Getting to Know Chinese Companies Beyond Alibaba and Tencent

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(This is the first in a series of articles that will highlight some of the most attractive and fastest-growing companies in China beyond widely known names such as Alibaba and Tencent)

A closer look at some of the Technology companies in our China Growth Leaders Index that are poised to benefit from the country’s renewed focus on “self-reliance” and “green energy”

The 19th Central Committee of the Communist Party of China met between October 26 and 29 to discuss and outline the country’s upcoming 14th ‘Five-Year Plan’ (2021-2025). The meeting was followed by the usual ideological communique, laden with such lofty goals as “achieving socialist modernization,” and “technology independence and self-reliance,” which are closely tied to the party’s stated goal of tripling per capita GDP by 2035. Investors interested in tapping into the country’s growth drivers through its bustling equity market would do well to look past the headlines and pay close attention to the areas where the government is allocating capital across the country.

While the latest Five-Year Plan—the specifics of which will need to be ratified by the National People’s Congress in March 2021—didn’t suggest any changes to the direction of the party’s economic policy, two particular areas of government emphasis stood out to us amidst the usual platitudes often found in CCP communiques: the party’s laser-like focus on innovation and technological self-reliance, and a marked shift to ‘green energy’ production. Neither of these familiar themes should come as a surprise to China watchers or to investors in Chinese equities, as the former has been at the center of political tensions between China and the U.S. (as well as Europe, Japan and Australia to a lesser degree) and the latter has been a policy priority for several years given the country’s worrisome environmental degradation. The party’s focus on the development of its domestic high-tech industry, in particular, has been surfacing in policy plans for years, such as in ‘Made in China 2025,’ issued in 2015, and most recently in the government’s “dual circulation” policy (its not-too subtle response to the restrictions placed by the Trump administration on the sale of critical components to Huawei Technologies, one of China’s technology darlings). But rather than dwell on the political implications of these policies, our goal is to highlight how investors in MarketGrader’s China Growth Leaders stand to benefit from the massive growth we see ahead for sectors of the economy that stand to benefit the most from these government directives, as well as to highlight the importance of doing so without losing focus of company selection or sound capital allocation.

While not mentioned explicitly in the preliminary Five-Year Plan blueprint, the many references to technological innovation, self-reliance and “dual circulation” clearly refer to the government’s pressing desire to develop the country’s semiconductor industry, China’s technological Achilles’s heel. And while China has few pure play semiconductor companies like, say, Taiwan, South Korea or the U.S., there are plenty of suppliers to the sector that stand to do very well given the ongoing level of capital expenditures in the space. There is also a growing crop of high-quality technology companies in China that are poised for significant growth as the government trains its sights and expands its support for areas of global competition such as 5G wireless networks, artificial intelligence (AI), the Internet of Things (IoT) and machine learning. But before highlighting a few of these that are members of our Growth Leaders Index, a bit of perspective helps. For starters, China is the world’s largest importer of integrated circuits, having imported $306 billion worth of semiconductors in 2019, which accounted for 74% of global sales, according to World Semiconductor Trade Statistics. On the supply side, China is nowhere near a leading position in either semiconductor design or manufacturing. According to the U.S.-based Semiconductors Industry Association’s (SIA) ‘2020 State of the Industry’ report, Chinese-headquartered semiconductor firms supply about 5% of the worldwide market and remain at least two generations behind international competitors in their ability to produce semiconductors that are incorporated into consumer electronics. The country ranks sixth globally in semiconductor sales behind the United States (47%), South Korea (19%), Japan (10%), Europe (10%) and Taiwan (10%).1 To further underscore how far behind China still is in semiconductor manufacturing, an October 2020 report by the U.S. Congressional Research Service2 lists the world’s top 15 semiconductor suppliers, which include, in ranking order, Intel, Samsung, Taiwan Semiconductor Manufacturing, SK Hynix, Micron, Broadcom, Qualcomm, Texas Instruments, Kioxioa (formerly Toshiba), Nvidia, Sony, STMicroelectronics, Infineon, NXP and MediaTek. Of these, six are based in the United States, three in Europe, two in Taiwan, two in South Korea, two in Japan, and none in China.

