China investments: Opportunity for bold investors

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by Jörg Billina, Euro on Sunday

China’s People’s Liberation Army is currently on permanent duty off the coast of Taiwan. A few weeks ago, the visit of top US politician Nancy Pelosi triggered strong criticism from Beijing and unprecedented military maneuvers. Shortly thereafter, China’s armed forces again demonstrated strength. A delegation of US Democrats had met in Taipei for talks with Taiwan’s government – from Beijing’s point of view a “shameless violation of China’s sovereignty”.

The Taiwan dispute harbors considerable risks. If the conflict escalates, this would have massive consequences for the markets. A fight is not unlikely. In the recently published white paper, Beijing expressly reserves the right to use military means to achieve reunification with the “breakaway province”: “We will not refrain from using force.” Taiwan’s democratically elected government has again increased defense spending in response to the latest threats

Above all, however, Taiwan Semiconductor Manufacturing Company (TSMC) guarantees Taiwan’s independence and security. Based in Hsinchu, the company produces high-quality microchips used in vehicles, cloud servers, high-speed computers, 5G communication systems and iPhones.

China is still dependent on TSMC semiconductors to keep the economy running. So far, the Middle Kingdom has not been able to produce them in the same quality and quantity. “An act of war directed against Taiwan would jeopardize the mainland’s supply of this critical input,” according to a study by the Berlin Foundation for Science and Politics.

TSMC customers include both Chinese and US companies such as Apple, NVIDIA and Advanced Micro Devices. TSMC generates around two-thirds of its sales in the USA. Washington therefore has a vital interest in ensuring that the microchip supply chain is not disrupted. US President Joe Biden assured Taiwan that it could rely on US military support.

Beijing doesn’t like it. They want to end their dependency on TSMC as soon as possible. “The expansion of domestic production is high on the Chinese government’s economic agenda and continues to receive political support,” says Norbert Frey, Head of Fund Management at Fürst Fugger Bank.

Order to catch up

Semiconductor Manufacturing International Corporation (SMIC), (WKN: A2D H1J) is China’s largest chip contract manufacturer. CEO Zhao Haijun is said to reduce the technological gap compared to the Taiwanese competition. Three new production and research facilities are currently being built in Beijing, Shenzhen and Shanghai. However, the company, which is financially supported by the Chinese government, has been on the US list of trade restrictions, the “entity list”, since December 2020. Since then, SMIC has been cut off from necessary US technology.

Nevertheless, a breakthrough seems to have been achieved. According to reports from the information service TechInsights, the company has produced seven-nanometer chips for the first time. TSMC or Samsung have been producing semiconductors on this scale for four years. For SMIC it would be – if the news is confirmed – a real milestone.

The share has not yet ignited on the stock exchange. Since the beginning of the year, the price has only slightly increased. In the second quarter, profits were significantly lower than in the same quarter of the previous year. Citigroup also expects headwinds in the coming months. Consumer electronics companies in particular are currently canceling their orders from SMIC. For courageous investors with a long investment horizon, however, it should be worth getting started. In addition to the prospect of further technological advances, a price-to-earnings ratio of around ten motivates to buy.

There are also good opportunities for investors in the e-vehicle segment. According to a forecast by the China Passenger Car Association, six million new electric cars will be sold this year, more than twice as many as last year. Build Your Dreams (BYD) is benefiting from strong domestic demand. The company sold more vehicles in China than Tesla worldwide in the first half of the year. Although BYD is already very highly valued, the expansion plans ignite ongoing price fantasies. BYD wants to gain market share in Australia, the USA, Europe and Latin America. Another plus: The group also produces e-batteries, electric motors and chips for cars. He therefore does not have to fear interrupted supply chains.

Central bank lowers interest rate

In addition to buying attractive individual stocks, investors can also diversify the funds widely. The iShares MSCI China, for example, comprises 720 stocks. Despite a number of imponderables, which include the Chinese government’s radical action against tech companies in addition to the Taiwan problem, the investment bank Goldman Sachs believes Chinese stocks are capable of an increase of around 20 percent in the next twelve months. The forecast is based on an economic recovery from the third quarter. In the months of April to June, gross domestic product grew by only 0.4 percent compared to the same quarter of the previous year as a result of strict corona lockdowns and a slump in demand in the real estate market.

In order to ensure that the economy actually picks up, China’s central bank lowered the reference interest rate for one-year loans to financial institutions by ten basis points to 2.75 percent on Monday. The aim of the People’s Bank of China measure is to make credit cheaper in order to stimulate consumption and investment. But that alone should not be enough to achieve the growth of 5.5 percent targeted for 2022.

Asia investors expect additional stimulus measures to be taken. China’s Prime Minister Li Keqiang has called on the provincial governments to invest significantly more in infrastructure. Beijing is sticking to the overarching goal of replacing the United States as the number one economic power in just a few years.

INVESTOR INFO

With the iShares MSCI China A ETF, investors participate in the performance of 495 Chinese companies. Top stocks include Longi Green Energy, China Merchants Bank and BYD. The consumer industry is weighted at 24 percent. Financial stocks account for 16 percent of funds, and IT stocks for 13 percent. Since the beginning of the year, the Exchange Traded Fund has lost around nine percent. With an average price-earnings ratio of 15, the portfolio is now cheaply valued. For investors willing to take risks.

Own investment ideas

JPM China Fund manager duo Howard Wang and Rebecca Jiang consistently deviate from the CSI 300 benchmark index. IT titles are currently weighted higher. Financials, on the other hand, are underrepresented. Internet companies Tencent and Alibaba are among the top stocks. Your own investment ideas bring success. In five years, the fund returned 47 percent. Despite a minus of 17 percent in the current year, the fund is a buy for long-term investors.

Taiwan Semiconductor