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China Macro Outlook – A New China is Emerging
Victoria Mio, CFA CPA FRM
CIO China, co-Head Asia Pacific Equities, Fund Manager Robeco Chinese Equities
22 February 2016
1
For professional investors only
China’s Five Mega Trends in the Next Five Year
Source: CEIC, Morgan Stanley, Robeco
2
> A new consumption driven economy is emerging
> The old economy is adjusting to the new normal
> CNY will gradually become an international hard currency
> The Chinese capital market will be more integrated into the global markets
> China will play an increasing important role in international cooperation
Nominal GDP growth by sector
Nominal GDP growth decelerated but expected to stabilize
Source: CEIC, Morgan Stanley, Robeco
3
10.6 10.5 9.7
12.9
17.7
15.7
17.1
23.1
18.2
9.1
18.3 18.4
10.3 10.1
8.1
6.4
0
5
10
15
20
25
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
ppts Nominal GDP growth, ppt contribution
Tertiary Industry
Secondary Industry
Primary Industry
Nominal GDP
Falling old economy vs. rising new economy
Source: Bloomberg, PBOC, Gartner, Haver, Company filings, Boxofficemojo.com, Capital IQ and Bernstein analysis, Robeco
China’s old indicators: YoY growth China’s new indicators: YoY growth
4
Power Production
Railway Freight
Export Trade USD
Import Trade USD
New Housing
Floor Space
-30%
-25%
-20%
-15%
-10%
-5%
0%
5%
10%
15%
20%
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
Airline Passen-
gers
Car Sales
Alibaba's GMV
Travel Tours
Movie Box Office
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
1Q
14
2Q
14
3Q
14
4Q
14
1Q
15
2Q
15
3Q
15
4Q
15
1) China’s emerging middle class leads to emerging consumption
5
Chinese household annual disposable income distribution in %
29 16
54
22
14
54
3 9
0
20
40
60
80
100
120
2012 2022
Poor (<US$9,000) Mass middle class (US$9,000-16,000)
Upper middle class (US$16,000-34,000) Affluent (US$>34,000)
Projected growth of consumption
2012-2022 CAGR%
19.6
22.4
-3.3
-1.5
Source: McKinsey
1) China’s internet development catches up with the world
Source: CNNIC, iResearch, Analysis, MIIT
6
1) China is at the forefront of mobile ecommerce, cloud computing, and mobile payment
> These emerging sectors still have huge growth potential
> Aug 2015: 276mn mobile payment user (20% penetration), 168mn mobile travel booking user (12% penetration)
Data source: ITThink, Context China, Xinhuanet, Robeco
Mobile e-commerce Mobile payment
China
51.71%
Emerging
Markets
China
40.43%
Emerging
Markets
7
Cloud computing
1) Will China Have The World’s Largest Box Office In 2016?
Source: Morgan Stanley, IBTimes, Robeco
China Box Office registered explosive growth Chinese movie-goers wear 3-D glasses watch movie
8
> China movie box office growth trend - Quickly catching up with the US, growing from 15% of the US market size to over 60% in less than 5 years.
1) China domestic tourist #s - continues to grow at 10% CAGR for the next 5 years
Source: Morgan Stanley, Disney, Robeco
> As of 2014, China’s per capital GDP, based on purchasing power parity, reached USD11,907. When US per capita GDP reached USD10,000, travel expenditure accelerated.
> China’s first Disney theme park will be unveiled soon, including its six themed lands filled with world-class attractions and live entertainment spectaculars.
9
Total Domestic Tourists Growth Accelerated Shanghai Disney Resort opening 16 June 2016
1) Chinese travelers demonstrate an incredible purchasing power (US$229 bn in 2015E)
Source: Luxury Society, WSJ China Real Time Report
> Total outbound passenger journeys will double between 2014 and 2020, to approximately 234 million.
> Overseas spending by Chinese tourists set to jump 23% to US$229 billion in 2015.
> By 2020, FBIC Global Retail & Technology projects this figure to rise to US$422 billion.
10
Total Outbound Chinese Journey Numbers, 2005-2020F Chinese tourists pose for a photo in St Petersburg, Russia
1) All signs are pointing to explosive growth of sport in China
Source: www.wantchinatimes.com, Morgan Stanley, en.olympic.cn
> The massive broadcasting deals are an indicator of the growing value of sport in China.
> High-profile overseas soccer player transfers to Chinese soccer teams: Jackson Martinez (EUR42mn); Geuvanio Santos Silva (EUR3mn); Ramires Santos do Nascimento (EUR28mn); Elkeson de Oliveira Cardoso (EUR18.5mn).
