China calling

A guide to the breathtaking rise of mobile and internet companies in China and the investment opportunities they offer.

China is no longer a copycat economy. That's history.

Accelerating growth, evolving technology and huge end user demand make telecoms and the internet key growth areas in the Chinese economy.

In fact, many aspects of the technological innovation in China is leading the world. Welcome to the cutting edge.

Impressive (mobile) numbers

China boasts the largest mobile market in the world. There are currently over one billion mobile phone subscribers and this is growing at a jaw-dropping rate.

Dominated by just three home-grown providers, including the largest provider in the world by subscribers, China Mobile.

The country has a high quality mobile network infrastructure and there is an astonishing consumption of profit boosting data services which continues to grow.

And with billions in cash on the balance sheet the future looks bright for investors. It is likely that a share of this wealth will be returned to shareholders or invested in new technology like 5G that will, in turn, drive future returns and long-term growth.

The growing mobile market is also facilitating the growth of online products like social media platforms who are adding new subscribers at an astonishing rate.

With figures like these, and a bright future ahead, these markets could offer potential for further growth.

4G – for growth

There has been a happy confluence of factors that have lead to the recent acceleration of growth of the mobile market in China.

Principally, the provision of cheap 4G-enabled handsets has led to a huge increase in demand for mobile data provision. More and more users surf the net and use web enabled apps and this will continue to grow.

In fact, at China Mobile, revenue from data use charges has already overtaken voice and SMS as the largest contributor to revenue - and volumes continue to rise.

Unlike the UK market, China does not offer unlimited data packages, so companies are actually able to properly monetise the growth in demand for data which will further enhance profits.

Positive signals

“Uh-oh, no reception”.

It’s likely that we have all been in this situation, wandering about, waving the mobile phone in the air looking for a signal from the network.

To provide a signal, mobile companies have to build towers which requires significant capital expenditure and investment, both to build and maintain.

In China, the three telecom providers have made a very smart move that will help to reduce the need for them to build these networks.

The firms have transferred ownership of their towers to a new joint venture – the China Tower company - which they jointly own. China Tower will handle the construction, maintenance and operation of telecommunications network towers and auxiliary infrastructure across the country.

In practical terms, this frees the companies from an expensive ‘arms race’ to build infrastructure - and prevents the duplication of assets. This is highly significant and will yield operating leverage.

Ownership of China Tower company is split between the three telcos and the new entity is expected to go public in 2017. China Mobile owns 38% of the joint venture, while China Unicom has a 28.1% stake and China Telecom holds 27.9%. China Reform Corp., a state-owned asset holding company, will take a 6% stake in the joint venture and will focus on corporate governance.

Source: Martin Currie and company reports as at 31 August 2016. 

Source: Martin Currie and company reports as at 31 August 2016. 

This may prove more advantageous to the challenger companies than China Mobile, who will be able to increase their network coverage quickly by sharing China Mobile's pool of telecommunications assets.

In fact, we believe that China Unicom will be the largest beneficiary, as it has the highest stake value/market cap ratio and this has yet to be fully appreciated by the market.

But on the whole it’s a long-term benefit to the entire industry.

The carriers will have enhanced network coverage and save on capital expenditure for constructing telecom towers, which hold equipment for their mobile networks.

A $70 billion embarrassment of riches

China Mobile’s success means that it has amassed around US$70 billion of cash on its balance sheet, with a further US$8 billion due in 2017 from tower sales.

And since capital expenditure and investment programmes have peaked, it’s likely that this rising free cash flow may result in higher dividends to its shareholders.

It may also engage in some merger and acquisition activity (likely to be in the internet, data analytics, or cyber security arenas).

Alternatively, this could be used as a war chest to prepare for 5G, which will require significant capital expenditure from 2020 onwards.

Digital ecosystems: the next step for the internet

"WeChat is ubiquitous across China.

People are using it on the underground, in coffee-shop queues and in hotel lobbies... everywhere.

It currently has around 800 million active users every month."
"You can message, video call, hail a cab, buy film tickets, check-in for flights, pay bills, split bills, find a parking space, make a doctor's appointment or a donation to charity, locate your friends ... and the list goes on.

It's like having having Facebook, Uber, Amazon, Spotify and a dozen other apps all in one."

Mike Millar, Martin Currie Asia team

In a virtuous circle, the rise of 4G mobile infrastructure has facilitated the growth of social media platforms and 'apps' that drives the consumption of mobile data - and the profits of the service providers.

It has also driven the growth of social media platforms and internet based companies that are high growth, high profit. Many of these are attracting a phenomenal number of users and are proving to be interesting investment opportunities in their own right.

