Posted inAsset Class in Focus

UBS Wealth defends China tech valuations

The sector is expected to deliver earnings growth of 25-30% in the next 12-18 months.
Eva Lee, UBS Wealth Management

While valuations of Chinese technology companies have become more expensive, they are justified given the sector’s significantly higher growth prospects, according to Eva Lee, head of Hong Kong equities at UBS Wealth Management’s chief investment office.

“Taking into account their growth prospects, we find that China tech has still very attractive valuations [on a price/earnings to growth basis], even compared to their US peers,” she said during a recent webinar.

Source: UBS Wealth Management

“We also suspect superior earnings growth of 20-25% over the next 12-18 months, driven by 5G, cloud and internet,” she added.

Multi-sector expansion

Lee expects growth to come from different sub-sectors of China’s technology industry, including e-commerce, fintech and cloud computing.

While e-commerce has become more mature in China compared to other parts of the world, Lee argued that there is still room for the sector to grow.

“The penetration for e-commerce in tier 1 cities, [such as Shanghai, Beijing and Shenzhen] is probably about 70%. But the penetration rate in lower tier cities is just at 30%.

“This is where the growth prospects will be coming from, which also explains why many e-commerce companies are now targeting lower tier cities,” she said.

Meanwhile, for fintech companies, Lee expects more growth in internet finance, such as online lending and wealth management.

“A lot of people focus on just mobile payments in fintech. But apart from mobile payments, players in the fintech space are now generating profits from internet finance, which continues to be underpenetrated.”

Source: UBS Wealth Management

For example, internet finance is expected to further drive the growth of Ant Financial, which will be listed in Hong Kong next week and in Shanghai on a later date, according to a Morningstar report.

The report said that Ant’s online credit services, investment portal and insurance platform already made up 59% of its revenue in 2019 and are expected to help drive a forecasted 10-year revenue CAGR of 21%.

“Its access to the vast amount of merchant and customer data allows Ant to expand its credit services to small businesses and individuals that have not been well services by the traditional financial system. Its investment portal provides asset management partners with a way to reach China’s youth, presenting an untapped investor market. Similarly, its insurance platform allows China’s masses to access a variety of insurers,” the report said.

Turning to cloud computing, Lee said that cloud adoption from enterprises in China continues to be low.

“China is probably three-to-five years behind that of the US in terms of cloud spend. But on the other hand, we expect a lot more cloud revenue growth, at around 30-40% per annum over the medium term,” she said.

Source: UBS Wealth Management

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