SECTOR BRIEFING number DBS Asian Insights DBS Group74 Research • May 2019 Greater Bay Area In-depth Study 19
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Greater Bay Area In-depth Study
Carol WU Danielle WANG, CFA Patricia YEUNG [email protected] [email protected] [email protected]
Ken HE, CFA Tsz Wang TAM, CFA Mark KONG, CFA [email protected] [email protected] [email protected]
Dennis LAM Chris KO, CFA Vincent YANG [email protected] [email protected] [email protected]
Rachel MIU Ken SHIH Jason LAM [email protected] [email protected] [email protected]
Mavis HUI Manyi LU Susanna CHUI [email protected] [email protected] [email protected]
Produced by: Asian Insights Office • DBS Group Research
go.dbs.com/research @dbsinsights [email protected]
Wen Nan Tan Editor Martin Tacchi Art Editor 19
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04 Executive Summary 11 New policies to support growth 25 Transform into a service driven economy 27 Growth and de-growth industries 36 Automobile Sector 42 Education 54 Environmental 61 Financial Services 72 Healthcare 78 Home appliances sector 86 Infrastructure and construction 91 Logistics and warehouses 99 Office 107 Telecommunication, Media & Technology (TMT) 118 Key challenges and risk DBS Asian Insights SECTOR BRIEFING 74 04
Executive Summary
Policy support to power strong growth in the Greater Bay Area
The Greater Bay Area (GBA), which consists of Hong Kong, Macau and 9 key cities in the Guangdong province, is a region that will become an economic powerhouse for China over the next decade. The GBA region, covering only 0.6% of national total land area, contributed c.12% of China’s GDP in 2017 and its economic size is greater than Canada. The latest policy initiatives announced in February will allow GBA to grow at a rate much faster than expected and transform into an innovation hub that is competitive to its global peers, such as San Francisco Bay, characterized by high connectivity of labor, capital and technology. The policy outline also clarifies the mid-term target (2022) and long-term target (2035) for GBA.
The key areas of focus include:
1. Forming an international innovation and technology hub in R&D, financing and commercialization
2. Fostering stronger bonds between Hong Kong and mainland financial systems
3. Accelerating infrastructural, human resources, and financial connectivity
4. Building an international competitive modern industrial system
5. Improving quality of life, work and travel
6. Participating in “Belt and Road initiative” (B&R)
Hong Kong and Guangzhou are given a bigger role to play
In terms of city positioning, Hong Kong takes a central role in being a financial, trade and service centre, and Shenzhen a technology innovative centre. Yet, what was not expected in the policy outline was Shenzhen’s expected role as an innovative area for insurance. Guangzhou will take a central role in developing the regional private equity (PE), property rights and commodities market, and Hong Kong to play a central role in international aviation and risk management. In addition, the outline has adjusted the sequence of key development areas and put innovation at top priority and added new contents to put ecological conservation on the agenda. While Shenzhen is well expected to lead innovation DBS Asian Insights SECTOR BRIEFING 74 05
in the region, we also expect Guangzhou and Hong Kong to play crucial roles in R&D and transforming the region into an innovation hub.
GBA to enjoy higher GBA is positioned to be an innovation hub, which is crucial for China Manufacturing 2025, positioning compared especially under the backdrop of China-US trade war and US’s technology barriers. The to other two regional key target for coordinated development of Jing-Jin-Ji (JJJ) region is to relocate non-capital development plans in functions out of Beijing and build up a modern Xiong’an New District. Regional integration China of Yangtze River Delta (YRD) region has just been raised to national strategy with blueprint to be announced. We expect the key focus for YRD is to coordinate development in each city in the region to enhance competitiveness in global trade.
GBA has great GBA is widely benchmarked to the three international bay areas, namely New York Bay growth potential, (NY Bay), San Francisco Bay (SF Bay) and Greater Tokyo Area (Tokyo Bay). Compared to benchmarking to international peers, GBA’s GDP per capita is lower, due to a lower proportion of GDP international bay areas contribution from the services industry. Yet, we believe GDP per capita will catch up with the industry upgrade. We project GBA’s GDP per capita to expand by > 5.3% CAGR during 2017-2030 (benchmarked to Guangdong Academy of Social Sciences’ projection for GDP per capital of Guangdong province during 2017-2035), translating into a GDP per capita of Rmb265k in 2030, double GBA’s 2017 level and similar to the current level in Tokyo Bay.
Population to grow In addition, GBA’s population density is less than half of Tokyo Bay. There is a lot of room from 70m to over for population inflow, as we benchmark GBA to Tokyo Bay based on geographical and 100m by 2030 with cultural proximity. In fact, GBA’s population grew at a CAGR of 2.1% in the past decade, strong talent inflow much higher than the national average of 0.5%. In addition, Shenzhen and Guangzhou remain the top 1 and 2 cities in terms of population/talent inflow. We expect population in the entire GBA region to expand at a CAGR of over 2.2% during 2017-2030, translating into a population of over >100m in 2030. Therefore, GBA’s larger land area and talent base with higher GDP growth outlook will enhance its potential to be next innovation hub with global impact.
There may be some challenges but foundations already in place to drive growth
Some of the successful elements are also available in the GBA region:
1. Depth of the capital market in Hong Kong and Shenzhen
2. Strong presence of leading academic institutions in Hong Kong and Guangzhou
3. Development guidance from the state such as the GBA policy outline and China Manufacturing 2025 blueprint DBS Asian Insights SECTOR BRIEFING 74 06
Qualities absent are:
1. Culture willing to assume longer term risks for scientific projects (which explains the scarcity of venture capitalists)
2. Strong services economy to drive accelerated growth (though these have been addressed in the blueprint with Guangzhou to become a regional PE hub and numerous policy initiatives to boost the formation of a services-based economy)
GBA to transform to a services oriented economy
Excluding Hong Kong and Macao, serviced industry only accounts for 57% of GDP in the 9 cities in Guangdong. In our view, GBA will follow its global peers’ development path and gradually upgrade its industry cluster to become a services oriented economy. It took around 30 years for SF Bay and Tokyo Bay to move from a manufacturing driven to a services oriented economy, while it was only 15 years for Shanghai. We expect it will take less than 15 years for the GBA’s transformation. On our estimate, services industry’s contribution to GDP in GBA is projected to move from 66% (57% excl. Hong Kong and Macau) to 76% (72%) by 2030. We expect the growth in services industry’s GDP in PRD cities to be stronger than HK and Macao with each PRD city to see the ratio go up by c.10ppts on average during 2017-2030. Shenzhen and Dongguan will see the highest growth in services sector GDP over the next decade.
New energy vehicles We have performed an analysis to identify the potential of each GBA industry based on near- and smart appliance term (2022) growth CAGR and long-term (2030) growth CAGR targets. Our rankings show will post strongest higher value-added manufacturing, such as new energy vehicles (NEV), smart appliances, growth in the mid-term environmental products, consumer IoT hardware, will lead mid-term (2018-2022) growth, followed by online ads, healthcare, insurance, and education services. Over the longer term (2030), several segments under financial services will climb up the list, similar to the past experience witnessed in SF Bay and Tokyo Bay. Warehouse, logistics and office segments will also see strong growth, as the services industry flourishes.
Infrastructure and For example, infrastructure accounted for c.20% of public expenditure in Tokyo Bay area construction usually back in the 1960s/1970s. We expect a similar trend for GBA, especially with the mega play an important projects in the pipeline to improve connectivity and financial support from the Public Private role in early stage of Partnership (PPP) model. Infrastructure expenditure (fixed asset investments, FAI) is expected developing global bay to grow at 8.6%/4.2% CAGR to Rmb1.1trn/Rmb1.3trn by 2022/2030. Major state-owned areas construction companies stand to benefit from the infrastructure project developments, including China Communications Construction, China Railway Construction Co, China Railway Group, China State Construction Engineering, and China State Construction International. DBS Asian Insights SECTOR BRIEFING 74 07
New energy vehicle Guangdong houses two important automobile companies, GAC and BYD, with the former continues to be a near based in Guangzhou and the latter in Shenzhen. As China aims for higher electric vehicle term growth driver (EV) penetration, GBA can become a pilot centre for smart EVs. Combined EV production by these two automakers is expected to grow at 44.2%/19.4% by 2022/2030. Hence, BYD and GAC are two key beneficiaries.
Smart appliances to With rising penetration, smart appliances is likely to see CAGR of 25% in 2017-2021. GBA lead growth in home should offer better prospects for this sector, given continuous young population inflow and appliances sector rising personal income. Smart appliances in the GBA region should stage faster growth than overall China, at a sales CAGR of nearly 30% by 2022 and 25-30% by 2030. Major players such as Midea, Gree and Hisense Kelon are based in GBA area and are well positioned to ride on rising spending power in GBA. Robotics nationwide is expected to grow by 22.7%/20% by 2022/2030, on improving affordability, and premiumisation and consumption upgrade, benefiting Midea with its acquisition of robot manufacturer, KUKA.
TMT is GBA key focus and competitive edge
Shenzhen already accommodates some high-profile hardware/software corporates, given its established talent pool, IT research and supply-chain capabilities. The city will retain its prime position as the preferred city for high-tech corporates to enjoy dense clusters of technology and tax benefits. Besides, we also expect Guangzhou and Hong Kong’s R&D capabilities to catch up. Guangzhou and Hong Kong have a target to increase R&D as a percentage of GDP from 2.4%/0.7% now to 3.0%/1.5% by 2020.
Hardware companies We project the hardware segment to post CAGR growth of 9.9%/7.9% by 2022/2030, with to shift towards AAC Technologies as a beneficiary. Meanwhile, we expect higher growth for the software higher value-added segment, driven by more start-up cultivation as well as synergies generated between internet manufacturing, with companies. The CAGR growth is projected to be 11.3%/9.1% by 2022/2030. Tencent will favourable policy continue to dominate. support We also expect consumer IoT (Internet of Things) hardware to achieve 19.0%/15.2% volume CAGR by 2022/2030, as 5G roll-out could drive internet connectivity from smartphones to other consumer products. We also expect online advertising to achieve higher growth of 21.3%/17.2% CAGR by 2022/2030, as advertisers are increasing their budgets towards online ads due to improving internet firms’ user data analytics capabilities.
Data centres in GBA is another area to see strong growth, driven by establishment of high-tech companies and rising economic activities, and improving network connectivity leveraging on Hong Kong’s position as global carrier hub. Based on linear regression between number of cabinets and GDP per capita, we project number of data centres in GBA to grow at 7.7%/6.5% by 2022/2030 respectively. GDS (GDS US) is expected to ride on the growth. DBS Asian Insights SECTOR BRIEFING 74 08
Healthcare will benefit from rising population and personal income
We expect healthcare expenditure in Guangdong to accelerate from 19% CAGR in 2010- 2016 to 20% in 2018-2022, driven by population increase and rising medical facilities. Judging from the data in 2010-16, Guangdong healthcare expenditure’s CAGR outpaced national healthcare expenditure CAGR by c.4ppts and national healthcare expenditure CAGR doubled GDP CAGR. Assuming a) national GDP CAGR in 2022-30 at 6%; b) national healthcare expenditure CAGR to double GDP CAGR; c) Guangdong’s healthcare expenditure CAGR to outpace the national expenditure by 3ppts, we come up with 15% CAGR growth in GBA healthcare expenditure in 2018-2030. We have also identified three ongoing trends: (1) rising demand for hospitals in Dongguan, (2) rising medical tours to Hong Kong for medical services and pharmaceutical products, and (3) elderly care facilities outside Hong Kong. Potential beneficiaries: Guangdong Kanghua, UMH, UMP, C-Mer Eye Care.
Education to play a key role in transforming GBA from labour- intensive to knowledge-driven economy
Global bay areas typically spent over 30% of public expenditure on education during the period transforming from a manufacturing base to an innovation driven economy. We expect GBA to follow suit. Currently, public spending on education is less than 20%, implying large potential ahead. In fact, during 2011-2016, education expenditure in Guangdong recorded 14.8% CAGR, outpacing GDP CAGR of 8.4%. We expect the high CAGR growth rate to continue given (1) a growing and younger population, (2) high economic growth and income, (3) higher penetration ratio for private education, and (4) improvement of enrolment ratio for higher education. We expect student numbers to expand by 1.5% CAGR by 2022 and a larger CAGR of 2.5% by 2030, due to higher birth rates translating to more student enrolment in the long term. We also project average spending on education to grow at 13.0% CAGR by 2022 and 11.0% by 2030.
K12 schools and We expect K12 schools and tutoring to grow faster than universities, as the sub segment tutoring expected will directly benefit from population inflow as a result of talent immigration programmes. to grow faster than Among the Hong Kong-listed companies, Wisdom Education and China Education Group universities are the main players in GBA. In terms of business opportunities in private education in each city in GBA, we prefer Shenzhen and Guangzhou, followed by Dongguan and Foshan, and then Huizhou and Zhongshan.
Financial industry to contribute >18% of GDP by 2030
Financial industry has played an important role in nursing global bay areas. Currently, the financial industry in Guangdong province (a proxy to GBA) only made up 8% of GDP in 2017. We expect this to ramp up to 18.5% in 2030, translating into a 16% CAGR growth during 2018-2022 and 13.5% CAGR during 2018-2030. The assets and loans of major listed China banks exposed to PRD (a proxy to GBA) grew 9%/12% CAGR in 2012-2017, vs. the national DBS Asian Insights SECTOR BRIEFING 74 09
average of 13%/14%. Still, we expect growth to further speed up supported by robust demand for banking services arising from the regional integration and transformation into an innovation hub. We estimate growth in bank loans/assets located in the GBA area may reach 14%/13% CAGR by 2020 and 12%/11% CAGR by 2030F. Among major listed China banks, China Merchant Bank, China Construction Bank and Agricultural Bank of China have the highest loan exposure to PRD and we believe these three banks are better positioned to capture business opportunities from the GBA.
Growth in insurance China insurers’ per capita premium growth in the Guangdong province reached 22% CAGR in premiums per 2012-17, as compared to China’s average per capita premium growth of 20% CAGR during the capita can’t be same period. Given growth in premiums per capita usually has an exponential relationship with underestimated individual wealth, this suggests that once per capita income has reached a certain level, growth in per capita premium will start to accelerate. We expect insurers’ premium to grow at 20%/16% CAGR by 2020/2030. Ping An, China Life and China Taiping have higher regional exposure.
Peer-to-peer lending GBA’s focus on innovation should offer huge room for the P2P segment. Currently, 20% of (P2P) segment and VC/ the operating P2P platforms are registered in Guangdong, and 5 of the top 20 platforms are PE segment also hold from Guangdong. P2P loans are projected to grow at 5%/17% CAGR by 2020/2030. We also good growth potential expect VC/PE to support new start-ups as growth engines shift. Currently, Guangdong province was ranked no. 4 in terms of VC/PE investments in China in 2018, after Beijing, Zhejiang, and Shanghai. Guangdong is looking at >3,000 PE firms with the number of technology incubators to grow from 399 in 2015 to 800 in 2020. Guangzhou is positioned as a regional PE hub.
Transportation and warehousing one of the longer-term growth drivers, benchmarking SF Bay experience
Improving connectivity and radiating downstream manufacturing to outer areas of GBA will drive growth in transportation and warehousing sectors. Per capita logistics space in GBA is only 0.07 square metres per capita, far below US’s 1.7 and Shanghai’s 0.31 square metres per capita. We expect such a level to grow at least 4 times to Shanghai’s current level, translating into 10% CAGR growth by 2022 and 9.8% by 2030. West GBA to be the major supply, as land supply is constrained in East GBA. Rental CAGR growth was 4-5% during 2013-2017, and we expect such growth to continue, supported by rising economic activities in the region while supply is limited. Rental CAGR is expected to be 3.0% by 2022 and 4.0% by 2030. Major players of warehouse sector headquartered in GBA include Vanke, Blogis (under CNDI), Guangzhou R&F and SF Express. Logistics companies in Hong Kong, such as Kerry, could deploy their extensive global network and IT management systems to Guangdong while utilising the latter’s cost competency and warehouse capacity.
Office sector to directly benefit from industry upgrade and talent inflow
Driven by higher growth in tertiary sector’s GDP, Shenzhen will replace Hong Kong to become the largest Grade-A office market. Our analysis shows strong correlation between DBS Asian Insights SECTOR BRIEFING 74 10
services industry GDP and occupied Grade A office space in the past 12-17 years. We believe this trend will continue. Based on the projected 2030 tertiary GDP for these mega cities, our model shows that Shenzhen’s occupied office space by 2030 will be 18.4m sqms, up 251% from 2017’s level, exceeding Hong Kong. In terms of rental growth, we expect Guangzhou to register the highest CAGR of 5.0% for Grade-A office rental rate in 2017-2030, followed by Shenzhen at 2.8%. Tertiary GDP per sqm for office space is the key ratio to drive future rentals. CR Land and Excellence Group are the major office suppliers in Shenzhen, while Yuexiu Property is the major players in Guangzhou.
Rising awareness of environmental protection.
“Taking forward ecological conservation” was newly added as a key development area in the GBA blueprint, highlighting its importance. In fact, Shanghai has also witnessed superior growth in environmental related industries. As environmental investments as a percentage of GDP will ramp up from 0.5% currently to 0.7%/1.0% in 2022/2030 , we expect the sector to grow at 18.0%/13.0% CAGR by 2022/2030. Canvest and Dongjiang have higher exposure to Guangdong. DBS Asian Insights SECTOR BRIEFING 74 11
New policies to support growth
New strategic mission to drive strong economic growth
History of the Greater The concept of regional cooperation between Guangdong province and Hong Kong/Macao Bay Area was firstly proposed in the” Outline of the Pearl River Delta (PRD) Reform and Development Plan” in late-2008. The concept has since been frequently mentioned in various government reports over the past years. On 1 July 2017, the “Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Bay Area” (深化粵 港澳合作 推進大灣區建設框架協議) was signed in Hong Kong, outlining targets and key development areas. The long-awaited “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” (粵港澳大灣區發展規劃綱要) was officially announced on 18 February 2019, beefing up content based on the framework agreement, plus including mid-term and long-term targets.
