Tales from the Road - How China's Greater Bay Area is 'Greater' for Real Assets

Asia Pacific Real Income

28 January 2019

Shenzhen - Greater Bay

In our view, all real assets should benefit from the increased population in the region.

China’s Greater Bay Area (GBA) has seen phenomenal growth over the last 40 years. Now boasting two of the country’s largest megacities, it is a shining example of urbanisation and population growth in Asia – and provides some excellent opportunities for listed real asset companies.

Key findings from trip

  • Shenzhen and Guangzhou to see further strong population growth
  • Evidence of the emergence of middle class apparent across key tier-1 cities in China
  • Infrastructure projects continue to be built, providing opportunity for listed real asset companies

The GBA: Buoyant, dynamic and room to grow

My recent visit to the Greater Bay area (GBA) gave me the opportunity to assess the potential for listed real asset companies1 and the broader economic capability in the region

The GBA spans nine cities in the Guangdong province, as well as Hong Kong and Macau. Its development is part of a plan by the Chinese and Hong Kong governments to better link cities and provinces, and promote the region as a key manufacturing and financial hub, comparable with other notable bay areas worldwide, such as such as Tokyo and San Francisco

The GBA is already the most productive province in mainland China in terms of GDP square metre2 and this looks set to continue, with further infrastructure developments on the horizon, ongoing strength in manufacturing, and continued population growth. The region also has room to grow with 700 square kilometres of new development land still available2.

As well as touring key utilities, infrastructure and property sites, I met with an eclectic range of Chinese companies to better understand the economic story of the region and how it supports ongoing population growth.

I came away from my meetings feeling that the GBA economy is buoyant and dynamic, underpinned by growth in the finance and IT sectors, with large companies like Tencent6 headquartered in Shenzhen.

My visit took in three key cities within the region Hong Kong, Guangzhou and Shenzhen. Of those, I was particularly impressed with what I found in Shenzhen, which neighbours Hong Kong.

Greater Bay Map

Urbanisation and population growth in action

For real assets, population growth is a critical part of our investment thesis. Quite simply, the more a population grows, the higher the volume of demand for real assets. Even where country-level population growth is modest, as it is in China, increasing urbanisation boosts city population growth rates. China's urban population is expected to continue to grow, with urbanisation going from 55% in 2015 to 80% in 20503.

Shenzhen is a fantastic example of urbanisation and population growth in Asia. The city was essentially farm land 40 years ago and has developed into a megacity (a city with over 10 million inhabitants).

Shezhen population: UN estimates (thousands)

Shezhen population graph

Past performance is not a guide to future returns.

Source: Martin Currie Australia, UN Population Division; as at 30 November 2018 UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2018 Revision.

While we have seen large growth in the population already in Shenzhen, it is interesting to note that UN estimates for actual population keep exceeding its forecasts.

The UN’s 2014 forecast of 11.3 million people for 20203 was largely met by 2015, five years ahead of forecast.

It is expected that Shenzhen's urbanisation and population growth rates will continue, with the latest UN forecasts suggesting an attractive per annum growth of around 1.7% from 2015 to 2030 – leading to a population of more than 14.5 million3.

Population growth 2015 to 2030
Shezhen population growth

Past performance is not a guide to future returns.
Source: Martin Currie Australia, UN Population Division; as at 30 November 2018 UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2018 Revision.

For real assets, population growth is a critical part of our investment thesis. Quite simply, the more a population grows, the higher the volume of demand for real assets. And even where country-level growth is modest, as it is in China, increasing urbanisation boosts city population growth rates..

Big investment in infrastructure

China continues to spend big on infrastructure projects across road and rail, to keep up with the growing city-based population. This can be clearly seen in the GBA:

High-Speed Rail

The new high-speed rail link between Hong Kong and Guangzhou, not only links the two cities, but effectively links Hong Kong with the broader Chinese national highspeed rail network.

Managed by MTR Corp6 (held in the strategy), the new rail link has reduced the travel time between the two cities from around three hours to less than 50 minutes, with impressive speeds upwards of 300 kilometres per hour.

