A “phase one” U.S.-China trade deal may be in place, but the drawn-out frictions appear to have had a lasting impact in China and across Asia.

As 2020 gets underway, it’s clear that while some things are set to change, others will stay the same. Although the U.S. and China have signed the “phase one” trade deal, we believe that trade frictions are here to stay. Trade tariffs may have peaked for now - which could limit further economic impact - however, we anticipate that other non-tariff trade hurdles will emerge.

Against this backdrop, we expect to see two major structural changes in the global economy: supply chain redirection and import substitution. Both of these developments are parts of a rising de-globalization that presents significant opportunities for investors interested in Asia. 

Since 2010, China-based manufacturers have been migrating capacity to neighbouring countries with lower labor costs, such as Vietnam. The imposition of import tariffs on goods manufactured in China by the United States has significantly accelerated this trend as exporters seek tariff exemption. In addition, non-U.S. companies with strong technological know-how will likely benefit from China weaning themselves off U.S. technology. We believe these trends will persist into the foreseeable future.

Driven by new regulation and an increasingly demanding domestic consumer, Chinese companies have responded by producing higher quality products across both local and international markets. 

There has been a growing urgency for localization in China, especially in strategic sectors such as semiconductors and aerospace products. Traditionally, China has relied heavily on the U.S. for these products, but rather than replacing these U.S. imports with products from other countries, China is increasing its self-sufficiency by developing its own core components and products. 

Examples include Huawei developing semiconductor chips and Guangzhou Haige Communications  developing products including computer chips to connect into the Chinese navigation systems called Beidou that is under construction (the equivalent of the U.S. GPS navigation system). The result is that sectors with high import market share in China will be exposed to more intense domestic competition as Chinese manufacturers make significant technological advancements.

There are now a number of companies that are emerging as beneficiaries of this evolving global landscape, and we note this list is not exhaustive.    

  • Luxshare (002475 CH)

Luxshare is the major assembler of Apple’s Airpods and a manufacturer of various components for the iPhone, Apple Watch and other consumer electronics devices. Luxshare is also a leading connector producer in China for many local brands including Huawei.

Luxshare is managing the U.S.-imposed tariffs on Chinese manufacturers by having nearly 30% of its capacity in Vietnam1. This allows the company to lower labor costs and gain tariff exemptions for exports to the United States. The company will probably also gain domestic market share as China’s domestic brands are likely to allocate more components and wearable device orders to Luxshare, given the company’s considerable expertise in wireless connectivity solutions. 

  • Samsung Electronics (SMSN LI)

As a household Korean name, Samsung is a leading semiconductor and electronics manufacturer with a diverse set of businesses that include DRAM and NAND memory chips, mobile handsets, OLED displays, and a growing foundry and in-house chips business.

Samsung is benefitting from the shift by Chinese smartphone and PC manufacturers to procure DRAM memory chips from non-U.S. suppliers. Samsung may also gain ground in the mobile handsets sector, capturing global market share that was previously lost to Huawei. 

  • Murata (6981 JP)

Murata is a leading Japanese electronic component manufacturer with a large variety of products, including radio frequency (RF) modules, multi-layer ceramic capacitors and metrocircuit. Murata is expected to see vast opportunities with the further rollout of 5G technology.    

Chinese smartphone brands, particularly Huawei, are rapidly increasing procurement outside of the United States for 5G handset components. Murata is well positioned for this and sees market share rising in Chinese RF-related segments.   

  • Wuxi Lead Intelligent Equipment (300450 CH)

Wuxi Lead is the world’s leading manufacturer of new energy equipment focused on lithium-ion battery and fuel cell technology.

As the industry leader in China’s battery equipment sector, Wuxi Lead is set to win orders from tier-1 Korean and Japanese customers as they expand their capacity in China. Recent orders from LG, Tesla and Northvolt proved Wuxi Lead’s ability to benefit from overseas customers’ expansion and become the “go-to” partner of domestic electric vehicle battery players.

  • Guangzhou Haige Communications (002465 CH)

This underrated company is the main supplier of wireless communication equipment to China’s military. Haige is the network services provider to China’s telecommunications providers, and provide key chips, antenna and modules for the Beidou navigation system - China’s alternative to the U.S. GPS navigation system.

Haige is a key beneficiary of China’s domestic players making a shift from GPS to Beidou. Already the largest supplier of military-use Beidou equipment for four consecutive years2, we believe Haige will also generate growing revenue from the civilian market as the telcom network is undergoing the upgrade from 4G to 5G in China.

  • SMIC (981 HK)

The Semiconductor Manufacturing International Corporation (SMIC) provides Integrated Circuit (IC) foundry and technology services globally in testing, design, manufacturing and packaging.     

SMIC’s sales have been bolstered by significant support from the Chinese government. Semiconductor demand is recovering with the accelerating adoption of 5G handsets and demand for hyper-scale computing power. Recent large orders could enable the company to deliver high double-digit earnings growth over the next two years.

  • Hengan (1044 HK)

This is a leading sanitary napkin and tissue producer in China with robust profitability. 

With 100% of Hengan’s revenue coming from China, the company is defensive against trade conflicts, and can leverage this protection for massive gains in domestic market share from foreign players. It has growth potential from import substitution in the domestic consumer market, especially through online sales, given that its market share for major products is less than 30%3

  • Mindray (300760 CH)

Mindray is one of the largest medical device manufacturers in China with a broad product portfolio covering patient monitoring and life support, intravenous devices and medical imaging.

Mindray is a market leader in high-quality domestic medical devices manufacturing, and the company is continually expanding into tier one teaching hospitals. Improved brand recognition in the high-end hospital market has strengthened the company’s position as a major beneficiary of import substitution. 

Speak with your J.P. Morgan representative to see how these ideas and perspectives might bring about investment choices that suit your needs.

Note

1. Source: Goldman Sachs. Data as of October 30, 2019. 

2. Source: Great Wall Securities. Data as of October 25, 2019. 

3. Source: Company filings. J.P. Morgan Private Bank. Data as of January 6, 2020.