.These developments help drive further declines ineffective battery cost as LFP technology does not use materials likeNickel and Cobalt.These improvements have raised hopes for EVs to achieve price paritywith
71、 gasoline vehicles though this is threatened by recent material costinflation.At the same time,the efficiency and range of electric vehicle batterieshave also improved resulting in improved consumer convenience andacceptance.Open Chinese Market for Foreign PlayerIncreases Competition and ImprovesNeg
72、otiation Power Over SuppliersIn 2018,the Chinese government relaxed restrictions on foreign investmentin Chinas automotive industry which has mostly benefited EVmanufacturers.As result of easing restrictions on foreign investment China hasregained its position as the largest EV market in the world,w
73、ith foreigninvestment starting to flow into the NEV sector in China.Toyota and BYD established a JV to jointly develop car batteries andelectric vehicles while Volkswagen plans to invest around 2.1bn in EVsin China following in the footsteps of Teslas capacity investments.Therefore,we expect the Chi
74、nese EV market to be more competitive thanbefore as EV manufacturers continue to introduce attractive new modelsmore regularly than before and traditional automakers introduce new EVmodels into their product line up.On the other hand,if more automakers enter the EV market includingtradition large au
75、tomakers,there will likely be a shift in negotiating powerwith suppliers and costs could be expected to fall further as a result ofgreater scale and intense negotiations.Chinese EVs are Becoming PopularOverseasAccording to the China Association of Automobile Manufacturers,domesticauto exports grew b
76、y 87.7%YoY to 231k units in January 2022.The exportvolume of new energy passenger vehicles(NEV)grew by 538.7%YoY to 54kChinas Evolving EV IndustryMio Kato15It is evident that in recent years the popularity of Chinese EV brands hasrisen,particularly in Europe.Chinese auto brands like by SAIC,Great Wa
77、ll,and NIO have all targeted the European market for their overseas exports.The second-largest source of BEVs registered in Europe in 2021 was Chinaand China accounted for nearly 15%of BEVs registered in 2021,second onlyto Germany in share.The Premium EV SpaceEV technology is becoming mature and EV
78、penetration has started to growsignificantly in the premium-branded luxury segment.Tesla is the firstmover to offer premium EVs and now many EV manufacturers areintroducing premium EVs to the market.Currently,Teslas EV models compete with the Mercedes EQs,BMW i cars,Audi E-trons,and new-groove Porsc
79、hes as Mercedes-Benz,BMW,JaguarLand Rover and Volvo continue to expand in the premium EV segment.Inaddition to that,NIO is also among a small group of Chinese challengers,having launched its ES8 premium electric SUV.During the last two years,demand for EVs has grown significantly in Europeand tradit
80、ional manufacturers are gradually shifting their large vehicleranges over to electric.NIO has revealed its overseas expansion strategy focused on the premiumsegment,starting with Norway and also plans to enter Germany,theNetherlands,Denmark,and Sweden in 2022,and reach 25 countries by 2025.It also s
81、eeks access to the U.S.market.The company expects to introduce the ET5 model which is one their keypremium EV models and expects to launch the more expensive ET7 electricsedan shortly after.The NIO ET7 is a luxury vehicle targeted at Mercedes,Audi or BMW purchasers and signals the brands intent to c
82、ompete withthem in their own home market.The ET7 will be one of the brands first carslaunched in Europe and takes on the luxury legends in Germany by offeringa range of up to 1,000 Km with an interchangeable 150 kWh battery.NIOmodels are not necessarily cheap as most are selling at prices above$70ka
83、nd the company will have to rely on strong technology,quality and serviceto develop their brand in international markets and compete with Tesla andEuropean brands.Soaring Raw Material Prices will DentEV Demand Short TermDuring the last few years,EV battery prices have dropped sharply and in2021,the
84、average price of a lithium-ion battery pack was$132 per kWh($101 per kWh on a cell basis),down from$140 per kwh in 2020.However,Chinas Evolving EV IndustryMio Kato16the recent increase in material prices of nickel,lithium,and other materialshas resulted in an increase in EV battery prices.The increa
85、sed raw materialprices were mainly due to scarcity of resources and Russias invasion ofUkraine which impacted nickel prices which have hit record highs asconcerns surround Nornickel,the Russian mining company which producesaround 20%of the worlds high-purity class one nickel.According to E Source,th
86、e current battery cell cost basis is roughly$128 perkWh and by next year costs were expected to decline to$110 per kWh butestimates have battery cell prices surging 22%from 2023 through 2026.Eventhe lower cost LFP technology has seen prices driven up due to supply chainissues resulting in an increas
87、e in LFP battery prices by 10%to 20%byChinese manufacturers.Further,the increase in raw material prices will delay the timeline on costparity between EV and ICE vehicles.Experts across the industry broadlyplace the$100 per kWh price point as where the cost of EVs will match theprices of ICEs.Long-te
88、rm we expect lithium to be a key bottleneck and tracking prices oflithium carbonate and especially lithium hydroxide will be key.Newcontracts for battery materials on SGX could be ideal for this purpose as theyare based on Fastmarkets prices that are often benchmarked in contracts.Chinas Evolving EV
89、 IndustryMio Kato17Key players in ChinaChinese EV Market is Fragmented,butSigns of ConsolidationChinas EV sector is too fragmented as according to state-owned Xinhuathere are about 300 EV makers in China.This was due to Chinesegovernment tax breaks and subsidy schemes for consumers who purchasedEVs
90、encouraging new EV start-ups as well entry into the space by companiesfrom disparate industries.Recently,the government has started to address this issue by setting upminimum production capacity utilisation rates for EV manufacturers on aper province basis.If the manufacturers fail to achieve the mi
91、nimumcapacity utilisation threshold,Beijing will prohibit the local governmentfrom green-lighting new production facilities until firms close the shortfall.Chinas big EV manufacturers are best positioned to benefit from thegovernments push for market consolidation,as tighter regulations shouldpressu
92、re smaller firms with less access to capital and lower technologicalcapability as has happened with past such moves.Tesla and BYD are the Market LeadersTesla and BYD remained by far the market leaders in Chinas battery electriccar market in 2021,while new competitors emerged against smaller rivalsli
93、ke NIO.In 2021,Chinese automaker BYD sold more electric and hybridvehicles in China than Tesla.Many of BYDs electric vehicles and hybrids are priced betweenCNY100-200k which is well below Teslas electric models that start at aroundCNY300k.Other than BYD,low price EVs have tended to capture the growi