Bridge projects

The 34-mile Hong Kong-Zuhai-Macau bridge has recently been completed, making it the longest road bridge in the world. It effectively connects Hong Kong, Macao and Zhuhai to all major cities in the Pearl River delta. Another bridge, tolink Shenzhen and Zhongshan is under construction.

This will make it easier for Zhongshan and Zhuhai to better service e-commerce hubs and industries around Shenzhen. These projects help further ingrate the region and will improve travel times and connections to the region.

While some of these transport projects are currently government owned, we expect asset recycling (where government-owned brownfield assets are privatised to generate funds for new infrastructure) over time, leading to some of these assets finding their way into listed real asset companies. Given the notable growth in the regional population going forward, we would also expect many more real assets to be developed.

A good example of a population-driven project is the new Pearl River Delta Water Resources Allocation Project under construction in Guangdong that will address the potential for water shortages by pumping water from the Xijiang River to the Dongjiang River.

This US$5 billion project is currently being built by the sponsor of Guangdong Investments6 (held in the strategy).

Greater Bay Pipes

Rising middle class leads to more consumption

Shenzhen felt more like Singapore than Beijing. Its wide streets, space and good town planning meant that traffic flowed well. The shopping malls and the cars being driven also felt very middle class.
Growth in the middle class is a key demand driver for real assets. For example, the wealthier a population, the more likely it is to travel, so demand for better rail networks and airports will increase as incomes rise.

Electric Cars

Nio, a domestic electric car manufacturer, has retail showrooms across China. The US$80,000 price tag, three months wait time, and sales of around 50 cars a day4, indicate a healthy middle-upper class in China.

Travel demand per capita vs. income levels
Global travel demand per capita vs income levels

Source: Martin Currie Australia, World Bank: national accounts data, OECD National Accounts data files, United Nations Population Division World Population Prospects, International Civil Aviation Organization, Civil Aviation Statistics of the World and ICAO staff estimates, IATA air passenger market analysis; latest available as of 31 December 2017.
*Air passengers carried include both domestic and international aircraft passengers of air carriers registered in the country.

Discussions with management at manufacturing firms during my trip also highlighted the positive outlook for the middle class. In particular, management noted that wage growth in skilled manufacturing roles was very high and the job market was tight.

I also saw a number of examples of the burgeoning growth in the middle class throughout the GBA, with very healthy trading in the mid- to high-end shopping malls such as Swire Properties’Taikoo Hui Mall, Guangdong Investments’ Teemall both in neighbouring Guangzhou, and Wharf REIC’s6 Harbour City in Hong Kong. Both Guangdong Investments and Wharf REIC are held in our Asia Pacific Real Income strategy.

Swire Properties’6 Taikoo Hui Mall, while still relatively new (opened 2011), is already a top-10 mall in China by revenues. In fact, four of the top 10 malls in China are based in the GBA5.

Greater Bay Mall

Trade tensions promoting intra-region investment

Companies cited rising wages but also higher US tariffs as key reasons why they are actively looking at the Asian region as an alternative manufacturing source, alongside China.
While many were in early stages of their investigations, key countries of interest include Malaysia, Singapore, Thailand and Vietnam. This provides a positive backdrop to more investment in the region.
It should be noted that the portfolio’s exposure to trade-related companies remains minimal, with demand driven by local population growth as opposed to trade or cyclical business-cycle driven growth.

Summary

In our view, all real assets should benefit from the increased population in the region, bolstering the prospects and demand for highways, airports, water, property and other utility services (waste, power, etc).

My trip has given me increased confidence in the GBAexposed companies already held in our Asia Pacific Real Income strategy, including Guangdong Investments, Yuexiu Transport, and our Hong Kong-based names such as Wharf REIC and MTR6, as well as presenting a range of potential new investment opportunities to be investigated further.

My trip has given me increased confidence in the GBA-exposed companies already held in our Asia Pacific Real Income strategy.


1Real assets include utilities, infrastructure and property. 
2Source: CBRE Research, 2018. The Guangdong-Hong Kong-Macuau Greater Bay Area.
3UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2014 and 2018 Revisions.
4Based on discussions with Nio car dealership staff.
5Source: Linkshop; compiled by Fung Business Intelligence.
6The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable.