COVID-19 and China: New Challenges and Opportunities
[You industry]: Trends and Startups 2019 Next Global Tech 50 About EqualOcean
EqualOcean is an information service provider and investment research firm that aims to become a global platform for industrial innovation. We strive to make technology inclusive, accessible and transparent.
Founded in October 2018, EqualOcean is an international branch of EO Company, a leading Chinese tech media and investment research organization that is headquartered in Beijing and has offices in Shanghai, Shenzhen and New York. Contents
4 Introduction
5 Highlights
6 Overview
7 Stock market
8 Inflation?
9 Industry breakdown
10 The real economy
12 The contactless economy
14 Semiconductor industry
19 Fintech industry
23 Healthcare industry
29 Education industry
31 Retail & consumer industry
36 SaaS industry
38 Through the darkness, we see hope Highlights
China’s economy is facing unprecedented challenges
• At the end of March, the total market cap of The pandemic exposes the Shanghai & Shenzhen stock dichotomy of China’s markets was at CNY 45.84 economy trillion, decreasing 2.38% compared with December, • Supply chains are heavily As China gained the 2019. affected by the pandemic. control over the outbreak
• Total GDP in 2020 Q1 was • There was a shortage of • In March, the CPI fell to CNY 20.65 trillion, a year- about 60,000 medical 104.3 as companies on-year decrease of 6.8% at infrared cameras and started gradually comparable prices. about 550,000 handheld resuming operations. medical infrared cameras as of late February. • China demonstrated risk management ability that • Remote working, life led to a quick economic streaming and other recovery. online platforms are benefiting since the start • In the post-pandemic of the outbreak. period, the order of globalization is likely to be restored, with global supply chains getting localized and diverse. Introduction
The coronavirus pandemic is exposing a dichotomy in the world’s tech economy. Companies such as Zoom are riding a surge in remote working and SaaS, while thousands of businesses with outsized footprints in the real economy are being exposed to a huge rift. Chinese technology firms have played a prominent role in the battle against the outbreak.
The pandemic boils down to the difference between hawking analog and digital wares. In the real economy, to cut the high holding costs, many practitioners aim at ‘zero inventory’ for lean production, which has proven itself to be efficient in normal times. At the same time, manufacturers need to rethink their strategies to mitigate the risks as their vast business footprints make supply chains fragile when global emergencies happen.
Unlike the manufacturing firms, which are struggling to cope with uncertainty and risks to varying degrees, online platform-based software businesses, such as Zoom, Tencent and ByteDance, are benefiting from hugely increased user traffic as millions are staying at home. Tencent, which has reported earnings for March, is expected to unveil a surge in time spent on games such as Honor of Kings and growth of activity on WeChat. Zoom’s daily users ballooned to more than 200 million in March from a previous record of 10 million.
We believe that, in the short term, the pandemic will not spur ‘de-globalization.’ Because many countries need to resume operations as soon as possible following the damage to their economic vitality, the best way is to rely on the globalized efficient division of the labor system and resume operations as soon as possible. ‘De-globalization’ would mean the need to rebuild production lines, add fresh support to the industrial chain and train skilled workers. This requires a lot of time and capital expenditure. With the economy in disarray from the pandemic, it is not likely to happen in the short term.
In the long run, the pandemic may not push foreign companies to leave China, but is projected to increase China's attractiveness to foreign investment. The social order, management capabilities and completeness of the industrial chain that China demonstrated during the crisis are the keys to overcoming the pandemic and resuming production. There is also the manufacturing advantage of China over other emerging markets to consider; if the world enters the stage of normal pandemic prevention, this strength will appeal within numerous areas. In the post-pandemic period, the order of globalization can be restored shortly, with more resilient global supply chains.
Key contacts
Yi Huicong Zhang Fan Huang Yuanpu Analyst Co-founder Founder Smart manufacturing, Auto [email protected] [email protected] [email protected]
Acknowledgement
Chenli Shuhong Feng Linyan Fu Yingwei Ivan Platonov
Analyst Senior Analyst Analyst Analyst Fintech, Retail Enterprise services, Auto Artificial Intelligence Markets, High tech [email protected] [email protected] [email protected] [email protected]
Qian Chendi Qasim Khan Wang Butao Yusuf Tuna
Analyst Analyst Analyst Analyst Fintech Education Retail, Consumer Healthcare [email protected] [email protected] [email protected] [email protected]
The author wishes to thank Luke Sheehan for his editorial support, and EqualOcean analyst team for their reviews and ideas.
5 Overview
China’s Seasonal GDP (in tn CNY)
GDP Growth (Y-o-Y) Primary Industry Secondary Industry Tertiary Industry
6.8% 6.8% 6.7% 6.7% 6.8% 6.7% 6.5% 6.4% 6.4% 6.2% 6.0% 6.0%
27.80 25.88 25.23 2.75 24.29 23.54 23.45 2.49 -6.8% 22.40 1.44 1.98 21.28 2.30 1.82 21.81 20.20 20.20 1.30 0.88 20.65 1.83 1.02 18.19 1.26 0.86 10.93 0.82 10.40 9.76 9.79 9.31 8.18 9.54 9.11 7.36 8.23 8.46 7.66 6.93
13.46 14.13 11.99 12.31 12.98 12.75 13.08 12.27 10.43 10.70 11.00 11.71 11.69
Q1/17 Q2/17 Q3/17 Q4/17 Q1/18 Q2/18 Q3/18 Q4/18 Q1/19 Q2/19 Q3/19 Q4/19 Q1/20
Source: National Bureau of Statistics, EqualOcean analysis
In the recorded history, due to natural disasters or On April 17, the National Bureau of Statistics epidemics (such as COVID-19), many civilizations, released the GDP in the first quarter. Total GDP regimes, and empires have ended. Covering about in 2020 Q1 was CNY 20.65 trillion, a year-on-year 190 countries, killing more than 15,000 people, decrease of 6.8% at comparable prices. COVID-19 has been declared as pandemic on 11 In general, China's economic remained stable March by the World Health Organization (WHO). under the impact of the pandemic but overall it According to WHO, China reported a cluster of was better than expected. In March, it showed a cases of pneumonia in Wuhan, Hubei Province on rapid recovery as the production and social December 31, 2019. Within a month, the number activities are resumed a lot. of cases increased exponentially, and by mid- At the same time, it should also be noted that the January 2020, the virus had spread to many other COVID-19 continuous to spread overseas, the provinces in China. Ground activity in the world’s downside risks of the world economy are second-largest economy came to a halt as drastic increasing, unstable and uncertain factors have curbs on people movement shut down factories, increased significantly, resuming production, transport and shopping malls. economic and social development is facing new There is no doubt that China’s GDP of the first challenges. quarter will have shrunk, and would reverse the a 6% expansion in the fourth quarter of 2019.
6 Stock market
The capital market was negatively affected by the pandemic since January, but in March, it showed rebound as the production and social activities gradually resumed Market cap of Shanghai & Shenzhen stock exchanges（in tn CNY）
No. of companies (SZ) No. of companies (SH) Market cap (SH) Market cap (SZ)
2,221 2,197 2,205 2,209 2,214 2,167 2,170 2,173 2,179 2,184 2,188 2,140 2,144 2,153 2,159 1,599 1,605 1,572 1,583 1,535 1,554 1,509 1,518 1,524 1,460 1,462 1,464 1,468 1,472 1,478 -2.38% 46.96 46.27 43.72 45.84 36.80 28.74 27.41 24.31 27.79 27.41 28.74 29.11 27.51 28.48 28.18 27.91 28.16 28.63 29.11 24.31
18.22 18.85 19.41 18.05 12.49 15.21 16.82 16.42 15.42 15.83 16.05 16.13 16.37 16.75 16.64
Jan, Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, Feb Mar 2019 2020 Source: Choice terminal, EqualOcean analysis
The chart shows the market capitalization in The total market cap of the United States stock China’s stock market. The total GDP of China in market accounts for about 166% of the total GDP, 2019 is about CNY 99 trillion, and the total market Japanese stock market accounts for about 120% of cap of Shanghai and Shenzhen listed stocks the its GDP. This proportion in Germany is about accounts for more than 60% of China’s GDP as of 106% and about 109% in France, there is still the end of 2019. Actually, this proportion is not much room for growth in the market value of the high compared with other major countries. Chinese stock market.