94、ng demandin China.SAIC-GM-Wulings low-priced electric car is taking off in Chinasrural areas with the budget electric car known as the Hongguang Miniretaining the best-selling spot more than tripling sales volume in 2021 to395k units.EV ManufacturerTotal Deliveries in 2021YOY growthSAIC Motor*732,64
95、6129%Tesla473,078110%BYD320,622146%Lynk&Co.*220,51626%Great Wall Motor*136,95382%XPeng Motors98,155263%NIO91,429109%Li Auto*90,491177%WM Motor44,157199%Chinas Evolving EV IndustryMio Kato18Zeekr6,007N/ASource:electrek,*Total is for all NEVs including PHEVsEVManufacturerTypeDescriptionSAIC MotorLocal
96、 legacyplayersmoving intoEVs,JV andoffering LowEndproductsSAIC Motor Corporation Limited(SAIC)is owned by the Shanghai municipalgovernment and operates two major passenger car joint ventures-ShanghaiVolkswagen and Shanghai GM.The companys bestselling EV model is theHongguang Mini.TeslaPure EVPlayer,
97、HighEndproductsTesla is a US based EV manufacturer which entered Chinese market in 2013and its Model 3 and Model Y remained no 2&3 in terms of EV sales volumein China.Recently,the company introduced cheaper version of the Model YSUV with a shorter driving range to compete with Chinese EV modelsBYDLo
98、cal legacyplayersmoving intoEVs,Fullrange ofproductsOne of Chinas largest electric vehicle manufactures which recently stoppedmaking combustion engine vehicles to focus only on full electric and heavilyelectrified plug-in hybrid cars.The company also manufactures EV batteriesand it is among the top
99、5 largest EV battery manufactures in globe.In April2022,BYD reached a 50%market share in LFP batteries,surpassing CATL inChina.Lynk&Co,High Endproducts andJVLynk&Co is a Chinese-Swedish automobile brand that is the result of a Jointventure between Geely Auto and Volvo Car.Great WallMotorLocal legacy
100、playersmoving intoEVsGreat Wall Motor is a Chinese privately-owned automobile manufacturer.The company is the 8thlargest automobile manufacturer in China,having1.3m units of sales volume in 2021.The company produces EVs like theORA.XPengMotorsPure EVPlayer,HighEndThe company was founded in 2014 and
101、introduced its first vehicle,the G3compact SUV,less than three years ago.Since then,the company hasintroduced several models to the market including the P7 long-range sportssedan to its lineup,and recently,announced its next vehicle,the P5 sedan.NIOPure EVPlayer,HighEndproductsThe company was founde
102、d in 2014 to design and develop EVs.Thecompany has developed battery-swapping technology and deployed batteryswapping stations for its vehicles to differentiate itself.Li AutoPure EVPlayer,HighEndproductsThe company was founded in 2015 and specializes in developing electricvehicles to cater to the l
103、uxury segment in China.It focuses more on PHEVproducts.WM MotorPure EVPlayer,LowEndproductsWeltmeister is owned by WM Motor Technology,and it launched its firstproduction car,the EX5 in 2018.The company plans to lauch its first sedan,the M7,which has range of over 700 Km.ZeekrPure EVPlayer,HighEndpr
104、oductsZeekr owned by Geely Automobile was founded in 2021.The brand offerspremium electric vehicles and has international expansion plans including tothe US where it has partnered with Waymo for autonomous technology.Source:electrek,Company disclosuresCompanyExchange:TickerMarket Cap-$bnEV/SalesFY2
105、EV/EBITDA FY2 EV/EBITFY0 FY1 FY2SAIC MotorSHSE:60010429.40.30.30.25.34.1TeslaNasdaqGS:TSLA745.0 13.78.56.425.136.3BYDSEHK:1211129.23.82.62.124.051.9Great Wall MotorSEHK:233338.41.81.41.113.920.3XPeng MotorsNYSE:XPEV22.35.42.91.7-5.4-3.6NIOSGX:NIO31.14.82.91.7230.8-17.5Li AutoNasdaqGS:LI30.05.63.21.7
106、53.2229.8Source:CapIQChinas Evolving EV IndustryMio Kato19NIONIO is a Chinese EV manufacturer which was founded in 2014.The companyfocuses on developing high performance premium electric vehicles and isfinancially backed by companies such as Tencent,Lenovo and Baidu.Similar to other EV players in Ch
107、ina,the company experienced highergrowth during the pandemic driven by extended government subsidies.NIOs Top Performing Models in ChinaModelPriceBattery0-100Km/hRangeTop SpeedSeatingNIO ES8$59,00070-84 Kwh4.4s355-425 Km200 Km/h7NIO ES6$55,00070-84 Kwh4.7-5.6s420-510 Km200 Km/h5NIO EC6$51,000100 Kwh
108、4.5s615 km200 Km/h5Source:Company disclosures,evcompareThe company focuses on continuous development of technology to offerdifferentiated product from their competitors and it has been investingheavily in R&D.NIO has filed more than 300 patent applications during thelast five years related to commun
109、ication systems,safety features,lighting,HVAC systems,distribution,and electric power conversion.The companyslong-term strategy is to grow revenue through creating an ecosystem forusers including community spaces called NIO Houses across 47 globallocations,swappable batteries and even plans to enter
110、 the smartphonemarket.NIO Autonomous Driving(NAD)NIOs autonomous driving technology includes NIO Aquila Super Sensingand NIO Adam Super Computing.NIO Aquila consists of 33 high-performance sensing units which includes 8-MP high-resolution cameras,1ultralong-range high-resolution LiDAR,5 mm-wave rada
111、rs,12 ultrasonicsensors,and 2 high-precision positioning units.NIO Adam is aChinas Evolving EV IndustryMio Kato20supercomputer that process data to create high-clarity images.The companyfirst introduced the autonomous driving technology in the NIO ET7,inJanuary 2021.Battery as a Service(BaaS)BaaS is
112、 a subscription model or leasing service which is offered by NIO toreduce costs for their customers enabling them to save up to CNY100k by notchoosing to own the battery of their EV.Instead of owning it,the consumercan pay a fee of around CNY1,280 per month for six years.This allows NIO toprovide be
113、tter value addition to their customers as it resolves issues ofbattery degradation,upgradability,and lower second-hand market value.NIOs battery swapping technology is what enables this unique businessmodel.During the last few years,NIO has accelerated its innovative battery-swapping technology for
114、electric vehicles with the introduction of a newBattery-as-a-Service(BaaS)subscription model and its NIO Power SwapStation 2.0.Currently,NIO has 900 Power Swap Stations around Chinawhere customers can have a battery pack installed in about five minutes.In FY2021,NIOs revenue from vehicle sales was$5
115、.2bn(+223%YoY)whileother revenue was$465.5m(+282%YoY).NIOs other sales includes itsBattery as a Service(BaaS)and One-Click-for-Power services for emergencysituations on the road,such as dead batteries or flat tires.By 2025,NIO hasset a target to install more than 4,000 battery swap stations globally
116、,with1,000 of them based outside China.NIO has already launched the firstbattery swap station in Norway where it intends to have 20 by the end of2022.NIOs battery service has also reduced the price of each electric vehicle by$10,000 because the battery service is decoupled from the sale of the car a