Much more than PRD The well-known PRD region includes Guangzhou, Shenzhen, Zhuhai, Foshan, Dongguan, Zhongshan, Huizhou, Jiangmen and Zhaoqing. PRD was first proposed in 1985, at the initial period of reform and opening-up. The mission for PRD was to earn foreign exchange via exports, bring in advanced technology, drive up economic development in inland areas via a window demonstration effect. Over the past three decades (1991-2018), the economic size in the PRD region has grown 65 times to RMb 8.1 trillion in 2018.
New strategic mission With an area covering 56,000 square kilometres (sq km) and a total population of 70 million as of the end of 2017, the Greater Bay Area (GBA) is a geo-economic union of 11 cities, including nine cities (PRD) in Guangdong province and two special administrative regions of Hong Kong and Macao. With slightly broader geographic coverage, GBA is under “One country, two systems”, plus three currencies and customs. While the area accounts for only 5% of China’s total, it contributed 12% of China’s GDP, and the economic size is similar to Canada. Just Shenzhen alone, its GDP size is similar to Norway, and surpassed Hong Kong, Demark, and Singapore. In some areas within Shenzhen, the wealthy level in terms of GDP per capita, such as Nanshan, is similar to Singapore and higher than Hong Kong. Based on 40 years of success since opening up, the new mission for GBA is to build academic/ R&D alliances inside the region, developing it into an international science and technology innovation centre and expand through China Manufacturing 2025 initiatives. DBS Asian Insights SECTOR BRIEFING 74 12
Greater Bay Area
GUANGDONG
Guangzhou Zhaoqing Huizhou Foshan Dongguan Zhongshan Jiangmen Shenzhen Zhuhai Hong Kong Macau
CHINA
Source: DBS
Higher importance In our view, the GBA development is of higher importance than any other initiative as the than Yangtze River aim is to develop the GBA into an international innovation and technology hub, which caters Delta Region (YRD) and to China Manufacturing 2025. Among the three regions, Yangtze River Delta Region (YRD) Jing-Jin-Ji (JJJ) regions is larger in terms of regional area, population and GDP. In addition, economic development with GBA’s focus on is more balanced across the cities in YRD. Yet, GBA stands out in terms of GDP per capita, innovation due to a higher proportion from the tertiary or services industry in Hong Kong and Macao. Regional integration of the YRD region has just been raised to national strategy level with blueprint to be announced soon. We expect YRD’s key focus is to coordinate development in each city in the region to enhance competitiveness in global trade. The key priority for the coordinated development of Jing-Jin-Ji (JJJ) region is to relocate non-capital functions out of Beijing and build up a modern Xiong’an New District. The JJJ region covers Beijing, Tianjin and Hebei province. DBS Asian Insights SECTOR BRIEFING 74 13
GBA GDP comparison 2017* in RMB bn
Source: DBS HK, CEIC
GBA GDP breakdown 2017* in RMB bn
Source: DBS HK, CEIC DBS Asian Insights SECTOR BRIEFING 74 14
GDP comparison (2017)
Source: DBS HK, CEIC
GDP per capita comparison (2017)
Note: Nanshan is a district in Shenzhen Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 15
% to the total GDP of mainland China, Hong Kong and Macau
Source: DBS HK, CEIC Comparison of three coastal regions in China GBA YRD Jing-Jin-Ji Core city Hong Kong, Macao, Shanghai, Hangzhou, Beijing, Tianjin Guangzhou, Shenzhen Nanjing No. of cities 9+2 26 11 National strategy Development Plan for the Regional Integration for Coordinated Development Guangdong-Hong Kong- the Yangtze River Delta for the Beijing-Tianjin- Macao Greater Bay Area Region Hebei Region Outline Announced Drafting Announced Key target An international n.a. Relocating non-capital innovation and functions from Beijing technology hub and building up a modern Xiong'an New District Area ('000 skm) 56 219 217 Population (m) 69.6 128.3 112.5 GDP (US$ trn) 1.6 2.6 1.3 GDP per capita (US$ 000) 23 13 11 Urbanisation 70% 69% 49% Tertiary as % of total GDP 66% 54% 59% Shortest intercity distance (km) 10 30 50 Macau-Zhuhai Suzhou-Wuxi Beijing-Langfang Longest intercity distance (km) 200 750 440 Zhaoqing-Huizhou Lianyungang-Wenzhou Chengde-Shijiazhuang No. of airports (excl. military) 7 16 9 No. of berths 1,817 1,828 373 Length of highway (km) 218,085 289,649 227,221 Free trade area (sq km) 116 241 120 Source: CEIC, CBRE, DBS HK DBS Asian Insights SECTOR BRIEFING 74 16
GDP components China’s Central government aims to create a mega-hub, leveraging on each city’s competitive inferior to global peers advantages. The fast development of the region in past decades have already laid a solid foundation for another breakthrough. The GBA region, covering only 0.6% of national total land area, contributed c.12% of China’s GDP in 2017. The GDP per capita in the area exceeded US$23,000 in 2017, far beyond national average of US$8,800, but the level is still lower than the three international bay areas. The key reason is tertiary industry’s contribution to GDP is relatively low at 66% vs. peers’ 82-89%. Excluding Hong Kong and Macao, the ratio for the rest of the cities in GBA is only 57%.
Comparison with international bay areas
GBA SF Bay NY Bay Tokyo Bay Area ('000 km) 56.0 18.0 22.0 37.0
Population (m) 69.6 7.7 20.2 44.0
Population density (person/km) 1,185 434 686 2,617
GDP (US$ trn) 1.6 0.8 1.7 1.9
GDP per capita (US$ 000) 23 102 82 42
Tertiary as % of total GDP 66% 83% 89% 82%
Source: CEIC, CBRE, DBS HK
More room for population In terms of population density, GBA’s is higher than SF Bay and NY Bay, but is less than half density and GDP per capita of Tokyo Bay. Zhaoqing, Jiangmen, and Huizhou occupy 60% of total gross floor area (GFA) to catch up, which implies in GBA, yet only has 20% of the total population in the area. Even for Shenzhen, population significant growth in density was slightly below 6.0k/sq km, below Tokyo’s 6.4k/sq km. Using Tokyo Bay as a population and benchmark based on geographic and cultural proximity, we think there is more potential economic strength for population density in GBA to go up further, by leveraging on improving connectivity inside the region.
Tokyo Bay witnessed rapid population growth in 1950s/1960s, with population CAGR of 4.0%/3.7%. In fact, the population growth was faster than expected during that time. In the late-1950s, the government was looking at a population of 26.6m for Tokyo Bay by 1975, which was raised to 33.1m in late-1960s. After the metropolitan area reached maturity in the 1980s/1990s, population CAGR slowed down to 1.8%/1.3%.
For GBA, population CAGR in the past decade (2007-2017) was 2.1%, much higher than national average of 0.5%. In addition, growth has been accelerating lately, as several municipal governments within the GBA have launched various talent immigration programmes over the past few years. Shenzhen has also initiated a favourable personal income tax scheme (Qianhai Pilot Zone) to attract overseas talent. Also, Shenzhen and DBS Asian Insights SECTOR BRIEFING 74 17
Guangzhou remain the top two cities in terms of population absorption, accordingly to Baidu’s research report on city vitality in China (中國都市活力研究報告). Shenzhen’s and Guangzhou’s municipal governments are targeting population CAGR of 2.4%/1.6% by 2030. We expect population in the whole region to grow at a CAGR of >2.2% during 2017-2030, translating into a population of around100m in 2030.
With the industry upgrade in the region, GDP per capita will also catch up with its global peers. Guangdong Academy of Social Sciences (廣東省社科院) is expecting GDP per capita to expand at a CAGR of 5.3% in Guangdong province up to 2035. We expect GDP per capita in GBA to achieve at least similar CAGR growth in 2017-2030. In fact, GDP per capita grew at a CAGR of 6.7% in the past decade (2007-2017). A similar growth rate during the next decade will allow GDP per capita in GBA to expand to Rmb265k in 2030, which is double 2017’s level and similar to the current level in Tokyo Bay. In fact, the growth in GBA has accelerated over the past two years, with y-o-y growth sprinting from 5.0% in 2015 to 8.4% in 2017. Population growth and the ramp-up in GDP per capita should be able to support a faster GDP growth trajectory.
Top 10 cities in terms of population absorption (2018)
Rank City 1 Shenzhen
2 Guangzhou
3 Beijing
4 Shanghai
5 Dongguan
6 Suzhou
7 Chengdu
8 Chongqing
9 Foshan
10 Hangzhou
Source: Baidu, DBS HK DBS Asian Insights SECTOR BRIEFING 74 18
Population of Greater Tokyo Area, 1950-2010
Source: Statista, UN, DBS HK
Population CAGR of Greater Tokyo Area
Source: Statista, UN, DBS HK DBS Asian Insights SECTOR BRIEFING 74 19
Various policies to attract talent to GBA City Year Policy Highlights Shenzhen 2010 Overseas talent recognition • Budget of Rmb4.4bn every year to attract 2011 Overseas advanced talent plan talents (or “Peacock plan”) • Rental housing, affordable housing and monetary support 2012 Qianhai talent personal income • Monetary support for overseas talents tax incentive • Favourable personal income tax rate in Qianhai 2014 Talent housing support plan Pilot Zone Guangzhou 2017 Advanced talent recognition/ • Budget of Rmb1.5bn over five years to attract support/subsidy talents 2018 Headquarter economy • Monetary support as well as other convenience enhancementenhancement such as child education, household registration, and etc. Foshan 2018 Reform on talent development • Budget Rmb500m every year to attract talents system • R&D and housing subsidy for talents 2018 Establishment of research centres • Extra monetary support in Chancheng district and talent-hunting platform in Chancheng
Zhuhai 2018 Talent scheme • Budget of Rmb6.7bn for 2018-2023 • Monetary support, or subsidised housing, or shared-ownership housing • Higher mortgage cap under housing provident fund loan
Zhaoqing 2018 Xijiang talent scheme ‘1+10+N’ • Budget set at 1% of previous year’s fiscal income to attract talents • Subsidy for start-ups • Housing/financial supports for talents
Source: CBRE, Governments’ website, DBS HK
To forge vibrant economic engine Blueprint released for The outline for GBA was unveiled lately, setting out goals and directions on key development GBA areas to transform GBA into a world-leading centre of innovation, technology and economic activity. The outline also clarifies the mid-term target (2022) and long-term target (2035).
The key areas of focus include:
1. Forming an international innovation and technology hub in R&D, financing and commercialization DBS Asian Insights SECTOR BRIEFING 74 20
2. Fostering stronger bonds between Hong Kong and mainland financial systems
3. Accelerating infrastructural, human resources, and financial connectivity
4. Building an international competitive modern industrial system
5. Improving quality of life, work and travel
6. Participating in “Belt and Road initiative” (B&R)
GDP per capita in GBA
Source: CEIC, DBS HK
Key adjustments We have summarised the comparison between the outline and framework agreements in compared to previous the table below. framework The key adjustments include:
1. The outline puts more emphasis on innovation and technology and has raised it as the first development area
2. The outline also clarifies GBA’s participation in the B&R initiative DBS Asian Insights SECTOR BRIEFING 74 21
3. The outline has more concrete disclosures of each city’s role. The international aviation hub and risk management centre are new roles for Hong Kong. The outline also defines Guangzhou as a transport hub and a technological, educational and cultural centre. Shenzhen, obviously, will take on the role of a technology innovative centre. Apart from these, some were unexpected, for example, Shenzhen to take on the role of an innovative centre for insurance, and Guangzhou taking a central role in regional private equity (PE), property rights and commodities market
Forging China’s version In our view, the closest comparable to GBA is San Francisco Bay. The key contributing of “Silicon Valley” factors to replicate the GBA as China’s version of “Silicon Valley” are: (1) abundance of venture capital, (2) development guidance from the state, and (3) strong presence of leading academic institutions. In short, it is a junction point for academia, private sector, and the state. The private sector would provide the funding while universities to constantly inject talent flow, and the state would provide development guidance from time to time.
Building academic The concept to develop the “Guangzhou-Shenzhen-Hong Kong-Macao” innovation alliances is a crucial and technology corridor can be traced back to mid-August 2018, yet this was already component to success highlighted as the first part in the “Developing an international innovation and technology of GBA hub” session, which is the first key development area in the recently released blueprint.
Shenzhen is well expected to drive high-tech and R&D in the region, given its established IT research capabilities, supply-chain and talent pool. Yet, we think Guangzhou and Hong Kong also have high potential in R&D and innovation. Firstly, most of China’s prestigious universities are located in Guangzhou and Hong Kong; Two out of 39 universities that are classified into the national 985 programs are located in Guangzhou, providing a continuous pipeline of new talent. In addition, Guangzhou’s cost of living is more reasonable compared to Shenzhen. Improving connectivity and the huge metro construction plan in Guangzhou will also attract talent and increase R&D activities in the city. Moreover, Guangzhou’s R&D as a percentage of GDP was relatively low at 2.4% (2015), and the city is looking to move this ratio up to 3.0% in 2020.
Hong Kong’s position is becoming more crucial, especially given the background of China- US trade tensions (with the focus on intellectual property in China, especially technology).
1. The US has concerns over innovation/technology flowing into mainland China . Yet, Hong Kong is still able to attract and connect global innovation resources, given its special administrative region (SAR) status. Plus, English is one of the official languages in Hong Kong. Therefore, the cross-boundary flow of innovation ideas is important for GBA to learn from international experience
2. Hong Kong also provides an efficient capital market for the region. The Hong Kong Stock Exchange’s recent implementation of Weighted Voting Rights allows tech DBS Asian Insights SECTOR BRIEFING 74 22
entrepreneurs to gain easier access to the capital market, without weakening their control over their companies. Mainland corporates would also be able to raise funds in Hong Kong by issuing both CNY- and USD-denominated bonds
3. Hong Kong is a global carrier hub that is well connected with the rest of the world while China has limited international Internet bandwidth
4. Hong Kong is also catching up in R&D, and expects R&D as a percentage of GDP to double to 1.5% in 2020. This also explains why more and more China enterprises are setting up R&D centres in Hong Kong
R&D as % of GDP in key cities in China
Source: Local governments, CEIC, DBS HK R&D as % of GDP comparison in global bay areas
Source: Local governments, CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 23
China’s top 5 VC/PE regions by investments in 2018
Province/City US$ bn Beijing 50.7 Shanghai 27.5 Zhejiang 22.6 Guangdong 15.0 Jiangsu 10.8
Source: ChinaVenture, DBS HK Outline and key differences from previous frameworks or market expectation Outline Development Plan for the Framework Agreement on Difference from framework or Guangdong-Hong Kong-Macao Deepening Guangdong-Hong market expectation Greater Bay Area Kong-Macao Cooperation in the 粵港澳大灣區發展規劃綱要" Development of the Greater Bay Area 深化粵港澳合作 推進大灣區建設框 架協議" Date 2019-2 2017-7
Principles • To be driven by innovation • To be guided by openness and More emphasis on innovation and and led by reform driven by innovation put 'driven by innovation' to the To open up and cooperate • To achieve a win-win situation first and achieve a win-win through complementary outcome • To be led by the market and • To coordinate development driven by the government and plan holistically • To adopt the early and pilot • To pursue green development implementation approach and and ecological conservation make breakthroughs in key • To share the benefits of areas development and improve • To prioritise ecology and people's livelihood pursue green development" • To adhere to 'one country, two systems' and act in accordance with the law
Positioning • A vibrant world-class city • A more dynamic economic Emphasis on its global influence in cluster region innovation and technology • A globally influential • A quality living circle for Regional participation on the Belt international innovation and living, working and travelling and Road initiative technology hub • A showcase for in-depth • An important support cooperation between the pillar for the Belt and Road Mainland and HK/Macao Initiative • A first-class bay area and • A showcase for in-depth world-class city cluster" cooperation between the Mainland and HK/Macao • A quality living circle for living, working and travelling DBS Asian Insights SECTOR BRIEFING 74 24
Outline and key differences from previous frameworks or market expectation cont.
Targets • By 2022, the framework of Time table for mid-term and long- an international first-class term targets bay area and world-class city More clarification on the four core cluster cities, especially for Guangzhou • By 2035, an international first- and Shenzhen class bay area fully developed, supported by innovation, with HK's role as an international strengthened international aviation hub and international risk competitiveness and influence management centre
Layout • Driven by poles, supported by axes and radiating to nearby areas • Four core cities: Hong Kong, Macao, Guangzhou and Shenzhen Key areas 1. Developing an international 3. To build a global technology Move to top development area innovation and technology hub and innovation hub 2. Expediting infrastructural 1. To promote infrastructure connectivity connectivity
3. Building a globally competitive 4. To build a modern system of Add Shenzhen's role of modern industrial system industries through coordinated innovative area for insurance, development and Guangzhou's role in regional private equity, property rights and commodities
4. Taking forward ecological Newly added conservation
5. Developing a quality living circle 5. To jointly build a quality living for living, working and travelling circle to provide an ideal place for living, working and travelling 6. Strengthening cooperation and 2. To enhance the level of market jointly participating in the Belt integration and Road initiative 6. To cultivate new strengths in international cooperation
7. Jointly developing Guangdong- 7. To support the establishment of Hong Kong-Macao cooperation major cooperation platforms platforms
Source: the State Council, DBS HK DBS Asian Insights SECTOR BRIEFING 74 25
Transform into a service driven economy
GBA to mimic SF Bay’s development path, but at a faster pace
GBA to become With the strong policy support, we expect GBA to follow its global peers’ development a service oriented path and gradually transform its industry clusters and become a service oriented economy. economy It took 30-40 years for global peers to move from a manufacturing driven to a service oriented economy. The percentage of employees in the services sector in San Francisco Bay rose from 57% in 1969 to above 70% in 1999. A similar situation was seen in Tokyo Bay, as manufacturing as a percentage of total GDP dropped by 12ppts during 1955-1999.
Yet, it has taken Shanghai only 15 years to transform to a service driven economy. Given GBA’s position as a R&D hub and Central government’s support, we believe it will take less than 15 years for GBA to become a service oriented economy. On our estimates, the services industry in GBA will account for 76% of total GDP in 2030, a big jump from the current 66%. The huge increase will be from cities outside of Hong Kong and Macao. Services industry as a percentage of GDP in the PRD cities will increase from 57% to 72% during 2017-2030, with Shenzhen and Dongguan to see the biggest improvements.