Social media platforms
Social network platforms like Tencent are the most attractive with big draws for users and a loyal customer base.

Services like Tencent’s WeChat messaging service, Weibo (a cross between Facebook and Twitter) and Alibaba’s Taoboa (a customer-to-customer e-commerce company) are a big draw for users.

WeChat is ubiquitous across China. People are using it on the underground, in coffee-shop queues, hotel lobbies... absolutely everywhere.

It started life as a messaging app but now dwarves most western apps in terms of its functionality and ambition and has become integral to everyday life for many Chinese.

You can message, video call, hail a cab, buy film tickets, check-in for flights, pay bills, split bills, find a parking space, make a doctor's appointment or a donation to charity, locate your friends ... and the list goes on.

Click to find out more about WeChat. 
Note that this links to  YouTube video created by a third party over which we have no control and may contain advertisements.

It's like having having Facebook, Uber, Amazon, Spotify and a dozen other apps all in one.
It currently has around 800 million active monthly users.

To put this into perspective, that's over 12 times the size of the UK population and two and a half times the entire population of the United States.

All about the money, money, money.
It's not uncommon to hear about a huge online company or world famous internet brand that is making huge losses and is finding it hard to monetise the user base they have.

But companies like Tencent are building 'ecosystems' around their original services that provide an exciting range of opportunities to generate revenue.

These including digital advertising, mobile games, subscription services, music streaming and payment services.

These can be highly cash generative and profitable activities that boost the balance sheet and create barriers to entry.

Search engines
In contrast, as an investment team, we are currently less keen on search portals.

These companies have historically struggled to monetise advertising in the switch from PC to mobile – and we are sceptical that this will change in the future.

There is also a leakage of advertising spend to the verticals and social networking platforms.

Verticals are internet businesses that offer everything from second-hand car sales to travel. Many have been spending heavily on advertising and promotion and it has impacted the bottom line.

Online education
While not an internet company per se, we also see strong growth prospects in Chinese private education.

Companies are developing online-to-offline (O2O) platforms, that deliver classroom materials. This gives additional operating leverage and increases student retention rates.

Perhaps online education will be the norm in the future?

In conclusion
Imagine a world without Facebook, Uber, Apple, Vodafone, Skype...these are just some of the companies or products that we interact with on a daily basis; they have become part of the very fabric of our lives.

For so long we have looked to the US for technological advancement and we remain under the illusion that China simply copies Western technology and tweaks it a little bit for local tastes.

That's history.

The reality of the present day is that creativity, innovation and individualism has reached new levels.

China is powering along the innovation curve. And the seeds of innovation being planted will flower in the future as many of the historical barriers dissolve. This offers investment opportunities.

But many barriers to direct investment do still exist and corporate governance issues remain prevalent. Investing in China requires experience, knowledge, judgement and expertise.

And there's more.

China is just one of many Asian countries that offer tantalising investment opportunities.

In fact, we believe that Martin Currie Asia Unconstrained Trust has 20-30 of the best.

Please note that Martin Currie Asia Unconstrained Trust invests in China Mobile and Tencent at time of publication (January 2016).

Martin Currie Asia Unconstrained Trust:
access to the Asian growth story

Martin Currie Asia Unconstrained Trust - aiming to capture Asian growth with less volatility than the market.

We believe that the investment approach of Martin Currie Asia Unconstrained Trust provides an opportunity for investors to benefit from Asia’s extraordinary growth.

Our investment research is underpinned by analysis of companies’ long-term fundamentals. Therefore, the importance of obtaining first-hand proprietary information on research trips like these cannot be underestimated.

They play an essential role in building our conviction in companies in which we are already invested, and developing valuable insight into emerging themes and opportunities.

  1. Over the long term, we aim to deliver returns in line with, or ahead of, Asian GDP growth.

  2. We adopt a ‘buy and hold’ investment approach, focusing on long-term cash flow potential.

  3. We employ forensic-accounting techniques to gain an in-depth understanding of company fundamentals and place a heavy emphasis on corporate governance. This helps to increase conviction and manage risk.

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  5. The outcome for our clients is a portfolio that efficiently captures the Asian growth story with lower volatility and low turnover.

We don’t claim that anything we are trying to do is proprietary in nature. Much of our approach is simply ‘first principles’ investing.

Our competitive advantage is the simplicity and long-term focus of our approach, along with our disciplined and rigorous stock-selection process.

In an industry typified by its focus on short-term returns, we think that these attributes are increasingly rare.


This information is issued and approved by Martin Currie Investment Management Limited. It does not constitute investment advice. Market and currency movements may cause the capital value of shares,and the income from them, to fall as well as rise and you may get back less than you invested. Past performance is not a guide to future returns.

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