117、ndusers have more options to choose different battery sizes at the Power Swapstations based on their driving needs.According to Frost&Sullivan,Chinas battery swap market is to grow at aCAGR of 73%during 2020-25 and they expect an increase in the number ofbattery swap stations from around 555 station
118、s to 8,600 over the same timeperiod.In addition to their own expansion strategy,NIO is partnering with ShellGroup,which they expect to accelerate growth of the combined batteryswapping and fast charging hubs at Shell Stations in China and Europe.NIOmay face more competition in future as several auto
119、motive manufactureshave shown interest in offering battery swapping services in China andoverseas.However,some concerns remain about NIOs charging technology as existingNIO fast charging technologies require up to 50 mins for a full charge whileTeslas technology takes about 30 minutes.In addition,th
120、e company needsto invest capital expenditure of$500K per BaaS station compared to a typicalcharger unit costing$100K.Chinas Evolving EV IndustryMio Kato21NIO PowerNIO Power provides solutions for“One Click for Power,”,a 24/7 on-call valetcharging system.This service is integrated as an option on the
121、 NIO app.Itprovides a pick-up and drop service to recharge a NIO within the shortesttime based on selecting the best option at the given time(Power Swap,Mobile,or Charger).As of January 2022,the company had 800 batteryswapping stations,637 supercharging stations,and 645 destination chargingstations
122、which connected with over 460k public chargers in China.Major EV Manufacturers in ChinaSAIC MotorThe company is the largest auto manufacturer in China and the companymanufactures both passenger and commercial vehicles.In 2021,thecompany sold 5.4m vehicles including 733k NEV units.The company isactiv
123、ely promoting the commercialisation of new energy vehicles andconnected cars.SAIC group includes subsidiaries including foreign equity-funded JVs such asSAIC Volkswagen Automotive,SAIC General Motors,SAIC PassengerVehicle,which has its own brands Roewe and MG,and SAIC GM WulingAutomobile.SAIC-GM-Wul
124、ing produces the Wuling Hongguang MINIEVwhich leads the NEV passenger car market in China.SAIC Motor produces auto parts including power drive systems,chassis,interior and exterior trims,and the core components and smart productsystems of new energy vehicles such as batteries,electric drives and pow
125、erelectronics.The company experienced a downtrend in its total sale volumefrom 2018,but NEV sales and export volumes increased significantly duringthe last few years.In 2021,the company sold 5.5m vehicles(-2.4%YoY),ofwhich 733k were NEVs(+129%YoY)and 390k(+79%YoY)exports.SAIC disclosed its five-year
126、 plan(2021-2025)and expects to investCNY300bn in smart EVs and they expect to achieve sales volumes of morethan 2.7m NEVs globally and increase the NEV ratio of commercial vehiclesales to 38%by 2025 and hit overseas sales volume of 1.5m units or 15%total sales volume.BYDThe company was founded in 19
127、95 and manufactures and offers traditionalICE vehicles,and NEVs.The company also manufactures and sellsrechargeable batteries,photovoltaic products,handset components andother electronic products.BYD has four manufacturing plant bases in China in Shenzhen,Xian,Changsha and Changzhou,with a capacity
128、of 600,000 units in 2021.Thecompany is currently building new production bases in Hefei,Zhengzhou,Jinan and Xiangyang to expand both battery and EV production capacity.Chinas Evolving EV IndustryMio Kato22In April 2022,the company sold 106k(+1%MoM,+313%YoY)NEVs despitethe Covid impact.Out of total s
129、ales of 106k units,57k were EVs which grew256%YoY while PHEV sales grew 439%YoY to 48k.Higher growth in BYDsPHEV was due to its new DM-i system that provides substantial batteryrange.In 1Q2022,BYD sold 286k EVs and hybrid vehicles which was nearly equal toTeslas all-electric deliveries in China and
130、BYDs sales are significantlyhigher than Chinese pure EV players like NIO,Li Auto and Xpeng.Inaddition to its EV business the company also produces batteries for EVs andexpects to expand its LFP battery production capacity.In addition to using their batteries to produce BYD EVs,the company alsosells
131、its batteries to other OEMs.Currently,the company sells batteries tothe made-in-China Ford Mustang Mach-E.GM and Toyota expect to use BYDbatteries for upcoming small EVs for the Chinese market where BYDs Bladebattery has proven particularly competitive.XPeng MotorsXPeng Motors is a Chinese pure EV m
132、anufacturer founded in 2017.Thecompany experienced a phase of very fast growth and reached a milestone ofproducing 100,000 EVs in October 2021and now expects to double theproduction capacity of its Zhaoqing manufacturing plant to 200,000 units.The companys revenue grew by 259%YoY to CNY21bn in 2021
133、as result of a263%increase vehicle deliveries to 98,155.Like other Chinese EVmanufactures,XPeng also expects to expand its business overseas.Marketing has begun in Denmark,Norway,and Sweden and Xpeng hasbegun shipping its G3 SUVs and P7 sedans in Norway with further expansionslated for 2022.Li AutoL
134、i Auto is one of the leading premium smart EV manufacturers in China,founded in 2015.The company introduced its first EV model,the“Li ONE”4years after founding and released it in May 2021.The Li ONE,is a six-seaterpremium electric SUV of which a cumulative 160k units had been delivered.Currently,the
135、 company has production capacity of 100k EVs per annum and206 retail centres in China covering 102 cities,and 278 after-salesmaintenance centres covering 204 cities.Li Auto expects to introduce new models including BEVs and EREVs,totarget a broader consumer base in China and the company will add thr
136、eemodels in 2022 and 2023.In 2022,Li Auto plans to introduce a large SUVwith electric-only propulsion and the company considers the vehicle to be aclose substitute and competitor for Audis Q7 and BMWs X5.TeslaTesla entered the Chinese market in 2013 but only built its Gigafactory inShanghai in 2019
137、and delivered the first China-made Tesla car in 2020.Thecompany plans to expand its factory in Shanghai to meet the growingChinas Evolving EV IndustryMio Kato23demand from Europe and China and expects to produce 1.5m autos in 2022,an increase of 50%YoY.Teslas Model Y became the top-selling modelamon
138、g all crossover/SUVs in 1Q2022.Great Wall MotorGreat Wall Motor was founded in 1984 and is currently the 8th largestautomobile manufacturer in China,with 1.3m unit sales in 2021.In itsstrategic plan for 2025 the company expects to sell 4m vehicles,of which3.2m vehicles(80%)are to be NEVs.In 2021,the
139、 company sold 137k NEVsrepresenting 10.3%of total sales.The company launched the HAVAL H6HEV,HAVAL JOLION HEV,ORA GOODCAT and WEY Mocha PHEV inoverseas markets in 2021.Great Wall Motor plans to invest$1.9bn in Brazilduring the next decade to build manufacturing facilities for EVs and hybridvehicles.