R&D as % of GDP in key cities in China
Source: CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 26
R&D as % of GDP comparison in global bay areas
Source: CEIC, DBS HK
Tertiary industry output as % of local GDP for each city in GBA , 2017 and 2030
Source: CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 27
Growth and de-growth industries
GBA to see similar growth pattern to Shanghai and San Francisco Bay areas
During past 15 years of Shanghai’s transformation, almost all manufacturing industries decelerated except for production of gas and medical/culture/sports related products. Some manufacturing sectors moved out of Shanghai, such as textile, wine/beverages, and extraction of oil/gas. Auto production was only in line with GDP growth while general industries and computer hardware recorded below GDP growth rates. Meanwhile, growth of all services industries witnessed higher growth during the period, especially finance, real estate and environmental segments.
As San Francisco Bay transformed to an innovation centre, transport/warehouse, education, healthcare, and IT services outperformed, while all manufacturing activities underperformed.
We expect GBA to ride on:
1. Industry upgrade, as GBA aims to be an innovation hub and advanced manufacturing centre,
2. Infrastructure upgrade to support connectivity and mobility
3. Consumption upgrade on rising population and income
Which industrial The GBA blueprint encourages TMT downstream hardware and general industrial sectors to see the production with lower valued added to move to east, west and north Guangdong biggest decline? (outside GBA) or even outside Guangdong. In fact, we have seen some industries such as shoe and toy manufacturing moving to ASEAN countries and we expect such a trend to continue. Shanghai could also serve as a benchmark.
The move of certain manufacturing sectors out of Shanghai, such as textiles, was faster than expected, while lower value added manufacturing had radiated to outer areas of Shanghai. Yet, higher value-added manufacturing will still play an important role in GBA, such as: DBS Asian Insights SECTOR BRIEFING 74 28
1. TMT with focus on R&D and software development and upstream hardware manufacturing
2. New energy vehicles
3. Smart home appliances
4. Sports and entertainment/educational products
5. Water and electricity supply and production
6. Medical device/medicine manufacturing
Which services Like the growth path of other bay areas, services especially professional services will segments to see higher dominate growth, such as: growth? • Transportation and warehousing (logistics)
• Real estate, especially office, warehouse, data centre and senior homes
• IT services
• Scientific research and technical services
• Financial services
• Healthcare and social assistance
• Environmental related
• Cultural, sports, and entertainment
• Education services
This scenario will apply to GBA as well. Using Shanghai as a benchmark, growth of all services industries will be higher than GDP growth except for wholesale/retail and hotel/catering segments. Warehouse segment growth was slower as it had moved out of Shanghai. This might not apply to GBA (GBA would be more similar to San Francisco Bay) given the larger footprint.
As GBA aims to improve connectivity inside the region, we believe infrastructure will benefit most in the early stage. At the early stage (1970s) of building Tokyo Bay, nearly 20% fiscal expenditure was invested into infrastructure. We should see a similar path in the GBA area. SF Bay experience has also shown that transport/warehouse, education, healthcare and information/tech services outperformed on its way to become an innovation center DBS Asian Insights SECTOR BRIEFING 74 29
New energy vehicles We did an analysis to identify the potential of each industry based on near-term (2022) and smart appliance growth CAGR and long-term (2030) growth CAGR. Our rankings show higher value- will post strongest added manufacturing, such as new energy vehicles (EV), smart appliances, environmental growth in the mid-term products, consumer IoT hardware, will lead mid-term (2018-2022) growth, followed by online advertising, healthcare, financial industry (insurance premium) and education services. Over the longer term (2030), several segments under financial services will climb up the list, similar to that witnessed in SF Bay and Tokyo Bay.
Mid-term CAGR growth comparison (2017/8-2022), GBA
Source: DBS HK Long-term CAGR growth comparison (2017/8-2030), GBA
Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 30
Shanghai industrial sectors’ CAGR growth over the past 15 years
Shanghai Industrial sectors 5 year 10 year 15 year CAGR CAGR CAGR Gross Domestic Product 8.0% 10.3% 11.9% Manufacture of Automobile 8% NA NA Manufacture of Railway, Ship,Aeronautics and Other Transport equipment 0% NA NA Comprehensive Utilization of Waste -6% 5% NA Manufacture of Metal Products,Machinery and Equipment Maintenance 21% NA NA Production and Supply of Gas 16% 18% 21% Manufacture of Furniture 5% 6% 15% Tobacco Products 6% 15% 15% Total Manufacture of Auto + Railway, ship and other transport equipment 6% 13% 14% Manufacture of General-purpose Machinery -1% 5% 13% Manufacture of Special-purpose Machinery -2% 9% 12% Production and Supply of Electric Power and Heat Power -6% 6% 12% Manufacture of Raw Chemical Materials and Chemical Products -1% 7% 12% Manufacture of Communication Equipment, Computers and Other Electronic Equipment -3% 3% 12% Manufacture of Medicines 10% 11% 11% Manufacture of Food 4% 10% 10% Manufacture of Electrical Machinery and Equipment -1% 5% 10% Manufacture of Cultural, Educational,Sports and Entertainment Articles 21% 9% 10% Smelting and Pressing of Nonferrous Metals 0% -1% 9% Rubber and Plastic Products 1% 5% 9% Production and Supply of Water 8% 9% 9% Processing of Farm and Sideline Food 2% 8% 9% Manufacture of Instruments and Meters -1% 2% 8% Nonmetal Mineral Products 0% 4% 8% Papermaking and Paper Products -3% 4% 8% Leather, Fur, Feather, Down and Related Products 3% 4% 8% Metal Products 0% 3% 7% Petroleum Refining, Coking and Nuclear Fuel Processing -9% 1% 7% Printing and Record Medium Reproduction 0% 3% 6% Smelting and Pressing of Ferrous Metals -9% -3% 3% Manufacture of Wine, Beverage and Refined Tea -12% -2% 2% Manufacture of Textile Garments, Footwear and Headgear -6% -2% 2% Other Manufactures -30% -5% -1% Textile Industry -13% -6% -2% Timber Processing, Bamboo, Cane, Palm Fiber & Straw Products -5% -2% -2% Manufacture of Chemical Fibers -3% -3% -2% Extraction of Petroleum and Natural Gas -13% -11% -6% DBS Asian Insights SECTOR BRIEFING 74 31
Shanghai industrial sectors’ CAGR growth over the past 15 years cont
Shanghai Industrial sectors 5 year 10 year 15 year CAGR CAGR CAGR Gross Domestic Product 8.0% 10.3% 11.9% Leasing and Business Services 12.3% 17.2% 17.9% Information Transmission, Computer Services and Software 16.0% 14.6% 16.0% Finance Intermediation 15.9% 19.2% 15.8% Scientific Reseach and Technical Services 17.6% 15.7% 15.6% Health Care and Social Work 14.9% 13.5% 14.8% Wholesale and retail services 6.3% 16.1% 14.3% Resident Services and Other Services 9.0% 10.7% 13.7% Real Estate 15.8% 11.9% 13.3% Education 14.9% 10.9% 13.2% Public Administration and Social Organizations 8.5% 11.1% 12.6% Culture, Sports and Recreation 12.6% 9.0% 10.9% Hotels and Catering Services 6.8% 7.2% 3.2% Transportation, Storage and post 7.3% 6.3% 8.9% Water Conservancy, Environment and Public Facilities Management 16.6% 7.4% 8.8%
Source: DBS HK Source: CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 32
SF Bay sectors’ CAGR growth over the past 15 years
San Francisco Bay Area (employment) 5-year 10-year 15-year CAGR CAGR CAGR Transportation and Warehousing 15.57% 7.34% 5.32% Educational services 5.38% 3.82% 3.65% Health care and social assistance 6.34% 4.22% 3.26% Forestry, fishing, and related activities -0.83% 1.33% 2.88% Utilities -0.93% 4.26% 2.68% Real estate and rental and leasing 1.79% 0.70% 2.61% Accommodation and food services 4.40% 2.71% 2.16% Arts, entertainment, and recreation 4.30% 3.06% 1.90% 2.47% 2.05% 1.83% Mining, quarrying, and oil and gas extraction 0.40% 4.40% 1.60% Other services (except government and government enterprises) 3.02% 1.62% 1.35% Information 7.48% 4.07% 1.13%
Finance and insurance 1.18% 1.38% 1.04% Admin support and waste management/remediation services 4.10% 1.66% 0.94% Wholesale trade 3.51% 2.11% 0.60% Construction 5.54% -0.44% 0.01% Retail trade 1.78% 0.17% -0.03% Military -0.40% -0.25% -0.52% Federal civilian -0.67% -0.99% -1.01% Farmproprietors employment 0.27% 0.59% -1.11% Management of companies and enterprises 3.82% 2.60% -1.11% Manufacturing 1.69% -0.17% -1.83% Total employment (number of jobs) 3.71% 1.79% 1.05%
Source: CEIC, CBRE, DBS HK DBS Asian Insights SECTOR BRIEFING 74 33
Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector
Key drivers 2017/8- 2017/8- Projection basis / Stock ideas 2022 CAGR 2030 CAGR benchmark Warehouse GFA Improving connectivity, 10.0% 9.8% Benchmarking Vanke (000002 CH/2202 rising young population, warehouse per capita HK), Guangzhou online retail sales in Shanghai R&F (2777 HK), CNDI (002314 CH), Kerry Logistics (636 HK) Warehouse rental Decent demand while 3.0% 4.0% Benchmarking CAGR limited future supply growth in the past Office GFA - Industry upgrade, talent 8.0% 7.2% Linear regression Yuexiu Property (123 Guangzhou inflow between office space HK) and teriary GDP Office rental - 6.0% 5.0% Teriary industry's Guangzhou occupancy costs Office GFA - 11.5% 10.8% Linear regression CR Land (1109 HK) Shenzhen between office space and teriary GDP Office rental - 0.0% 2.8% Teriary industry's Shenzhen occupancy costs Guangdong Increasing population 20.0% 15.0% National healthcare Guangdong Kanghua healthcare resulting from relaxation expenditure (3689 HK), UMH (2138 expenditure of birth control and CAGR doubles the HK), UMP (722 HK), increasing migration into GDP CAGR; and C-Mer eye care (3309 the province. Increasing Guangdong should HK) medical facilities. outpace Student number Population inflow, 1.5% 2.5% Accelerated trend Wisdom (6068 hk) growth increasing new birth, in past 5 yrs; larger and China Edu Group increase in higher population inflow; 2‰ (839 hk) education enrolment higher birth rate in ratio 2016/17 will translate to student enrolment in long term Avg spending on Higher GDP per capita, 13.0% 11.0% Recorded 13-14% education higher disposable income growth in 2014-16. A slowing down trend as we expect GDP growth to down by 1-2ppt China Data (1) establishment of new 7.7% 6.5% Linear regression GDS (GDS US) Centre technology companies between number of and rising economic cabinets and GDP per activities capita (2) improving network connectivity leveraging on Hong Kong’s position as global carrier hu DBS Asian Insights SECTOR BRIEFING 74 34
Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector cont.
Key drivers 2017/8- 2017/8- Projection basis / Stock ideas 2022 CAGR 2030 CAGR benchmark Communication Expecting favourable 9.9% 7.9% Industry value as AAC Technologies Equipment, policy support, we expect percentage of GDP in (2018 HK) Computers and hardware companies to Guangdong Other Electronic shift towards to higher Equipment value-added products Information More start-up cultivation 11.3% 9.1% Industry value as Tencent (700 HK) transmission, as well as synergies percentage of GDP in software and generated between Guangdong information internet companies technology services Consumer IoT 5G roll-out catalysing 19.0% 15.2% Benchmarking AAC Technologies hardware sales Internet connectivity from national growth (2018 HK) smartphones to other of consumer IoT consumer products hardware sales Online Advertisers spending 21.3% 17.2% Benchmarking Tencent (700 HK) advertising a greater part of their national growth of budget on online online advertising advertising, with improving Internet companies' user data analytics capabilities Online value Higher paying ratio for 14.4% 11.6% Benchmarking Tencent (700 HK) added services digital content national growth of (i.e. online online value added games and services online content) Home Improving household 7.0% 6.9% Euromonitor; GDP & Operators based in appliances income; rising population population growth the Greater Bay Area, of Greater Bay Area; including Midea a case study of San (000333.CH), Gree Francisco Bay Area (000651.CH), Hisense Home Appliances (921. HK / 000921.CH), Vatti (002543.CH), etc. Smart appliances Improving affordability; c.30% 25-30% IHS Markit; Players with stronger consumption upgrade; penetration rates; GDP edge in R&D and rising young population & population growth premiumization, of Greater Bay Area; including Qingdao a case study of San Haier (600690.CH), Francisco Bay Area Haier Electronic (1169. HK), Midea (000333.CH) Robotics Improving affordability; 22.7% c.20% OCN; GDP & Midea (000333.CH), (Nationwide) premiumisation and population growth who has acquired the consumption upgrade; robot manufacturer talent inflow KUKA (KU2.DE) DBS Asian Insights SECTOR BRIEFING 74 35
Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector cont.
Key drivers 2017/8- 2017/8- Projection basis / Stock ideas 2022 CAGR 2030 CAGR benchmark Communication Expecting favourable 9.9% 7.9% Industry value as AAC Technologies Home Improving household 5.0% 4.9% Euromonitor; GDP & Leading players Equipment, policy support, we expect percentage of GDP in (2018 HK) appliances income; rising population population growth of in China including Computers and hardware companies to Guangdong (Nationwide) China Qingdao Haier Other Electronic shift towards to higher (600690.CH), Haier Equipment value-added products Electronics (1169.HK), Midea (000333.CH), Information More start-up cultivation 11.3% 9.1% Industry value as Tencent (700 HK) Gree (000651.CH) transmission, as well as synergies percentage of GDP in software and generated between Guangdong China/HK bank Improving integration 13.0% 11.0% Financial service CMB (3968 HK), CCB information internet companies and connectivity industry as a (939 HK), BOC HK technology percentage of GDP to (2388 HK) services catch up Tier-1 cities Consumer IoT 5G roll-out catalysing 19.0% 15.2% Benchmarking AAC Technologies China/HK Premium/capita to 20.0% 16.0% Continue the same Ping An (2318 HK), hardware sales Internet connectivity from national growth (2018 HK) insurance improve with wealth population growth China Taiping (966 smartphones to other of consumer IoT effect rate, along with the HK), AIA (1299 HK) consumer products hardware sales increase in premium penetration Online Advertisers spending 21.3% 17.2% Benchmarking Tencent (700 HK) P2P “underserved” consumer 5.0% 17.0% Rising penetration and Lexin (LX US) advertising a greater part of their national growth of lending market increasing consumer budget on online online advertising leverage advertising, with improving Internet Automobile Investments into NEV 2.5% 2.0% Government policy on Guangzhou Auto companies' user data investment - production and capacity NEV development (2238 HK) analytics capabilities Guangdong expansion Online value Higher paying ratio for 14.4% 11.6% Benchmarking Tencent (700 HK) Automobile Rise in consumption 3.5% 3.0% Government Guangzhou Auto added services digital content national growth of production power and new car model supportive measures (2238 HK) (i.e. online online value added -Guangdong launches on automobile games and services production hub online content) development Home Improving household 7.0% 6.9% Euromonitor; GDP & Operators based in Automobile Increase in automobile 12.0% 8.0% Rapid development of BYD Co (1211 HK) appliances income; rising population population growth the Greater Bay Area, industrial output investment on car battery the NEV eco-system of Greater Bay Area; including Midea - Shenzhen and NEV development a case study of San (000333.CH), Gree Transport fixed Anticipate rise in 7.0% 4.0% Projected new metro CRCC (1186 HK); CRG Francisco Bay Area (000651.CH), Hisense asset investment transportation demand line expansion and (390 HK); CSCI (3311 Home Appliances (921. - Guangdong within GBA and other infrastructure HK) HK / 000921.CH), Vatti government plans on investments (002543.CH), etc. metro network expansion Smart appliances Improving affordability; c.30% 25-30% IHS Markit; Players with stronger consumption upgrade; penetration rates; GDP edge in R&D and Metro operating Development plan on 7.6% 2.5% Past metro passenger CRCC (1186 HK); CRG rising young population & population growth premiumization, length metro network expansion traffic demand (390 HK) of Greater Bay Area; including Qingdao projections - a case study of San Haier (600690.CH), Guangdong Francisco Bay Area Haier Electronic (1169. HK), Midea (000333.CH) Source: DBS HK Robotics Improving affordability; 22.7% c.20% OCN; GDP & Midea (000333.CH), (Nationwide) premiumisation and population growth who has acquired the consumption upgrade; robot manufacturer talent inflow KUKA (KU2.DE) DBS Asian Insights SECTOR BRIEFING 74 36
Automobile Sector
Automobile sector critical to Guangzhou and Shenzhen’s development
Guangdong is one of the major automobile manufacturing clusters in China. Its automobile sector has flourished over the years and the province is the leader in new energy vehicle (NEV) development. The province houses two important automobile companies, Guangzhou Automobile Co, Ltd (GAC) and BYD Co Ltd (BYD).
The auto sector is an important economic driver to Guangdong’s GDP, as it involves a huge supplier network. The automobile gross industrial output ballooned from approximately Rmb16bn in 1995 to Rmb406bn in 2015, at a CAGR of 19%. As a percentage of GDP, it increased from 2.3% in 1995 to 5.6% in 2015. In fact, Guangdong’s automobile gross industrial output is ranked second in China, only after Shanghai. Automobile gross industrial output ranking
Source: CEIC
Automobile gross industrial output ranking
Source: CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 37
The fixed asset investment (FAI) into Guangdong’s automobile sector has been trending upwards over the years, in tandem with the sector’s development and economic performance. In 2018, the automobile FAI surged sharply to over Rmb40n, compared to about Rmb12bn in 2014. The new investments point to automakers’ (both domestic and foreign players) confidence in the industry’s prospects and the huge growth opportunity, given the low automobile penetration rate in China.
