2011-03-03
Before the outbreak of uprisings in the Middle East oil exporting nations, the consensus among investors appeared to be that equities in Developed Markets would outperform Emerging Markets because of the gradual recovery in the US corporate sector, while Asia needed to tighten to curb rising inflation.
Now, however, there is a growing concern that the price of oil will continue to rise and negatively affect the consumption recovery in developed markets. How this plays out remains to be seen, but encouraging for China focused investors is that China’s economy is relatively less sensitive to international oil prices. Domestic growth in China remains as strong as ever, and so does the outlook for earnings growth in the corporate sector.
Massive investments continue
In addition to a healthy export sector and booming consumption growth, China’s leaders continue to press ahead with massive infrastructure investments. Updated plans for the aviation sector revealed that China will build 45 major airports in the next five years. This year the government also announced plans to build 10 million subsidized homes corresponding to a total of 600 million square meters. This is an amazing amount of additional building in just one year and will lead to increased demand of labor, construction equipment and building materials such as cement, steel and copper.
Strong earnings growth
On the corporate front, some of our portfolio holdings have recently reported and earnings have been either strong or very strong. Sporting goods company Anta reported a net profit increase of 24% and a sales growth of 26% for 2010. Mining giant BHP Billiton recorded a 72% rise in profit during fiscal first half year to AUD 10.5 billion, up from AUD 6.1 billion for the same period last year.
Chinese computer maker Lenovo reported a third-quarter profit increase of 25% with revenues reaching USD 5.8 billion, up 22% year-on-year. Lenovo accounted for 10.4% of global PC shipments in the last quarter, up from 8.8% a year earlier, and was the only major supplier to gain market share. Later this month, Lenovo will launch a competing product to Apple’s iPad, called LePad, on the Chinese market. Apple’s globally awaited launch of iPad 2 in March will benefit Hon Hai, the Taiwanese producer of the iPad and also one of the portfolio holdings.
China climbs on patent-filing ladder
Finally, telecom equipment supplier ZTE grew net income by 26% to 3.0 bn RMB and sales by 14% to 70.1 bn RMB. Speaking of ZTE, the company moved up to 2nd place in the global rankings of international patent filings 2010, up from 20th place in 2009. As a nation, China increased international patent filings by 56% last year according to World Intellectual Property Organization’s Patent Cooperation Treaty, thereby overtaking South Korea as the fourth PCT filing country of origin worldwide.
One of ZTE’s key customers, and the world’s number one cellular operator China Mobile, presses ahead at full steam to speed up the adoption of China’s 4G standard TD-LTE. Trials with TD-LTE have been successful and have gained international interest with applications such as handset TV. Telecommunication infrastructure could become yet another example of how China goes from practically nowhere to global industrial leadership in less than 30 years.
Gustav Rhenman
Fund manager
NEWS - Investments in BRIC & Frontier Markets - NEWS