140、Further,the company launched more affordable EVs in Thailand in2021 and aims to expand within Asian by launching nine different EVmodels within three years.Lynk&CoThe company was founded in 2016 as a JV between Geely Auto Group andVolvo Car Group.In 2021 the company sold 221k units,an increase of 26
141、%YoY and currently has 319 sales and experience centres across China.Theycontinue to expand with seven permanent Lynk&Co Clubs in theNetherlands,Sweden,Belgium and Germany and plans to enter new marketsin the Gulf and Asia Pacific,starting with Kuwait.Lynk&Co introduced itsfirst EV model,the“Lynk&Co
142、 01”compact SUV in 2017 and has introduced8 EVs since with the“Lynk&Co 09”mid-sized PHEV being the latest.WM MotorThe company was founded in 2015 as a Chinese pure EV player backed byLenovo,Baidu and Tencent that is well known for electric SUVs,but thecompany recently introduced a new sedan model.In
143、itially,three electricSUVs were launched,namely the EX5(electric compact sedan in 2018),EX6(mid-size SUV in 2019)and W6(electric compact SUV in 2021).The M7,asedan model was introduced in 2022.In addition to EV manufacturing,thecompany also provides a range of charging solutions and a charging netwo
144、rkof over 200,000 public chargers in China.In 2021,the company delivered44,157 units(+96.3%YoY)and as of the end of 2021,had cumulative totaldeliveries of 88,686 units.ZeekrThe company is a pure Chinese EV manufacturer,and is part of Geely.Thecompany was founded in 2021 to specialise in offering pre
145、mium EVs.Sinceits founding,the company delivered 20,000 EVs producing just one model,the Zeekr 001,however they expect to expand the product line to 7 modelsby 2025.The company expects to reach a cumulative delivery goal of 70kunits by the end of 2022 and reach 650k units sold annually by 2025.Likeo
146、ther pure EV manufacturers,the company also intends to expand itsbusiness overseas mainly in Europe and North America.Chinas Evolving EV IndustryMio Kato24Current Opportunities and Risks inChinaOpportunitiesIncreasingly Competitive TechnologyAs the Chinese government eases restrictions regarding for
147、eigninvestments,foreign players have entered the Chinese market chasinglucrative growth in Chinas EV sector and during the last few years mostconventional auto manufacturers have expanded their presence inChina.Some of the foreign players have set up JVs with Chinese playersto develop EVs.Establishi
148、ng JVs with global players and opening the Chinese market toforeign players will help Chinese manufactures improve their EVtechnology and become more competitive.In addition to that,it isevident that most of the Chinese manufactures have invested in somedegree of internal research and development of
149、 electric batteries andare proactively incorporating other technologies like autonomousdriving into their EVs which is good sign for their competitiveness.Currently,Chinese EV players have demonstrated significantimprovements in the EV technology that they utilise and have loweredthe technology gap
150、between themselves and global players like Tesla interms of range,efficiency and charging times.Therefore,this shrinking of the technological competitive gap forChinese EV manufacturers will allow them to better compete in theglobal market as they offer products at competitive prices even iflacking
151、some brand power.Growing Overseas Demand for NEVsChinese EV manufactures have started to expand their businessoverseas,especially in Europe,the second largest EV market to China.MG owner SAIC expanded its presence in the European EV marketusing MG which already has 350 dealers in 16 European countri
152、es.Twoother Chinese EV automakers,NIO and BYD,entered Europe throughthe Norwegian market.Great Wall Motors also launched an all-electriccompact and plug-in hybrid EV(PHEV)SUV in 2022.The ASEAN region is one of the fastest growing in the world for autosales.According to the International Renewable En
153、ergy Agency,sales ofnew energy vehicles in Southeast Asia will increase to 10 million by2025.This represents a further opportunity for Chinese players whichcan build up strong ties with the region.Chinas Evolving EV IndustryMio Kato25In recent years,more and more Chinese new energy vehicle companies
154、have entered the Southeast Asian market,strengthening cooperationwith local partners and ASEAN countries are increasingly payingattention to the development of new energy vehicles.Therefore,we believe that the ASEAN region will be the logical nextmove for Chinese EV players after expanding in Europe
155、.RisksOvercapacityOver the last few years,the majority of the EV manufactures haveinvested aggressively to increase their production capacity as theyexpected to gain a higher market share of global automotive salesvolume as EV penetration increases.For example,the JV between Volkswagen and Audi is b
156、uilding a factoryfor producing 150k vehicles a year,Honda Motor plans to get approvalfor capacity expansion at a JV and Dongfeng Motor has invest incapacity to make 100k NEVs a year.According to the China Passenger Cars Association the annualproduction capacity for passenger car NEVs totalled 5.7m w
157、ith autilisation rate of 58%in China as at the end of 2021.Generally,it takes around 2 years to start operations for NEVproduction after the start of construction.Based on current capacityexpansion plans,total NEV production capacity will reach an annualcapacity of 15m units in 2025.If the productio
158、n utilisation rate falls below 50%there is a material riskof making losses and to reach a 50%utilisation rate Chinas NEV salesvolume would have to reach 7.5m units by 2025.This means that theNEV sales volume in China would have to grow at a CAGR of 29%whichlooks aggressive without further extension
159、of government subsidies.Supply Chain Disruption&Inflated Material PricesEV manufacturers in China face challengers from supply chaindisruptions due to Covid and inflated EV battery material costs.In China,Shanghai,Guangzhou and other parts of the country remainunder Covid controls and these cities a
160、re automobile manufacturinghubs in China.The China Passenger Car Association estimates a volume decline of48%YoY in April and Teslas production volume in China fell 81%MoMto 10,757 units in April.In addition to that,Chinese and other EV automakers are experiencingrapidly rising battery costs due to
161、soaring prices for lithium carbonateand lithium hydroxide as well as cobalt and nickel.This has forcedTesla,BYD and other EV manufacturers to raise the prices of their EVs.Chinas Evolving EV IndustryMio Kato26While LFP technologies could offer some insulation from surging nickeland cobalt prices,the
162、 pace of EV manufacturing expansion is likely toresult in continued upward pressure on lithium prices and potentiallysimple shortfalls in production at almost any price.Hydrogen,PHEVs and HybridsWhile BEVs are the frontrunner in Chinas NEV landscape thegovernment continues to support fuel cell and h
163、ydrogen technologyand even hybrids.Competition thus remains for market share not just within BEVs butalso amongst carbon neutral and low carbon passenger vehicletechnologies.Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews expressed in this ins
164、ight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply wi
