Investors bet on localizing China's tech sector
As the "technology war" between the US and China grows wider, investors are betting on China's efforts to replace US technology with local applications and components for public sector networking..
In recent months, local governments and state-owned companies such as China Telecom have announced plans and purchases to build their own technology ecosystem to replace hardware like Intel, Microsoft, Oracle and IBM..
CSIINT Index Tracking Stocks in China's IT Sector, Jumped nearly 30% this year, doubling the blue-chip gains of the CSI300 index, designed to mimic the performance of the top 300 stocks traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange.
«We see more and more US action against China, and the future is increasingly seen as «one world, two systems», – said Wu Kan, portfolio manager at Soochow Securities Co, which has invested in Chinese technology leaders including China National Software & Service. Co Ltd, China Greatwall Technology Group and Beijing Kingsoft Office Software.
«Any segment facing separation risks presents a great investment opportunity» – he added.
Some market analysts warn that valuations of Chinese tech stocks are becoming overvalued, with roughly 60 times their earnings, noting that it could take Chinese companies years to catch up with established global players. But Wu countered that price levels are justified by upside potential and direct government support..
Administration Donald Trump recently imposed even greater restrictions on the Chinese company Huawei Technologies and imposed sanctions on China's TikTok and WeChat apps. Washington also launched an initiative «Net net», to exclude Chinese tech companies deemed to pose a threat to US national security.
Under US pressure, Chinese suppliers are poised to gain local market share, said Jie Lu, Head of Research, Robeco China.
«China will increase investment and R&D intensity in critical industries such as semiconductors», – Lou said.
Dongxing Securities predicts the retooling will allow local suppliers to receive up to 1 trillion yuan ($ 144.46 billion) over the next three years.
Local governments rush to create industry federations to promote the use of Huawei's Kunpeng processing technologies.
Last week, China Unicom's Wuchang subsidiary entered into a partnership with Huanghe Technology, which makes servers and PCs using Kunpeng technologies. In May, IT distributor Digital China said it was building factories to manufacture computers and servers equipped with Kunpeng processors.
Investors are getting new ways to invest in Chinese tech stocks
Also in May, China Telecom said it will purchase up to 56,314 servers in 2020, one-fifth of which will use Kunpeng and Hygon Dhyana chips to compete with US brands Intel and AMD..
«China must promote a quality manufacturer, even though its current technology lags far behind», – said the chairman of Xin Ding Capital Zhang Chi during an investor presentation of Haigon Information Technology, chip maker Hygon Dhyana.
About 95% of Chinese servers use Intel processors.
According to Zhang, this will be a disaster., «if one day Trump bans Intel from selling processors to China».
Zhang expects Chinese government agencies to replace all computers using American chips in the next five years, which shares the views of many analysts..
National Software & Service, which makes operating systems that rival Windows and middleware that aims to compete with IBM and Oracle, expects revenues to grow 70% this year to 10 billion yuan..
Beijing Kingsoft Office Software this week reported 143% growth in 1H profit and said China's need for cyber security is driving sales.
Investor Relations Official Guo Xing said Beijing Baolande Software Corp also sees government structures and financial companies as new engines of growth thanks to the demand for replacement.
But Brian Bandsma, New York-based Portfolio Manager at Vontobel Asset Management, said the capacity in terms of demand for replacement would be limited given less competitive local offerings and a longer-than-expected pace of adoption.
«Companies like Microsoft have been around for decades and have very sophisticated software that is actively used in many industries. There's a reason Microsoft is in this position, Bundsma said..
«There is probably too much optimism in the estimates for what these local companies are going to gain from China's focus on domestic suppliers.».