In terms of disposable income per capita trend, Guangdong has performed well. In 2017, disposal income per capita reached approximately US$6,000, almost five times higher than in 1997. As a result, the rising disposal income lifted new motor vehicle registrations from 340,000 units in 2002 to 2.7m units by 2018, translating into a penetration rate of 24 vehicles per 100 households.
The overall motor vehicle penetration rate in Guangdong is relatively low. But in the case of Guangzhou and Shenzhen, the two wealthiest regions within the Guangdong province, the government had imposed automobile sales restriction back in 2012 to control the rapid rise in vehicle population. In fact, the motor vehicle penetration per 100 households in Shenzhen is the highest among the cities in Guangdong, and the penetration rates in Shenzhen and Guangzhou would have been even higher if not for the automobile sales restriction policy in those cities.
New motor vehicle registrations projections – Guangdong (2002-2030F)
Source: CEIC, DBS Bank Motor vehicle penetration rates in Guangdong, Guangzhou, and Shenzhen
Source: CEIC DBS Asian Insights SECTOR BRIEFING 74 38
GBA push for high value-added manufacturing, especially in new energy vehicle development
Guangdong houses two important automobile companies, GAC and BYD. GAC is the fifth largest automobile group in China, based on 2018 volume sales. The company has collaborations with several foreign global automakers in Guangzhou. Its joint ventures with Japanese auto brands - Honda, Toyota and Mitsubishi - form the bulk of its sales. Apart from the Japanese auto brands, GAC also works with Fiat Chrysler Auto to produce the famous Jeep vehicles. In addition, GAC produces its own vehicles under the local brand Trumpchi. Combining the various joint ventures and its local brand, GAC achieved volume sales of about 2.2m vehicles nationwide in 2018, up 7.3% y-o-y despite major market challenges as a result of the trade war impact and slowdown of the Chinese economy.
GAC’s total vehicle sales
Source: Company BYD’s EV sales performance
Source: Company DBS Asian Insights SECTOR BRIEFING 74 39
Together with its Japanese partners, GAC is embarking on a strategy to accelerate electric vehicle (EV) development. In fact, the Japanese partners are leveraging on GAC’s low- cost EV technology for self-applications. Toyota and Mitsubishi have introduced some EV models to the Chinese consumers for future mass production. This indicates that GAC’s self-developed EV technology is being accepted by major global automakers. Besides, GAC is investing in a Rmb4.7bn new energy vehicle hub in Guangzhou with an initial capacity of 200,000 units. By 2020, GAC plans to achieve EV sales of 1m units, accounting for about 20% of total sales volume.
Shenzhen has the largest EV production base in China, which is undertaken by BYD. China is leading in the NEV field and it is now the largest NEV market in the world, accounting for about half of the total production last year. China produced approximately 1.3m units of NEVs in 2018. Among the Chinese automakers, BYD has emerged as the largest EV maker in the world. Last year, BYD commanded about 20% of the domestic EV market and 10% globally.
The development of the EV sector is an important directive of the Chinese government, and Shenzhen is riding on the industry uptrend and positive policies. As China aims for higher EV penetration, GBA can become a pilot centre for smart EVs. Government financial incentives are also lending support to encourage electric car purchases especially in Shenzhen, where the public transportation sector is highly electrified. The GBA should become the testbed for auto companies to engage in EV and smart vehicle development.
The rapid development of high-value vehicle manufacturing activities would need the support of a vibrant supplier network. There are many automotive parts suppliers located in the GBA and they support a number of large automakers. The table below shows some of the automotive parts companies in Guangdong province.
Due to the substantial production scale and economic representation of Guangzhou and Shenzhen, we believe the automobile industry will continue to flourish under the GBA initiative. Both Guangzhou and Shenzhen will continue to be key production centres for high-value vehicles. They will also play a pivotal role in vehicle consumption in the cities within GBA. Other than Guangzhou and Shenzhen which have a relatively decent vehicle penetration rate, the other cities have very low penetration rates of about 10 vehicles per 100 households. Hence, the automobile market potential is huge in GBA. DBS Asian Insights SECTOR BRIEFING 74 40
Shenzhen’s automobile industrial output
Source: CEIC DBS Asian Insights SECTOR BRIEFING 74 41
Automotive parts suppliers in GBA
Principal Business Location Customers
Shock Absorbers, steering gear, muffler, parts and moulds Foshan Guangzhou Honda and Dongfeng Honda, BYD, fauercia, Midea Instrument Desk Table, Mould, Inferiors GuangZhou GAC Seating System, Inferior System Huadu,Guang Dong BYD, Dong Feng, Greatwall, Geely, SAIC- GM, Ford, Changan, SAIC-Volkswagen
Car carpets, car seat covers, steering wheel covers, GuangZhou GAC, FAW
Soundproofing material for Automobile GuangZhou Honda, GAC, Dongfeng Honda, GAC Honda, Hino, GAC Hino SuspensionSpring, Valve Spring, Horizontal GuangZhou GZ Honda Toyota, GAC, Nissan, BYD, Stabilizer, Seat Frame Assembly, TorsionalBar- FAW, SGM, BAIC, ChangAn, SGMW, Hinge Assembly, Support Rod and Shardped Spring Dongfeng, GAC Mitsubishi, GreatWall, includingnap,Tension,torsional Spring FAW Plastic Moulds Shenzhen Wiring Harness Assembly, Connectivity System GuangZhou GM, SAIC-Volkswagen, FAW- Volkwswagen, Chery, Ford, Toyota, Dong Feng Nissan Sale to China of Speaker products, Mobile Audio GuangZhou products Auto chemicals (stone guard coatings, bending and GuangDong Dong Feng, GAC Toyota, GAC Honda, structure adhesives, anti-freezing auto oils, welding SAIC GM, Dong feng Nissan, Buick, sealants for auto projects, and shock absorbing Cadiliac, (GM), Chevrolet, Lotus, Toyota adhesives; vehicle welding adhesives, such as auto Motor, ACURA, GAC Mitsubashi, BAIC- bottom coatings, SGC products, PU glass glues, and Hyundai anti-corrosion waxes) ,Auto Parts , auto mats Rubber parts , auto parts and accessories (excluding GuangZhou Honda, GAC Honda, GAC-Toyota, Nissan, automotive engine), automotive parts design ISUZU, Mitsubashi, Dongfeng Honda, services; vehicle engineering technology research Haima and development; motorcycle parts and accessories manufacturing; mold manufacturing; hardware accessories manufacturing and processing Camera for Automobile, reversing image system, GuangZhou BAIC-Mercedez, Ford, Toyota, Cadiliac, microwave radar anti-collision system, 3D Volkswagen, GM aroundview monitor system Aluminum alloy die casings GuangDong Nissan, Honda, Chrysler, GM, Chery
Automotive rearview mirrors, door handles, interior Foshan FAW-VW; FAW; Jinbei; Citreon; BAIC; BJ- dome lights, window lifter rails, Benz; Guangqi-Honda, DF-Honda; SAIC- GM; Chery Auto; Hafei Auto; iianghuai; FAW-Toyota; Guangzhou-Toyota; Huachen; Chongqing Qingling-Isuzu; Beiqi Foton; Great Wall Motor
Source: Companies DBS Asian Insights SECTOR BRIEFING 74 42
Education
Guangdong’s education market is the largest and still growing
The demand for education is mainly driven by population and economic growth. In China, parents are willing spend on education. According to research studies done in 2016 by iResearch and TAL on education, in Chinese families, the higher the household income, the higher portion of income was spent on education.
With the largest population and high average disposable income of more than Rmb 33,000 in 2017, Guangdong is the largest education market among all provinces. There are five provinces including Beijing and Shanghai with higher disposable income than Guangdong, but their population size is much smaller, leading to a smaller potential market size. During 2011-2016, GDP from education in Guangdong expanded by 14.8% CAGR, reaching Rmb 244.2bn, while total GDP CAGR was 8.4%.
Provincial population and income
Source: National Statistics Bureau, DBS HK DBS Asian Insights SECTOR BRIEFING 74 43
15% growth to sustain Looking into the next 3 years, we expect the market to continue growing at a similar pace in 2018-22 i.e. 15%. GDP growth slowed to 7.5% in 2017 Assuming 7% GDP growth CAGR in 2017- 2022, the impact could be well offset by a 1-2ppt higher growth in student numbers. Meanwhile, the supply side would be supported by higher private education penetration and higher university enrolment quota.
Slight slowdown to In the longer term, we expect the growth in the education market to slow slightly based 14% CAGR in on the assumptions of (i) GDP CAGR to decline to 5%; partly offset by (ii) 2-3% higher 2018-2030 population growth rate supported by the recent increase in the birth rate in Guangdong.
Details of our assumptions are below:
Growing and younger population
In 2017, the permanent resident population in Guangdong increased by 1.7 million or 1.55%, mainly led by Guangzhou and Shenzhen, to reach 111.69 million. The increase is the highest among all the provinces in China, and more than double that of the first runner- up, Zhejiang, which saw an increase of 670,000.
Looking forward, we believe the strong population growth trend in these cities will continue as there are 1) more employment opportunities in Tier 1 cities like Guangzhou and Shenzhen; and 2) more appealing policies in Tier 2 cities like Zhuhai and Dongguan to attract talent.
The birth rate is also increasing, especially after the relaxation of the demographic policy allowing a second child. In 2017, the birth rate reached 13.68‰ after five years’ of consecutive growth. The number of newborns in recent years provides visible demand for kindergartens and early education in the next few years.
Population increase and birth rate in Guangdong
Source: Guangdong Statistics Bureau, DBS HK DBS Asian Insights SECTOR BRIEFING 74 44
High economic growth
Guangdong has been China’s largest provincial economy for 29 years. The total GDP reached Rmb 9tn in 2017, which is a similar level to that of Russia. According to a study made by Guangdong Academy of Social Sciences, Guangdong’s GDP is expected to reach Rmb 26tn, or 12.4% of the national total by 2035.
The per capita GDP is projected to exceed Rmb 100,000 in 2022 and reach close to Rmb 200,000 by 2035. The per capita GDP growth is projected to be at the 5% CAGR level between 2017 and 2035.
The robust economic growth will create more employment opportunities and attract students at the university level. Meanwhile, disposable income will improve from GDP growth as well as urbanisation, which would make parents more willing to spend on education services. Schools at all stages and after-school tutoring will benefit from higher pricing power.
Guangdong GDP growth forecast Private fundamental educa- tion revenue in Guangdong
Source: Guangdong Academy of Social Sciences, DBS HK
Higher penetration ratio for private education
Private education is playing an increasingly important role in China, especially premium institutions which are now offering more options to parents. They charge much higher tuition fees than public schools. This is especially true for primary to high schools, where parents are willing to pay more than double to gain a better score for the National College Entrance Examination, popularly known as Gaokao. DBS Asian Insights SECTOR BRIEFING 74 45
National average tuition fees 2016/17
Source: China Institute for Educational Finance Research, DBS HK Private fundamental education revenue in Guangdong
Private fundamental educa- tion revenue in Guangdong
Source: Frost & Sullivan, DBS HK
As the starting point of private enterprises in China, Guangdong has the highest private education penetration ratio by student enrolment in China. In 2015, the penetration ratio of private fundamental education in Guangdong reached 28.7% while the national level was 7-12% for primary to high schools.
The high private education penetration ratio in the province has supported the strong growth in private education in the fundamental education segment. Frost & Sullivan estimates that revenue CAGR of private fundamental education in Guangdong was 13.1% in 2012-2015, and will continue to expand at double digit growth rate in the years to come with 11% CAGR in 2016-2020.
Improvement of enrolment ratio for higher education
The growth opportunities of private universities is mainly from the improvement in the gross enrolment ratio (GER) of higher education. In 2017, Guangdong’s higher education GER was c. 35%, much lower than the national average of 42.7%, indicating there is large room for future growth. DBS Asian Insights SECTOR BRIEFING 74 46
As laid out in Guangdong’s 13th Five-Year Plan (FYP), the government’s GER target is 50% by the end of 2020. It is difficult for public universities to further expand their scale because of the limitation from government fiscal spending. The higher student numbers will be mainly supported by private universities. Predictably, there will be greater demand for private higher education unleashed ahead.
Vocational education is also a focus for future development. In the 3-year plan of Guangdong’s vocational education from 2019 to 2021, Guangdong’s government plans to have 50,000 to 70,000 more vocational students in 2019, and 120,000 increase in vocational enrolment capacity by 2021.
K12 schools and tutoring show higher growth than universities. The population policy relaxation will first benefit the junior level of schools. According to Guangdong province’s 14th FYP, student enrolment will show the highest growth in the kindergarten to middle school stages, while high school and higher education would show low or negative growth. Altogether, K12 education will see 3% growth in student numbers from 2015 to 2020 and higher education at 0.1%. With the higher pricing power of K12 institutions compared to universities, we also expect spending on K12 education to increase more than universities. K12 after-school tutoring institutions will also benefit from the K12 student enrolment increase, and higher income.
Guangdong student enrolment target
Source: Guangdong government, DBS HK
Among the Hong Kong-listed companies, Wisdom Education and China Education Group are the main players in GBA. The former is a K12 player based in Dongguan and the latter is involved in higher education in Guangzhou. GBA link: more co-operation and communication
The impact of GBA on education growth is indirect rather than direct. We see some direct co-operation opportunities in the GBA area on education, but it is mostly academic DBS Asian Insights SECTOR BRIEFING 74 47
communication between public schools which will benefit in the longer term with a high quality talent pool. In the short term, the direct impact on private education is limited.
The main education co-operation plans are as follows:
Six high schools sign co-operation memo
In Jan 2018, the GBA education co-operation forum was held in Guangzhou to promote the GBA co-operation and communication in K12 education. During the forum, six high schools signed a co-operation memo to further improve communication in school management, teaching methods, student exchange and parent visits. The six participants were (i) two of the best high schools in Guangzhou - Guangdong Experimental High School and Guangzhou Zhixin High School, and (ii) one school each from Hong Kong and Macau.
Education officials from Guangdong, Macau, and Hong Kong believe that fundamental education plays an important role in training talent for GBA. More of such education co-operation initiatives may be implemented, bringing new opportunities in education development.
28 universities plan to set up GBA education community
Universities within the GBA are also working more closely together. In 2016, the “Guangdong-Hong Kong-Macau Higher Education Alliance” was established. Now, it has a total of 28 universities including the best universities in the three regions - 12 are from Guangdong including Sun Yat-Sen University, nine are from Hong Kong, and the balance 7 from Macau. DBS Asian Insights SECTOR BRIEFING 74 48
GBA education community
Guangdong 1 Sun Yat-Sen University 中山大學
2 SouthChina University of Technology 華南理工大學
3 Jinan University 暨南大學
4 South China Agricultural University 華南農業大學
5 Southern Medical University 南方醫科大學
6 Guangzhou University of Chinese Medicine 廣州中醫藥大學
7 South China Normal University 華南師範大學
8 Guangdong University of Technology 廣東工業大學
9 Guangdong University of Foreign Studies 廣東外語外貿大學
10 Shantou University 汕頭大學
11 Shenzhen University 深圳大學
12 Southern University of Science and Technology 南方科技大學 Hong Kong 1 The Chinese University of Hong Kong 香港中文大學
2 Lingnan University 嶺南大學
3 The University of Hong Kong 香港大學
4 The Open University of Hong Kong 香港公開大學
5 City University of Hong Kong 香港城市大學
6 The Hong Kong University of Science & Technology 香港科技大學
7 Hong Kong Baptist University 香港浸會大學
8 The Hong Kong Polytechnic University 香港理工大學
9 The Education University of Hong Kong 香港教育大學 Macau
1 University of Macau 澳門大學
2 University of Saint Joseph 聖若瑟大學
3 Institute For Tourism Studies 旅遊學院
4 City University of Macau 澳門城市大學
5 Macau University of Science and Technology 澳門科技大學
6 Macao Polytechnic Institute 澳門理工學院
7 Kiang Wu Nursing College of Macau 澳門鏡湖護理學院
Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 49
The GBA will establish a higher education community in 2035 to support technology and Guangdong economic growth. For now, there are around 190 co-operation initiatives in the undergraduate program in GBA. In the future, the co-operation programmes will be largely focus on resource 1 Sun Yat-Sen University 中山大學 sharing, joint operation of schools, talent mobility, and application of scientific research. 2 SouthChina University of Technology 華南理工大學
3 Jinan University 暨南大學 Cities with the largest business opportunities
4 South China Agricultural University 華南農業大學 As discussed, fundamental education is mainly driven by population and economic growth. In 5 Southern Medical University 南方醫科大學 terms of the different schooling stages, kindergarten and primary schools are more influenced 6 Guangzhou University of Chinese Medicine 廣州中醫藥大學 by local birth rates. Middle/ high schools and K12 tutoring are related to growth in student numbers, which is affected by both population growth and teaching quality. Cities with 7 South China Normal University 華南師範大學 better schools would attract more students as middle and high school students leave their 8 Guangdong University of Technology 廣東工業大學 hometowns to study in other cities in the province. Household income is also a critical factor 9 Guangdong University of Foreign Studies 廣東外語外貿大學 in this stage. Demand for tutoring increases as Gaokao approaches.
10 Shantou University 汕頭大學 To dig deeper into business opportunities in each city, we see that Tier 1 cities such as 11 Shenzhen University 深圳大學 Guangzhou and Shenzhen will still have the largest market and high growth. Dongguan and 12 Southern University of Science and Technology 南方科技大學 Foshan also have good growth potential for education among the rest of the cities in GBA. Hong Kong Population of 3-6 year olds from 2018-2021 1 The Chinese University of Hong Kong 香港中文大學 2 Lingnan University 嶺南大學 Based on the birth rates and population in recent years, we can roughly gauge the population 3 The University of Hong Kong 香港大學 size of 3-6 year olds in 2018-2021, which would determine the demand for kindergartens and primary schools. 4 The Open University of Hong Kong 香港公開大學 5 City University of Hong Kong 香港城市大學 Among all the nine cities in GBA, Guangzhou has the largest population base as well as 6 The Hong Kong University of Science & Technology 香港科技大學 high growth. Shenzhen also has a large market with 6-7m of 3-6-year-old kids though growth is slower than in Guangzhou. Dongguan and Foshan follow in terms of young 7 Hong Kong Baptist University 香港浸會大學 population and growth. 8 The Hong Kong Polytechnic University 香港理工大學 Population of 3-6 year olds 9 The Education University of Hong Kong 香港教育大學 Macau
1 University of Macau 澳門大學
2 University of Saint Joseph 聖若瑟大學
3 Institute For Tourism Studies 旅遊學院
4 City University of Macau 澳門城市大學
5 Macau University of Science and Technology 澳門科技大學
6 Macao Polytechnic Institute 澳門理工學院
7 Kiang Wu Nursing College of Macau 澳門鏡湖護理學院
Source: Local Statistics Bureau, DBS HK DBS Asian Insights SECTOR BRIEFING 74 50
Number of primary/middle student students in each city
Not surprisingly, Shenzhen and Guangzhou have the largest student numbers for both primary and secondary schools, followed by Dongguan and Foshan. Shenzhen has the highest growth in primary school student enrolment at 5.6% CAGR in 2015-17. Foshan and Huizhou were next with 5.3% and 5.1%.
Primary school student enrolment
Source: Local Statistics Bureau, DBS HK
Middle and high school student enrolment
Source: Local Statistics Bureau, DBS HK DBS Asian Insights SECTOR BRIEFING 74 51
The growth of middle and high school student numbers was lower than that of primary school in all the nine cities during 2015-2017. Some cities like Jiangmen and Zhaoqing recorded a declining trend. Shenzhen had again reported the highest CAGR of 5.3% in student numbers, followed by Dongguan 4.9% and Foshan 4.6%. Zhongshan’s growth was also decent at 3.9%, but the absolute number was much lower, making the potential market smaller.
In general, we see a positive correlation between secondary school student growth and the Gaokao exam performance. Cities with high growth like Shenzhen, Foshan, Dongguan and Zhongshan also have higher Tier 1 university admission ratio. Part of the reason might be that these cities have better education resources, e.g. higher quality schools and teachers to attract students.
Student number growth vs Gaokao performance
Bubble area represents 2017 secondary student numbers in each city Source: Local Statistics Bureau, DBS HK A special case is Guangzhou, which has the top schools in the province but has seen a slight decrease in student numbers in past years. This could be because of the already-high population base and full capacity utilisation.
Average salary and GDP growth
Guangzhou and Shenzhen have the highest average salary levels with strong growth momentum, followed by Zhuhai, Foshan and Zhongshan. Among all the nine cities, Zhongshan had the highest growth in average salary in 2017 at 14.3%. DBS Asian Insights SECTOR BRIEFING 74 52
Average salary growth
Source: Local Statistics Bureau, DBS HK
GDP growth
Source: Local Statistics Bureau, DBS HK
In 2017, all cities in GBA except for Zhaoqing reported over 7% y-o-y growth in GDP. All the nine cities are targeting for 7-8% y-o-y GDP growth in 2018. DBS Asian Insights SECTOR BRIEFING 74 53
To conclude, we have ranked the cities in GBA in terms of business opportunities in private education:
• Tier 1: Shenzhen and Guangzhou – largest population, best economic and income growth, largest market for fundamental education and higher education. The two cities have the best education resources and will continuously attract students
• Tier 2: Dongguan and Foshan – decent population growth and birth rates, good teaching quality in middle and high schools with good performance in Gaokao. More room for smaller players in the after-school training segment which has lower competition
• Tier 3: Huizhou and Zhongshan: Good teaching quality, increasing number of middle school students but the total population is much smaller than Tier1/2 cities, creating robust but smaller markets
City and segment comparison
Guangzhou Shenzhen Dongguan Foshan Huizhou Zhongshan 3-6 yr population in 2020 (m) 640 700 300 310 166 100
3yr CAGR (%) 11 7 0 9 0 14
Primary school enrolment 2017(m) 1004 965 765 544 557 297
3yr CAGR (%) 3.5 5.6 3.1 5.3 5.1 3.7
Secondary school enrolment 2017 (m) 509 418 310 328 288 155
3yr CAGR (%) -0.6 4.1 3.9 3.5 3.1 3
2016 Average salary (Rmb 000) 89 90 58 67 65 67
yoy growth (%) 9.8 10.8 8.3 8.7 10.5 14.3
Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 54
Environmental
Increasing investment in environmental protection
Thanks to the government’s strong determination in addressing environmental issues, its investments to combat environmental pollution in China increased from Rmb711.4bn in 2011 to Rmb922bn in 2016. Guangdong province had also put in significant efforts in environmental protection with a total investment of Rmb36.8bn in 2016. With strict implementation of environmental regulations, demand for environmental services, such as treatment for sewage, household waste, industrial solid waste, hazardous waste and soil remediation, has been increasing.
Investment in environmental protection in China
Source: China Statistical Yearbook on Environment Sewage treatment rate
Source: China Statistical Yearbook on Environment DBS Asian Insights SECTOR BRIEFING 74 55
Positive results from the huge amount of investments in environmental protection are reflected in the rising sewage treatment rates, reduction in carbon emissions, etc. In particular, the improvement in air quality in Guangdong province in recent years has outperformed the national average. While emissions of industrial gas in China climbed 1.6% during 2011-15, that in Guangdong province dropped 2.9%. The drops in emissions of sulphur dioxide and nitrogen oxide in Guangdong province has been 4-5ppts higher than China’s overall figure.
Emission of industrial waste gas
Source: China Statistical Yearbook on Environment
Investment in environmental protection as % of GDP
Source: China Statistical Yearbook on Environment DBS Asian Insights SECTOR BRIEFING 74 56
Notwithstanding the positive results in the improvement in the environment, we believe investment in environmental protection as a percentage of GDP in Guangdong province is still low compared with the national average. There is still a large gap between the current environmental condition and the one under a well-off society. We reckon relatively more funding will be put not only into the urban sector but also industrial sector, particularly solid waste and hazardous waste, areas that have been under invested in the past few years.
Breakdown of investment in environmental protection (2016)
Source: China Statistical Yearbook on Environment
Assuming the investment percentage gradually climbs to 0.7% of GDP in 2022, investments in environmental protection in Guangdong province will see CAGR of 18% between 2018- 22. The CAGR between 2022-30 will slow down to 10.5% assuming 1% of GDP will be spent on environmental protection by 2030. Green development and green economy in Greater Bay Area
While the development of GBA will provide strong support for an upgraded economy in China, in particular driving the economic development in southern China, environmental protection rather than robust economic growth is now the first priority. This means that economic growth must not be achieved at the expense of the environment. In particular, as stated in the 13th Five Year Plan (FYP) in environment protection of Guangdong province, PRD’s competitiveness will rely on industrial upgrades to become more environmentally friendly with the adoption of energy conservation and reduction in carbon emissions. A DBS Asian Insights SECTOR BRIEFING 74 57
well-developed ecological environment in the PRD, which is part of GBA, will be a showcase not only for the rest of Guangdong province but also for the rest of China. Thus, the development of GBA, particularly a series of infrastructure projects to be unfolded at the early stage, will have to be “green and sustainable”. And it has to comply with various targets set in the 13th Five Year Plan in environmental protection with regards to air quality, water quality, waste treatment (both household and industrial), soil remediation, ecological environment, etc. Some of those targets are listed in the following table:
Targets of 13th FYP for environmental protection
China Guangdong province % 2015 2020 2015 2018 2020 Percentage of days reaching good air quality 76.7 >80 91.5 92 92.5
Reduction in PM2.5 - -18 - - -10
Percentage of surface water with quality below category V 9.7 <5 8.45 7 0
Percentage of surface water with quality above category III 66 >70 77.5 81.7 84.5
Percentage of black and stinky water - - - <15 <10
Reduction in emission of sulphur dioxide - -15 - - -15
Reduction in emission of COD - -10 - - -10
Household sewage treatment rate
City 91.9 95-100 - 90 95
County 85 >85 - 80 85
Household waste treatment rate (major cities) 80-90 95-100 90 95 98
Percentage of recovered contaminated farmland - 90 - - 90
Treatment of hazardous waste of selected key enterprises - - 100 100 100
Source: State Council, Department of Environmental Protection of Guangdong Province
Guangdong government has made good progress in developing a sound ecological environment in various development zones. The PRD is one of the first major city that has achieved PM2.5 target for three consecutive years. Over 80% of water resources in Guangdong province has reached quality above category III. A well-operated waste- to-energy plant in Nanhai, Foshan, has improved the environment of the nearby region substantially which now has become one of the sightseeing spots. These are the results of good environmental planning and the implementation of strict environmental regulations.
In fact, the GBA development plan even steps up the effort in ecological conservation where environmental protection regulations in GBA would be the strictest with the highest DBS Asian Insights SECTOR BRIEFING 74 58
requirement in terms of the levels of conservation and efficient use of resources. Emphasis will be put on regulating the pollution in PRD and drainage facilities at river outlets, as well as strengthening the pollution management at coastal areas. Draft guidelines that call for a ban on new industrial capacity for a range of businesses in the PRD region was also issued. These businesses include steel, petroleum, petrochemicals, glass, ceramic and non-ferrous metal smelting. This will also support GBA in eliminating traditional low-end production and shift towards high-tech industries with high added value. Thus, demand for more environmental services for industrial sectors is anticipated, such as solid waste/hazardous waste treatment, emission reduction, industrial wastewater treatment, pollution monitoring services, recycling of industrial waste services, industrial water recycling systems, etc.
Production and treatment capacity of hazardous waste (2016)
Source: Annual report on solid waste treatment
In particular, secondary pollution arising from solid / hazardous waste and soil contamination could cause even more serious health problems than other kinds of pollution but attention has not been put into these areas until recent years. In China, qualified treatment capacity is also under-supplied but the shortage in Guangdong province is not as serious as other provinces. Nevertheless, we expect capex will still be needed in these segments as more industrial parks are built.
The 13th FYP states that consumption of coal in the PRD has to be contained at 85m metric tonnes by 2020 and the construction of new coal-fired generators will be prohibited in certain development zones. Thus, the use of renewable and clean energy sources will be preferred in GBA, which will encourage the use of integrated energy systems, particularly in industrial parks. This is positive to local gas distributors. DBS Asian Insights SECTOR BRIEFING 74 59
More environmental services along with urbanisation
As China aims to develop GBA as a quality place for living, working and traveling, more environmental services will be required for urban areas. These include water purification services, treatment for household sewage, household garbage, kitchen waste, city sanitation, black and stinky water body, etc. Assuming each person consumes 300 liters of water per day, we estimate that a 10% increase in the population in Guangdong province will require additional treatment capacity of 2.7-3.0m tons per day for each of water purification and water sewage, implying a capex of at least Rmb4.5-6.0bn and Rmb5.5-6.5bn respectively. Investment will be even larger if upgrades and extensions to the existing water pipeline network are taken into consideration.
While landfill used to be the major method in treating household waste, the risk of secondary pollution and the lack of land resources have prompted Guangdong government to shift to incineration or waste-to-energy operations. Assuming each person produces 1kg of household waste each day, a 10% increase in the population will require additional capacity of 10,000 tons per day for waste-to-energy operations, implying a capex of at least Rmb5.0bn. Additional investments will be required for some auxiliary services, such as waste sorting, logistics arrangement, city sanitation, etc.
In addition, coal to gas conversion in residential areas also plays a part in government’s structural change in energy consumption. The penetration rate of natural gas in Guangdong was only 26.8% in 2016, compared with the national average of 38.7%. The difference was even larger when comparing with some Northern cities, such as Beijing (77%) and Tianjin (68.8%). Although the use of natural gas is more popular in the northern region (particularly for heating purposes), we expect penetration rate in Guangdong province will continue to climb given that it is far lower than that in other countries, such as the US, the UK and Japan, which varies from 80-90%. We expect gas distributors in Guangdong province will continue to extend the gas pipeline to increase connectivity. Assuming penetration rate increases by 30ppts, capex required is estimated to be Rmb17bn. DBS Asian Insights SECTOR BRIEFING 74 60
Penetration rate of natural gas
Source: Wind DBS Asian Insights SECTOR BRIEFING 74 61
Financial Services
Business opportunity for Financial service industry
The increased connectivity and integration of the 9+2 cities within Greater Bay Area (GBA) is expected to enhance business activities and movement of goods and services, people, capital and information flow within the region. With GBA’s key focus to transform into an innovative and technology hub, we believe this paves the way for the financials services industry in the region to further prosper. Taking also the advantage of Hong Kong’s position as a major international financial center and as the largest renminbi offshore market, and two well-established equity markets (HKSE and SZSE) within the GBA region, we believe this will stimulate business opportunities including cross-border trade finance and settlement, renminbi on-shore and off-shore financing, currency exchange, digital payment and consumer financing services, and various individual financial services, which ultimately will benefit financial intermediaries including banks, insurance companies, wealth management companies and P2P providers.
Financial industry to contribute > 18% of GDP by 2030F
Financial services industry accounted for 8% of Guangdong province’s (as a proxy to GBA) GDP in 2017, up from 4% in 2007 (10 years ago) and 6% (5 years ago) in 2012 and has grown at 16%/19%/21% CAGR for the past 5/10/15 years. Compared to Tier 1 cities such as Beijing and Shanghai, where financial services industry accounted for 17% of GDP in 2017, we believe GBA’s level is low. Even with Shenzhen which is considered as a more developed city among the 9 Guangdong cities within the GBA, its financial services industry only accounted for 14% of its GDP.
Guangdong financial services industry and GDP growth in the past
Source: WIND, DBS HK DBS Asian Insights SECTOR BRIEFING 74 62
To expand by 16% and 14% CAGR by 2020F and 2030F
On the back of the forecast that the services industry will contribute 76% to the GBA economy (including Hong Kong and Macau) by 2030F, we expect financial services industry to contribute at least 18% of GDP by 2030F, implying the segment’s CAGR will outpace GBA region’s GDP CAGR by 6.9ppts during the period. This also implies the financial services industry in the GBA may grow at 16% CAGR during 2018-2020F, and 14% CAGR during 2018-2030F. Service and financial services industry as %GDP in GBA
Source: WIND, DBS HK Bank assets to grow by 13% and 11% CAGR by 2020F and 2030F
By using the exposure to PRD region as a proxy to GBA, assets and loans at major listed China banks grew at 9%/12% CAGR during 2012-17. Compared to the entire China banking system where assets/loans (Rmb) has grown at 13%/14% CAGR during the period, the growth rates recorded by major listed China banks in the GBA in the past 5 years does not seem to be particularly strong. We believe the main reason for the slower growth was due to the impact from Rmb depreciation, especially since 2015, and China’s capital controls, as a large portion of businesses in the GBA area are export-oriented industries. This is also evidenced by the gradual decline in offshore Rmb trade settlements in Hong Kong.
Nonetheless, with GBA’s more integrated and connected economic zone accompanied by its focus to transform into an innovative and technology hub, we believe growth for various banking services and demand will continue to grow. Among major listed China banks, China Merchant Bank, China Construction Bank and Agricultural Bank of China have the highest loan exposure at 17%/15%/15% of total loans and 18%/14%/16% of pre-tax profit to the PRD region. We thus believe CMB, CCB and ABC are better positioned to capture business opportunities from GBA. DBS Asian Insights SECTOR BRIEFING 74 63
Offshore Rmb trade settlements in Hong Kong
Source: HKMA, DBS HK
China banks’ asset and loans exposure in GBA
BOC and BoComm figures refer to exposure in Central and Southern China; other banks figs refer to exposure to Pearl River Delta region Source: Company data, DBS HK
On the back of the assumption that financial services industry is set to grow at 16% and 24% CAGR by 2020F and 2030F, reaching a scale of Rmb14.1tn and Rmb37.2tn, respectively, we estimate growth in bank loans/assets located in the GBA area may hit 14%/13% CAGR by 2020F and 12%/11% CAGR by 2030F, respectively. DBS Asian Insights SECTOR BRIEFING 74 64
Insurers premium grew by 22% CAGR in the past 5 years
China insurers’ per capita premium growth in Guangdong province reached 22% CAGR during 2012-17. Compared to China’s average per capita premium growth of 20% CAGR during the same period, Guangdong’s premium growth has outperformed the sector. We believe this is on the back of Guangdong’s faster GDP per capita growth of 9% during the past 5 years, compared to 8% for the whole country. More importantly, Guangdong’s GDP per capita has reached Rmb82,278, which is at the higher-mid end compared to other provinces (China’s GDP per capita at Rmb63,163). Given growth in premium per capita usually has an exponential relationship with one’s wealth, this suggests that once income per capita has attained a certain level, per capita premium growth will start to accelerate. This can be evidenced by looking at China’s Tier 1 cities such as Beijing and Shanghai, where GDP per capita is twice of China’s average, while premium per capita is 3-4 times higher than the country’s average.
Guangdong’s premium per capita and GDP per capita reached Rmb 2,244 and Rmb82,278, respectively, in 2017, which is above national average. With GDP growth from GBA estimated to accelerate in the long term, we believe this paves the way for the life insurance segment within the region to grow further. This may also explain why China insurers have relatively high premium exposure in the Guangdong area.
China major province/cities premium growth
Source: CBIRC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 65
Premium growth projected to be 20%/16% CAGR by 2020F/2030F
Assuming the population growth rate in the GBA area is in line with Guangdong’s population growth in the past 5 years, along with the increase in premium penetration and GDP per capita, we estimate insurance premium growth may reach 20% CAGR by 2020F and 16% CAGR by 2030F in the GBA area.