The financial industry has shown a significant change Market cap by industries
Energy Consumer discretionary Financials Utilities Materials Consumer staples IT Real estate Industrials Healthcare Telecom services
2% 5% 2% 4% 10% 9% 15% 3% 16% 3% 4% 15% 3% 15% Dec , 2019 Mar, 2020 9% 8% 30% 25% 9% 8% 7% 7%
Source: Choice terminal, EqualOcean analysis
7 Inflation?
In February, the outbreak of COVID-19 had a more In March 2020, the Consumer Price Index (CPI) complex impact on the price trend. However, as went up by 4.3 percent year-on-year, with an companies gradually resumed work and resumed increase of 4.0 percent in urban and 5.3 percent in production, the price operation was generally rural. The food prices went up by 18.3 percent, stable, showing a structural change trend of rising and the non-food prices increased by 0.7 percent. and falling. The CPI continued to rise but the The prices of consumer goods went up by 6.2 increase was As a result, food prices have risen a percent, and that of services grew by 1.1 percent. lot; PPI has declined slightly and steadily. From January to March, on average, the overall consumer prices were up by 4.9 percent from the According to the National Bureau of Statistics, in same period of the previous year. February 2020, the Consumer Price Index (CPI) went up by 5.2% year-on-year, with an increase of In March, national consumer prices dropped by 4.8% in urban and 6.3% in rural. The food prices 1.2 percent month-on-month. Among them, the went up by 21.9%, and the non-food prices prices in urban and rural were down by 1.2 and increased by 0.9%. The prices of consumer goods 1.3 percent respectively; the prices of foodstuff went up by 7.9%, and that of services grew by 0.6%. decreased by 3.8 percent, that of non-foodstuff From January to February, on average, the overall decreased by 0.4 percent; and that of consumer consumer prices were up by 5.3 percent from the goods went down by 1.7 percent, and hat of same period of the previous year. services fell 0.3 percent.
In February, national consumer prices rose by 0.8 Chen Yulu, vice governor of the People's Bank of percent month-on-month. Among them, the prices China (PBoC), told a press conference that in urban and rural were up by 0.8 and 0.9 percent although the COVID-19 outbreak's impact on respectively; the prices of foodstuff increased by consumer prices will still continue for a while, he 4.3 percent, that of non-foodstuff decreased by 0.2 expects the overall inflation to decline quarter by percent; and that of consumer goods went up by quarter as production resumes. 1.4 percent, while that of services fell 0.2 percent.
March 2020, the CPI fell back as companies gradually resumed work and production Monthly CPI in China
107 CPI (Consumer Price Index) 106 105.4105.2
105 104.3
104
103 102.3 102 101.5
101
100 Aug， Sep Oct Nov Dec Jan, Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan, Feb Mar 2018 2019 2020
Source: National Bureau of Statistics, EqualOcean analysis
8 Industry breakdown
9 The real economy
Speculators and scams: gradually out of the During the pandemic, manufacturers realized game. that the safety stock is no longer safe.
The year 2020 started in an unexpected way; Inventory provides buffer between uncertain disasters came in bundles and undermined the supply and demand. However, in the process of foundation of the world economy. The alarm of digital transformation, manufacturing the coronavirus’s impact on businesses is enterprises aim to achieve "zero inventories" also sounding and reaching far corners of tech known as “Just in Time” to cut the high holding communities around the world. cost. For instant, at present, there are 40 tier 1 and tier 2 suppliers that provide parts and For China, COVID-19 pressed the deacceleration components to Korean OEMs. If the supply button for the country’s economy. The National continues to be in short supply, the production Bureau of Statistics released that PMI capacity of Hyundai and Kia alone in China will (Purchasing Managers’ Index) for February shrink nearly 50,000 vehicles, resulting in sales dropped to 35.7%, which is 14.3% lower than losses that will exceed CNY 5.88 billion according the number for January. Compared to the to ccid wise. threshold of 50.0%, a low PMI implies a slowing-down of economic activities as well as Before flexible production is fully achieved, how being a red flag to all economic bodies. In many proper inventories should be guaranteed March, the PMI rebounded to 52, however, the to respond to emergencies is an issue that needs Statistics Bureau said it does not mean that the to be rethink. economy has posted a solid rebound.
How has coronavirus affected China’s supply chain? The short-and long-term implications of COVID19 vary across manufacturing.
Supply and demand conflict Potential growth
Increase Computer and cloud hardware Delivery service
Medical protective equipment Automation equipment
Chemicals Iron and steel
term demand impact -
Construction Short
Primary food processing Furniture and home Less-than-load shipping
Supply & demand-side hit Demand-side hit Decrease
Negative Short-term supply impact Neutral
Note: Short-term negative supply impact depends on value added by manufacturing, companies core earnings as percent of GDP any inventory reserves of industry Source: Bain&Company, EqualOcean analysis
10 The real economy
The cost and efficiency advantages of China's Post-pandemic: Lower probability, but more manufacturing supply chain are obvious. stability
China's supply chain network is huge and the As we can see, COVID-19 is undermining the overall production cost of is relatively low. basic principles of globalization. Economically, Relying on China's huge supply chain system, companies with supply chains in multiple the upstream and downstream related parts and countries will rethink and reduce their strategy raw materials for the production of a product and footprint overseas with the lessons learnt have a very high price-performance ratio, which from this pandemic. This will lead to a new era can control the overall production cost of the of supply chain stability. product to a very low level . “Global supply chains were already coming As China's trading partners increase year by under fire—economically, due to rising Chinese year and the Regional Comprehensive labor costs, U.S. President Donald Trump’s trade Economic Partnership Agreement (RCEP) is war, and advances in robotics, automation, and under negotiation, the customs clearance cost 3D printing, as well as politically, due to real and of China's manufacturing supply chain might be perceived job losses, especially in mature further reduced, and the efficiency will be economies”, according to Shannon K. O’Neil, further improved. the vice president, deputy director of studies, and Nelson and David Rockefeller senior fellow for Latin America Studies at the Council on Digitalization? Foreign Relations.
We believe that enterprises should strengthen The global supply chain is sticky and it’s an digital transformation and lay the foundation example of the division of labor and cooperation for the rapid development of manufacturing among countries in the context of economic enterprises. Use big data and other technologies globalization. Therefore, adjusting the supply to create a more convenient digital chain is very time-consuming. It is believed that management model. For example, the after the pandemic, more companies will start "pandemic information collection system" to consider how to hedge risks, rather than supported by Alibaba Cloud has made blindly seeking to reduce costs. important contributions to the pandemic prevention and control work.
Manufacturing marked the highest SaaS penetration level in China among all sectors Top 4 industries with the highest penetration rate, 2018
10.9% 10.4% 9.6% 9.4%
Manufacturing Finance E-commerce Software
Source: AliResearch, EqualOcean’s analysis
11 The contactless economy
Infrared technology Not only the demand for medical infrared thermal imagers has increased sharply, but also Infrared technology is a tool of screening of the demand for infrared temperature suspected patients with human temperature measurement chips. measurement. In nature, any object with temperature above absolute zero (-273° C) will According to industry insiders, it will take at emit infrared radiation, and a medical infrared least half a year to arrive if manufacturers camera can passively receive infrared radiation import core detector chips now. Since 2015, emitted by an object to transform it into a domestic enterprises such as Arrow thermal image. The different colors on the Optoelectronics, Dali Technology (SZ:002214), thermal image represent different temperatures Guide Infrared (SZ:002414) have been able to of objects. produce the industrial production of infrared detector, has gradually completed import At the time of the national prevention of COVID- substitution. 19, the return journey to the Spring Festival also ushered in a peak. Most airports, stations, The rapid growth of infrared thermal imager hospitals, and other densely populated areas consumption in the civilian market is mainly have installed professional medical infrared due to the continuous expansion of new cameras for human body temperature application fields caused by the reduction of measurement. Major domestic manufacturers product costs. The infrared thermal imager of infrared thermometers started emergency industry will usher in a period of rapid growth in resumption in the short term to work overtime. market demand. According to Maxtech International's forecast, the global civilian According to statistics from the Ministry of infrared market will reach USD 7.465 billion in Industry and Information Technology, there is 2023. currently a market gap of about 60,000 medical infrared cameras and about 550,000 handheld medical infrared cameras.
The global civilian infrared imager technology market is expected to reach USD7.5 billion in 2023
Market size of infrared imager technology (in bn USD) 7.47 7.01 6.43 5.89 5.04 4.57 4.13 3.73 3.11 3.33
2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E
Source: Maxtech International's forecast, EqualOcean analysis
12 The contactless economy
According to the latest results of statistical Strengthen the unmanned logistics research on the Automated Guided Vehicle management in the production process of the (AGV) Industry Alliance, China‘s AGV market in manufacturing enterprise and when the goods 2019 reached CNY 6.175 (including industrial are out of the warehouse is becoming a trend. AMR), with an increase of 45.2% compared to Actively promote the linkage between the 2018, of which there are over 18 companies manufacturing enterprise and the relevant reached revenue exceeded CNY 100 million. In departments, strengthen the automatic 2019, the new volume of all AGV robot products transshipment management of the terminal, the is 33,400 units, which increased of about 12.8% automobile shipping transit station and other compared with 2018. It is expected to reach places to deduce the sequence of capacity 12.58 billion yuan in 2023. recovery, and guide each link in the supply chain. The production needs can be predicted. Intelligent logistics provides guarantee for the In order to reduce losses after the pandemic, precise supply of manufacturing products. the manufacturing company will start rebound Logistics transportation is an indispensable the production. At that time, the raw materials, important link in the manufacturing supply parts and workers will be the main objects for chain. The virus outbreak occurred around the the manufacturing company. How to allocate Spring Festival and most logistics companies personnel and raw materials to match the have already taken off vacation to stop factory, equipment production, and how to transportation. Under such circumstances, reasonably allocate raw materials, parts, and regardless of whether it is the transportation of personnel to various industries to ensure the prevention and control materials or the perfect operation of the supply chain will transportation of manufacturing products are become a problem for enterprises to consider. facing huge challenges. At this time, unmanned logistics will give full play to its advantages and become a guarantee for the precise supply of manufacturing products.
China’s AGV Market Size 2015-2023 (in billion CNY)
12.58 11.98
10.42
8.34
6.18
4.25 2.85 1.89 1.20
2015 2016 2017 2018 2019 2020E 2021E 2022E 2023E
Source: China Automated Guided Vehicle Industry Alliance, EqualOcean analysis
13 Semiconductor industry
Having imported more than half the computer The country’s attempts to leapfrog over its chips sold globally over the last decade, China is competitors, which are often a subject for famously concerned about its domestic international disputes, have caused some semiconductor area. serious Intellectual Property (IP) objections originating from the western hemisphere, with Nowadays, tremendous amounts of capital are these feeding into actual or potential trade wars. being allocated to a sector that is yet to catch up with the world-leading corporations. The mainland’s chipmakers are lagging behind in three key respects – the scale, the scope and the core technology.
China’s mainland is yet to beget a semiconductor giant
The mainland’s leading semiconductor companies and their global counterparts, by revenue (in billion USD)
China’s RoW Region: mainland
Mobile chips Semiconductor Packaging Foundries Memory equipment and testing
HiSiliconUNISOC JCET SMIC Naura GigaDevice 2. 0.35 3.7 0.31 4.71 3.1 05 9
Applied ASE Materia Group Qualcomm ls 9.54 22.29 14.53 TSMC Am 32.1 Samsung Electronics kor 56.4 ASML 4.32 12.93 Apple 6.6
Note: 2018’s revenues. Acronyms on this chart include: RoW = the Rest of the World, JCET = Jiangsu Changjiang Electronics Technology, ASE = Advanced Semiconductor Engineering, SMIC = Semiconductor Manufacturing International Corporation, TSMC = Taiwan Semiconductor Manufacturing Company. Source: The companies’ financial statements, IC Insights, The Economist, EqualOcean analysis
14 Semiconductor industry
It seems obvious to all that China’s preeminence The electronics market, a vital source of in some areas is only a matter of time. However, demand for chips, is being shaken by the rapidly in spite of how the state is dealing with the changing shopping patterns: people are present challenges, there is something that can spending less on new gadgets these days, with wipe out all the interim achievements in a wink. the consumer confidence index dropping Namely, black swan events and we are facing continuously. one now. The regional supply chain is being hugely The COVID-19 pandemic appeared to be affected too. The prolonged holiday break destructive for the key downstream segment of period and further movement restrictions in the chipmaking industry – Information and China have stirred the labor shortage, which Communications Technology sector, or ICT, a was apparent in February. In the first quarter of five-trillion-large colossus. 2020, the ‘World’s Factory’ is operating way below capacity, per many industry forecasts.
A complex organism, the semiconductor supply chain is not black-swan-proof
Global semiconductor ecosystem, the supply chain and key actors
‘Fabless’ phase ‘Foundry’ phase Marketing phase
Raw material IP companies suppliers
Lead frames, IP cores used to Raw waters, packaging build IC chemicals materials
Assembling, Research Designing Manufacturing testing and Distributing packaging
Design services (by the use of Specialized equipment and tools specialized tools)
EDA Equipment companies suppliers
Note: Acronyms in this chart include following: IP = Intellectual Property, IC = Integrated Circuits, EDA = Electronic Design Automation Source: EqualOcean analysis
15 Semiconductor industry
The consumer electronics market slump. One way or another, the temporary equilibrium will, almost certainly, turn south-west this time. A temporary logistics network disarray seems to The client-side factors are likely to eat out more be a minor problem though. In essence, the of the potential demand for chips, a short-term tailing off of the semiconductor cycle signaled a oversupply thereby seems to be inevitable. Here recovery in the fourth quarter of 2019: chip below, we go through several pandemic-related shipments started growing in the region, narratives affecting the microelectronic devices making the inventory levels decline rapidly. market in China, trying to identify new Hence, chip manufacturers can possibly afford opportunities for the country’s chipmakers. themselves a quarter-long stock accumulation.
The oversaturated global smartphone market met some brand-new demand- side challenges in the beginning of 2020
Smartphone shipments worldwide, millions of unitsc
All Samsung Huawei Apple Xiaomi OPPO Others Forecast
-11.12% 1,520 1,433 1,455 1,403 1,371 1,351 1,167 296 1,004 241 191 126 114
404
2013 2014 2015 2016 2017 2018 2019 2020E*
Note: IDC forecast, made in February 2020 Source: IDC, TrendForce, Canalys, EqualOcean analysis
Other products that run on chips will also be hurt As the future of the pandemic is uncertain, it is by the expected worldwide economic downturn. relatively hard to project the consumer demand TrendForce, a market intelligence provider, in the second quarter of 2020. Nonetheless, we estimated in February that one of the fastest- can look back at history. The SARS outbreak of growing classes of wearables – smartwatches – 2002-2003, the last healthcare system crisis in will plunge significantly in the first quarter of Asia of comparable size (but, indeed, 2020. differences abound between the two), happened The company made changes in its January in the middle of the global smartphone craze, forecast, downgrading the figures for notebooks, when intelligent gadgets were on the rise. smart speakers and video game consoles by 12.3%, 12.1% and 10.1% respectively.
16 Semiconductor industry
At the time, the leading wireless chip providers’ The game has been flipped over since then. sales were shaken by the sliding demand. Chinese companies have entered the market, However, the market rebounded in less than occupying a vast share of it. Huawei, Xiaomi three months after the pandemic was finally (1810:HKEX) and OPPO accounted for over 35% handled and then kept on a solid uptrend. That of the global sales in 2019, for instance. And the was the time when Finnish giant Nokia was on same is true for other types of omnipresent the top of the planetwide ‘handset pyramid,’ technological marvels. followed by other old household names, such as Sony Ericsson and Motorola.
The oversaturated global smartphone market met some brand-new demand- side challenges in the beginning of 2020
Global smartphone market structure, by number of shipments-top vendors
Nokia Motorola Samsung Apple OPPO Others Sony Ericsson RIM HTC Xiaomi Huawei
14.50% 17.60% 19.00% 15.70% 56.90%
8.50% 10.40% 9.20% 21.80% 2003 19.10% 2011 2019 8.10% 8.90% 8.80% 5.10% 3.00% 18.40% 26.90% 28.10%
Source: IDC, Canalys, Gartner, EqualOcean analysis
For the local semiconductor players, it means An upcoming rollout of the fifth generation of that the industry is getting closer to the wireless technology, known as 5G, was expected sufficient degree of supply chain localization, to propel both the global smartphone market – making the entire path from raw materials to which has been shrinking since 2016 – and consumption quicker and more resilient. Chinese chipset producers’ revenues (a well- During this turbulent period of time, the known fact is that the country is at the forefront Chinese Original Equipment Manufacturers’ of 5G revolution). Now, the mainstream (OEMs’) traditional chip-making partners – large deployment of the new network protocol is Japanese and South Korean corporations – may posed to be postponed locally, as the state’s have difficulties in logistics and delivery money is limited and being moved to reach operations, allowing the mainland-based firms urgent goals. to win contracts with their compatriots.
17 Semiconductor industry
As the disease is spreading out into other Meanwhile, fabless startups that intend to regions and is being basically handled locally, develop hardware solutions for emerging the Middle Kingdom’s 5G hardware developers technological concepts, such as Beijing-based are getting extra time for their endeavors, embedded AI pioneer Horizon Robotics and aiming to beat the likes of Verizon eventually. cloud server processor builder Cambricon, look Besides, this period, in some respects, might be quite robust against the backdrop of a looming cherished by those relentless futurists that are recession. currently working on 6G. More traditional semiconductor businesses are Layers below also trying to jump on the bandwagon. Flash memory maker GigaDevice (603986:SH), for Apart from consumer electronics, pandemic- example, has been accelerating (in Chinese) spurred upswings in healthcare, remote production of chips for infrared temperature working platforms and some other areas are guns. Many others have launched new product creating a healthy demand for data center lines, manufacturing protective equipment for services. Servers are projected to become one of their employees, partners and beyond. A a few direct memory applications to grow in strategic industry, chipmaking is prioritized by 2020. For DRAM producers, like Hefei-based the Chinese state. Headquartered in Wuhan, the state-backed startup Changxin Memory current outbreak epicenter, 3D NAND developer Technologies (CXMT), this is a major driver. YMTC has reportedly been operating 24/7 with Going back to the semiconductor cycle that is no breaks since the Lunar New Year holidays. verging to a close, here is another bellwether: There are a plethora of interconnected factors foundries will be barely touched by the global that must be considered when answering the emergency in the following months. According questions of when and to what extent the world to TrendForce’s estimation, TSMC, the will take control of the pandemic. indisputable champion within the segment, will gain 43.7% more this year, compared to 2019. No matter which scenario plays out, China’s diverse nascent microelectronics industry will The mainland’s leader SMIC will increase its have something to say under the new world revenue by 26.8%. It is worth mentioning that order. And it is likely to start from the local fabs usually are working on contracts signed a market, ousting foreign rivals experiencing few seasons ago. The gloomy reality of the supply chain trouble. An open question is consumption slump will conceivably whether there will be sufficient demand from reverberate in their financial results in late OEMs and other downstream actors. 2020-early 2021.