11
China’s President Xi Jinping is an avid soccer fan 30,000 runners joined in the Beijing Marathon
0
0.2
0.4
0.6
0.8
1
1.2
1.4
0
50
100
150
200
250
300
350
2010 2011 2012 2013 2014 2015
Mill
ion
s
No. of marathon and fun races (left)No. of participants (right)
n/a
1) Uber sees explosive growth in China
Source: Uber, CLSA, Robeco
Number of trips monthly versus months since launch Integrated map + payment app
12
China Rest of the World
1) Aging of the population drives demand for healthcare
Source: UN, Deutsche Bank Strategy Research
13
Dropping working age population vs rising senior citizens
Now at historical peak
1) While manufacturing sector are firing, services sector are hiring
Source: CEIC and Citi Research, as of Sep 2015
Total No. of Employees and Growth by Sectors
14
10%
-7%
-8%
-6%
-4%
-2%
0%
2%
4%
6%
8%
10%
12%
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
10,000
Cult
ural
etc
.
Petr
ole
um, c
oki
ng
Leat
her
etc.
Wo
od
etc.
Elec
tro
nic
Equ
ipm
ent
Oil/
Gas
min
ing
Uti
litie
s
Ferr
ou
s m
etal
Coal
Min
ing
Min
ing
auxi
liary
Total No of Employees 2015 YTD change %(rhs)
(thousand)
Consolidation Expansion
2) Supply side reform is a structural reform, with first step of capacity reduction
15
Loss-Making Companies % among Overcapacity Sectors
Source: CEIC and Citi Research, as of Feb 2016
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Oil & Gas
Coal Mining
Steel Mining
Steel pressing
Non ferrous Metal
Textile
2) The impact on banks NPL will be significant, but will not cause systemic risk
Source, NPS, Goldman Sachs Research
16
Impact from eliminating zombie companies by 2017
> Employment: Upstream is 3% of total employment, zombie companies employ ~5.6mn people
> Tax: 8.4Bn RMB impact, 1.1% of local fiscal income
> Debt: 480Bn RMB NPL increase a year. Banks NPL balance is 1.2Trn RMB at 3Q2015, annual increase of 420Bn RMB. ~2Trn Profit in 2014 for banks.
23mn employment in commodity related sectors, 3% of total working population
Coal, 4.5mn
Oil and gas, 0.8mn
Ferrous, 4.2mn
Nonferrous, 2.4mn
Other mining, 0.3mn
Non-metal products (cement, glass etc),
6.2mn
Metal products,
3.5mn
Paper, 1.3mn
Urban-others, 370mn
Rural, 380mn
Urban-commodity
related, 23mn
2) China has the ambition and need to catch the automation wave
Source: Bernstein Research, www.alienelement.com
17
Market share of Chinese players in robotics in China Industry breakdown between domestic and foreign
> Automation and robotic penetration in China is still very low. Robust government support policies are a key driver
> Customized automation equipment suppliers that are gaining share high end supply chain of international consumer electronics makers
> Able to expand into new addressable markets in 3C and Auto segments
25%
27%
30%
32% 33% 33%
20%
22%
24%
26%
28%
30%
32%
34%
2009 2010 2011 2012 2013 2014
Market share of domestic players in China industrialrobotics
3) CNY depreciated against USD, but appreciated against others
> Despite the depreciation, CNY nominal effective exchange rate has appreciated by over 9%.
> SDR inclusion will create natural demand for CNY by global central banks.
> Stock connect will create natural demand for CNY by global investors.