Ping An, China Life and China Taiping have higher exposure to GBA
Among the listed China insurance companies, Ping An generates 18% of its premium from Guangdong, the highest among China life insurers, followed by China Life’s 9%. In the case of P&C insurance, Ping An P&C derive 16% of premiums from Guangdong province, followed by China Taiping at 14% (include Taiping HK and Taiping Macau). In addition to Guangdong, China insurers also have higher premium exposure to Beijing, Henan, Jiangsu, and Shandong provinces/ cities. A common characteristic of these provinces is that GDP per capita are all relatively high. In addition to the China insurers, we also see good opportunity for AIA to capture business opportunities from GBA, given the new initiatives introduced by HKMA to promote the” insurance connect scheme”, its leading marketing positioning in HK, and strong product know-how and brand franchise. China major cities/provinces insurance premium per capita to GDP per capita
Source: CBIRC, National Bureau of Statistic of China, DBS HK DBS Asian Insights SECTOR BRIEFING 74 66
Great potential for P2P segment
We believe GBA’s focus in transforming into an innovative and technology driven economy hub paves the way for the P2P (peer-to-peer) segment to grow. Despite China’s P2P sector has been impacted by stricter regulations and market consolidation is still expected within the next 1-2 quarters, the P2Ps are well positioned itself to serve the banks’ “underserved” consumers in China. We believe the addressable market in China’s P2P segment should reach Rmb8tn to Rmb10tn, with some 400m-500m individuals as target customers. Once the regulation and compliance procedures are completed by Jun-2019, we believe the segment should return to its normal growth pattern going forward.
China’s P2P and loan breakdown by province
Source: HKMA, DBS HK
China’s P2P outstanding loans and y-o-y growth (%)
Source: HKMA, DBS HK DBS Asian Insights SECTOR BRIEFING 74 67
According to the data from WDZJ, the number of operating P2P platforms reached 1,591 as of July 2018, which is down from the peak level of 3,473 platforms in November 2015. Of this, 20% of the platforms are registered in Guangdong, which contributes 16% of the outstanding loans. We believe this reflects the fact that Guangdong, more precisely Shenzhen, is considered as a cradle to innovation and technology development in China.
Total P2P loan outstanding has been on a clear upward trend in the past 4 years and reached a peak of Rmb1.3tn in May 2018 before declining to Rmb789bn in December 2018 due to policy headwinds. We believe loan growth is likely to reaccelerate once the compliance procedure completes, and we believe Guangdong will serve as one of the major areas to witness such growth (next to Beijing and Shanghai). Among the top 20 P2P platforms in China in terms of loan origination, 5 of the platforms originated in Guangdong whereas 8 and 5 platforms are from Beijing and Shanghai. Leading platforms in Guangdong include Tuandaiwang, Xiaoying, PPmong, Xiaoniu and Fffax, with loan origination in the Rmb10bn to Rmb16bn range. We see these five platforms as better positioned to capture the business opportunities from GBA.
Major P2P platforms in Guangdong
Rank Platform name Loan Volume Avg yield Duration outstanding (Rmb bn) (%) (month) (Rmb bn)
1 Xiaoying (小贏網金) 15.8 4.5 7.6 10.3 2 PPmoney (PP網貸) 11.8 1.7 9.8 14.7
3 Tuandaiwang (團貸網) 11.5 4.7 10.2 2.1
4 Xiaoniu (小牛在線 ) 7.4 0.8 8.2 12.3
5 Tounawan (投哪網) 5.4 0.6 9.1 17.1
6 ZhongYeXingRong (中業興融) 2.8 0.2 13.2 27.4
7 Ren Ren Ju Cai (人人聚財) 2.8 0.4 10.7 19.1
8 Min Dai (民貸天下) 1.5 0.3 10.6 32.0
9 Myerong (e融所) 1.4 0.1 12.0 30.1
10 Rong Jin Suo (融金所) 3.0 0.3 9.6 7.0
Source: WDZJ, DBS HK
P2P loan growth to reach 5%/17% CAGR by 2020F/2030F
As China’s P2P industry has been consolidating since the beginning of 2017 driven by regulatory tightening, loans outstanding has declined to Rmb789bn in 2018, from Rmb1tn in 2017, and we estimate loans outstanding will continue to shrink to Rmb650bn in DBS Asian Insights SECTOR BRIEFING 74 68
2019F. Nonetheless, as the penetration in China’s “underserved” consumer lending market remains low, we believe P2P loan origination will resume growth momentum after industry consolidation completes in 2020F. That said, with the assumption of rising penetration and increasing consumer leverage, we estimate P2P loan growth to reach 5% CAGR by 2022F and 17% CAGR by 2030F. As Beijing, Shanghai and Guangdong are expected to be the three major P2P hubs in the future as a result of industry consolidation, we thus expect P2P loan growth in the GBA to be in line with the industry growth level.
New initiatives to drive growth
From the recently released GBA Development Plan guideline, policy support to develop the financial services industry in the GBA is in three areas: 1) to promote E-signature certification and e-payment system in GBA, 2) to promote mutual financial market access between Hong Kong, Macau and Shenzhen, with initiatives to allow wider Rmb usage (on/offshore), develop cross-border Rmb interbank market, open up on-offshore Rmb bond issuance, open up cross-border Rmb investment products, allowing qualified Hong Kong and Macau banks and insurance companies to establish operating branches in GBA, and to develop featured finance (i.e. aircraft leasing, financial technology and green financing), and 3) to promote and develop cross-border innovative motor and health insurance products and supporting China, Hong Kong, Macau insurance companies to develop cross-border reinsurance business.
In addition to CMB, CCB and ABC already having a meaningful exposure in the GBA, many HK banks such as BOCHK, The Bank of East Asia (BEA) and Hang Seng Bank (HSB), are launching new initiatives including dual currency cards to facilitate on cross-border payments, cross-border RMB cash pooling services, expansion in wealth management/ private banking business and establish integrated system to fulfil cross-border business needs. Among which, BOCHK seems to be the most aggressive and better positioned. DBS Asian Insights SECTOR BRIEFING 74 69
HK banks’ initiatives to tap on GBA opportunities
Company Initiative details name
BOCHK Launched mobile payment service of BOC PAY & a dual currency card to facilitate cross-border payment
Promoted cross-border two-way RMB cash pooling services
Commenced mutual recognition programme for its Wealth Management Brand to offer consistent experience to customers
Implemented point-to-point port strategy by becoming the only bank to provide branch services in Terminal 1 of Hong Kong International Airport, set up a self-service banking centre at Hong Kong West Kowloon Rail Station and automated banking site at the Hong Kong-Zhuhai-Macao Bridge
Strengthened collaboration with BOC Group's entities in the Greater Bay Area and established an integrated system for marketing and service aiming to provide full range of financial services. Focus in servicing technological innovation industry
BEA Focus in Private Banking opportunity by leveraging its banking network in the Greater Bay Area to source new clients/business opportunities. Mainland clients now account for 47.1% of Private Banking’s total net income.
The Greater Bay Area currently accounts for 19.6% of Private Banking’s total AUM from the Mainland. Aims to double over the next three years.
Well positioned to serve the country’s new economic priorities and capitalise on opportunities arising from national strategies, in particular the Belt and Road Initiative and the development of the Greater Bay Area
DSB Expect for stronger funding needs from both domestic and offshore investments in the Greater Bay Area, including the investment in Belt and Road countries.
HSB Leveraging it well-integrated cross-border infrastructure to grow our core banking business on the Mainland and capitalise on new opportunities arising from major developments such as the Guangdong-Hong Kong- Macao Greater Bay Area and ‘One Belt, One Road
CHB As a core member of the Guangzhou-based Yuexiu Group, CHB will seize the opportunities brought about by the planning of the Greater Bay Area and take advantage of the group's strength, to continuously enhance the strategic position of its Mainland operations and capitalise on its advantageous positions in the unique cross-border business, so as to become an active financial player in the development of the Greater Bay Area.
Source: Company data, DBS HK DBS Asian Insights SECTOR BRIEFING 74 70
HK banks’ initiatives to tap on GBA opportunities
Initiative Details
E-signature To facilitate mutual recognition of e-signature certificates in public certificates services, finance, e-commerce areas
To promote Greater-Bay Area electronic payment system with mutual access
Mutual financial Progressively widening cross-border renminbi usage. Banking market access institutions can develop cross-border renminbi interbank market, renminbi forward foreign exchange trading business and renminbi- related derivatives business and cross-selling wealth management products business
Corporate within Greater-Bat Area can issue cross-border renminbi bonds. Widen the scope of Hong Kong and Mainland Chinese residents and institutions for cross-border mutual investment products (funds and insurance) and channels
To support investment institutions in Hong Kong to raise renminbi for investing into Hong Kong capital market and participating in private equity and venture capital funds
To improve Shanghai-HK, Shenzhen-HK stocks and bonds market access
To support qualified HK & Macau banks and insurance institutions to set up operating branches in Qianhai Shenzhen, Nansha Guangzhou and Hengqin Zhuhai
To develop Greater-Bay Area financial regulators from setting up communication mechanism, strengthening cross-border supervision and liquidity monitoring
To focus on developing featured finance including shipping finance, financial technology, aircraft and ship leasing etc
To facilitate anti-money laundering, anti-terrorism financing, anti- tax evasion co-operation and information sharing mechanism
Insurance To support Guangdong, Hong Kong and Macau insurance institutions to co-operate and develop innovative cross-border motor insurance and health insurance so as to offer effective underwriting, due-diligence and claims etc
To support China, HK and Macau insurance institutions to develop cross-border renminbi reinsurance business
To support Hong Kong and Macau financial institutions co-operate and co-develop offshore finance business and research international shipping insurance etc.
Source: HKIA, DBS HK DBS Asian Insights SECTOR BRIEFING 74 71
Financial institutions current landscape and exposure in GBA
Initiative Details
Hong Kong Banks exposure: Regional Banks exposure: 86 branch outlets( incl. HSB and Rural bank) E-signature To facilitate mutual recognition of e-signature certificates in public Total bank staff at 2,800 certificates services, finance, e-commerce areas 34/4 branches in GD/Macau (GZ/SZ/Zhuhai 13/13/7) 1 Security JV with staff at 110 1 Life insurance with staff at 20 4/14 branches in GD/Macau To promote Greater-Bay Area electronic payment system with 5/16 branch/sub-branch in GD (SZ/ZH/FS/GZ 1 mutual access 19/1 branches in GD/Macau (GZ/SZ at 7/6) brand; SZ/ZH/GZ 8/2/5 sub-branch) 2/3 branch/sub-branch in GD (GZ/ZH 1 brand; 3(+3 sub-branch)/1 GUANGDONG GZ/SZ 1/2 sub-branch) Mutual financial Progressively widening cross-border renminbi usage. Banking branches in GD/Macau market access institutions can develop cross-border renminbi interbank market, renminbi forward foreign exchange trading business and renminbi- related derivatives business and cross-selling wealth management Guangzhou products business China Banks exposure: Zhaoqing Huizhou 26 %of loans in central Foshan Dongguan Corporate within Greater-Bat Area can issue cross-border renminbi and southern China bonds. Widen the scope of Hong Kong and Mainland Chinese Jiangmen Shenzhen 15 %of loans in PRD residents and institutions for cross-border mutual investment Zhuhai products (funds and insurance) and channels 15 %of loans in PRD Hong Kong Macau China insurance: To support investment institutions in Hong Kong to raise renminbi 15 %of loans in PRD 18%/16 of life/P&C of premuium in GD for investing into Hong Kong capital market and participating in 17% of loans in PRD & West Side of Taiwan Strait 6%/12 of life/P&C of premuium in GD private equity and venture capital funds 14% of loans in Southern China 6%/14 of life/P&C of premuium in GD/GBA To improve Shanghai-HK, Shenzhen-HK stocks and bonds market 15% of loans in PRD and West Strait access 9% of life premuium in GD 19% of loans in Central and Southern China 8% of P&C premuium in GD
To support qualified HK & Macau banks and insurance institutions 19% of loans in PRD 5% of P&C premuium in GD to set up operating branches in Qianhai Shenzhen, Nansha Guangzhou and Hengqin Zhuhai
To develop Greater-Bay Area financial regulators from setting up Note: PRD = Pearl River Delta; GD = Guangdong; SZ = Shenzhen; GZ =Guangzhou; ZH= Zhuhai; FS = Foshan; communication mechanism, strengthening cross-border supervision Above indicates mainly the exposure to China and Macau portion of GBA and excludes HK exposure Source: Company data, DBS HK and liquidity monitoring
To focus on developing featured finance including shipping finance, financial technology, aircraft and ship leasing etc
To facilitate anti-money laundering, anti-terrorism financing, anti- tax evasion co-operation and information sharing mechanism
Insurance To support Guangdong, Hong Kong and Macau insurance institutions to co-operate and develop innovative cross-border motor insurance and health insurance so as to offer effective underwriting, due-diligence and claims etc
To support China, HK and Macau insurance institutions to develop cross-border renminbi reinsurance business
To support Hong Kong and Macau financial institutions co-operate and co-develop offshore finance business and research international shipping insurance etc.
DBS Asian Insights SECTOR BRIEFING 74 72
Healthcare
Healthcare expenditure growth in Guangdong province to accelerate
Healthcare expenditure in Guangdong expanded by 19% CAGR in 2010-16 to Rmb419bn, and outpaced the national growth by 4ppts. Healthcare expenditure ‘s contribution to Guangdong province’s GDP surged from 3.3% to 5.2% in 2010-16. The strong momentum should continue. We expect CAGR to accelerate to 20% in 2018-22 and then stabilise at 15% in 2022-30, driven by 1) population growth accelerating from 0.68% in 2015 to 0.86% from 2018 onwards, due to relaxation of birth control and increasing migration into the province resulting from expanding economic activities; 2) expanding medical facilities, as planned by the Guangdong provincial government, for example, the number of beds per thousand of permanent population will increase from ≤4.80 in 2018 to ≤6.0 in 2020.
We identify three areas with great potential in the Great Bay Area (GBA):
1. Surging demand for hospitals in Dongguan. The population growth in Dongguan could be faster than other GBA cites after its metro network is connected to Shenzhen and Guangzhou in 2020-22, thus increasing demand for hospitals. Meanwhile, medical resources there are currently very tight as evidenced by the higher ratio of population/ doctors in medical institutes than the average for Guangdong province (2017: 463 vs 431), particularly in the areas of paediatrics, oncology and psychiatry. Thus, there is huge opportunity from establishing hospitals that focus on these therapeutic areas
2. Increasing medical tours to Hong Kong, which has medical services of international standards, e.g. its survival rate after lung transplant surgery is higher than the US, Canada, and Singapore. Hong Kong hospitals can also supply medicines for treatment of serious diseases which Mainland may not be able to supply. This may attract more and more people from GBA to Hong Kong as transportation connectivity improves
3. Demand for clinics in GBA cities from Hong Kong retirees living there should increase as Hong Kong government is considering to allow healthcare vouchers issued to the elderly to be used in GBA cities. UMP and C-Mer eye care are expanding their clinic networks to the GBA to capture the demand. We believe more Hong Kong healthcare companies will do the same to ride on the trend DBS Asian Insights SECTOR BRIEFING 74 73
Healthcare expenditure in Guangdong (Rmb bn)
Source: Health & Family Planning Commission of Guangdong Province
Planned increase of medical facilities in Guangdong
2015 2018 2020
Number of medical institute's bed 4.02 ≤4.80 ≤6.0 per thousand of permanent population
Number of practicing (assistant) doctor 2.11 2.41 2.8 per thousand of permanent population
Number of registered nurse 2.35 2.69 3.5 per thousand of permanent population
Number of general practitioner 1.41 2 3 per thousand of permanent population
Source: Health & Family Planning Commission of Guangdong Province
Surging demand for hospitals in Dongguan
As discussed above, the population is set to increase in GBA. This would underpin the development of hospital services, particularly in cities facing a supply shortage. Among the GBA cities, we estimate that supply shortage of hospital services is more acute in Jiangmen, Zhaoqing, Dongguan as the ratio of population/number of doctors in medical institutes is higher than Guangdong province’ average (see the following table), implying medical resources are tighter than other cities in Guangdong. DBS Asian Insights SECTOR BRIEFING 74 74
Population to number of doctors in medical institutes
2017 Number of doctors Population (,0000) Population / in Number of medical institutes doctors in medical (,0000) institutes Guangdong province 25.9 11,169 431
Guangzhou 5.0 1,450 290
Shenzhen 3.3 1,253 380
Foshan 1.8 766 426
Dongguan 1.8 834 463
Jiangmen 1.0 456 456
Huizhou 1.3 478 368
Zhaoqing 0.8 412 515
Zhongshan 0.8 326 408
Zhuhai 0.6 177 295
Source: http://www.gdhealth.net.cn, DBS HK
The medical facilities in Dongguan, in particular, will be even tighter in future as its population growth will accelerate after its metro network connects to Shenzhen and Guangzhou by 2020 and 2022. The population of these two cities could then spill over to Dongguan. In terms of population in 2017, Guangzhou (14.5m), Shenzhen (12.5m), Dongguan (8.3m) are the top three populated cities within Guangdong province. In terms of residential property prices as measured by price per square meter in Sep 2018 according to E-House, Dongguan’s prices were 68% and 16% lower than Shenzhen and Guangzhou (Rmb17,700, Rmb54,697, Rmb21,000 per square metre respectively). Therefore, as stated above, the expansion of the metro network could lead to migration from Shenzhen to Guangzhou to Dongguan due to better transportation connectivity and more affordable property prices, thus creating more demand for hospital services.
To develop the hospital business in Dongguan, focusing on services areas with supply shortage is an easier and faster way to grow revenue. Dongguan’s government pointed out three therapeutic areas that are facing a supply shortage: DBS Asian Insights SECTOR BRIEFING 74 75
1. Paediatrics 2017 Number of doctors Population (,0000) Population / Source: Chinese People’s Political Consultative Conference Dongguan Committee. in Number of After the relaxation of birth control in 2016, the shortage should get more severe. medical institutes doctors in medical (,0000) institutes 2. Oncology Guangdong province 25.9 11,169 431 Source: Dongguan Municipal Health & Family Planning Bureau. Guangzhou 5.0 1,450 290 3. Psychiatry Shenzhen 3.3 1,253 380 Source: “Dongguan municipal 13th Five-Year Plan for hygiene and health” issued by Foshan 1.8 766 426 Dongguan government.