165、th Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms sp
166、ecified therein.Mio Kato(13 Jun 2022)Chinas Evolving EV IndustryMio Kato27Osbert Tang,CFAChina Analyst-Equity Long-Short,Onshore CreditThematic(Sector/Industry)China ConsumerDiscretionary:DarknessBefore DawnBy Osbert Tang,CFA|30 Jun 2022EXECUTIVE SUMMARY2Q22 is a tough quarter for Chinas consumer di
167、scretionary companies.Anta Sports Products(2020 HK)has experienced improvement inrecovery in May and Jun,but we see FILA stay challenging.In its FY22 result,Bosideng International Holdings(3998 HK)demonstrated its resilience in gross margin despite higher input costs.More positive developments are b
168、rewing in 2H of this year.Haier Smart Home(600690 CH)has its business rebounding after thelockdown and healthy performance in overseas market should partlymitigate the lockdown-induced weakness in 2Q22.DETAILA tough quarterChinas consumer discretionary sector has experienced one of the toughestquart
169、ers in the last three months.While the nationalistic trend we wrote inChina Consumer Discretionary:Beneficiaries of The Nationalistic Trend hasnot changed,the rapid spread of the Omicron variant has resulted in thelockdowns of many cities in China,disrupting store operations as well aslogistics.That
170、 said,the three stocks highlighted in the Smartkarma Originalhave seen weak performance YTD(Figure 1),only with some pick-ups afterthe lockdowns,particularly which for Shanghai,were removed.Nonetheless,we still see the long-term structural stories for them unchanged,and weanticipate a good recovery
171、over the next 12 months with added support fromgovernment policies.Figure 1:Share price performance of the three consumer discretionarystocksCompanyShare Price2Q221Q22YTDAnta Sports Products(2020 HK)HK$93.15-4.6%-15.6%-19.4%Bosideng International Holdings(3998 HK)HK$4.7730.3%-25.5%-2.9%China Consume
172、r Discretionary:Darkness Before DawnOsbert Tang,CFA28Haier Smart Home Co Ltd(6690 HK)HK$28.6512.6%-22.8%-13.1%Source:Eastmoney ChoiceAmong the three names,Anta Sports Products(2020 HK)has been thehardest hit.Instead,both Bosideng International Holdings(3998 HK)andHaier Smart Home Co Ltd(6690 HK)have
173、 experienced a strong comeback inJune,ending 2Q22 with positive returns.1.Anta Sports Products(2020 HK)-Sales for the various brands of Anta Sports Products(2020 HK)haveseen good improvement in 1Q22,with ANTA recording high-teensgrowth,FILA mid-single digit and all other brands at 40-45%.However,the
174、 pandemic in 2Q22 has impaired their performance,notably for theFILA brand.The pandemic lockdowns have resulted in YoY decline in sales for Aprand May,but they have already recovered to positive levels in Jun ascurrently only a handful of stores remain closed.In particular,therecovery momentum is fa
175、ster for FILA brand than ANTA,and this isunderstandable given FILA has been more severely affected during thelockdowns.The inventory levels for ANTA and FILA brands still look to bemanageable,and the situation is better than the period in 2020 duringthe first round of pandemic lockdowns.As such,we t
176、hink that whilethere will be YoY weakness in 2Q22 operations,Anta Sports overallperformance will still be ahead of that in 1H20.While it seems that the offensive ladies sports shoe poster(see linkhere)has not had a sustained negative impact on sales,this will stilltake time to tell,in our view.Also,
177、the slow return to normal pace inShanghai means that FILA may see a lengthy recovery track given manyof its stores are located in shopping malls(Figure 2).Figure 2:Anta Sports store countsSource:Company dataChina Consumer Discretionary:Darkness Before DawnOsbert Tang,CFA29Among the three consumer di
178、scretionary stocks that we highlighted,Anta Sports has the worst performance for YTD and 2Q22.This isprimarily driven by the fact that FILA has focused on higher tier citieslike Shanghai,Beijing and Shenzhen which have suffered more duringthe spread of Omicron variant.We expect the pandemic to highl
179、ight health consciousness and willbode well for the local sportswear companies like Anta Sports.With thedecline in share price YTD,the stock now trades on 21.3x and 17x PERsfor FY22F and FY23F.Relative to its close nationalistic sportswearpeers like Li Ning(2331 HK)and Xtep International(1368 HK),An
180、taSports stays as a less expensive play.2.Bosideng International Holdings(3998 HK)-Bosideng International Holdings(3998 HK)reported its FY22 result on23 Jun with a solid 20.6%increase in net profit driven by a 20%revenuegrowth.Sales of its all-important branded down apparel segment(Bosideng,Snow Fly
181、ing and Bengen)grew a healthy 21.4%YoY.Also,Bosideng maintained its position as the preferred down apparel expertbrand among over 71%of Chinese consumers.The consumer discretionary nationalistic trend continues to play out atBosideng,as foreign competitors scale back.For example,after theXinjiang Co
182、tton controversy,H&M has closed a total of 60 stores inChina in FY21 and its 4Q21 sales in China has plunged by 41%in Rmbterms.We note it is encouraging to see a 2pp expansion in gross margin forbranded down apparel segment,even in an environment with risinginput costs(Figure 3).This speaks well for
183、 its success in pushingtowards the premium down apparel market.Except for a few sectors,margin expansion is difficult in FY22,and Bosideng did it.Figure 3:Gross margin for Bosidengs branded down apparelSource:Company dataChina Consumer Discretionary:Darkness Before DawnOsbert Tang,CFA303Q22 is the l
184、ow season for down apparel.However,managementcommented that initial response in the just-started ordering season isencouraging.With new spokespersons and new flagship store inShanghai to be introduced in Sep and Oct,respectively,we anticipategood sales performance into 4Q22.Share price for Bosideng
185、has reacted positively to the FY22 result andhas since surged by 14.3%.Despite the share strength,we still see valueon the stock given its absolute leadership in the down apparel marketand quality management team.In our view,while trading on 16.6x PER for FY23F,Bosideng deservessuch premium multiple
186、 against its local fashion peers.For more details,please refer to Bosideng(3998 HK):Key Takeaways from Post-FY22Result Call,Generally Optimistic.3.Haier Smart Home Co Ltd(6690 HK)-Haier Smart Home Co Ltd(6690 HK)has a healthy 1Q22,registering a15.1%YoY growth in reported net profit and 13.1%on a rec
187、urring basis.While its margin for overseas market has seen heavier pressure than thedomestic market,it has managed to limit the contraction to only asmall magnitude.The lockdowns have had negative impact on 2Q22 sales,but it ispositive to learn that recovery has started after hitting a trough in Apr
188、.Also,during the lockdown period,many households have either boughtfreezer or upgrade refrigerator,mitigating the impact of the disrupteddemand for HSHs other products.For the high-end brand Casarte,salesfor 5M22 also recorded a double-digit growth,with rapid recovery tookplace immediately as lockdo
189、wns are removed.HSH maintained its leading position in the current quarter.Althoughthe exact figures are not disclosed,it continued to rank first in onlinesales of large home appliances,and this is achieved on the back of nosignificant increase in promotion efforts and spendings.Momentum for oversea