18 Fintech industry
Market performance Index performance: fintech industry vs. others The fintech industry has outperformed the market during the almost three month period Telecom 10.6% (as of March 20) that started at the beginning of this year. Xiangmihu Financial Technology Computer 10.2% index (399699:SZ) – China’s first fintech index, Fintech 3.4% developed by Shenzhen government agencies – increased by 3.40%. Meanwhile, CSI300, the Agriculture, Forestry & Fishing 3.3% mainland’s major market index, lost 12.02% in Healthcare 2.9% the same period. Electrical equipment 2.1% Besides, the performance of the Xiangmihu Electronics 1.7% Fintech Index has beat most of the other industry indexes under SWS second-level -0.5% Construction industry classification since the beginning of -0.8% National defense 2020. -5.0% Media
Index performance: fintech -6.0% Trade and Commerce industry vs. market benchmark -6.4% Machinery Xiangmihu Fintech Index -6.4% Apparel and Textiles CSI 300 Index -7.0% Chemicals Trade volume of Xiangmihu (billion CNY) -8.0% Public utilities 25% 100 -8.5% Automotive 20% -8.6% 15% 80 Light industry -10.3% 10% 60 Food and Beverages 5% -10.8% 0% Iron and Steel 40 -12.6% -5% Leisure -13.5% -10% 20 -15% -15.0% Non-ferrous metals -20% 0 Real estate Jan-20 Feb-20 Mar-20 -15.4% -15.4% Nonbank financial
Note: Xiangmihu Fintech Index is the first index -17.2% Home appliances designed to reflect the performance of the financial technology industry in China, which -17.3% Banking was jointly developed by Invest Shenzhen Futian, a government service agency to -17.4% Mining promote Futian's investment environment, and Shenzhen Securities Information Co. As of Note: The secondary market performance of March 20th, it has added 3.40% in the first fintech industry is measured by Xiangmihu quarter of 2020, while CSI300, the mainland's Fintech Index -- the first fintech in China, which main market index, lost 12.02% in the same was developed by government agencies in period. Shenzhen. Others follows CSI SWS industrial Source: Choice terminal, EqualOcean analysis index. Source: Choice terminal, EqualOcean analysis 19 Fintech industry
Policy action IT in finance The pandemic has unleashed severe effects on the real economy. These are especially severe The pandemic let incumbent players re-estimate for the SMEs. Fintech, as crucial leverage in the drawback of the traditional offline-focused developing inclusive finance, is experiencing a model, in particular, the limitations in customer favorable climate as the regulators draft policies service points and locally deployed projects. that target supporting SMEs in smoothing their This is projected to increase the market operations. recognition of AI-based products and accelerate the process for incumbents in moving to the On March 10, the State Council sought to cloud. accelerate policies regarding targeted Reserve Requirement Ratio (RRR) cuts, which are aimed AI-based products at facilitating support from the side of the The pandemic locked out the offline service commercial banks towards SME lending. points of banks, securities firms and trust Responding to this issue, PBoC launched companies from normal operations, which specific policies on March 13 which cut the RRR considerably affected their promotion activities by 50 to 100 basis points for eligible commercial and also subscriptions from the prospective banks. It has been effective since March 16, clients. releasing CNY 550 billion in liquidity, of which The double-system recording technology and CNY 400 billion is expected to be lent out for the AI-based intelligence (largely based on NLP, inclusive finance that benefits smaller firms, to be precise) customer service and intelligent while the remainder is for long-term loans. customer classification and product promotion On March 10, the State Council sought to technology have alleviated their anxiety to a accelerate policies regarding targeted Reserve certain extent. Requirement Ratio (RRR) cuts, which are aimed However, it is also worth noting that as these at facilitating support from the side of the fresh systems are lacking in clients – and thus, commercial banks towards SME lending. lacking in real-world scenario testing – prior to Responding to this issue, PBoC launched the outbreak, there are still outstanding pain specific policies on March 13 which cut the RRR points when applied to real business. These by 50 to 100 basis points for eligible commercial include the considerably high error rate in banks. It has been effective since March 16, recognition (about 20%), the difficulty in releasing CNY 550 billion in liquidity, of which recognizing the precise meaning of questions CNY 400 billion is expected to be lent out for raised by app users and their wealth inclusive finance that benefits smaller firms, management flavor on risk, return and duration. while the remainder is for long-term loans. Therefore, as these AI-based fintech product providers meet increasing market demand, they, unfortunately, miss a considerable part of the opportunity due to the immaturity of their business. In this sense, the pandemic also brings them an opportunity to hear more about the true requests from their potential clients, which then sheds light on the direction for them to improve their products.
20 Fintech industry
Financial service cloud However, with the continuous drives and support from the regulatory side 'luring' the The huge expenditures on IT operations and incumbents into stepping into the field of SME maintenance have always been a pain point for lending, better control on IT operations and the incumbents in the financial sector. maintenance expenditures is becoming According to Ma Zhitao – the CIO of Webank – extremely crucial (anyway, cost control is during an interview with China Business always important, even if they only serve the Network, the incumbent players spend CNY 20– key accounts). CNY 100 on this kind of expenditures annually for a single institutional account. This is not that As a comparison, in 2019, the IT operations and huge – considering the fact that their average maintenance expenditure attributed to a single ARPU is at a thousand yuan level, according to account was CNY 3.6 for Webank – a typical their most recent annual report. fintech company in the field of SME lending.
Accelerate the implementation of system, control costs and improve efficiencies constitutes the three major motivations for the incumbents to move to the cloud
Accelerate the implementation of system 81.4%
Control costs 80.2%
Improve efficiencies in operations and maintainces 76.7%
Support financial innovations 69.8%
Increase felxibility 69.8%
Suppport distributed applications 53.5%
Avoiding being locked-in by single vendor 46.5%
Improve the performance of current system 38.4%
Note: The results are based on a survey conducted by Xjrong -- a national-level journal under the Ministry of Industry and Information Technology (MIIT) -- on 125 leading incumbents in the financial sector, including banks, securities and insurance companies. The data was collected in December 2018. Source: Xjrong, EqualOcean analysis
Apart from the above concerns around costs The above factors provide space for fintech and efficiency, the recent outbreak has also firms that concentrate on cloud services. helped to accelerate the process for the Though the projected market size was USD 927.5 incumbents in moving from heavily localized IT million in 2019 (according to IDC), which more systems to cloud platforms. In the sense that all or less due to the lack of large-scale adoptions, the locally deployed projects are hard to operate the world-renowned research institute assigned given the current situation, which it a 40% year-on-year increase for the next three straightforwardly shows more incumbents the years end at 2023. This somewhat suggests the limitations of traditional IT systems in terms of future of financial cloud services in China in flexibility. terms that are worth looking into. 21 Fintech industry
IDC expects an about 40% year-on- China’s financial cloud service year growth on China’s financial market is still considerably service cloud market fragmented
Year-on-year growth Players distribution, 1H 2019 Market size (in mn USD) 12.2% 38.5% 45.8% 43.3% 3,590 6.7% 39.4% 40.1% 2,684 33.7% 6.3%
1,938 5.4% 65.1% 1,329 4.3% 928 662
2018 2019E 2020E 2021E 2022E 2023E Alibaba (BABA:NYSE) Sinosoft Technology (603927:SH) Source: IDC, EqualOcean analysis Tencent (0700:HKEX) Baidu (BIDU:NASDAQ) Moreover, this is also a quite fragmented Rongxinyun of Digital China (000034:SH) market – just as we find in most of the emerging Others areas. Though the arms of domestic tech giants like Ant Financial and Tencent are expected to Source: IDC, EqualOcean analysis share a considerable slice in the future – given their strong R&D capabilities and synergy with Third-party payment existing businesses – there is also plenty of The transaction volume of third party payment is opportunities for other players. expected to witness a slight fall in the short run. Consumer finance On the one hand, the offline acquiring business The pandemic has dealt a negative blow to plummeted. This is expected to regain previous consumer finance, which is reflected in levels after the economy recovers from the decreasing demand and increasing associated COVID-19. On the other hand, the online risks. The shrink in demand specifically lies in transaction volume is expected to smooth out. the installment loans associated with offline Although there was an increase in the online scenarios, for example, tourism and education. purchase of ingredients, daily necessities and Meanwhile, as a large part of users of internet take-away foods, the entire GMV of online consumer finance platforms come from lower- platforms is expected to drop – due to falling tier cities – and are more sensitive to the demand and delayed logistics. Besides, it is also fluctuations on income – this is likely to result worth mentioning that transaction volumes in a rise in the overdue rate for the subject to digital consumption – like TV network corresponding products. subscriptions and gaming – are expected to increase. Healthcare industry
Taking a step back at a time before the pervasive Different players have lined up to prove their virus, Chinese healthcare services had already dexterities. begun a transformative surge. The online health platform Medlinker has This is a country with massive urban & rural announced that it has set up a free online imbalances in healthcare services for an consultancy channel to address inquiries expanding and aging population and an enriching around the pandemic area and asked doctors middle class. The public health of these unique from the mainland to join the volunteer group of demographics is managed by result-driven medics. The platform is known as ‘the LinkedIn regulators and supported by a bourgeoning of doctors' in China and is backed by a group of technological ecosystem. wealthy investors, including Sequoia.
The transformation was doomed to be realized in Tencent's healthcare arm, TTD, known as China’s healthcare. COVID-19 has only accelerated Tencent Trusted Doctors, has also initiated a this shift from traditional to digital, cyber and free online health consultancy channel for the data-driven in China. pervasive virus.
Online Care Miaoshou Doctor, on the other hand, utilized its massive pharmacy network to address the needs "Hospitals are breeding grounds of the virus,” of Chinese citizens, many of whom have been rumor had it in China while the pandemic was struggling to find facemasks and knowledge peaking. As citizens are stuck at home, visiting the about an appropriate response. The company hospital for primary healthcare service was a has been promising that prices will not be high-risk operation for most. inflated. The country’s already-sophisticated online ‘cyber- health’ firms seized the opportunity to promote their services. China’s online healthcare market may reach CNY 200 billion (the equivalent of around USD 29bn) in 2020 after the pandemic, a consultancy in Beijing found. The outbreak has added billions to the industry in a matter of days.
The COVID-19 raised estimations for China’s online medical market by 26.6% Online healthcare market, in bn CNY +27%
200 158 150
100
50
0 2013 2014 2015 2016 2017 2018 2019 20* 20**
Notes: 20* means that, the market size in 2020 was estimated before the nCoV-19; 20** means that, the market size in 2020 is estimated after the COVID-19. Source: Analysys, EqualOcean analysis
23 Healthcare industry
The largest player in China's online health Medical Imaging and Analysis scene, Ping An Good Doctor (1833: HK), has Moving from services to cutting edge fields of responded to the crisis by sending over 10 Chinese health technologies, medical imaging- million facemasks to numerous Chinese cities related models were one of the main actors of the through its pharmacy network, as well as setting digital transformation. up an online consultancy channel through its widely used platform. Deep-learning driven medical image analysis companies have found a golden opportunity to PingAn Good Doctor and WeDoctor prove their value and capabilities. Several see user growth and more MAU companies have quickly developed algorithms to amid the COVID-19 detect lung abnormalities through CT-scan and ultimately spot the coronavirus, possibly Change in user data of Ping An Good alleviating the excess demands on lab-based Doctor and WeDoctor as of 2020 February, diagnostics. in million
Ping An Good Doctor Infervision, a Qiming-backed company, -33.3% described its coronavirus detection model as WeDoctor working through CT lung screening. This means that the new model detects ground-glass opacities (GGO) in the lung that may later be confirmed as one of the complications of the virus. It is the first deep-learning-based medical 315 imaging analysis firm from China, which could 210 -59.6% obtain a CE certification from the EU.
LinkingMed has launched its AI-based detection 67 27 model for pneumonia CT-screening and Registered users Monthly active users prediction based on Baidu’s PaddlePaddle (Parallel Distributed Deep Learning).
Note: MAU = monthly active users. It is an Medical infrastructure providers, such as the indicator to count the total active users within a Baidu-backed Neusoft Medical Systems, moved month, after deducting the redundant records. The data reflects the influence laid by the 2019 one step forward, sending a standby pandemic novel coronavirus, a positive impact on the treatment unit to Wuhan with CT machines – a whole internet healthcare industry. high-end medical facility that most Chinese Source: Ping An Good Doctor, WeDoctor, hospitals don’t have. Nomura, EqualOcean analysis One of the strategic Chinese healthtech Chinese insurance giant PingAn’s Good Doctor companies, the country’s only largest medical and internet behemoth Tencent’s Wedoctor, imaging device maker United Imaging equipped the largest players, have seen substantial Wuhan’s coronavirus-focused hospitals with CT- growth in users. machines at the very beginning of the pandemic. The company has also played a strategic role in the Chinese government’s systematic efforts to supply medical equipment to the afflicted countries around the world, including Iran, Iraq, Italy, and Serbia.
24 Healthcare industry
Lab Diagnostics During the course of the last two months, BGI was cleared by China’s National Medical Product Diagnosing the coronavirus is as important as Administration (NMPA), the US’s Food and Drug curing patients to sustain the social order and Administration (FDA) and in the EU by a CE curb the spread of the pandemic. Chinese mark. companies saw this and acted. Huo-Yan Lab, a diagnostic lab chain that is One company performed outstandingly both in equipped with BGI’s automatic machine for domestic and global markets in diagnostics: BGI sample preparation was confronted with a Genomics (300676: SH). The firm, as the multiple fold jump in diagnosis demand and it manufacturer of COVID-19 diagnostic kits, delivered. Since the launch of the lab on provided a one-stop COVID-19 examination plan February 5, in Hubei province where Wuhan is for enterprises. The company, and many others, the capital city, it has received a provincial-level have accelerated China’s normalization and total of 57 thousand patients samples as of “flattened the curve”. February 24.
Huo-Yan Lab sees a growth of over 80% for the COVID-19 RT-PCR* test in a week, just slightly over half its full capacity
One sample for one person*
10,000 Samples received Samples tested within/next day
+84.6%
5,420 5,325 4,734 4,602 4,482 3,747 3,505 2,822 2,884 3,015
Full capacity 16-Feb 17-Feb 18-Feb 19-Feb 20-Feb 21-Feb 22-Feb
Notes: RT-PCR = reverse transcription – polymerase chain reaction. Full capacity = the maximum capability to test sample sets on a single day Source: Huo-Yan Lab (Hubei), EqualOcean analysis
25 Healthcare industry
Dozens of organization forayed into developing tests for COVID-19
Selected biotechnology institutes
Developer Technique Description Status as of Feb 21
Chinese National Institute for Viral Detecting the nCoV with In widespread distribution in NAT Disease Control and RT-PCR* China Prevention
NAT using Metagenomic combinatorial probe- sequencing kit for anchor synthesis monitoring nCoV Emergency approval granted BGI Group method mutations by NMPA*** Real-time fluorescent Results delivered in RT-PCR* three hours
Two-step quantitative RT-PCR* assays for N Reference test shipped to University of Hong Real-time RT-PCR* gene and ORF1b of WHO and over 30 labs Kong subgenus globally Sarbecovirus**
Integrated microfluidic Hong Kong CE Marked On-site rapid test: silicon-based University of Science (‘ConformitéEuropéene’, molecular PCR micro-heater module (40 and Technology European Conformity) min)
Use Applied Biosystems US Centers for Emergency Use Authorization 7500 Fast Dx RT-PCR* Disease Control and Real-time RT-PCR* (EUA) granted by the FDA on instrument with SDS 1.4 Prevention (CDC) February 4 software
TIB Molbiol (Berlin, N gene CE-IVD 7 virus 20,000 kits sent to over 70 Germany) also via Respiratory Panel One-step RT-PCR* countries since the January Roche Diagnostics multiplex RT-PCR* launch
Prototype shipped on Qiagen QIAstat-Dx Respiratory Results delivered in one February 11 for clinical (Hilden, Germany) 2019-nCoV Panel hour assessment in China and Europe
Notes: The listed nine diagnostic tests are available to the public for general use. RT-PCR* = reverse transcriptase – polymerase chain reaction; NAT: nucleic acid test; subgenus Sarbecovirus , a kind of bat virus. NMPA***: National Medical Products Administration* Source: Nature Biotechnology, EqualOcean analyis
26 Healthcare industry
Vaccine makers and immunization hopes At the beginning of January, while Chinese media was mentioning a “Sars-like virus” , Chinese A- Not dozens, but hundreds of vaccine makers share investors started to price the vaccine makers, around the globe announced a pipeline for the some even outperformed the CSI300 Index. new coronavirus in a moving statement of solidarity against one of the most pervasive Is this permanent? pandemics in centuries, including behemoths To elaborate on whether the financial and Sanofi and Johnson & Johnson (JNJ: NYSE). technical influx in the Chinese healthtech scene Numerous Chinese companies, naturally, joined will be a renaissance in the industry, it is feasible the race, as their home is the known origin of to recall how China leapfrogged from being a the pandemic, and then pandemic. Cansino country with very premature financial services to a Biologics (6185:HKEX), Tianjin-based biotech country that is leading in mobile payment which previously developed an Ebola-vaccine penetration rates. Chinese tech companies and Walwax Biotechnology (300412:SH), known currently have an advantage compared to their for its pneumococcal and meningococcal western peers, thanks to the lax medical data vaccines are amongst private companies that regulations, high smartphone penetration rates, deserve to be kept tabs on. The company is and a well-set complementary tech ecosystem. Qiming-backed and publicly traded on both the Financial and technical capacity for China’s Hong Kong Stock Exchange and SSE Star Marker, healthtech could always be transferred from the the new Nasdaq style board of China. giants, including Alibaba, Baidu, and Tencent.
Although the mission to develop the vaccine first Plummeted user acquisition costs and surged was already militarized and being approached as costumer trust presumably push Chinese a national security issue, private vaccine makers healthtech to a state where it leads the rest of the were quickly soaked with capital by investors, in world, transforming this very problematic and a move to put a price tag on a possible unevenly distributed healthcare services scene in catastrophe. the country.
China’s largest private vaccine makers outperformed the index after pandemic
Relative stock performance- vaccine makers & CSI 300 Index Mar-9: Jan-13: Jan-20: Market CSI300 The first The first % case in the correction Walwax Dec-31:The reported US 160 first known death in Hualan China 150 cases in Biokangtai Wuhan 140 Zhifei 130 120 110 100 90
2019/12/2 2020/3/17
Note: Based on daily close price data. Source: the Shanghai Stock Exchange, the Shenzhen Stock Exchange, EqualOcean analysis
27 Education industry
According to a recently released iiMedia's However, the outbreak saw the total number of research report on the development of China's online education user base increase rapidly. online education industry, the online education With the suspension of all offline courses, users market in China reached CNY 404.1 billion in are already taking online classes, with a strong 2019 and it is expected to reach CNY 453.8 billion purpose to gain from them. GSX Techedu is in 2020. The report further stated that the total another Chinese educational firm that has number of online education users in China is benefited from the situation. The founder of the expected to reach 309 million by 2020, around 40 firm, Larry Chen said during the fourth quarter million more than the estimates of iResearch. financial report ceremony that “Now we see many teaching activities online. This will lead Three major plus points caused by the people to get used to taking online courses. pandemic There are about 200 million primary and The penetration rate has increased. When secondary school students in China. We assume offline schools were suspended, parents, that the cost of running a student from offline to students and teachers were left with no choice online is CNY about 1,000. We multiplied it to other than online education. Whether parents get a total cost of CNY 200 billion.” He further were conscious of their children or not, they had added, “At the same time, there are nearly 20 to choose online classes. Children from high, million teachers from primary, secondary middle and low-class families had to sit in front of schools and after-school tutoring institutions. their electronic devices and take the online Assuming that the cost of training a teacher classes. This has helped the industry’s online is CNY 200, this cost is CNY 40 billion. In penetration rate to increase significantly over a short, in today's situation, the pandemic has short period of time. Previously, the penetration saved nearly CNY 240 billion in promotional rate of subject-based online education in China costs for the online education industry.” was within 10%. After the suspension of classes Although this calculation is short and crude, it Dong Zhanbin, founding partner of Qingsong does tell us the trend to an extent. Fund, said in an interview with iiMedia that the All types of regions go online. According to the penetration rate of the online education industry data from Qianzhan research, China's online may reach 20%. In view of the changes and the education users are currently mainly distributed ability of online teachers to deliver classes, in second-tier, fourth-tier cities, and the students' getting used to online learning, and the proportion of the two users in 2018 is as high as attitude of parents towards online education after 34.8% and 32.6% respectively. In addition, while the pandemic, the penetration rate of online the proportion of users in second-tier cities has education will further increase. declined, the proportion of users in third-tier Customer acquisition efficiency has improved. cities and below has increased significantly. The First of all, in the short to medium term, from the country was hit by the pandemic during the perspective of the industry as a whole, the large-scale migration period around the Spring customer acquisition cost has decreased. Most of Festival. Regardless of whether students the leading players believe that the market remained in first-tier cities such as, Beijing, strategy of spending money in the early stage and Guangzhou, Shenzhen, or lower-tier cities, the occupying the largest market and making money delay of schooling in various places allowed the in the later stage will make the company bigger students in regions that previously had little and stronger. As a result, the cost of acquiring access to online education go online and learn. customers in the online education industry has risen dramatically, with an average of CNY 1,000.
28 Education industry
We believe that the penetration rate of online ‘To B’ online education companies that serve education in the third, fourth, and fifth-tier public colleges will benefit the most out of the cities will increase on the basis of the increase situation. The owners and the principles of in the penetration rate of the online education offline education companies will be dependent industry. on online firms more than ever, this will improve the relationship and the trust between But based on the above three points, can it be the two. The level of parental understanding judged that the online education industry has and familiarity with online education products reached an inflection point at a macro level? will improve. Online educational institutions And that once the pandemic is over, will online serving public institutions will compete more education see a downward trend? Will it usher fiercely to grab a big piece of the cake. However, in an explosive growth of the industry? these firms will have to face challenges from Explosive growth requires the improvement of powerful internet companies such as Huawei, the entire industrial supply chain, and the Alibaba, and Tencent. education industry is complicated. It is a slow industry. The process of completing an As for ‘to C,’ we believe that companies education product takes time. It starts with specializing in exam preparation track will teaching, researching, operating, selling, and benefit while others focusing on extracurricular then delivering results. education will see their market share further erode. Furthermore, judging from the size of the It can be seen that situations such as the companies, industry leaders will rather not pandemic will bring benefits to the industry at a worry but small and medium online education macro level, but it is too early to conclude institutions will face difficulties. The two leaders, whether the education industry has been such as New Oriental and TAL, will inevitably completely transformed. rely on their stronger resistance to the pressure, New Oriental backed online education firm greater brand effects, and more abundant Koolearn’s COO, Pan Xin analyzed, “This capital reserves to smoothly transition to online pandemic is good for online education, but it is and overcome difficulties. Koolearn and Xueersi, not good for online education institutions; it is which are owned by the two giants, will rapidly bad for offline education, but it is not bad for harvest a large wave of traffic. Leaders to be offline education institutions. The winner is firms such as Yuanfudao, GSX Techedu, and the online education.” Indeed, from a micro-level Zuoyebang, will also see its users grow. GSX perspective, for an individual educational Techedu recently claimed to have attracted 15 institution, there will be an inflection point. million students to sign up, Yuanfudao said that it has attracted more than 20 million students to K12 Online education market scale register, and Zuoyebang attracted more than 28 (million people) million students to register. 300
29 18 6 9
2016 2017 2018 2019 2020E
Source: EO intelligence, EqualOcean analysis
29 Education industry
At the same time, for small and medium-sized If such a company proves that the transition institutions, the situation doesn’t seem to be from media to education is an important path for promising. On one hand, it has to bear the the commercialization of content platforms, pressure of rent, labor cost, cash flow and other then other content companies that want to aspects that all educational institutions have to switch to education need to consider the changes face. On the other hand, there are free lessons in media forms and channels. on the Internet today. There is no shortage of Looking at the industry as a whole, there has high-quality content from educational been an increase in the adoption of smartphones institutions with big established names. and other mobile devices in China, which is In addition to various online and offline pushing the growth in the market. The increased education institutions, more and more content- per-capita spending capacity of the Chinese based companies are transforming into population and the flexibility in online education education companies to further expand the offerings have been key to driving the online educational extension. market. Training programs conducted by native English-speaking teachers can be easily accessed Luoji Siwei also known as Dedao, a China-based through the online medium. talk show, has a mobile app which allows users to subscribe to learn from key opinion leaders. Other than the pandemic, the advantages of In the early days, it released voice content online learning have gained more recognition through its WeChat public account and later from the parents over the recent years. Data published a systematic introduction to the shows that the online learning market for content of the book. Then, it launched an APP to children in 2018 was as high as 26.59%, way create a systematic online column course, and higher than the average online penetration rate now it has been extended to the offline ‘Dedao of the education industry overall. The Internet University,’ covering extensive education not only brings high-quality foreign teacher consumption scenarios. resources to Chinese families but also saves a lot of time for both parents and children. Therefore, parents are more inclined to choose online learning for their children.
Main concerns of off-line platforms in China
Less revenue 86%
High rent cost 75%
High labor cost 40%
Cash-flow pressure 34%
Competition from online platform 29%
Labor turnover 20%
Others 1%
Source: EO intelligence, EqualOcean analysis
30 Retail & consumer industry
COVID-19’s impact on China’s retail & consumer Meanwhile, the negative economic results were industry triggered by the demand end, as consumers were quarantined at home. Due to this The coronavirus struck China at the start of characteristic, the discretionary goods and December 2019. To fight against the pandemic, durables began to suffer more compared with Beijing imposed the most extensive and strict necessities. quarantine in history. Factories shut, public events were canceled, and people were ordered It’s worth mentioning that, from January to indoors. This raised the awareness of the public; February, the online retail sales of consumer meanwhile, it also changed their daily behavior, goods (accounted for 21.5% of the TRSCG) in and inevitably a slump in consumption was one China increased by 3.0% year-on-year, achieving direct result. a counter-trend growth. In response to the adverse impact of the pandemic, retailers and The total retail sales of consumer goods (TRSCG) catering enterprises actively developed their reported CNY 5.21 trillion for January and online businesses to boost online sales. February. Among them, commodity retail sales According to the data from several delivery dropped 17.6%. Mobility related retail sales saw a platforms, ‘contactless delivery’ accounted for bigger fall – the automobile and petroleum over 80% of total orders between January 26 and products sales above designated size slumped 37% February 8, 2020. and 26.2% year-on-year respectively; the catering sector fell by 43.1%; the accommodation sector From a comprehensive view, the impact of the revenue reported a plummet of almost 50%. pandemic is short-term, external, and controllable in China. With various policy Consumption data, which had been the most reactions taking effect, companies sped up work robust indicator, hit a new record low. The TRSCG resumption while the order of production and has not been negative since January 1995. Even in life gradually resumed. However, it’s worth the SARS pandemic period in 2003, the growth rate digging into the subsectors in the retail & of this index only decreased from 9.3% in March consumer market, unveiling the risks and 2003 to 4.3% in April. opportunities within.
Chinese TESCG after pandemic saw a record fall
The total retail sales of consumer goods and accumulate growth rate of China
TRSCG (in tn CNY) 6.61 -21.2%
5.21
3.81 3.81 3.88 3.38 3.39 3.45 3.17 3.06 3.30 3.31
2019Jan- Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2020Jan- Feb Feb
Note: China’s National Bureau of Statistics releases the combined economic indexes for the first two month each year due to the Spring Festival Source: National Bureau of Statistics, EqualOcean analysis 31 Retail & consumer industry
The impact of the pandemic on different retail Due to the need for contactless service during channels varies greatly this outbreak, we have observed the rise of e- commerce platforms that contain the most Based on the characteristics of each kind of diversified SKUs, instant delivery’s capacity and retailer and the attributes of the products the emerging power of new retail stores. JD.com, carried by each channel, we researched the WeChat mini programs and Freshippo under impact of each retail channel and analyzed the Alibaba are leaders in this area (we delve more possible current and post-pandemic influence. into these in part 2). During this period of time Please be noted there may have some overlaps they have acquired a bunch of new customers, in channels and business models among many of whom are seniors who used to go to the retailers due to the significant changes in the community fresh grocery stores or supermarkets transformation of China’s retail & consumer for daily necessities. market. After the pandemic, we expect many of them From the graph below, we separate the retail will return to their usual habits of purchasing channels based on the extent of influence they offline, because physical stores satisfied their have during this period; we also separate them needs for social networking. However, some further by the products they sell, whether daily part of them will keep using the new approaches, necessities or discretionary items. since the home delivery services can meet some of their demands conveniently – for example, to bring heavy things like bags of rice or deliver urgent items fast while saving some time.
The impact on different retail channels amid the coronavirus outbreak The channels which can provide contactless delivery services are better-off during the pandemic
E-commerce platforms New retail store Little or Community- positive based fresh effect grocery Front warehouses
Supermarket
Convenience store
Department store Negative effect Traditional farmers market Shopping mall
Daily necessities Discretionary items
Source: Roland Berger, EqualOcean analysis
32 Retail & consumer industry
Compared with other traditional offline retail A large number of shopping malls have initiated channels, supermarkets have been relatively a rent-free and rent-reduction plan to reduce the less affected by the pandemic. According to the operating pressure on tenants. Operators National Bureau of Statistics, the retail sales of include the Wanda Group, SCPG, China supermarkets and membered chain stores Resources, Seazen and Century Golden increased by 1.6% and 9.2% respectively on a Resources Group, all hoping to bring a positive year-on-year basis; the retail sales of support to the resumption of business as usual. community-based grocery stores and Retailers’ practices convenience stores decreased by 14.3% and 10.8% respectively. After the pandemic, most JD.com has benefited a lot from its self-operated supermarkets will still face competition from supply chain and logistics during the pandemic. online players and omnichannel challenges. As well as its fast delivery speed compared with Without the adjustment of business models and other outsourced e-commerce counterparties, it thorough digitalization, it is difficult to achieve has also enlisted self-driving robots to bring long-term growth. goods to medical workers in Wuhan and provide delivery services to pharmaceutical companies The traditional farmers market has seen a heavy and hospitals. toll on its sales from the beginning of February, since a large number of consumers turned to JD.com has implemented subsidy support more sanitized supermarket channels, the measures to ensure that the burden is not contactless e-commerce platforms. In the past placed on the 250,000 merchants who use JD’s few years, the market share of the farmers warehouse services. The measures have cost market has been continuously replaced by CNY 1 billion in expenses, deployed in order to supermarkets and e-commerce players at a rate lessen the pressure of logistics fees, traffic and of 1% to 2% per year. In the medium to long advertisement and to support their promotion term, this situation is expected to remain activities. Meanwhile, JD has also maintained a despite the effects of the coronavirus. steady flow of consumer goods during the crisis. By collaborating with brand partners – Shopping malls and department stores, which sometimes even utilizing JD Logistics to pick up provide mainly discretionary products and the necessary inventory directly from brand durables such as home appliances and luxury warehouses – JD has positioned itself as a items, are undoubtedly the worst hit. The steep reliable source for the needs of the public. decline in sales will see recovery after the pandemic. WeChat mini programs have been used by many retailers to offer contactless pickup to ensure As opposed to some observers, who expect a safe delivery to customers and to lower their drastic consumption rebound, we hold a more operational risks. On February 18, 2019, WeChat conservative view. In recent years, shopping launched a ‘Smart Retail’ entry point on its centers have adjusted their business model, payment page, where the mini-programs of welcoming more ‘non-retail’ merchants in merchants such as Miss Fresh, Yonghui catering and entertainment and media into the Superstores, Uniqlo and Walmart are handier mall. Therefore, the sunk loss will hardly be for online buyers to access. WeChat also compensated for, bringing more uncertainty to released the data of mini programs during the these two channels as well as the merchants pandemic period. From January 20 to February operating in the shopping centers and 8, the orders of fresh groceries increased by department stores. 149%, and the number of transactions in community-based e-commerce surged 322% year-on-year. 33 Retail & consumer industry
Freshippo, Alibaba’s self-operated grocery chain, What about each segment of the consumer has become a lifeline for many residents in China market? during the coronavirus outbreak. According to a Based on a consumer survey conducted by survey conducted by CMB Securities on February KANTAR during the pandemic period from 2, Freshippo was the third largest fresh grocery February 6 to February 9, we find that the channel in Beijing, Shanghai, Guangzhou, results also predict a recovery for categories in Shenzhen. The self-operated delivery service is offline channels and the discretionary items. the key reason for its outstanding performance However, the pure online consumption during the pandemic. However, the fulfillment categories such as live streaming, short video capability dropped dramatically due to the labor making and the front warehouse business will shortage and the sharp rise of grocery deliveries need to spend some effort in retaining users. across the country. Freshippo announced that 500 staff from Yunhaiyao and Youth Restaurant would join the company. It also said another 1,000 employees from Xibei, and 500 more staff from other restaurants, would form part of its temporary workforce.
The impact of the coronavirus outbreak on different consumption categories
Categories of Categories of consumption demand that is likely to consumption demand remain the same that is likely to decrease
65% 63% 57% 57% 49% 50% 52% 50%
26% 21% 20% 16% 16% 19% 19% 19% 17% 17% 17% 17% 12% 14% 13% 15%
Online Luxury goods Small home Major home Consumer Wine Sports Medical entertainment appliances appliances electronics equipment cosmetology
Categories of consumption demand that is likely to decrease 61% 55% 52% 53% 49% 48% 47% 48% 48% 42% 38% 35% 30% 30% 30% 30% 27% 25% 23% 23% 18% 19% 20% 17% 14% 15% 15% 12% 11% 10%
Dining out Travel Outdoor Pandemic Food & Insurance Apparel & Personal Cosmetic Gym activity protection beverage accessories care products kit Increase Constant Reduce
Source: KANTAR, EqualOcean analysis 34 Retail & consumer industry
Winning in the post-COVID-19 era Short video platforms, which experienced a surge of traffic during this period, welcomed more Before the coronavirus outbreak, the Chinese users with longer durations. Over 40% of government had been carrying out structural interviewees said they spent significantly longer reforms in response to the economic slowdown. time on the platforms than before. Other media By transforming the country from an platforms such as news, social media and online investment and manufacturing-driven economy music also saw increased user time with at least to a consumption and service-fueled one, the 26% of interviewees staying longer in their apps. country has injected more vitality into people’s consumption upgrade. Therefore, amid the Despite the impact of the pandemic on people slowdown of the pandemic in China these days, and their consumption behavior, the more the robustness of the consumer & retail sector is profound transformation is hinged on the retail expected to support the country more than industry chain. other industries. Chinese retailers now are widely aware of the During the period of the spread of Covid-9, we importance of industrial chain management, and also observed Chinese consumers’ change of new models emerge in the retail industry chain behavior in several aspects provided such as online mini programs, WeChat moments, opportunities for many new sectors. Based on a short video and live-streaming were applied consumer survey conducted by KANTAR from extensively by many retailers during the February 6 to February 9, we noticed that 84% of pandemic. Online-offline convergence and the interviewees tried at least one new service. community-based marketing continues to grow. Among them, online healthcare service, online- After the COVID-19 crisis, what won’t change are education, remote working and paid online the more demanding consumers who no longer entertainment were the most popular services conform to traditional retail scenes and product during this period. categories. However, retailers in China are now aware of the urgency to collaborate actively and to commit to advance inclusive growth strategies.
The pandemic changed people’s behavior and generated new opportunities
Things people try for the first time during the pandemic period
34% 33% 29% 26% Online Healthcare Online Education Telecommuting Paid Online Service Entertainment
21% 18% 14% 13% Live-streaming on Social-networking Indoor Fitness Online Banking Mobile Phone E-commerce Equipment
Source: KANTAR, EqualOcean analysis
35 SaaS industry
Like food services and online education, In the meantime, Feishu (飞书), the work collaboration is undergoing an unprecedented collaboration platform designed by TikTok’s period that will decide the market landscape of parent company ByteDance, also rushed in the the future. front. Worth to mention, Feishu is the version for China market and its sister app, Lark. is for Work collaboration tools were pushed to a markets outside China. vertex in one month. The remote work topic peaked as a search term On the first back-to-work day after the extended on February 10th – the first workday after Spring Festival, more than 200 million holidays. However, only a few companies employees adopted a popular online resumed on-site work mode. Ding Talk attracted collaboration application DingTalk, an Alibaba's the most attention, then followed by WeChat division. According to a report published on Work and Feishu. Meanwhile, Ding Talk was February 2 by the Chinese recruiting website topped in both IOS and Android app stores Zhaopin, 32.1% of employees in IT, during February and sustained the ranking for telecommunication, electronics and the straight 29 days. Internet will work from home during this period. As Ding Talk disclosed last year, it had accumulated over 200 million individual users Though the industry customer acquisition cost and 10 million enterprise accounts on its (CAC) plummeted, not all the players will thrive platform. Though the number presents a great in the future. And the market has already success, the penetration of SaaS in China tells a shown us winners, or at least now. different story. DingTalk was the most downloaded app in China's iOS App Store, followed by Tencent Conference and WeChat Work (ranking No. 5) on February 12. A US video conference application, Zoom, went from being the around 1200th most famous app to the 36th most popular on the same day.
Remote work’s-related keywords have been frequently searched since the holiday ended Count of keywords appeared in headline of news
500,000
400,000
300,000
200,000
100,000
Jan 10 Jan 19 Jan 28 Feb 06 Feb 15 Feb 24
Source: Baidu index, EqualOcean analysis SaaS industry
How are the twins, Lark and Feishu? Alibaba is the behemoth in e-commerce, ably covering B2B, B2C and C2C. The e-marketplace is The three platforms Ding Talk, WeChat Work and the backbone of Alibaba’s business and products Feishu have become the most popular work and services developed in the past two decades collaboration tools since the quarantine. They have contributed considerably to today’s feature instant message, file sharing and some prosperous e-commerce. Experienced in other OA functions. Being different from Ding communicating with B-side clients, Alibaba’s Talk and WeChat Work’s parent companies, Lark, Ding Talk was born with a natural advantage – or say Feishu, is the first approach from relying on the mega-size client pool of Alibaba. ByteDance to dabble in the ‘to B’ business world. Compared with the 6-year-old Ding Talk, Feishu As an inner-incubated OA software, Feishu tries seems to be a latecomer in the OA game, as it was to make internal communication and work founded in 2017. ByteDance is not as enriched in collaboration run smoothly; all other OA software 2B experience as Alibaba, but from the offerings apparently failed to satisfy ByteDance’s perspective of digital marketing, it is a big vendor own needs. The so-called ‘product factory’ on a global scale and is still in a fast-growing launched Feishu as early as 2017. In looking at status. Ding Talk is well-design for the majority of ByteDance’s investment activities, traits are China’s firms based on Alibaba’s understanding apparent. of its clients. WeChat Work relies heavily on the Since 2016, ByteDance has begun to invest in and national IM app WeChat, which has a billion- buy out startups whose core product might be sized user pool. Either Feishu or Lark hardly integrated into Feishu. For instance, Sortime, a depends on ByteDance’ pre-existing products like calendar management SaaS startup, was Toutiao, TikTok and Douyin (Chinese version of purchased by ByteDance in 2017, and its CEO TikTok), but its design fits better for Internet Chen Hao joined the Feishu team at the time. In companies because Feishu was originally the meantime, ByteDance granted Feishu the designed for ByteDance, the biggest new unicorn highest degree of freedom – almost an app producer in the world. independently-run company. Different products are designed for different Founder of ByteDance, Zhang Yiming, wrote on needs and needs are changing as enterprises step Weibo, “Develop a company as a product.” into the next phase. Because of COVID-19, the ByteDance has been mocked as the Foxconn of quarantine flooded millions of new users into OA, mobile applications for its fast pace in product and Feishu stands at the same beginning line with development. It is undeniable that ByteDance is Ding Talk and WeChat Work. Ding Talk and excellent in making C-end products like Toutiao WeChat Work are just as equal as Feishu – at least and TikTok. ByteDance has green fingers in it is a comparatively fair game for Feishu. How culturing the garden of million-user apps for the does Feishu rush to the front when Alibaba’s C-end market. Still, it must know how to improve business ecosystem has rooted deeply and firmly enterprises’ efficiency to stand in the 2B service in the land of China? The question can apply to market. This pre-requisite is bringing success to other SaaS services created by giants like Huawei Feishu’s competitor Ding Talk in China, even and Tencent. The sunny side of this question goes though its parent company, Alibaba, is not the back to the beginning of the topic – the SaaS best ‘product manager.’ market is still a blue ocean in China and the market is yet to be educated.
37 Through the darkness, we see hope
Chinese consumers are more optimistic about the economic outlook compared to a month ago
Confidence in China’s economic conditions after COVID-19 (percentage of respondents)
Optimistic Unsure Pessimistic Optimistic: the economy will rebound within 2-3 months and grow just as strong or stronger than before COVID-19 43% 48% Unsure: the economy will be impacted for 6-12 months or longer and will stagnate or show growth thereafter 56% 46% Pessimistic: COVID-19 will have a long lasting 1% 6% impact on the economy and show regression/fall Feb 21-24 March 20-23 into lengthy recession
Source: McKinsey & Company, EqualOcean analysis
Chinese consumers are starting to go back to work
Expected change time allocation (percentage of respondents)
Decrease Stay the same Increase
Working and work-related activities 10% 40% 50% Using social media 20% 44% 36% Reading news online 23% 41% 36% Watching live news 23% 42% 35% Watching video content 25% 40% 35% Online shopping for groceries 23% 45% 32% Online shopping for non-food purchases 23% 45% 32% Texting, chatting, messaging 24% 43% 33% Watching movies or shows 24% 44% 32% Reading of fiction/non-fiction for personal interest 29% 40% 31% Playing video games 33% 38% 29% Watching live TV programming 32% 43% 25% Reading physical newspapers 38% 40% 23%
Source: McKinsey & Company, EqualOcean analysis
Economist Robin Xing now sees downside risks Falling demand and disrupted supply chains will to the country's growth, due to weaker demand trigger a global economic recession. However, from the US and other regions. Meanwhile, a strong monetary and fiscal policy responses under weaker job market, combined with prolonged way could set the stage for a rebound in the second social distancing could constrain its domestic half of 2020. We estimate that the pandemic-stirred consumption recovery. His base case for economic slump will slowly ebb away starting China’s economy is now 4% growth for 2020 and from the third quarter of this year. 7.5% for 2021.
38 Our services
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For more information, contact us at [email protected]. This report is based on research analysis of information provided to EqualOcean through various channels. Although EqualOcean has made every effort to use comprehensive data from reliable sources, the firm has not independently verified any such information provided and makes no representation or warranty, express or implied, that such information is accurate or complete. All the projections and conclusions contained herein are based on the information described above and should not be construed as definitive forecasts or guarantees of future performance or results. This report is not investment advice and should not be relied on for such advice or as a substitute for consultation with professional financial advisors.
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