Dongguan 1.8 834 463 Increasing medical tours to Hong Kong for Mainlanders
Jiangmen 1.0 456 456 As infrastructure and transportation among GBA cities improves, we believe there will be Huizhou 1.3 478 368 more mainlanders travelling to Hong Kong to seek medical services and pharmaceutical products because: Zhaoqing 0.8 412 515 1. Hong Kong can supply crucial medicine for treatment for serious diseases which Zhongshan 0.8 326 408 Mainland may not be able to supply. Zhuhai 0.6 177 295 Example 1: Human Papillomavirus 9-valent Vaccine produced by Merck (MRK US), for prevention of cervical, vaginal, vulvar, and anal cancers, and genital warts caused by 9 types of human papillomavirus. This product is well-known and welcomed by mainlanders. Hong Kong started to supply this in Mar 2016. Mainland China approved this product in Apr 2018 for launch. There is a two-year time lag before the drug is sold on the Mainland.
Example 2: PD-1 (programmed cell death protein 1) inhibitors. This is a new generation of anti-cancer drugs based on immunotherapy. It is used to treat certain cancers in the final stages where traditional treatment has been ineffective. The medicines were registered in Hong Kong by Merck and Bristol-Myers Squibb (BMY US) in Dec 2015 and launched afterwards. Mainland China approved this product in June 2018. There is time lag of over two years before the drug is sold on the Mainland.
The reason of the time lag, we believe, is due to the shorter time it takes for imported drugs to be registered in Hong Kong. Based on our discussions with a drugs distributor in Hong Kong, in terms of average time taken for registration, it is c.4 years in Mainland China, Singapore c.2-3 years, and Hong Kong c.1-2years. As long as the drug is approved to be marketed in developed countries, the time for approval in Hong Kong can be shortened. We estimate another reason for the shorter registration and approval time in Hong Kong (comparing to Mainland China) is that medical institutes in Hong Kong use English as their formal communication language. DBS Asian Insights SECTOR BRIEFING 74 76
It is easier for them to understand the medicines being marketed in English-speaking developed countries.
2. There are areas of medical services where Hong Kong is better than Mainland China.
As mentioned above, Hong Kong can provide some crucial medicines for treatment of serious diseases which Mainland China may not be able to provide. This enables Hong Kong to provide medical services better than Mainland China in certain aspects, for example, precision medicine (targeted to make a more accurate diagnosis). According to some media reporting, as of Jul 2017, Hong Kong has approved 23 targeted therapy medicines in this aspect while Mainland China has only approved 10. This allows Hong Kong to provide better level of service in this aspect.
Also, the medical services in Hong Kong is up to international standards. We have two examples here.
Example 1: Heart transplant surgery. The 1-year and 5-year survival rate after surgery are standards used to judge the quality of the surgery. The survival rate after surgery in Hong Kong is higher than certain developed countries.
Survival rate after heart transplant surgery
Survival rate after heart transplant surgery 1 year 5 years
Hong Kong 85% 80%
U.S. 88% 75%
Singapore 80% 70%
Source: National Heart, Lung & Blood Institute (U.S.), The Hong Kong Society of Transplantation, Singapore Heart Foundation Example 2: Lung transplant surgery. The survival rate after surgery in Hong Kong is higher than certain developed countries.
Survival rate after lung transplant surgery
Survival rate after lung transplant surgery 1 year 5 years
Hong Kong 100% 78%
U.S. 88% 54%
Canada 80% 60%
Singapore 76% 60%
Source: www.hkgolden50.org, Public Health Agency of Canada, SingHealth DBS Asian Insights SECTOR BRIEFING 74 77
There are listed companies actively arranging medical tours for Mainlanders to travel to Hong Kong to enjoy its advantages in imported medicine supply and medical services, like UMH. We believe there will be more and more healthcare companies that will participate in this business.
Expanding clinic network to capture demand from Hong Kong retirees living in GBA cities
According to some media reporting, the Hong Kong government is considering allowing healthcare vouchers issued to elderly aged 65 and above (annual amount: HK$2,000 per person) to be used in GBA cities. As such, demand for healthcare services from Hong Kong retirees living in GBA cities will increase. We estimate there are c.20,000 Hong Kong retirees living in GBA cities currently. As infrastructure and transportation among GBA cities improve, we believe there will be more and more from Hong Kong retiring there.
For treatment of serious diseases, we estimate those retirees will still return to Hong Kong for that. But for treatment of less serious illnesses like colds and body checks, they may do them in Mainland, thus boosting demand for clinic services there.
Compared to mainland clinic companies, we believe that retirees are more confident to visit clinics operated by companies with a Hong Kong background. Therefore, Hong Kong Survival rate after heart transplant surgery 1 year 5 years companies are in a better position to capture this source of demand. UMP and C-Mer eye Hong Kong 85% 80% care are expanding their networks in Guangdong province to seize the opportunity. We estimate more Hong Kong healthcare companies will do so. U.S. 88% 75% Other than demand from Hong Kong retirees, we estimate these clinics would also attract Singapore 80% 70% demand from the mainland population as medical resources in China are facing supply shortages. According to Frost & Sullivan, a patient in China spends on average 3 hours on an outpatient visit, in which the effective time dedicated to the patient’s diagnosis is only 8 minutes. To avoid a long waiting time and obtaining better quality medical services, we believe some mainland patients will seek help from clinics operated by Hong Kong companies.
Survival rate after lung transplant surgery 1 year 5 years
Hong Kong 100% 78%
U.S. 88% 54%
Canada 80% 60%
Singapore 76% 60%
DBS Asian Insights SECTOR BRIEFING 74 78
Home appliances sector
Growth via premiumisation and volume
The Home appliance industry in China sustained healthy sales CAGR of 6.1% in 2010- 2017, entirely driven by volume growth (7.2% volume CAGR). In the coming 5 years, the sector could see decent 5% sales CAGR, to be partly lifted by higher average selling price (ASP), and partially from volume CAGR of 3.5% (source: Euromonitor).
In recent years, we have already come across a rising trend of premiumisation. According to AVC (奥维云网), the proportion of sales of mid- to high-end products in key segments in 2014-2017 has expanded, such as refrigerators (+28.9ppts to 72.7% of total), washing machines (+18.1ppts to 73.9%), and air conditioners (+9.7ppts to 78.9%). As household affordability in China continues to grow in the medium-term, we expect the increase in ASP along with moderate volume growth to support expansion of the home appliance market.
Home appliance sales growth in PRC
Source: Euromonitor
Smart appliances In particular, smart appliances should have the highest growth potential. At this early stage leading way of development, penetration of smart home appliances in China was only in the high-teens in 2017 among the key product categories, and there is ample room to expand. IHS Markit projects the average penetration rate of smart appliances for air conditioners, washing DBS Asian Insights SECTOR BRIEFING 74 79
machines and refrigerators to reach over 35% by 2021, and sees further scope to expand in the longer term. This could translate into an average volume CAGR of c.25% for smart appliances in 2017-21, comprising nearly 40% CAGR for refrigerators, over 20% CAGR for washing machines, and over 15% for air conditioners.
Life cycle of smart home appliances
Introduction Growth Maturity
Unit shipment
Production definition Smart home Hardware makers Cloud platform Operation System Integrated service Smartphone control IoT automation and Providers Large data Services Higher industry entry Standard issue Grow quickly Barrier Low penetration New business model Low growth ratio Conventional business Brisk competition Dominators Model Large players Online sales channels Better profit
2010-2020 2021-2030 2031-
Source: IHS Markit (May 2018), DBS HK
GBA to see better prospects
The GBA should hold even better growth potential. As we refer to the historical development of major economic hubs worldwide, such as the San Francisco Bay Area (SFBA), we specifically look at the wage level of staff working in the home furnishing & appliances stores that mainly earn commission-based salaries, and compare with the overall US market. On average, the income level in SFBA expanded at a faster 2ppt CAGR throughout the 3 decades during1970-2000 against the overall US market based on metropolitan areas. Accordingly, we expect the home furnishing & appliances sector in China’s GBA to enjoy a better performance relative to the national average in the mid- to long-term.
Anticipating a faster progress on GBA development in the next 5-10 years compared to SFBA’s progress, we project home appliance sales in the GBA to grow by about 7% CAGR during 2018-2022, which could be c.2ppt ahead of the sector’s national growth rate during the same period. Smart appliances in the region should also stage faster growth than China overall, at a sales CAGR of nearly 30% based on our projections. DBS Asian Insights SECTOR BRIEFING 74 80
Home appliance sales growth in PRC
CAGR 1970-1980 1980-1990 1990-2000
US (Metropolitan Portion) 8.9% 9.2% 6.4%
San Francisco-Oakland-Hayward, CA 10.9% 10.3% 8.5% (Metropolitan Statistical Area)
Note: Home furnishing & appliance stores include retail stores selling goods used for furnishing the home, such as furniture, domestic stoves, refrigerators, gas appliances and other household electrical, floor coverings, draperies, glass and chinaware, etc. Source: US Bureau of Economic Analysis
Who could be the major beneficiaries in GBA?
The home appliance manufacturing sector (represented by “the manufacture of electrical machinery & equipment industry”) was ranked as the second largest manufacturing industry in Guangdong province, and contributed 10% of total industrial gross output value in the province as stated in the 2017 Guangdong Statistical Yearbook. Going forward, we believe the sector should sustain its importance. Among the nine GBA cities in Guangdong province, Foshan, Shenzhen, Zhongshan, Guangzhou, and Zhuhai altogether produced 83% of the province’s gross output value. Major Chinese home appliance players such as Midea, Gree, Hisense Kelon, etc. are all based in these cities. Riding on better GBA spending power ahead, we should see these companies enjoying rapid business expansion. DBS Asian Insights SECTOR BRIEFING 74 81
GBA electrical machinery and equipment industry gross output value
CAGR 1970-1980 1980-1990 1990-2000 City "Industrial Gross "Manufacture of Industrial Gross Output Home Appliance Company Output Value above Electrical Machinery Value Contribution Example & Remarks US (Metropolitan Portion) 8.9% 9.2% 6.4% Designated Size and Equipment from Manufacture of (RMB 100m)" Industry Gross Output Electrical Machinery San Francisco-Oakland-Hayward, CA 10.9% 10.3% 8.5% Value and Equipment (Metropolitan Statistical Area) (RMB 100m)" Industry
Foshan 21,187 4,727 22% Midea (000333.CH), Hisense Kelon (000921.CH/921.HK), Macro (000533.CH), Vanward (002543.CH), Galanz Shenzhen 27,292 2,329 9% Mainly electronic equipment manufacturers Zhongshan 6,615 1,205 18% Vatti (002035.CH), Homa (002688.CH) Guangzhou 18,907 1,147 6% Mainly electronic equipment manufacturers Zhuhai 4,353 1,124 26% Gree (000651.CH) Dongguan 14,692 1,033 7% Mainly electronic and optoelectronic equipment manufacturers Huizhou 7,617 546 7% Mainly battery manufacturers Jiangmen 4,274 429 10% Zhaoqing 4,022 85 2% GBA 9 cities 108,961 12,627 12% Guangdong 133,768 13,613 10%
Source: Guangdong Statistical Yearbook 2017, Wind
Production of major white goods in Guangdong province
Source: Guangdong Statistical Yearbook
Source: IHS Markit (May 2018), DBS HK DBS Asian Insights SECTOR BRIEFING 74 82
Notably, Midea should benefit the most among major peers based in the GBA. Aside from strong growth prospects of smart appliances, the group’s earlier acquisition of KUKA – a key manufacturer of industrial robots and solutions for factory automation – should also pay off. The overall market size of machinery robots in China is projected to grow by 22.7% CAGR, from US$2.2bn in 2018 to US$5.1bn in 2022, predominantly driven by volume growth (source: OCN). Coupled with synergies from KUKA in terms of further automation & technical advancement for Midea’s production systems and business operations, we should see plentiful opportunities for the group to expand market share in both the home appliance industry as well as automation & technology sector.
China machinery robot sales (by volume)
Source: OCN
China machinery robot market (by sales value)
Source: OCN DBS Asian Insights SECTOR BRIEFING 74 83
While Haier is headquartered in Qingdao rather than the GBA region, the group stands tall among smart appliance leaders across China, with high demand for its products within GBA. The group is ahead of the industry, as Haier had rolled out China’s first magnetic central air-conditioner in 2006 for installation in the Shenzhen China Merchants Real Estate Project and saw good results. This year, the group will launch its air-cooling heat bump magnetic central air-conditioner in April, which also leads the industry as the only smart energy-saving solution (for connection and inter-operation) in the PRC, reinstating Haier’s leading position in research & development of smart appliances.
In view of the robust prospects in GBA, on Sep 30, Haier Group also unveiled plans to build the world’s most advanced air-ecology intelligence & manufacturing centre in Nansha, Guangzhou (GBA). Therefore, we believe Haier Group should have sufficient capacity to enjoy strong growth in medium to longer run.
Lingering trade war concerns?
At the moment, one of the hottest global topics include whether the trade war between China and the US would accelerate further in the near-term. While some in the market have started to pencil in the worst-case scenario, we note that total exports of Guangdong province to the US market was 23% in 2016, which is a much higher proportion that some would expect. Besides, given the bulky nature of home appliances, the sector is still selling more of its local-made products in the domestic or Asian markets relative to most other industries (e.g. textiles, apparels). Hence, we believe the home appliance sector in China should do well in the medium to longer run.
Guangdong exports: 23% channeled to the US (2016)
Note: Assume all Hong Kong re-exports to the US are directly come from Guangdong Source: Guangdong Statistical Yearbook, Hong Kong Census and Statistics Department DBS Asian Insights SECTOR BRIEFING 74 84
Industry CAGR (2018-2030F): nationwide vs. GBA
Key drivers 2018- 2022F 2018- 2030F Projection basis / Stock ideas sales CAGR sales CAGR benchmark
Home Improving 5.0% 4.9% Euromonitor; GDP & Leading players in China appliances household income; population growth of including Qingdao (Nationwide) rising population China Haier (600690.CH), Haier Electronics (1169. HK), Midea (000333.CH), Gree (000651.CH) Home Improving 7.0% 6.9% Euromonitor; GDP & Operators based in appliances household income; population growth of the Greater Bay Area, (Greater Bay rising population Greater Bay Area; a case including Midea Area) study of San Francisco (000333.CH), Gree Bay Area (000651.CH), Hisense Home Appliances (921. HK / 000921.CH), Vatti (002543.CH), etc. Smart Improving c.30% 25-30% IHS Markit; penetration Players with stronger appliances affordability; rates; GDP & population edge in R&D and (Greater Bay consumption growth of Greater Bay premiumization, Area) upgrade; rising Area; a case study of including Qingdao young population San Francisco Bay Area Haier (600690.CH), Haier Electronic (1169. HK), Midea (000333.CH) Robotics Improving 22.7% c.20% OCN; GDP & population Midea (000333.CH), (Nationwide) affordability; growth who has acquired the premiumisation robot manufacturer and consumption KUKA (KU2.DE) upgrade; talent inflow
Source: Euromonitor, IHS Markit, OCN, US Bureau of Economic Analysis, GDASS, YCWB, DBS HK
1. Market share held by various players in major home appliance segments in China Refrigeration Appliance Market Share By Sales Volume (PRC)
Source: Euromonitor DBS Asian Insights SECTOR BRIEFING 74 85
Air Conditioner Market Share By Sales Volume (PRC)
Source: OCN
Washing Machine Market Share By Sales Volume (PRC)
Source: Euromonitor * Little Swan is owned by Midea Group. Sanyo was acquired by Panasonic in 2008 and then bought by Whirlpool in 2013.
2. Smart appliances: penetration by segment in China China domestic smart room air conditioner unit shipments forecast, 2018-2021
Source: Guangdong Statistical Yearbook 2017, Wind DBS Asian Insights SECTOR BRIEFING 74 86
Infrastructure and construction
FAI spurs economic growth
Guangdong’s economic growth is highly correlated to the fixed asset investment (FAI) trend. Total FAI in Guangdong grew at a CAGR of 14% from 2008-2017. This rapid expansion was attributable to the growing importance of the southern region and huge investment inflows to tap the robust outlook. As a result, Guangdong’s GDP expanded at a relatively strong pace in the past decade.
FAI-driven GDP growth in Guangdong
Source: CEIC, Wind
Out of the total FAI in Guangdong, basic government infrastructure investments cover a broad range of projects, including all aspects of transportation, amenities, and other government public projects undertaken by SOEs.
Within the GBA, total FAI reached Rmb2.8tr in 2017. The property, manufacturing, transportation and environmental segments accounted for the bulk of the total FAI, as shown in the following chart: DBS Asian Insights SECTOR BRIEFING 74 87
FAI split in GBA (2018)
Source: Guangdong government, DBS HK
Transportation links crucial to GBA’s future prospects
In the last decade, the Guangdong government had spent massive amounts on the transportation sector. The transport FAI has increased substantially over the years, as this is critical for economic development. From 2003-2018, transport FAI surged from around Rmb100bn to Rmb940bn.
Guangdong transportation FAI projections (2003-2030F)
Source: Wind; DBS HK DBS Asian Insights SECTOR BRIEFING 74 88
Guangdong’s transportation network is well connected to Hong Kong and Macau. The super network, including mega projects such as the Zhuhai Macau Bridge and the High-Speed Railway Link from Hong Kong, is one of the important transportation investments in recent years. The upcoming transportation projects such as the Shenzhen Zhongshan Bridge and Humen Second Bridge should further facilitate inter-city connectivity in Guangdong. The goal is to achieve the “one-hour” living circle within the GBA by 2030. Given China’s expertise in construction of mega projects, achieving this goal is not an issue.
We also see other opportunities in the public transportation sector – metro and subway systems development. The proportion of passengers travelling on metro systems within the whole public transportation sector has been on the rise post the global financial crisis. In 2016, metro systems accounted for about 36% of the total passenger traffic. The Guangdong government has been focusing on metro and subway network development in the past ten years. The total operating length of the metro system in Guangzhou had increased from 135km in 2008 to 742.1km in 2017. Based on existing metro projects under construction, by 2022, Guangdong’s metro systems will operate a total of 955km, an approximate 40% increase from 2017’s level.
Share of passenger traffic on Guangdong’s metro system to public transportation sector
Source: Wind Guangdong passenger traffic and metro operating length projections (2003-2030F)
Source: Wind; DBS HK DBS Asian Insights SECTOR BRIEFING 74 89
While China is seeking greater social participation in infrastructure developments, the public-private partnership (PPP) model is becoming an important funding source for future infrastructure developments. Since the start of the PPP model, the total value of transportation projects under this had reached Rmb140bn as at end-July 2018.