China knows too well that semiconductors represent a strategic vulnerability for the country, as companies like Huawei rely on the chips produced at cutting edge manufacturing facilities in Taiwan and elsewhere around the world. And, assuming the U.S. presses ahead with stricter export controls directed at China, this will continue to galvanize public sentiment and motivate government officials and domestic investors to further support the country’s “self-reliance” push. This domestic support, to be certain, already goes beyond government communiques as both the government and institutional investors are directing large amounts of capital to this national effort. More specifically, the state backed in 2014 the creation of the China National Integrated Circuit Industry Investment Fund (known as the “Big Fund”), designed to support semiconductor startups and R&D efforts in the space on a large, national scale; it raised almost US $20 billion in its first round. That was followed by a US $29 billion round in 2019 as the U.S. increased its pressure campaign on China’s technology sector. And the creation of the Shanghai Stock Exchange’s new Science and Technology Innovation Board (known as “STAR”), China’s latest Nasdaq-style stock exchange, is squarely focused on channeling investment into the country’s fledgling technology companies, with a special emphasis on semiconductor development.

The Companies

Technology is the largest sector in the MarketGrader China All-Cap Growth Leaders Index, which holds the best 200 companies in China according to our GARP selection approach, regardless of size, sector or listing venue. The Index’s sector weights, by the way, are not based on a top-down allocation but rather a result of MarketGrader’s bottom-up selection process. The fact that our largest sector, at 24.4% of the Index’s weight is Technology, suggests this is one of the areas where our methodology is finding the greatest quality growth at a reasonable price across the approximately 3,200 Chinese publicly traded companies that constitute the Index’s underlying investable universe. The sector’s weight is based on a selection of 30 stocks, which are weighed in the Index according to their free-float market capitalization but capped at 5% of the entire Index’s total for any given company. Among these companies there are two that could be considered ‘pure’ semiconductor plays, two of which are key providers to the semiconductor manufacturing complex, two that are directly leveraged to the solar (green energy production) industry and one that is primarily leveraged to smartphones and advanced electronics. We highlight them below.

WUS Printed Circuit (Kunshan) Co. Ltd. (002463.CN)

WUS is one of two leading manufacturers of printed circuit boards in China, and among the companies most directly leveraged to the semiconductor sector. Printed circuit boards (PCBs) are vital components in a broad range of electronics, including smartphones, base telecommunications stations, smart cars and similar Internet-connected technologies, such as those used in Internet of Things (IoT) products. PCBs are vital components in the ongoing global race to build 5G networks, which is why the company is a key supplier to Huawei Technologies. As China’s buildout of 5G networks (both domestically and abroad) continues, WUS should stand to benefit from significant levels of investment in the space. The company has a MarketGrader Score of 71 (out of 100) and was first selected to our China Growth Leaders Index in September 2019. It has been selected to the Index three out of 27 total selection periods.

Zhejiang Jingsheng Mechanical & Electrical Co. (300316.CN)

Zhejiang Jingsheng manufactures and sells critical equipment used in the development and manufacturing of semiconductors. More specifically, it produces the furnaces used in the manufacture of crystalline silicon, the dominant semiconducting material used in photovoltaic technology. The company’s equipment could be considered a vital piece of China’s in-sourcing efforts since it allows companies to produce the feedstock from which silicon wafers are made; these are used for the production of solar cells, integrated circuits and other semiconductor and electronic devices. The company has a MarketGrader Score of 57 (out of 100) and was first selected to our China Growth Leaders Index in September of this year.

Eoptolink Technology Inc. (300502.CN)

Eoptolink manufactures optical modules, or transceivers, which could be thought of as the building blocks of network connectivity inside and outside data centers. These devices essentially connect an electrical device, such as a switch, and a fiber optic cable, making them indispensable cogs in our increasingly interconnected world. Optical modules convert an electrical signal into light, and vice versa, facilitating the flow of digital traffic through data centers globally. And while wireless communications, especially 5G, grabs all the headlines when it comes to 21st century telecommunications technology, ultimately all Internet traffic must pass through data centers all around the world, including those where the ‘cloud’ operates. This puts the devices manufactured by Eoptolink at the heart of all technological breakthroughs that are changing the way we live, including e-commerce, remote working, on-demand video and all Internet-dependent applications. The company has a MarketGrader Score of 68 (out of 100) and was first selected to our China Growth Leaders Index during our last rebalance in September 2020.