190、s market has been healthy in 2Q22,with salesgrowth reaching mid-to-high single digit level.In particular,sales inemerging market have recorded good double-digit increase,and the Junperformance stay in a positive uptrend.That said,we believe HSHsoverseas markets may partly offset the negative shock o
191、f the pandemicin China in 2Q22.While high penetration rate for home appliances in China hasweakened the linkage between HSHs sales with the property market,improvement in sentiment of the latter will nonetheless still bode wellfor HSH.The decline in residential housing sales in China has narrowedin
192、May to-37.7%,from-46.6%in Apr(Figure 4),and total sales havegrown by 29.7%MoM.Figure 4:YoY change residential housing sales by monthChina Consumer Discretionary:Darkness Before DawnOsbert Tang,CFA31Source:National Bureau of StatisticsShare price for HSH has a weak start in this year,dropping by 22.8
193、%in1Q22,but it has picked up by 12.6%in 2Q22.The stock now trades on14x and 12.2x PERs for FY22 and FY23,respectively,which we think areinexpensive relative to its 3-year EPS CAGR of 15.5%and its absoluteleadership in Chinas home appliances market.For more details,pleaserefer to Haier Smart Home(669
194、0 HK):Still Looking for a Decent Year.Overall,we believe the nationalistic trend for the consumer discretionarysector will stay in play in the next two years.We expect both BosidengInternational Holdings(3998 HK)and Haier Smart Home Co Ltd(6690 HK)to see sustained good performance into 3Q22.While we
195、 think Anta SportsProducts(2020 HK)will also witness a rebound in sales in the comingquarter,it will still be lagging behind that for the other two,primarily giventhe high reliance of the FILA brand on tier-1 cities which are only seeing thenegative impact of the lockdowns gradually diminished.For e
196、xample,fulldine-in services for restaurants in Shanghai have only restarted on aselective scale on 29 Jun,and it will take time for shopping malls to regainfoot traffic and thus visit to Anta Sports FILA stores.We will continue tomonitor the sectors development in the next three months and report ba
197、ckin our next quarterly update in Sep.China Consumer Discretionary:Darkness Before DawnOsbert Tang,CFA32Disclosure&CertificationI/We intend to have position(s)in one or more of the securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)abou
198、t the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountr
199、y from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Osbert Tang,CFA(29 May 2022)China Consu
200、mer Discretionary:Darkness Before DawnOsbert Tang,CFA33Said DesaqueGlobal EconomistMacroeconomicsChinas State CapitalismCreated Real EstateExcesses and LimitsRemedial Options toReduce StressBy Said Desaque|28 Aug 2022EXECUTIVE SUMMARYResidential property investment as a%of GDP in China stands at muc
201、hhigher levels compared to the US peak in 2006 before the globalfinancial crisis.Selling state-owned housing stock in 1988 at artificially low pricescreated a class of buyers who believed that home ownership was a one-way bet in terms of wealth creation.Considerable uncertainty prevails about the co
202、nsequences for mortgagestrikers due to lack of personal bankruptcy law in China,Thegovernments priority is to facilitate project completions to ensuresocial stability.DETAILElevated Real Estate Activity Poses Problems in ChinaThe boom in US residential real estate before 2006 sowed the seeds for the
203、global financial crisis via cross-border capital flows.China was forced torespond to the threat of significant economic headwinds following thecollapse of Lehman Brothers with a massive debt-financed stimulusprogramme equivalent to 14%of GDP.Meanwhile,Chinas housing markethad already been exhibiting
204、 strong investment and price appreciation before2008.Arguably,the stimulus simply helped to fuel an already booming sector.Residential investment as a%of GDP rose from 3%in 2000 to 7%in 2008.The comparable metric at the peak of the US housing boom was 6.6%in 2006Q1.Unlike the US National Income&Prod
205、uct Accounts(NIPA),data onresidential investment as a%of GDP in China is not released as part of thequarterly GDP data.Based on separate monthly reports on real estateinvestment and development,residential housing investment was 9.2%ofChinas State Capitalism Created Real Estate Excesses and Limits R
206、emedial Options to Reduce StressSaid Desaque34GDP in 2022 Q2.This level is,therefore,considerably above the peak reached inUS,thereby raising concerns about an impending bust with serious economicand financial consequences.Residential Investment As%of GDP Remains Elevated in ChinaThe recent experien
207、ce of China in the realm of housing has been at considerablevariance with the history of developed economies.Historically,residentialinvestment as a%of GDP in Western economies has been relatively small,butnotoriously volatile.Moreover,declines in residential investments share ofGDP have typically p
208、resaged recessions.The importance of housingconstruction within GDP has,however,been falling since the 1970s.Since theglobal financial crisis,residential real estate investment has generally gravitatedto lower levels in most developed countries.Hence,the current elevated levelof fixed residential in
209、vestment in China raises the spectre of broadereconomic implications if the housing sector goes into contraction.Construction activity does not,however,capture the total impact of realestate on aggregate economic activity.There is the issue of funding bothconstruction and purchases of newly-built ho
210、using stock.Invariably,therewill be a strong nexus with the financial sector.Adverse developments in thereal estate sector could,therefore,seemingly have implications for the financialsector via degraded asset quality in the banking system.Housing Bubbles in China Are Not NewThe media is apt to forg
211、et that Chinas private housing market is relativelynew.Furthermore,the country already has already experienced residentialreal estate excesses.Arguably,the economic reforms enacted during thelate-1980s helped to sow the seeds of these previous episodes of exuberance and,crucially,create a mind-set t
212、hat still has legacies in the current environment.Prior to 1988,Chinas households lived in welfare housing units that werestate-owned.Premier Zhu Rongji oversaw the selling of these entities atrock-bottom prices.The decision to sell these properties at artificially depressedChinas State Capitalism C
213、reated Real Estate Excesses and Limits Remedial Options to Reduce StressSaid Desaque35prices meant that a class of new homeowners quickly emerged and experiencedappreciation in the value of their properties.Consequently,this imparted a beliefamongst households that owning property was a one-way bet
214、in terms of wealthcreation.Furthermore,this favourable view of housing was reinforced bylocal governments who began their ever-increasing reliance on land sales asa source of revenue.Arguably,the first Chinese real estate bubble occurred on Hainan Island,anupscale holiday destination,between 1989 an
215、d 1992.This initial bubble was,however,crushed by rising interest rates in 1993.Serious development ofChinas private housing market began 1998.There was sharp appreciation inhome prices between 2004 and 2007,particularly in Tier 1 cities.Thegovernment responded by raising mortgage rates and tighteni
