2020 vision, as we look back

Over the first 10 years of the 21st century the Iraq War in 2003 was the second-most read about news item. The death of pop star Michael Jackson in 2009 ranked fifth and the election of Barack Obama as US president came sixth. Yet the biggest story of the decade was the rise of China as an economic powerhouse, according to Global Language Monitor, a media research specialist which deploys algorithms to search print media and the internet for trends in word usage.

The same theme has stayed in the top position for much of the following 10 years as well, the same company confirmed recently. It seems unlikely to change after a turbulent 2020 that saw the Chinese economy narrow the gap further on its US counterpart, despite the worst trade tensions in recent memory. But it also got WiC thinking about tracing some of the bigger-picture themes inside China and where they might lead next. The stock market is usually said to be a leading indicator of where an economy is heading to next, for instance. So as 2020 draws to a close, WiC has picked out a few contrasting trends, pairing companies that are illustrative of changes in the past 10 years.

Tencent vs China Mobile

The last decade was a golden era for social media, beginning with a series of major private equity investments, including one that valued Facebook at $76 billion in 2009. Such heady levels were often deemed unrealistic, prompting cover stories about bubbles in the making (not so, as it turns out: Facebook was worth more than $800 billion this week, a 10-times return over the period).

Similar questions were asked of the leading internet stocks in China, and yet they have generally delivered on the hype as well.

Take Tencent: after listing on the Hong Kong Stock Exchange in 2004, the online gaming platform’s share price had already rallied more than 3,600% by the start of 2010. But investors who then took profit would have left a lot of potential gain on the table. Tencent’s stock price went on to rally another 16-times over the last 10 years. As of this week, it was worth more than HK$5.6 trillion ($728 billion), ranking as the most valuable listed firm from China (although the top spot yoyos between Tencent and its archrival Alibaba).

Prior to the emergence of Tencent, China Mobile was the darling of those investors looking to profit from the China growth story. The state-owned enterprise was already the world’s biggest mobile carrier by subscribers by the start of 2010, when it was trading at about HK$80 a share. Its shares have now dipped below HK$50, meaning that it has a market capitalisation of less than a fifth of Tencent’s.

China Mobile has struggled to tap into changing trends in technology and consumer behaviour. In relative terms, all of the SOE telcos have proven among the biggest losers in the internet and social media boom. That must be galling as they have done much of the capital-intensive work in laying out the infrastructure that supports the internet revolution. But non-state owned firms have reaped most of the benefits by developing new products and services with an innovative and customer-friendly focus.

Another landmark event in the social media boom was the China launch of Apple’s iPhone in late 2009 – just a few months before Google’s exit from the same market (see WiC46). The way the iPhone has transformed the internet sector has also primed investor interest in Chinese tech firms. Tencent started WeChat as an experimental project in 2010. Launched a year later, the new app was soon spectacularly popular in the smartphone era. Much of Tencent’s ascent has stemmed from WeChat’s dominance. The app is embedded in everyday life – straddling everything from communication among friends to making digital payments to ordering food.

In contrast, China Mobile did launch a number of ‘new media’ initiatives in a bid to ride on changing trends but the efforts have largely failed to catch on. Its market value is now only about half that of Meituan, a food delivery app – backed by Tencent – that was founded in 2010.

Can China Mobile claw back some of its former glory? After all, it still boasts nearly 950 million customers, an incredible number. Yet almost paradoxically for an incumbent of that scale, it may need a new wave of disruption to open up new opportunities, in part by weakening the grip of companies like Tencent, Meituan and Alibaba.

On this note, Tencent’s founder Pony Ma offered an intriguing prediction this week, forecasting that the decade-old “mobile internet” is close to another phase of revolution. “We call the next wave of upgrade ‘all-reality internet’… the door separating the real world and digital world has been opened,” Ma writes. “Those failing to catch up will be knocked out of the game.”

BYD vs PetroChina

These two companies have plotted a divergent course over the past 10 years or so – it’s a pairing we think illustrates the battle for investor interest between ‘new economy’ and ‘old economy’ stocks.

A crowning moment for BYD – a Chinese battery maker that transitioned into making electric cars – came in 2010 when Warren Buffett made a rare visit to China and BYD’s headquarters. He had invested $230 million in BYD in 2008 and his four-day tour with Bill Gates was filled with factory visits and company dinners.

Buffett has a huge following in China (see WiC193) and the publicity generated by the tour added further credibility to BYD’s brand. In fact, the company only started making cars in 2006 but it would become China’s biggest EV (electric vehicle) maker by sales by 2010. There was talk that the Buffett connection could even help it enter the US market too.

Buffett has only invested in two Chinese firms. The other was the oil major PetroChina, in which he earlier bought a $500 million stake in 2003, selling at a profit of $3.5 billion four years later.

He then switched to his second bet in China – a company that had pinned its prospects on an all-electric future, or the polar opposite of PetroChina’s fossil fuel focus.

Buffett’s timing was good. PetroChina was the most profitable company in Asia when he exited and it had briefly overtaken Exxon Mobil as the world’s most valuable listed firm in 2007, following its A-share debut in Shanghai.

But PetroChina’s shares came under further pressure after 2010 when the Chinese government levied higher taxes on the state-owned oil giants and began to grant more space to newcomers in parts of the energy sector.

The launch of Chinese President Xi Jinping’s anti-corruption campaign was another factor in shaking up the industry, eroding some of the political influence of the energy sector SOEs, especially after a series of arrests of senior officials connected to ‘Big Oil’ (see WiC207).

A longer-term decline in the price of oil has hardly been in PetroChina’s favour. But probably the biggest contributor to the company’s loss of status – in investors’ minds – is the new direction in the economy, where the government has been trying to prioritise less energy-intensive development.

Instead, the focus has turned to sectors like technology and consumer industries, with lesser enthusiasm for “old economy” sectors like oil.

PetroChina’s profitability hit an all-time high around 2010. Its Hong Kong-listed shares were trading at about HK$10 in January 2010. But after an 80% dive to about HK$2 this month, the company teeters in and out of the top 10 of China’s most valuable firms.

BYD’s story is rather different, with its Hong Kong shares sailing past the HK$200 threshold last month, or 250% higher than early 2010. That has significantly narrowed the gap on PetroChina’s HK$843 billion market capitalisation (and Buffett is now sitting on a $5 billion profit from his BYD investment).

Most of this gain actually happened this year with a 4.5-times surge that has propelled its market capitalisation to HK$557 billion. The rally has been fuelled by a marked change in enthusiasm for the EV sector in general, led by stellar gains from pioneers such as Tesla. Optimism has spilled over into investor sentiment for Chinese players like NIO and XPENG (see WiC521). Bigger picture, the policy tailwinds have been exciting for investors too. Sales of new energy vehicles (NEVs) account for 5% of China’s car market at the moment. But the government wants to see the proportion raised to 20% by 2025 and 50% by 2030 – a policy that is a key component of China’s pledge to achieve ‘carbon neutrality’ by 2060.

Tencent’s market value overtook China Mobile’s for the first time in 2016. Will the same also happen with BYD and PetroChina in the next decade?

The Sage from Omaha might still offer some guidance on this question. Berkshire Hathaway is now sitting on a $5 billion profit from its BYD investment back in 2008. His followers in China will watch with interest to see if Buffett takes profit or continues to sit tight.

Moutai vs SMIC

Investors would have needed to display a bit of Dutch courage to snap up Kweichow Moutai’s shares on the Shanghai bourse in early 2014. They had just halved in price in the wake of a national anti-graft campaign that clamped down on bureaucratic banqueting and other dubious sources of demand for high-priced bottles of baijiu.

Indeed, China’s most famous liquor brand had acquired an unwanted reputation as a proxy for corruption (see WiC172). Over the years a number of disgraced officials were found to be hoarding the finest bottles, often received as gifts from compromised businesspeople.

Perhaps that was a factor in Moutai’s strong performance in the first decade of this century, when its shares went on an extended surge after going public in 2001.

In the five years after the 2014 share price correction Moutai managed to reposition itself, reorganising much of its distribution system and taking back control of its inventory and pricing. The new approach was welcomed by investors, with asset managers starting to see the shares as more of a proxy for surging consumer demand than corruption.

As of this week, Moutai was worth Rmb2.28 trillion ($350 billion), giving it the largest capitalisation of any stock in the A-share market, outgrowing the likes of ICBC, China’s biggest bank, (Rmb1.85 trillion) and Ping An Insurance (Rmb1.58 trillion).

At Rmb1,850 per share, the stock has climbed more than 11 times in the past 10 years.

But will Moutai maintain its position as the A-share champion? This summer there were signs of strain, including an intriguing comparison made in a widely-forwarded research report from Guosen Securities in July.

The most valuable A-share, the brokerage argued, should really be China’s biggest chip foundry SMIC, and not the lower-tech booze brand Moutai.

“SMIC is even more precious than Kweichow Moutai,” Guosen reckoned. “It is an irreplaceable and invaluable asset in the Chinese market.”

The People’s Daily followed up on the claim with an attack on Moutai on social media. “Liquor is something to drink, not speculate on,” the newspaper insisted (the article triggered an 8% decline in Moutai’s share price).

Perhaps the comparison between Moutai and SMIC highlights a sense of unease that an alcohol brand is hogging the top spot in the A-share market at a time when a top government’s priority is upgrading the country’s capacity in key technologies like semiconductors.

Policymakers have been pursuing this goal for more than two decades, closing the gap in the assembly, testing and packaging of electronic goods, but still lagging behind in the design and manufacture of integrated circuits.

Chinese foundries can now produce lower-performance chips but they don’t compete in the semiconductors that support more sophisticated applications in the world’s most advanced technologies.

SMIC has been tasked as a leading force in surpassing China’s international competitors in the sector. Buoyed by its status as a national champion (and by a secondary listing on Shanghai’s STAR Market in July), its market value soared to more than Rmb600 billion earlier this year. Yet that valuation is still well behind Moutai and catching up with the best of the world’s semiconductor firms is going to be even more of a challenge, especially if the US government maintains its restrictions on exports of key chip manufacturing equipment to a series of Chinese companies, SMIC included.

State vs private sector

SMIC is counting on support from the state in its bid for semiconductor greatness. Conversely many of the tech champions that have rose to prominence in the past decade have come from outside the state’s direct control – especially in the internet sector. But circumstances can change quickly, forcing a rapid re-evaluation of their commercial prospects.

Another contender for the title of China’s most valuable A-share was set to be Ant Group, the fintech arm of internet giant Alibaba. It was gearing up for the world’s largest IPO last month but the dual listing in Shanghai and Hong Kong was pulled a few days prior to its trading debut after Chinese regulators intervened.

The reason: a drafting of new rules on microloans and consumer lending, which promises to reshape Ant’s core business.

Beyond the nixing of the IPO, senior government figures are said to be readying regulations to curb monopolistic behaviour by the country’s internet platforms as well. This is a departure on years of previous policy, which had been light-touch and supportive of the leading domestic firms in the e-commerce and internet sectors, providing the conditions for companies such as Tencent and Alibaba to thrive.

The talk of a new direction is raising concerns that the pendulum of governmental favour might swing back towards the state enterprises more generally. Yes, SOEs have a reputation for inefficiency and a lack of innovative thinking. But they continue to be major employers and serve as key contributors to China’s governing system. There is also the sense that there is new appetite at central government level for state-backed champions in key sectors – like SMIC in semiconductors – to be lavishly endowed with money and talent in order to meet state goals.

Yet conversely, Pony Ma’s prediction on a new wave of innovation seems to obliquely signal that private sector leadership will still be the fundamental force for change in areas like 5G, the Internet of Things, AI, Big Data, robotics and new energy vehicles.

So will Tencent’s stock surge another 16 times in the decade ahead as it invests in these new areas, for instance. Or might it be overtaken in value by 2030 by a state-backed behemoth, cobbled together from a series of giant mergers?

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