Some 50 million businesses are registered in China, with many of them offering various business or even investment opportunities. Of this lot, Du Yi, investment manager for thematic equities at Pictet Asset Management, is focusing his attention on those with an angle in the following three themes: domestic consolidation, local substitution and global extension.

Companies in the domestic consolidation group tend to be “high-quality” leaders in their respective industries, even if this is a small sub-segment of a wider market, says Du in an interview with The Edge Singapore. “They tend to have a higher competitive advantage built up in their continuous investment into R&D [and] improving their know-how. The beauty is that they can continue consolidating the market and avoid excessive pricing.”

Some leading Chinese battery companies boast a domestic market share of more than 40%, says Du.

Indeed, six Chinese companies made it to a list of the world’s 10 largest battery suppliers for fully electric vehicles, plug-in hybrids and hybrids in 2022, says South Korean consultancy SNE Research. They are CATL, BYD, CALB, Gotion High Tech, Sunwoda and Farasis Energy. China’s CATL ranked first, recording a global market share of 28% based on sales and 39% based on shipment. South Korea’s LGES ranked second with a sales market share of 12%, China’s BYD placed third with 10% of the market share, South Korea’s Samsung SDI ranked fourth with 6% and SK On placed fifth with 5%.

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On local substitution, an increasing number of Chinese companies are advancing within industries previously dominated by foreign players, says Du. These include factory automation, “especially component manufacturers”.

For example, Japan’s Fanuc has been acknowledged as a leading player in this field for years.

“The local players are getting more and more [market] share from the foreign players because of their continued investment and know-how,” adds Du.

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On global expansion, renewable companies, especially those on the solar value chain, are trying to expand overseas and export their manufactured goods and manufacturing capability worldwide, says Du. “With this expansion, we believe it will provide more business opportunities than most companies, and they will continue to grow.”

Research and consultancy group Wood Mackenzie says China’s solar exports grew 64% to US$52 billion in 2022 despite global trade tensions. China’s exports were mainly dominated by modules in 2022, and Europe remained the country’s top solar module export market with a 56% share.

Solar cells saw more than 100% growth as the global photovoltaic (PV) market expanded, with Southeast Asia taking a 31% share of China’s solar cell exports.

US tariffs on Chinese-made modules have driven module production to Southeast Asia, where many manufacturing facilities import cells from China, says Alex Whitworth, research director at Wood Mackenzie.

Chinese modules kept their cost competitiveness against other markets in 2022 and were up to 57% cheaper than US- and EU-produced modules. “This price gap was mainly driven by material cost, where China holds the advantage due to low energy costs, scale advantages and government support, whereas US and EU solar module manufacturing are not competitive without subsidies,” reads Wood Mackenzie’s analysis, released May 23.

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For more stories about where money flows, <a class='gtm_see_also_3_inread' style='text-decoration: underline;' href='/section/capital?utm_source=website&utm_medium=article&utm_campaign=ONPAGESEO'>click here for Capital Section</a>

China no longer needs to provide subsidies for new renewable energy projects, says Du. Citing International Energy Agency data, Du says China owns two-thirds of the global clean energy industry’s market share. “China has the economic interest to continue to help these companies to go overseas, expand overseas and sell their solutions around the world.”

Pictet Asset Management is eyeing these growing areas with the Pictet-China Environmental Opportunities, an active equity fund investing in leading Chinese environmental solutions providers. Launched on March 31 and domiciled in Luxembourg, the fund aims to “increase the value of your investment while seeking to achieve a positive environmental impact” and references the Shanghai Shenzhen CSI 300 Index, an index that does not take into account environmental, social and governance (ESG) factors.

While the three-month-old fund has not published its returns, the reference index has returned –1.53% over the past year and –2.51% over the past five years, as of June 22.

The fund is classified as Article 9 under the EU’s Sustainable Finance Disclosure Regulation. Funds labelled Article 9 are bespoke sustainable investments, “where a financial product has sustainable investment as its objective and an index has been designated as a reference benchmark”.

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The Pictet-China Environmental Opportunities fund leverages the team’s expertise behind the Pictet-Global Environmental Opportunities, an earlier, global-focused fund launched in September 2010.

The fund has returned 19.37% over the past year and 9.44% over the past five years, annualised in US dollars, as of June 21.

As of May 31, its top five holdings are Applied Materials, American Water Works, Eaton Corp, Synopsys and Ansys.

Du, who has co-managed the global fund since joining the Swiss multinational asset manager in September 2018, now leads the China-focused fund. “I will continue to stay with the [global] fund because there are synergies between these two strategies.”

While the China-focused fund has not disclosed its stocks, Pictet sees five segments within the environment-focused investment universe. They are renewable energy, green transportation, industrial decarbonisation, resource efficiency and environmental protection.

China is leading in 37 out of 44 critical technologies globally, says Du, who is based in Geneva.

Citing data from the Australian Strategic Policy Institute and Pictet Asset Management, Du says China is pulling ahead with “high-impact research output” in areas like nanoscale materials and manufacturing, advanced radiofrequency communications (5G and 6G), advanced optical communications, hydrogen and ammonia for power, supercapacitors, electric batteries, post-quantum cryptography, synthetic biology and advanced aircraft engines, among others.

Citing World Bank data, Du says China is the largest high-tech exporter and a major exporter of environmental solutions worldwide.

Technology, scale and policy are three key reasons to look at opportunities in China, says Du, who was formerly at JP Morgan and Barclays in Hong Kong. “For over a decade, environmental protection has been one of China’s national priorities… In the longer term, because of China’s commitment to the 2060 carbon neutrality target, we believe those policies will create tailwinds for those sectors.”

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Fund managers like Du rely on accurate and transparent disclosures to qualify investee companies for inclusion. Du says ESG disclosure by A-share companies has increased over 150% in the past decade. “That is a significant improvement.”

However, China comes with its caveats. “It’s important to also focus on the contribution made from the local ESG data providers because currently, many of the international data or rating providers cover a very limited percentage of the China equities, maybe below 20%,” says Du, whose team relies on local service providers, who can “better collect and analyse” ESG data from Chinese companies.

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According to a research paper published in June 2022 by academics from two universities in Wuhan, there are about 20 ESG rating agencies in China, including Sino-Securities Index Information, SynTao Green Finance and China Alliance of Social Value Investment.

One rating agency of note is MioTech, founded in Hong Kong. It is an artificial intelligence platform with offices in Shanghai, Beijing and Singapore. Its investors include GIC, Moody’s, HSBC, Guotai Junan International and JP Morgan Asset Management.

Other times, the language of the disclosures is a barrier in itself. Many Chinese companies are still reporting their annual reports in Mandarin, says Du. “That area can be improved in the coming years to get more interest from global investors.”

Engagement with companies about ESG issues is receiving greater attention within China, says Du, but there is still some way to go. “In terms of depth [and] frequency of the engagement meetings, it’s just a start in China [compared to] our experience managing the global equity strategy.”

Photos: Albert Chua/The Edge Singapore

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