24 BARRON’S November 22, 2021
“Longer
term,
we see
a secular
slowdown
as China
targets
slower,
more
sustainable,
less debt-
driven—
and more
equal—
growth.”
Rory Greendance. That doesn’t mean they will be
nationalized or canceled, but there
will be greater scrutiny. There’s room
to grow, but perhaps the multiple
needs to be adjusted.
Jain:We sold Alibaba last year. Now
we are warming up. You can buy util-
ities in China at 18 or 20 times earn-
ings. Is Alibaba worse than a utility
whenitcangrowat6%or7%andis
trading at 15 times earnings? They’re
necessary for the system. They will
no longer be 25% to 30% growers, so
there is a transition. They are sitting
in growth purgatory—slowing too
much for growth managers, but not
cheap enough for value managers.
We also likeMeituan[3690.Hong
Kong], which we didn’t own three
or four months ago. A lot of bad news
is priced in, and there is more regula-
tory clarity, with Meituan just settling
with the government and paying a
fine.
Which companies will benefit
from China’s common prosperity
push to narrow inequality?
Chwang:It’s China’s 2.0 version of
poverty alleviation. The government
isn’t that concerned about poverty
anymore and is focused on the next
segment of the economy—the middle
class, especially in the rural parts of
China. That should bode well for
Zhongsheng Group[881.Hong
Kong], a luxury-auto dealership trad-
ing at a low-teens valuation. There’s
aspirational demand for luxury autos
and opportunity in secondhand cars
and services.
What other opportunities are pop-
ping up as the government shifts
its focus?
Chwang:Areas of the solar and
electric-vehicle value chain offer
opportunity as penetration ticks up.
Wuxi Lead Intelligent Equipment
[300450.China] is a battery-equip-
ment provider toContemporary
Amperex Technology[300750.
China], or CATL, one of the largest
battery-equipment manufacturers
in China. It is in the first inning of
growth. And at 50 times forward
earnings, Wuxi Lead is cheaper than
CATL,whichtradesat80times,
making it a more attractive way to
tap the developments in electric
vehicles.
Moreno:China has committed to
raising the non-fossil-fuel share in its
energy mix to 25% by 2030, so there
is a commitment to net-zero and Photograph by David Vintiner
November 22, 2021 BARRON’S 25
history that a country other than
the U.S. will get to the next level of
telecommunications first. The U.S.
was first with email, personal com-
puters, 2G, and 3G, and that meant
the U.S. market led the globe with
e-commerce—withAmazon.com
[AMZN] andUber Technologies
[UBER] and other companies based
off mobile. Now, China is going to be
that [first mover] for 5G. China is a
leading indicator for where the rest
of the world’s internet is going.
What risk related to China isn’t
ness prospects] more sustainable.
You want to buy the sorts of busi-
nesses that China has to buy, rather
than what China sells.
Green:The 5G infrastructure provid-
ers are also essential, particularly
with the growth slowdown under
way and a shift to greater fiscal eas-
ing. There is going to be a massive
buildout in China 5G. Sichuan has
35,000 5G base stations, the U.S. has
50,000, and Sichuan is going to go to
250,000—a similar magnitude jump
across China.
It’s going to be the first time in
Semiconductors have been at the
center of this localization push as
the U.S. begins to restrict China’s
access to critical technology. How
do you capitalize on that?
Chwang:China still imports a hefty
amount of content [for chips]. The
onset of the trade war in 2018 sparked
more thinking about the degree of
dependency, creating a movement to
increasingly use more local content in
semiconductors and software. Tai-
wan-listedAlchip Technologies
[3661.Taiwan] is seeing a lot of growth
from design houses in China trying to
make chips locally.
Moreno:We ownSilergy[6415.Tai-
wan], a fabless design house based in
Taiwan that works in power-manage-
ment integrated circuits. It isn’t just
the localization trend in China that
helps; they are gaining share world-
wide.
Jain:We still like the semi-equip-
ment companies—whether it’sASML
Holding[ASML],LAM Research
[LRCX], orTokyo Electron[8035.
Japan]—because there are really no
alternatives. That makes [their busi-
“India stands
out as a
country
immune
to China’s
slowing
growth.
We like
Zomato,
India’s
leading
online food-
delivery
company.”
Sara MorenoSara Moreno
Co-manager, PGIM Jennison Emerging Markets Equity Opportunities Fund
Company / Ticker Recent Price Market Value (bil) Forward P/E
Silergy/ 6415.Taiwan NT$5,350 17.9 65
Contemporary Amperex CNY625.88 226.7 79
Technology/ 300750.China
Zomato/ 543320.India INR165.65 16.7 NM
Forward P/E for next 12 months. NM=not meaningful. Source: FactSetlower policy uncertainty around this
objective. We own CATL. It is expen-
sive, but it is delivering triple-digit
growth. 2022 earnings estimates have
doubled year to date. Transportation
is the biggest component of that de-
carbonization target. CATL is at the
nexus of that. They service all the
large OEMs [original equipment
manufacturers], includingTesla
[TSLA], in China.
Jain:There is always growth in China,
but the question is about gross mar-
gins. Are you concerned about some-
body else nipping at their heels?
Moreno:They are coming from the
highest margins in the industry and
are the low-cost operator. It’s a fac-
tor,butthelandgrabinmarket-
share growth that CATL is able to
attain is supportive in the near term.
Jain:The Chinese gas transition is
controversial, but longer term,
PetroChina[PTR] will be the big-
gest player. One of the biggest parts
of the energy transition involves cut-
ting back on polluting industries.
The marginal players in this asset-
heavy business are being squeezed
out, so profitability should improve
dramatically [for PetroChina]. And
as PetroChina shifts from oil and gas
to more gas, it should become more
stable and grow at mid-single digits.
Valuation assumes a decline in
growth. Plus, PetroChina has a
dividendyieldofabout8%.
Which companies will benefit
from Beijing’s push to become
more self-reliant?
Chwang:Domestic production is
proliferating in semiconductors and
a range of other sectors, including
medical devices and even specialty
chemicals. In many markets, the for-
eign participants are dominant, but
for smaller Chinese businesses that
can grow market share from 1% to
3%,or3%to5%,it’sabigmovein
terms of earnings.
In addition to benefiting from local-
ization, small-caps have benefited
from the regulatory headwinds expe-
rienced by larger companies this year.
Leader Harmonious Drive Systems
[688017.China] is an industrial auto-
mation company that benefits from
localization, but also addresses a
demographic shift in China. In the
lower-tier cities, it is getting harder
to find migrant workers, and there is
increased willingness by factory own-
ers to use more robotics and industrial
Photograph by Sasha Israelautomation.