Already expensive Chinese tech shares remain favourites for 2020 amid Beijing’s self-reliance push, 5G boom
- Four out of the 10 best-performing stocks on the CSI 300 in 2019 were tech companies
- Tech stocks already outperforming consumer companies, last year’s best performers
Traders are betting that a strong momentum in Chinese technology stocks – the most expensive sector following a buying spree last year – will continue into 2020.
Companies ranging from semiconductor manufacturers to electronics makers will continue to be supported by a government push for self-reliance, as well as a boom prompted by the transition to fifth-generation wireless networks, according to investors such as Xufunds Investment Management and Jingxi Investment Management. A gauge of mainland China-traded technology companies was trading at 4.9 times book values on average after a 60 per cent gain last year, making it the priciest among 10 industry groups of the CSI 300 Index, according to Bloomberg.
Out of the 10 best-performing stocks on the CSI 300 in 2019, four were technology companies.
Will Semiconductor, a supplier of integrated circuit products for telecommunications and electronics for cars, surged 390 per cent last year, taking the No. 1 spot. Luxshare Precision Industry and GoerTek, suppliers of consumer electronics products to giants such as Apple, and GigaDevice Semiconductor, which makes flash chips, jumped by at least 193 per cent.
“I am still optimistic about the sector, which is supposed to have further room for upside to run,” said Wang Chen, a Shanghai-based partner at Xufunds Investment. “Demand isn’t a problem, as the Chinese government is pushing ahead with the move to replace imported hi-tech products with home-made ones, and 5G construction is really in full swing. So these factors are really benefiting the sector, and valuations are not going to contract. The best growth stocks will still come from the technology sector this year.”
China’s trade war with the United States, which has now lasted for two years, set alarm bells ringing in Beijing, and policymakers have put the development of home-grown cutting-edge technology at the top of their agendas.
US President Donald Trump’s ban on Shenzhen-based telecommunications equipment and systems company ZTE Corporation that barred it from buying US technology nearly put it out of business for a few months in 2018. Huawei Technologies, a rival, has also been in the spotlight after Washington blacklisted it citing national security concerns.
To wean its technology sector off its reliance on American know-how, Beijing unveiled a Nasdaq style stock board last year to support home-grown hi-tech companies, waived corporate taxes and allowed unprofitable companies to raise money from the capital market.
There is immense potential for growth in China’s technology sector. Currently, local companies fulfil only 12 per cent of the country’s domestic demand, brokerage Ping An Securities said. Should local manufacturers meet half of the domestic demand for semiconductors and chips in 2025, for instance, they could earn as much as 10 times their 2018 earnings, it said.
“The semiconductor industry is one of the few sectors that have long-term growth prospects,” said Hua Jinshu, an analyst at Ping An Securities. “There’s pretty urgent demand for self-reliance and security both at the state and corporate levels.”
Hua said leading technology companies would engage in more mergers and acquisitions this year, building up higher barriers for patents and creating new sources of profit growth. The analyst recommended stocks such as Shenzhen Goodix Technology, Unigroup Guoxin Microelectronics and Tongfu Microelectronics.
Not everyone is on board with this rosy picture. Chen Li, chief economist at Soochow Securities in Shanghai, said a bubble was forming in the technology sector, which might deflate in the second half of 2020 because of elevated valuations and weakening industry sentiment.
“The gains in the sector were excessive last year and lots of companies traded at price-to-earnings ratios of above 40 times, or even 60 times, as the market believed their earnings growth would be sustainable in the following months,” he said. “Our judgment is that technology stocks may start to fall after the second quarter. The bubble is still building up now. But the risk is huge for the sector going forward.”
This is in line with the National Integrated Circuit Industry Investment Fund – a government-backed fund created in 2014 to support local semiconductor companies – saying last month that it would sell no more than 1 per cent shares of each of three listed companies in the coming months. Before the announcement, the fund held at least a 6.6 per cent stake each in GigaDevice, Shenzhen Goodix and Goke Microelectronics.
This has not dented the appetite for technology stocks so far. Shares of GigaDevice, for instance, rose to a record on Friday, and Shenzhen Goodix, which makes chips for fingerprint identification, has recouped all the losses incurred by the stake reduction news and was trading close to its all-time high last week.
And technology stocks have made a resilient start to the new year, delivering better returns than any other sector so far. A gauge tracking the industry has risen 3.9 per cent in the first two days of trading this year, while the consume-staple sub-index, the best performer last year, has declined 2.7 per cent.
Kweichow Moutai, the biggest constituent on the gauge of consumer stocks, fell 8.8 per cent over the last two trading days, after it issued an earnings guidance that trailed analysts’ expectations for the first time in four years.
Opportunities for investment still exist, with orders previously meant for foreign companies shifting to domestic players amid a localisation and self-reliance push, said Wang Zheng, chief investment officer at Jingxi Investment. “But buying needs to selective this year, and you’ll need to avoid those with excessive gains.”
