COVID 19 IMPACT Risk and opportunities in China and the Region - PowerPoint PPT Presentation

COVID 19 IMPACT Risk and opportunities in China and the Region Lynda Zhou, CFA Portfolio Manager, Fidelity International

IMPACT OF COVID-19: RISKS Momentum of deglobalisation and protectionism expediated ▪ Wealth inequality continues ▪ Populism and national protectionism on the rise ▪ Supply chain security concerns and migration ▪ Deglobalization and inflation accelerated Expenditure outlook by income Trade openness index, 1870-2017 100% 8% 6% 6% 10% 9% 21% 80% 29% 30% 33% 37% 60% 40% 73% 65% 62% 57% 54% 20% 0% ≥ RMB 30,000 Total < RMB RMB RMB 15,000- 6,000 6,000- 29,999 14,4999 May cut down expenses May not cut down expenses May increase expenses Source: Morgan Stanley, May 2020 Source: PIIE, Our World in Data, April 2020

IMPACT OF COVID-19: OPPORTUNITIES Importance of technology adoption highlighted ▪ Higher incentive to adopt automation to reduce reliance on labour ▪ Increasing demand on internet both hardware and software ▪ Countries with good IT infrastructure will take the lead Opportunities for the region ▪ Benefit ASEAN countries as low-end manufacturing move out from China ▪ Benefit Korea, Japan, Taiwan as tech supply chain in China may need an alternative Lifestyle changes ▪ Spend more inside China ▪ High end consumption will outperform ▪ Higher expenditure on health care, for example vaccine Source: Fidelity International

CONSUMPTION UPGRADE Economic Reform Continuously Drives Development of the Industry China consumer’s spending on luxury goods will China millennials are more willing to spend on leisure continue to grow and non-necessity 3,500 100% 3,117 9% 3,000 2,609 30% 14% 80% 2,406 2,500 28% 16% CNY Bn 60% 2,000 1,679 1,482 1,263 16% 1,500 40% 1,000 1,227 49% 921 20% 38% 770 500 537 152 311 0 0% 2008 2012 2016 2018 2020E 2025E China overall Chinese millennials Housing, transport, utilities Shopping, food China Rest of world Shopping, non-food Leisure Source: Statista Source: CBRE, Euromonitor, Goldman Sachs.

HIGH-END MANUFACTURING Industrial robot adoption has ample space for long-term growth Low density of industrial robot in China Strong demand growth of industrial robot in China 800 250 In 2021, China is predicted to represent 700 Sales of industrial robot (‘000 unit) ▪ Almost 50% of all global new sales of industrial Robotic Industry Development 200 robots Unit per 10,000 workers 600 Plan targets 150 unit per 10,000 Over 1/3 of all installed industrial robots in the ▪ workers by 2020 world 500 150 400 100 300 200 50 100 0 0 South Germany Japan USA Taiwan China 2016 2017 2018 Korea Source: IFR, 2019. Source: IFR, CRIA, 2019.

FOREIGN CAPITAL INFLOW UNAFFECTED BY COVID-19 Structural transformation in the A-share market ▪ With greater inclusion of A share in MSCI index, proportion of foreign institutional investor is expected to rise, enhancing the maturity of the A share market ▪ Quality style outperformed significantly in the past 5 years Foreign holding ratio Estimated Stock Connect turnover as a % of total A- (Free float market capitalization) share stocks turnover 12% 35% 30% 28% 30% 10% 25% 8% 8.1% 20% 16% 6% 15% 9% 4% 10% 2% 5% 0% 0% Japan Taiwan Korea China 2015 2016 2017 2018 2019 2020 Source: Wind, CICC Strategy Research, June 2020 Ceiling: northbound buying + selling / total A-share turnover Floor: northbound buying (or selling, whichever is greater) / total turnover Source: Wind, CEIC, TSE, PBOC, CICC Strategy Research, 2020 Estimated %: median of ceiling and floor estimation

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PROGRESSION OF ECONOMIC GROWTH IMPACTED BY COVID-19 Recovery in 2Q for China and in 3Q for other global economies China’s GDP growth V -share recovery in 2Q 2020 GDP growth forecast of global markets (YoY %) (YoY %) 2019 2020E 2021E 12% World 2.9 -4.9 5.4 10% Advanced economies 1.7 -8.0 4.8 8% United States 2.3 -8.0 4.5 6% Euro Area 1.3 -10.2 6.0 Germany 4% 0.6 -7.8 5.4 France 2% 1.5 -12.5 7.3 Italy 0.3 -12.8 6.3 0% Spain 2.0 -12.8 6.3 -2% Japan 0.7 -5.8 2.4 -4% United Kingdom 1.4 -10.2 6.3 Other advanced economies -6% 1.7 -4.8 4.2 Emerging and developing economies 3.7 -3.0 5.9 -8% China Q3 2010 Q1 2011 Q3 2011 Q1 2012 Q3 2012 Q1 2013 Q3 2013 Q1 2014 Q3 2014 Q1 2015 Q3 2015 Q1 2016 Q3 2016 Q1 2017 Q3 2017 Q1 2018 Q3 2018 Q1 2019 Q3 2019 Q1 2020 6.1 1.0 8.2 India 4.2 -4.5 6.0 Emerging and Developing Asia 5.5 -0.8 7.4 Source: Refinitiv Datastream, August 2020 Source: IMF, World Economic Outlook Update, June 2020

MONETARY POLICY: ACCOMMODATIVE WITH DISCIPLINE Reserve requirement ratio (%) Interest rate difference between China and US 25% 7% 6% 20% 5% 15% 4% 3% 10% 2% 5% 1% 0% 0% Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Aug-17 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 Small banks Large banks Fed funds rate China 5Y - Loan rate Source: Refinitiv Datastream, August 2019. Source: Refinitiv Datastream, August 2019.

A-SHARES ARE ATTRACTIVE IN GLOBAL STOCK MARKETS CSI 300 index Europe Estimated EPS growth in 2020: Estimated EPS growth in 2020: -1.8% -32.5% Estimated P/E in 2020: Estimated P/E in 2020: 15.9x 22.0x USA Estimated EPS growth in 2020: Japan -17.1% Estimated EPS growth in 2020: Estimated P/E in 2020: -30.5% 25.5x Estimated P/E in 2020: 22.9x World Estimated EPS growth in 2020: -22.4% Estimated P/E in 2020: 24.0x Source: Factset, MSCI, as at 11 September 2020.

OPENING UP OF FINANCIAL MARKET New policies attract institutional capital inflow Removal of QFII / RQFII quota limit Increase in hedging instruments Addition of Stock Connect quota Launch of Sci-tech Innovation board (STIB) 1. IPO will be changed from CSRC approval to registration system. Significantly reduced IPO cost/ inefficiency 2. Price will be set up demand/supply (ie market driven) Vs currently all priced at 23x historical PE. 3. Listing rules are much lower requirements than main board 4. Limit Up/Down: 20% (vs currently 10%), No price limit for first 5 trading days after IPO. 5. Short selling is available from first day trading for STIB stocks. Change of ChiNext’s IPO system from approval to registration basis Source: Fidelity International, 2020.

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