Identifying the risks and the opportunities
Although the coronavirus has disrupted China’s growth in the short-term, the medium-to-long-term consumer demand trends – driven by technological innovation, a rising middle class and an ageing population – remain intact. That said, a deep understanding of the Chinese economy and market is required to navigate the current situation and identify the genuine opportunities that exist.
We expect China’s burgeoning new economy players, such as those in the technology, new energy vehicles (NEVs), healthcare, e-commerce and e-learning sectors to be more resilient, and may even benefit from the outbreak.
Technology: The impact of the outbreak on the technology sector is currently at a macro level. In contrast to traditional industries, the technology industry does not rely on traditional foot traffic. While the outbreak and the extension of the Spring Festival holiday will inevitably disrupt the labour-intensive activities involved in manufacturing mobile phones, computers and servers, online technology will benefit, to some extent, from the current outbreak.
Online gaming and video content providers are likely to be the key beneficiaries. The holiday extension along with self-quarantine will encourage the Chinese to stay indoors, which, will in turn, increase their time spent viewing online content. Online videos, literature, social media, games, etc., are activities which can be enjoyed by consumers of all ages. In this context, relevant service providers in the various segments should see a significant increase in active users, usage time, and paid user conversion rates.
New energy vehicles: The short-term impact on the NEV industry should be neutral, thanks to its high degree of manufacturing automation. Even if the assembly process still requires some human inputs, the number of workers needed is significantly lower than the consumer electronics industry. As such, we believe that that the impact of the outbreak on the NEV production will be relatively limited. However, if the scale of the outbreak expands, the demand for automobiles, including NEVs, will inevitably suffer.
Healthcare: The healthcare industry is likely to be one of the more resilient industries. In the short-term, sales of pharmaceutical companies should increase significantly, while makers of protective equipment and related medications should probably also benefit. That said, investors need to look beyond the short-term hype and be disciplined regarding valuations.
From a long-term perspective, we believe that episodes of virus outbreaks will have a positive effect on China’s healthcare industry and will help raise the country’s level of health awareness. Spending on healthcare is still very low in China versus the developed countries and is likely to increase in the future. The research and development capabilities of China’s pharmaceutical industry will also be strengthened, which would create more long-term opportunities for investors.
China’s medical research and R&D in innovative drugs have gained unprecedented traction during the coronavirus outbreak. Through the social media, the public is witnessing how medical R&D is racing against the epidemic outbreak. We expect to see structural advancements in the industry and more frequent replacement cycles in drugs. We believe that the innovation in the healthcare industry will only accelerate, which underpins our investment thesis in this sector.
Education: While schools have been disrupted due to the outbreak, student enrolments at education centres and therefore tuition revenues should not be affected over the long term. The outbreak may draw greater attention to online learning, which is a very cost-effective education platform, but still a small revenue generator for many education providers. As the penetration of online learning increases, online technology providers will also benefit.
Retailing: Department stores have been the hardest hit from the decline in foot traffic but the impact on supermarkets has been more mixed while e-retailers have benefited. Demand for supermarket home delivery has surged despite the short-term disruption to capacity and supply chains. Nevertheless, supermarkets are taking this opportunity to aggressively promote their home delivery services – those with established online shopping platforms should benefit in the medium and long term.
The epidemic will further strengthen online consumption habits and lift online penetration. Major e-commerce companies have established special zones and provided special logistical support for epidemic areas. These measures, together with the generous donations from some large e-commerce players have helped to promote a positive image of the e-commerce platform. We expect the fundamentals for the e-commerce industry to improve significantly from the last quarter of 2020 going into 2021.