Source: Bloomberg, Morgan Stanley, Robeco, as of 18February, 2016
18
CNY / USD exchange rate CNY nominal effective exchange rate
-7% China CNY vs USD
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
1
Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16
%
-3%
91
93
95
97
99
101
103
105
Jun-1
4
Jul-1
4
Aug-1
4
Sep-1
4
Oct-
14
No
v-1
4
De
c-1
4
Jan-1
5
Feb
-15
Ma
r-1
5
Apr-
15
Ma
y-1
5
Jun-1
5
Jul-1
5
Aug-1
5
Sep-1
5
Oct-
15
No
v-1
5
De
c-1
5
Jan-1
6
Feb
-16
China NEER, Dec 2014=100 Aug 10,
2015
3) USD strengthens due to end of QE and rate hike potential
Source: Bloomberg, Robeco, as of 18 February, 2016
19
USD strengthened against other currencies
-41% Brazil BRL vs USD
-56% Russia RUB vs USD
-7% China CNY vs USD
-19% EUR vs USD
-7% JPY vs USD
+21% USD vs a multicurrency global index
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15
%
3) China is far from currency crisis
Source: World Bank, IMF, Haver, Bloomberg, Bernstein analysis, Robeco
20
Current Account as % of GDP prior to Currency Crises Benchmark Interest Rate Spread vs US
> Significant currency depreciations happened under the conditions:
– The economy in question has operated a current account deficit
– Interest rates have been high and rising
3) The China Foreign Exchange Trade System (CFETS) RMB index as the new anchor
Source: PBOC, CEFTS, Mizuho, Robeco, as of 18 February, 2016
21
Weighting of the CFETS RMB exchange rate composite index
26.4%
21.4%
14.7%
6.6%
3.9%
6.3%
0.7% 3.8%
1.5% 2.5%
4.7% 4.4% 3.3%
USD EUR JPY HKD GBP AUD NZD
SGD CHF CAD MYR RUB THB
Trade weighted index
4) MSCI inclusion of China A shares – likely to announced in June 2016
> Increase China’s weight in MSCI EM to 45% with 100% China A share inclusion.
> When Korea and Taiwan are excluded, China will represent over 56%. Separate asset class.
Data source: Bloomberg, MSCI, Deutsche Bank, Robeco, as of Jan 2016
MSCI EM (100% China A share inclusion) MSCI EM (excl Korea & Taiwan)
China
51.71%
Emerging
Markets
China
40.43%
Emerging
Markets
22
A-share, 21.3%
ADR, 4.6%
H+B+P+Red, 18.5%
KR, 11.8%
TW, 9.2%
IN, 6.6%
SA, 5.1%
BR, 4.1%
MX, 3.4%
RU, 2.6%
MY, 2.5% ID, 1.9%
TH, 1.5%
Others, 6.9%
China, 44.5%
Emerging Markets
China, 44.5%
Emerging Markets
China (A), 27.0%
ADR, 5.9%
H+B+P+Red, 23.4%
IN, 8.3%
SA, 6.5%
BR, 5.2%
MX, 4.3%
RU, 3.3%
MY, 3.1%
ID, 2.5%
TH, 1.9%
Others, 8.7%
Emerging Markets
China, 56.2%
Emerging Markets
4) A share stocks’ valuation are high, although we need to take growth into consideration
23
Valuation vs. growth (size of the bubble represents the dividend yield, red color are the sectors we like)
Source: Wind, CITICS research
Petrochemical
Coal
Electricity&Utilities
Power Generation&Grid
Environmental&Public Utilities
Basic Chemicals
Construction
Building Materials
Light Industry
Machinery
Power Equipment
Auto
Retail Trade
Catering&Travel
Home Appliances
Textiles&Garments
Pharmaceuticals
F&B
Agriculture
Securities Insurance
Real Estates
Transportation
Elect. Components
Communications
Computers
Media
Comprehensive
0
20
40
60
80
100
0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%
TTM
P/E
EPS Growth(2016-17)
5) New Silk Road Initiative – improves regional connectivity through infrastructure
Source: Reuters
24
> China expects that the annual trade volume between China and the OBOR countries to surpass USD 2.5 tn by 2025.
> Asia will need annual infrastructure spending of approximately USD 730 bn up to 2020
Conclusion: structural opportunities based on the mega trends
New economy will continue to outperform the old economy
> Driven by consumption and innovation, the new economy will have strong organic growth
> But be selective in new economy as valuation is very high in some sectors
Old economy will face more pressure as supply-side reforms intensify
> Government has strong commitment to revive the growth engine but they also need to solve the old problems by capacity reduction, inventory clearance and deleveraging
Key risks to add to uncertainty
> CNY exchange rate fluctuation risks
> Credit default risks
25
Investment themes: Aligned with structural reforms
Source: NDRC, State Council announcement, Robeco
Key Themes Rationales Overweight Sectors
1) Consumption Raising minimum wages, transfer payment for healthcare, education, pension
Consumer Discretionary
2) Technology and Innovation Government to support and stimulate consumption in: cultural, entertainment, internet, gaming, travel, IT services
Internet and Hardware
3) Healthcare Reforms Expand access to health services to rural China Improve quality of care and deliver cost-effective care
Healthcare & Services
4) New Silk Road Initiatives Build cross border infrastructure network on road & sea Export infrastructure construction capability
Construction , Railway Equip & Machinery
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