Fujian Torch Electron Technology Co. Ltd. (603678.CN)

Fujian Torch Electron is one of the top manufacturers of ceramic capacitors in China, which are key components in consumer electronics, cellphones, tablets and new Internet of Things (IoT) devices. Capacitors, more specifically, are electrical components used to store energy for a short period of time, used where small physical size and large charge storage is required, such as electronic components in most consumer electronics. In fact, consumer electronics consume 50% of all MLCCs (Multilayer Ceramic Capacitors, like the ones produced by Fujian Torch) in China, which is the largest producer of consumer electronics in the world. So, while the company may not be directly in the business of manufacturing semiconductors, mobile phones or consumer electronics, it is a key supplier to some of the fastest growing industries in the world. The company has a MarketGrader Score of 66 (out of 100) and was first selected to our China Growth Leaders Index during our last rebalance in September 2020.

LONGi Green Energy Technology Co. Ltd. (601012.CN)

LONGi Green Energy Technology manufactures mono-crystalline silicon products, the primary light-absorbing material used in the fabrication of solar cells globally, as well as most modern electronic equipment. Solar cells made of this type of silicon typically have a higher power output than other silicon-based solar cells (such as polycrystalline cells, which are made from multiple silicon fragments melted together), making them highly sought after by solar panel manufacturers and also the most widely type of material used in solar energy projects worldwide. Based on market capitalization, LONGi is considered the world’s largest solar panel manufacturer. The company has a MarketGrader Score of 78 (out of 100) and has been selected to our China Growth Leaders Index six times (out of 27 total selections). It first made the Index in September of 2016.

Xinyi Solar Holdings Ltd. (968.HK)

Xinyi engages in two core business segments, namely, (i) the sale and manufacturing of solar photovoltaic (PV) glasses; and (ii) the solar farm business, which includes both solar farm development and solar power generation. The company’s PV glass business benefits from both subsidized and non-subsidized business growth. China’s National Energy Administration (“NEA”) subsidizes PV power generation projects, including residential rooftop projects, commercial distributed generation and utility-scale PV projects. According to the NEA, 434 PV projects were approved in June 2020 throughout China, with a total capacity of about 26GW; among others, for example, Xinyi secured a 60MW project in Guangxi Province.

Increased interest in PV investments by state-owned enterprises, year-to-date higher than expected approved quotas for government subsidized projects and overwhelming growth in nonsubsidized (grid parity) project applications across China contribute increasingly higher levels of PV deployment for the foreseeable future, from which companies like Xinyi stand to benefit handsomely. The company has a MarketGrader Score of 67 (out of 100) and has been selected to our China Growth Leaders Index on eight separate occasions (out of 27). It was first selected to the Index in September 2014.

Sunny Optical Technology (Group) Co. Ltd. (2382.HK)

Sunny Optical manufactures optical devices such as optical lenses and biometric identification lenses, ubiquitous today in mobile phones around the world. In fact, the company supplies optical devices to Chinese smartphone brands that include Huawei, Oppo and Vivo, as well as to Samsung Electronics. Additionally, the company has been rumored to become an optical lens supplier to Apple as a means to diversify its exposure to Chinese manufacturers, particularly Huawei, which has struggled with production since U.S. trade sanctions barred the sale of critical components to the telecommunications giant. Investors who believe Huawei will find a way around such sanctions and who seek exposure to the company’s smartphone business once growth resumes, could do well by owning shares in one of its key suppliers. Sunny Optical, which has a MarketGrader Score of 72 (out of 100) is the sixth most selected company to our China Growth Leaders Index since its inception in 2017[3], with its stock making the list in 17 out of 27 total semi-annual selection periods. It was first selected to the Index in September 2014.

1. ‘2020 State of the U.S. Semiconductor Industry,’ Semiconductor Industry Association.
2. ‘Semiconductors: U.S. Industry, Global Competition, and Federal Policy, October 26, 2020.’ Congressional Research Service,
3. The MarketGrader China All-Cap Growth Leaders Index was first published on February 21, 2020. Its base date, based on back tested performance that predates its publication date, is December 31, 2007.

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