216、ng loan-to-value ratios.Credit conditions were,however,eased in the aftermath of thecollapse of Lehman Brothers.Housing prices and homebuildingsubsequently resumed their upward trajectory to reach their currentelevated levels that pose important economic challenges.State Capitalism Has Distorted the
217、 Housing MarketState capitalism has helped to fuel the importance of housing within Chinaseconomy.The mechanism is very simple:central government in Beijing setsan official growth target and local governments help to achieve that goal vialand sales for residential construction,thereby creating a sou
218、rce of economicgrowth.Development in Western capitalist economies meant urbanisationand,therefore,increased demand for housing stock.Hence,some of therising activity in housing simply reflects Chinas economic development andthe emergence of a middle-class.State capitalism has,however,played a rolein
219、 artificially boosting housing demand due to the lack viable investment choicesavailable for households.Meanwhile,the state still plays a significant role in theallocation of capital via state-owned enterprises.Chinas capital markets arestill small relative to the size of the economy.The equity mark
220、et is 70%of GDP,while the local currency corporate bond market is 37%.Chinas State Capitalism Created Real Estate Excesses and Limits Remedial Options to Reduce StressSaid Desaque36Despite Rapid Growth Since 2008,Chinas Corporate Bond Market isRelatively Small SmallThe issue of financial stability f
221、irst raised its head in 2016 with respect to therise in corporate debt.In 2009 Q1,corporate bonds were just 5%of GDP.Subsequently,this metric rose rapidly to reach 26%by mid-2016.The rate ofincrease has,therefore,slowed since 2016,but the situation in the propertydevelopment sector is more precariou
222、s.Property developers have much higherleverage levels due to a plethora of deployed debt instruments,ranging frombank loans to trust loans and wealth management products.Meanwhile,developers also engaged in joint ventures that allowed companies to keepdebt off-balance sheet.The combination of excess
223、 leverage at developers andan economy struggling to fully recover from COVID-19,as well as a morecautious household sector,is imparting major headwinds for Chinashousing market.Mortgage Strikes Complicate Housing SolutionsChinas housing market is facing significant challenges due to concernsabout th
224、e solvency of developers.Consequently,there has been a mortgagestrike due to delayed projects.The aim of mortgagors is to pressure banks andthe government to ensure that projects are completed.Invariably,there havebeen questions about the implications for the banking system stemmingfrom the mortgage
225、 strike which impacts around 2.5%of total mortgageloans.The aggregate threat to asset quality in the banking system is,therefore,seemingly limited,particularly at state-owned lenders.There is,however,a riskthat the strike spreads to other distressed developers,thereby increasing thechances of banks
226、tightening residential mortgage lending standards.Ultimately,the biggest risk of spreading mortgage strikes would be furtherdeclines in house prices.The highest incidence of mortgage strikes has beenin lower-tiered cities that have experienced the largest falls in prices.Chinas State Capitalism Crea
227、ted Real Estate Excesses and Limits Remedial Options to Reduce StressSaid Desaque37Meanwhile,there are potentially wider economic implications stemmingfrom mortgage strikes.Households that walk away from mortgages couldendure lower future credit scores,thereby impacting their subsequent ability topu
228、rchase large-ticket items.There is,however,no personal bankruptcy law inChina,making it impossible to forgive debts.This backdrop may preventsome mortgagors from going on strike with payments.Ultimately,there needsto be a new Supreme Court ruling about the current situation of unfinishedproperties a
229、nd mortgage strikes.If borrowers are granted payment holidays aswell as not experiencing downgrading of credit scores,then there is a risk ofstrikes spreading that could even impact healthy developers.Meanwhile,themost likely outcome is central government enlisting banks,asset managers andlocal gove
230、rnments to ensure projects have adequate funding for completion ifonly for the sake of social stability.Fiscal and monetary policy stances willalso be eased to assure the aforementioned outcome.Disclosure&CertificationI/We have no position(s)in the any of securities referenced in this insightViews e
231、xpressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material information.To the best of my/our knowledge,the views expressed in th
232、is insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed the Insight Provider Agreement and this insight does not violate
233、 any of the terms specified therein.Said Desaque(26 Aug 2022)Chinas State Capitalism Created Real Estate Excesses and Limits Remedial Options to Reduce StressSaid Desaque38Steven HoldenAsset Allocation&FundPositioningCross Asset StrategyChina A-Share DeepDive:Growth Slows,butEM Funds Remain WellInve
234、stedBy Steven Holden|19 Sep 2022EXECUTIVE SUMMARYThe growth in China A-Share exposure has slowed as we approach fullownership across the EM active fund universe.China A-Share allocations have remained solid throughout this yearsvolatility and heavy country rotation.Midea Group,Kweichow Moutai and Co
235、ntemporary AmperexTechnology remain the most widely held stocks,but others are startingto make their mark.DETAILTime-Series Ownership AnalysisChina A-Shares have seen significant ownership growth over the last decade,with an ever increasing number of funds registering some kind ofinvestment in China
236、s onshore stock market.Current average fund weightsof 5.99%and 87.8%of funds invested sit close to the all-time highs,withactive funds positioned overweight the benchmark by+0.90%,on average.However,as we approach full ownership the rate of growth has naturallyslowed.China A-Share Deep Dive:Growth S
237、lows,but EM Funds Remain Well InvestedSteven Holden39Over the last 5-years,A-Shares have cemented themselves as part of theChina&HK investment landscape.China A-Share allocations now accountfor 20.2%of the total China&HK active fund weight,compared to 16.3%forthe iShares MSCI EEM ETF.Again,the rate
238、of growth of has ground to a halt,with that ratio of 20%remaining largely constant since late 2021.It feels asthough A-Shares are reaching a natural equilibrium of sorts,at least for now.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden40Country AnalysisIf taken as
239、a standalone country allocation,China A-Shares are the 6thlargest country holding on an average weight basis and the 8th largest on afunds invested basis.A-Shares have a lot in common with Brazil,with bothoccupying a standalone 2nd tier after the big 4,and both representing keyoverweights for active
240、 EM investors,with more than 50%of managerspositioned ahead of the iShares MSCI EM ETF.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden41Ownership changes across EM countries over the last 6-months highlightthe pause in the growth of China A-Share allocations.As re
