Alibaba
Alibaba (US:BABA) dominates the Chinese e-commerce market, having amassed 726m annual active users through popular marketplaces such as Taobao (a website where Chinese businesses and individuals can sell their products to consumers) and Tmall (a business-to-consumer marketplace).
E-commerce generates over 80 per cent of the group’s revenue, core commerce sales grew by 19 per cent to RMB94bn (£11bn) in the three months to 31 March, despite interference from the outbreak of Covid-19. Further retail growth should come from the push into China’s so-called ‘lower tier’ cities – the company has only reached 40 per cent of the population in less developed areas of China versus 85 per cent of developed regions.
Beyond online shopping, the group is forging ahead in cloud computing. It commands almost 50 per cent of the domestic market and is hoping to rival Amazon (US:AMZN) and Microsoft (US:MSFT) on the world stage. Chief executive Daniel Zhang said in 2018 that cloud computing could eventually become Alibaba’s main business. The segment is growing fast – cloud revenues surged by 62 per cent to RMB40bn in the year to 31 March. While lossmaking at present, increasing scale is edging it closer to profitability and Alibaba plans to invest $28bn (£22bn) over the next three years to expand its cloud infrastructure.
Chinese equities have been overshadowed by trade war tensions and additional uncertainty comes from the passage of the ‘Holding Foreign Companies Accountable Act’ through the US Senate. If passed into law, it could see Chinese companies delist from US exchanges, although Alibaba has a secondary listing in Hong Kong. While the risks are not insignificant, Alibaba has attractive investment qualities – high growth opportunities, RMB180bn of net cash, and superior margins to competitors such as JD.com (US:JD). NK
Taiwan semiconductor
Taiwan Semiconductor Manufacturing (US:TSM) is the world’s largest contract chip manufacturer and its products feature in everything from smartphones to the F-35 fighter jet. With its customers including the likes of Apple (US:AAPL), the group’s significance to supply chains makes it a bellwether for the global technology industry. Long-term trends lie in its favour as the proliferation of digital devices will require corresponding chips. But the near-term outlook is more challenging. Amid the fallout from Covid-19, TSM expects the semiconductor market (excluding memory chips) to be flat, at best, in 2020. But as a sign of confidence, it still plans to increase its capital expenditure to $15bn-$16bn (£12bn-£13bn) this year based on the “multi-year megatrends of 5G-related and HPC [high performance computing] applications”.
The group’s central role in supply chains means it is perhaps unsurprising that it has found itself caught in US-China tensions. As a supplier to Huawei’s HiSilicon chip division it is exposed to US efforts to curb the telecommunication giant’s global influence. The US has amended its chip export rules so that manufacturers making semiconductors abroad using US technology now require a licence to sell to Huawei. Should TSM no longer be permitted to supply Huawei, chairman Mark Liu believes the company could fill the order gap. While plans to build a $12bn chip plant in Arizona are likely to increase its political capital in Washington, TSM could find itself at odds with Beijing. NK
Tencent
Tencent (HKG:0700) is one of China’s largest technology companies offering everything from social networking and video streaming to digital payments and cloud computing. Its video games business accounts for more than a third of total revenue and has thrived during the Covid-19 lockdown – online gaming sales jumped by over 30 per cent year on year to RMB37bn (£4bn) in the three months to 31 March. Tencent also owns stakes in Fortnite creator Epic Games, as well as Activision Blizzard (US:ATVI), Ubisoft (FR:UBI) and London-listed Frontier Developments (FDEV). Those investments make it the world’s largest video games publisher.
Reliance on advertising – which generates just under a fifth of overall revenue – is a potential weak spot as China faces slower economic growth this year. Still, it is encouraging that a 10 per cent decline in ad revenue from its video and news platforms in the first quarter was more than offset by growth from messaging app WeChat. The social networking platform has 1.2bn monthly active users and also hosts a mobile payments system that enjoys a near-duopoly in China alongside AliPay.
The tech giant faces stiff competition on multiple fronts – Baidu (US:BIDU) subsidiary iQiyi (US:IQ) in video streaming, NetEase (HKG:9999) in gaming and Alibaba across internet services to name a few. But its pandemic performance has demonstrated resilience and the shares have rallied by more than a third from their March lows. While not cheap, with a planned RMB500bn investment over the next five years to push into high growth areas such as cloud computing, the upward trajectory will likely continue. NK
Samsung
Samsung Electronics (KS:005930) has a huge portfolio of consumer and industrial products, including mobile phones and semiconductors. A market leader in global technology, the South Korean company has almost doubled its share price over the past five years.
IT and mobile communications is the group’s largest division by sales, generating more than two-fifths of overall revenue in the first quarter. However, the superior margins of component manufacture means the semiconductor division contributes the majority of the company’s operating profits and here revenues nudged down 3 per cent in the same period. The company, like many of its peers, is bracing for a hit to earnings as coronavirus knocks demand for electronic devices.
But the group has not pulled back its long-term investments, having recently announced the expansion of a production line in South Korea. The move should strengthen Samsung’s position against Taiwan Semiconductor Manufacturing Co (US:TSM), a key competitor in the processor market.
Samsung too is caught in the middle of trade tensions between its key markets, the US and China. While US sanctions on Huawei might mean Samsung taking market share, the group has to be careful about how it positions itself between the two superpowers. Still, the company’s leading position in global tech makes for an attractive investment. LA
Read all nine elements of our Investing in Asia guide here:
The outlook for Asian economies