241、balancing occursin decent size between other countries(Russia,Taiwan,SK out-MENA,ASEAN,Brazil in),A-Shares have maintained a steady presence in active EMportfolios,with all measures of ownership barely moving over the period.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteve
242、n Holden42The chart below shows where current positioning in each Country sits versushistory going back to 2008 on a scale of 0-100%(y-axis),against a measureof fund activity for each sector between 02/28/2022 and 08/31/2022(x-axis).China A-Shares sit in the top-right quadrant though towards the cen
243、tre ofthe Grid.This is indicative of near record positioning yet neutralmomentum.Brazil,MENA and selected ASEAN nations are capturing thebulk of the rotation as Russia,Taiwan and South Korean allocations arescaled back.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Hold
244、en43Sector Positioning&ActivityOn a sector level,the trio of Industrials,Consumer Staples and ConsumerDiscretionary dominate the China A-Share landscape.All three are the mostwidely owned sectors among active GEM managers and the key overweightscompared to benchmark.Financials are the only major und
245、erweight,whilstReal Estate,Communication Services,Energy and Utilities are largelyavoided by EM active funds.Sector activity over the last 6-months has favoured A-Share ConsumerStaples and Utilities,with average weights rising in conjunction with anincrease in funds invested for both.Against this,EM
246、 funds reduced exposureto A-share Consumer Discretionary and Information Technology stocks,with1.4%and 2.2%of funds closing exposure respectively and all measures ofownership falling over the period.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden44The evolution of
247、 China A-Share sector weights can be seen in the chartsbelow.Whilst the top 7 sectors have seen strong investment growth over thelast decade,all but Industrials,Consumer Staples and Utilities have stalledover the last 12-months.Fund Holding&Style AnalysisChina A-Share Deep Dive:Growth Slows,but EM F
248、unds Remain Well InvestedSteven Holden45On a fund level,the majority of EM managers hold less than a 14%allocationin China A-Shares,with 50%of managers sandwiched between the lower andupper quartiles of 3.5%and 8.9%.At the lower end are the 24 funds with noexposure and the top end 9 funds above 14%,
249、topping out at 26.15%.The largest holders are a mixture of Value and Growth funds,led by LazardEmerging Markets Managed Vol(26.15%)and VP Bank EM Risk OptimisedESG(25.94%).On average though,the Style split shows A-Shares morefavoured by Aggressive Growth and Growth investors,with Value funds themost
250、 lightly allocated.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden46Fund activity between 02/28/2022 and 08/31/2022 is fairly evenly splitbetween those increasing and those decreasing allocations.AggressiveGrowth funds were perhaps the standout,with new positions
251、from JupiterGlobal Emerging Markets(+5.12%)and BNP Paribas Emerging Equity(+3.92%)helping to push allocations higher by+0.35%,on average.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden47Over the longer-term,Aggressive Growth and Growth Funds have movedahead of the
252、ir Style peers,growing their overweights to near record levels,whilst GARP,Value and Yield funds are maintaining a moderateunderweight,on average.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden48Stock Holdings&Activity AnalysisThe most widely held stocks are Midea
253、 Group Co Ltd A(000333 CH),Kweichow Moutai(600519 CH)and CATL(A)(300750 CH),all held by over afifth of the managers in our analysis and overweight the benchmark,onaverage.A further 11 stocks are held by more than 10%of managers,led byLONGi Green Energy Technology(601012 CH)and NARI Technology Co Ltd
254、A(600406 CH).High conviction positions are spread across a wide range ofstocks,though Kweichow Moutai is a common presence among the top 50.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden49Indeed,activity over the last 6-months has favoured Kweichow Moutai,witha f
255、urther+3.60%of funds buying in to the stock and combined inflows of$243m.China Yangtze Power Co,Ltd.(600900 CH),NARI Technology andMidea Group have also seen ownership levels rise,whilst HundsunTechnologies Inc A(600570 CH),Aier Eye Hospital Group(300015 CH)andContemporary Amperex Technology provide
256、d balance on the sell side.China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden50Split by Style,Midea Group is a top 3 holding for Aggressive Growth,Growth,Yield and Value investors,though largely avoided by GARP.Yield investorsprefer Inner Mongolia Yili Industrial Gro
257、up(A)(600887 CH)by some margin,whilst Value funds place a greater weight on Gree Electric Appliances(000651 CH).Shenzhen Inovance Technology Co.,(300124 CH)and FoshanHaitian Flavouring&Food(603288 CH)are well held by Aggressive Growthmanagers,but avoided elsewhere.China A-Share Deep Dive:Growth Slow
258、s,but EM Funds Remain Well InvestedSteven Holden51ConclusionsOur data shows a level of consolidation among active EM investors towardsChina A-Share stocks in 2022.Far from being a negative signal,it reflects astate whereby nearly all funds are invested and selected managers look totake profits on lo
259、ng-term positions and/or look for new opportunities.Indeed,2022 has been an active year for country rebalancing given theremoval of Russia from active EM portfolios and a move from high growthsectors to ones more Value aligned.The fact that A-Shares have maintainedtheir weighting in EM portfolios th
260、roughout speaks of a high level of long-term conviction.The China A-Share stock universe is vast,with over 750 companiesattracting some form of investment from the managers in our analysis.Thechart below shows a list of upcoming stocks.Those that were owned by lessthan 5%of the managers in our analy
261、sis 6-months ago and have seenownership levels rise since then.Stocks such as Wens Foodstuff Group Co.,Ltd.(300498 CH),with new positions from Nordea Stable Emerging Markets(+1.81%)and GS Emerging Markets CORE(+0.86%),or Ming Yang SmartEnergy Group-A(601615 CH),with new positions from CandriamSustai
262、nable EM(+1.70%)and Amonis Equity Emerging Markets(+1.46%).China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden52As the A-Share universe evolves,expect these stocks to feature more heavilyamong active EM investors in the future.Disclosure&CertificationI/We have no posi
263、tion(s)in the any of securities referenced in this insightViews expressed in this insight accurately reflects my/our personal opinion(s)about the referenced securities and issuers and/orother subject matter as appropriate.This insight does not contain and is not based on any non-public,material info
264、rmation.To the best of my/our knowledge,the views expressed in this insight comply with Singapore law as well as applicable law in thecountry from which it is postedI/We have not been commissioned to write this insight or hold any specific opinion on the securities referenced thereinI/We have signed
265、 the Insight Provider Agreement and this insight does not violate any of the terms specified therein.Steven Holden(18 Sep 2022)China A-Share Deep Dive:Growth Slows,but EM Funds Remain Well InvestedSteven Holden53SMARTKARMA RESEARCH:This publication is published by Smartkarma Innovations Pte Ltd(Smar
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