Guangdong PPP investment values
Source: Wind
GBA transportation network extension
Foshan Guangzhou Dongguan ( ) (佛山) Intercity MRT 廣州 Guangzhu (東莞) Guangzhou South Humen Pearl West Line Station River Bridge (廣珠西線) (城軌廣州南站) (虎門大橋) Shunde Shenzhen Intercity MRT (順德) Intercity MRT Shunde Station Zhongshan Shenzhen-Zhongshan (深圳) ( 城軌順德站 ) Station Passage/Bridge (深中通道) (城軌中山站) (under construction) Jiangmen Zhongshan-Kaiping Hong Kong Qianhai New Expressway Zhongshan Intercity MRT Zhongshan Port (香港) (江門) Nanlang Station Terminal District (中開平高速) (中山) (城軌南朗站) (中山港碼頭) (前海新區) China HK City Ferry Terminal (under planning) Jiuzhou Port Terminal Intercity MRT (中港城碼頭) Cuiheng Station (九洲港碼頭) Intercity MRT (城軌翠亨站) Jiangmen Station HK -Macau Hong Kong- Zhuhai - Macau Bridge Ferry Terminal Zhuhai (港珠澳大橋) (港澳碼頭) (珠海) Werstern Coastal Expressway (西部沿海高速) Macau Outer Harbour (澳門) Ferry Terminal (外港碼頭)
Source: The HK Economic Digest, DBS HK DBS Asian Insights SECTOR BRIEFING 74 90
The Guangdong government has mapped out a massive transportation network that comprises highways, bridges, railways, and metro systems, as shown in the chart below. For instance, the travelling time from Zhongshan to Shenzhen will take merely 30 minutes upon completion of the Shenzhen-Zhongshan Bridge in 2024. The Zhongshan-Kaiping Expressway which is in the planning stage, could also shorten the travelling time between Jiangmen and Shenzhen to one-and-a-half hours.
The development of mega infrastructure projects underpins the construction sector’s future robust outlook based on planned infrastructure projects and financial support from the PPP model. Major state-owned construction companies stand to benefit from infrastructure project developments, including China Communications Construction, China Railway Construction Co, China Railway Group, China State Construction Engineering, and China State Construction International.
Guangdong’s automobile gross industrial output
Source: CEIC DBS Asian Insights SECTOR BRIEFING 74 91
Logistics and warehouses
Logistics sector is one of the key sectors that China has been trying to push through in the past decade. Logistics cost as a percentage of GDP in China has seen significant improvement from 23.7% in 1991 to 14.6% in 2017 (and 14.3% based on our estimate), but is still much higher than US’ and Japan’s 8-9%. Therefore, development of the logistics sector is key to improving cost effectiveness in China, and the sector is highly leveraged on production, consumption and export. GBA is one of the key logistics and warehouse markets in China. Guangdong province’s logistics cost as a percentage of GDP is slightly lower than China’s average but still has room to improve. Guangdong targets to reduce the ratio to around 14.5% by 2020 from 14.7%.
Key drivers
Logistics demand is largely from e-commerce and retail sales, third party logistics, manufacturing, and export. The former two are major growth drivers for modern logistics properties.
1. Online retail sales has plenty of room to grow
Guangdong’s online retail sales reached Rmb1.3trillion in 2017, higher than Alibaba’s homebase in Zhejiang province. Despite a slowdown in the growth rate, current online retail sales is still growing at double the speed of total retail sales growth in the region. Guangdong’s online retail sales as a percentage of total retail sales was 35% in 2017 (vs. 16% for China). Compared with Beijing’s 48%, Shanghai’s 47% and Zhejiang’s 42%, Guangdong’s online retail sales still has plenty of room to grow.
2. Third party logistics in Guangdong is growing at faster pace than peers
Third party logistics sector is growing at a fast pace along with e-commerce. It is also the main driver of demand for modern warehouse properties. Third-party logistics companies in GBA recorded higher annual revenue and growth rates than Shanghai, Zhejiang and Beijing.
3. Exports and manufacturing might be affected by trade war but still keeping pace with economic restructuring progress
Guangdong’s exports amounted to USD646m, up 8% y-o-y in 2017 following 7% y-o-y decline in 2016. Industrial value-added growth slowed down from 16.8% in 2010 to 7.2% in 2017. The region has been restructuring its economy and targets to enhance its services sector to focus on the higher value-added portion of the production value chain. DBS Asian Insights SECTOR BRIEFING 74 92
Modern logistics space forecast
Modern logistics space is the key bottleneck of e-commerce development as reported by e-commerce players. Constrained by supply in the market, Alibaba, JD, etc. are building their own warehouses to support their operations. Guangzhou, Foshan, Dongguan, and Shenzhen are key markets supplying modern logistics space.
Logistics space per Our data shows that existing modern warehouse supply (in GFA term) in Guangdong and capita is lower in Hong Kong amounted to 7.3m sm (or 4.5m sm in Guangdong), which translates into Guangdong than YRD 0.11sm per capita (0.07sm per capita in Guangdong), which is significantly lower than and much lower US’s 1.17sm per capita and YRD’s 0.16sm per capita. Even in YRD, we continue to see than US supply shortage, evidenced by lowest vacant level and highest rental growth in the region. Therefore, we expect warehouse per capita in Guangdong to ramp up to at least the level in YRD, especially after improving connectivity in GBA.
We expect limited future supply in Hong Kong and the majority of supply will come from Guangdong province. Benchmarking YRD’s current space per capita and factoring population growth, Guangdong will need 15.5m sm of modern warehouse space in 2030, or 3.4x the existing space. Total GFA in Guangdong and Hong Kong will likely go up to 18.3m sm in 2030, vs. YRD’s existing level of 19.9m sm.
At present, Guangzhou, Dongguan, and Foshan are the current major gateways from Guangzhou to the provinces in central China including Hunan, Jiangxi, Hubei, etc due to their matured transportation networks. Along with the development of infrastructure in the region and lower land cost, we believe Zhaoqing and Zhongshan may have the highest growth in the warehouse market in the region.
Given land supply constraints, we believe the rentals has good growth potential. Rental growth of warehouses in the GBA was the among the highest compared to key cities at 4-5% y-o-y during 2013-2018. There is a significant price difference between East GBA and West GBA, which may continue.
Major players in the The ability to provide nationwide or even a global warehouse network is the key competitive warehouse sector advantage in the warehouse sector. The assets under management of the top players is headquartered in GBA significantly larger than the second-tier players. After privatising SGX-listed Global Logistics are Vanke, Blogis, Property (GLP), Vanke with its headquarters in Shenzhen, has been growing its warehouse Guangzhou R&F, business at full speed. Blogis, which is under Shenzhen Chiwan, also has its headquarters and Kerry in Shenzhen. Guangzhou R&F has sizeable warehouse land in Guangzhou to develop into modern logistics facilities. SF Express, China’s largest 3PL company, is also headquartered in Shenzhen. DBS Asian Insights SECTOR BRIEFING 74 93
Retail sales, Guangdong province
Source: Wind, DBS HK Retail sales, Guangdong province
Source: Wind, DBS HK Guangdong online retail sales and growth
Source: Wind, DBS HK DBS Asian Insights SECTOR BRIEFING 74 94
Guangdong online retail sales as % of total retail sales
Source: Wind, DBS HK Revenue of third party logistics sector
Source: Wind, DBS HK Revenue growth of third party logistics sector
Source: Wind, DBS HK DBS Asian Insights SECTOR BRIEFING 74 95
Export comparison
Source: Wind, DBS HK
Export growth comparison
Source: Wind, DBS HK Modern logistics space per capita
Source: Cushman & Wakefield, CBRE, Wind, DBS HK DBS Asian Insights SECTOR BRIEFING 74 96
Retail sales per square meter
Source: Cushman & Wakefield, CBRE, Wind, DBS HK Manufacturing sector growth
Source: Wind, DBS HK Rental CAGR growth (2013-2017): YRD tops the list, followed by GBA
Source: CBRE, Wind, DBS HK DBS Asian Insights SECTOR BRIEFING 74 97
Key logistics property market
Guangzhou,GUANGDONG existing logistics centre Foshan, a satelite and gateway to Hunan, Jiangxi, and hub providing more Hubei, future to Chongqing warehouse spaces Guangzhou Zhaoqing Huizhou Foshan Dongguan Shenzhen, high demand but Zhongshan Jiangmen Shenzhen limited land supply Zhuhai Hong Kong Macau Zhaoqing, Jiangmen and Zhongshan, emerging makets Future gateway to Guangxi and Guizhou, further to Yunan and Sichuan
CHINA
Source:DBS Difference in rentals between East and West GBA
Source: CBRE, Wind, DBS HK DBS Asian Insights SECTOR BRIEFING 74 98
Major players
Warehouse companies Chinese name Code (if applicable) Headquarters GFA (m sm) GLP 普洛斯 NYSE: GLP Shanghai 31.2 Goodman 嘉民管理咨詢 ASX: GMG Australia 2.8 Blogis 寳灣物流 N/A Shenzhen 2.5 CNLP 中國物流資產控股 HKSE: 1589 HK Shanghai 2.4 ESR (E-Shang) 上海益商倉儲服務 N/A Shanghai 2.3 Cainiao 菜鳥物流 N/A Shenzhen 2.2 Mapletree 豐樹物流信托 SGX: M44U Singapore 2.2 Prologis 安博 NYSE: PLD Shanghai (HK HQ) 1.9 Vanke 万科 HKSE: 2202 HK / SZ: 000002 CH Shenzhen 1.5 Vipshop 唯品會 NYSE: VIPS Guangzhou 1.5
Major warehouse users and owners English name Headquarters Warehouse (mn sm) 京東物流 JD Logistics Beijing 6.33 蘇寧物流 Suning Nanjing 6 安得智聯科技 Annto Foshan 5.85 青島日日順 Qingdao 4.83 廈門象嶼 XMXYG Xiamen 3.22 招商局物流 China Merchat Logistics Shenzhen 1.51 中遠海運物流倉儲 COSCO Shipping Logistics Beijing 1.5 山東蓋世國際物流 Gaishi Group Jinan 1.5 嘉里大通物流 Kerry Logistics (636 HK) Hong Kong 1.5 深圳富泰通国际物流 Shenzhen 1.33
Source: Companies, DBS HK Major 3PL players
Company English name Stock code Headquarters 順豐控股 SF Express 002352 CH Shenzhen 韻達股份 Yunda Express 002120 CH Shanghai 申通快遞 STO Express 002468 CH Shanghai 中通快遞 ZTO Express ZTO US Shanghai 圓通速遞 YTO Express 600233 CH Shanghai 德邦股份 Deppon Logistics 603056 CH Shanghai 天天快遞 TTKD Express Nanjing 晟邦物流 Chengbang Logistics Nanjing 百世快遞 Best Express Hangzhou 京東物流 JD Logistics Beijing 中國郵政速遞物流 EMS Beijing 宅急送 ZJS Express Beijing
Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 99
Office
Strong correlation between tertiary or services industry’s GDP and occupied office space
We have run a linear regression on historical nominal GDP from the services industry against occupied Grade A office space for Shenzhen for the past 12 years, and observed strong correlation coefficient of 99%. We believe this trend will continue.
Linear regression between tertiary GDP and occupied Grade A office space: Shenzhen
Source: JLL, DBS HK
Room for industry As discussed above, service industry’s contribution to GDP in GBA is still low when upgrade compared to global bay areas, as manufacturing remains a key industry cluster in GBA. This could reflect its lower GDP per capita vs. the three global bay areas. We expect key cities in GBA (especially Guangzhou and Shenzhen) to continue to experience industry upgrades after fast urbanisation over the past decades. Tertiary industry as a percentage of local GDP has risen by 0.9-1.3ppts in Guangzhou and Shenzhen each year in the past several years and we use this trend as a key assumption to forecast service industry’s local GDP contribution in 2030. DBS Asian Insights SECTOR BRIEFING 74 100
Comparison of tertiary industry as % of GDP, 2017
Source: CBRE, CEIC, DBS HK Factors to support industry upgrades in GBA will include government support in the three Free Trade Zones (FTZ) in Guangdong and its plan to transform GBA into a hub similar to Silicon Valley, together with financial innovation, tax incentives, and talent immigration programmes.
Three FTZs in After the first free trade zone (FTZ) in Shanghai in 2013, the central government approved Guangdong to a further three FTZs in Guangdong province in late-2014 - Nansha in Guangzhou, Qianhai/ stimulate economic Shekou in Shenzhen and Hengqin in Zhuhai. The three FTZs aim to collaborate with the two integration and attract special administrative regions in GBA in the fields of business ties, financial innovation, talent companies management and tax agreements. By the end of 2017 (or three years after establishment), the number of newly-registered companies in the three FTZs has exceeded 210k, according to Guangdong FTZ’s official website. The three FTZs have also attracted 9,639 foreign companies, with total foreign investments of US$13bn during 2015-2017.
Becoming China’s ‘Silicon Valley’
According to Deloitte’s report, there are 115 unicorns (privately held start-up companies that are valued at over US$1bn) in Asia, accounting for 46% of the global total. China was ranked second in terms of the number of unicorn companies (98), followed by India (10), Korea (3), Singapore (2), and Indonesia (1). In China, the unicorn companies are also concentrated in the three mega regions and tier 1 cities. We expect them to be the next generation corporations, which will be big GDP contributors and Grade-A office occupiers. Shenzhen is expected to be China’s tech hub, benefiting from China Manufacturing 2025 initiatives and government’s aim to enhance its global competitiveness.
According to official websites, 229 enterprises in GBA had signed for cross-border Rmb loans, with cumulated amount of cross-border loans withdrawn at Rmb42.9bn as at end- 2017. We also expect gradual financial liberalisation, rise of Fintech, market connect (SZ-HK stock connect and bond connect, etc.) and more financial products (upcoming C-REITs) to continue to enable Shenzhen to become a financial hub. DBS Asian Insights SECTOR BRIEFING 74 101
Eligible corporates and foreign talents (including those from Hong Kong, Macau, and Taiwan) could enjoy 15% corporate income tax or personal income tax rate in Qianhai.
Several municipal governments in GBA have launched various talent programmes over the past years. In addition, Shenzhen also initiated favourable personal income tax (15%, even lower than that in Hong Kong) scheme to attract overseas talents (including those from Hong Kong, Macau and Taiwan).
Expecting Shenzhen Given improving infrastructure in GBA and business ties inside the region, we expect the to accelerate services proportion of tertiary industry to GDP to accelerate in the key cities such as Guangzhou industry development and Shenzhen, while manufacturing will be relocated to West GBA or outside GBA. As mentioned above, tertiary industry as a percentage of local GDP has risen by an average of 0.9ppt and 1.3ppts p.a. in Shenzhen and Guangzhou respecitvely over the past several years. We expect the ratio to accelerate to 1.3ppts for Shenzhen in the next decade while we expect Guangzhou to remain its historical trend. As such, we expect teritary industry contribution’s to local GDP to improve to 75.8% and 79.0% in Shenzhen and Guangzhou respectively. At the same time, we expect Shenzhen and Guangzhou to outpace Hong Kong in terms of tertiary industry’s contribution to GDP.
Solid demand from Demand for office space in core areas in Shanghai is still on the rise, driven by high-tech industry upgrade firms, domestic financial services, and professional services companies. Total Grade-A office stock in Shenzhen and Guangzhou stood at 6.4m sm and 5.3m sm respectively as at end of June 2018, still lower than international hub cities. We expect both cities to enjoy more demand for prime office areas from high-tech firms, domestic financial and professional service firms ahead.
Prime office stock and rental rate comparison, 2Q18
Source: JLL, DBS HK Note: rents are for CBD areas only, shown as net effective rents, in Rmb/sm/month. London stock is inclusive of Grade B office. New York stock is Grade A for Manhattan DBS Asian Insights SECTOR BRIEFING 74 102
We have made an estimate of 2030 Grade-A office space in Guangzhou and Shenzhen in China, based on the regression relationship between historical occupied Grade-A office space and local tertiary GDP, as well as our forecast of 2030 tertiary GDP. For matured markets like Hong Kong, we used occupied Grade-A office space as a proportion of tertiary GDP in 2017 multiplied by our estimated 2030 tertiary GDP to forecast demand for 2030 office space. Based on our abovementioned regression model, we expect tertiary industries to occupy 19.8m sm and 11.9m sm of space in Shenzhen and Guangzhou respectively in 2030 (up 278% and 147% respectively from 2017 level). New supply will primarly come from Bao’an/Nanshan districts in Shenzhen and Pazhou/Nansha districts in Guangzhou. Meanwhile, we also expect a certain portion of supply coming from redevelopment of old factories or buildings in Futian/Bao’an/Longgang districts in Shenzhen and Tianhe/Haizhu/ Baiyun districts in Guangzhou.
Occupied office space (or office demand), 2017 & 2030F
Source: JLL, DBS HK
Guangzhou to enjoy As shown from the chart above, rental rate in Guangzhou is much lower than international higher rental rate gateway cities and its peers in China and we expect the city to catch up with peers and growth enjoy higher rental rate growth over the next decade.
As Grade-A offices are mainly occupied by tertiary industry players, we use total office rental costs (occupied Grade-A office space multiplied by annual rents) divided by tertiary GDP as a proxy to gauge tertiary industry’s occupancy cost for each city. This ratio ranged from 0.6-1.2% for Guangzhou and Shenzhen in 2018, and was 1.0% for Singapore and 5.6% in Hong Kong. Also, this ratio edged up by an average of 0.07-0.08ppt per annum for both cities over the past decade and we have assumed that this trend will continue. Based on this, we expect tertiary industry’s occupancy cost to go up to 1.7-1.9% for both cities in 2030. DBS Asian Insights SECTOR BRIEFING 74 103
Tertiary industry’s occupancy cost forecast for Shenzhen
Source: JLL, CEIC, DBS HK
Then, we derived the total Grade-A office rental costs in 2030 for each city based on our forecast of 2030 tertiary industry’s occupancy cost ratio multiplied by forecast of 2030 tertiary GDP. Thereafter, we used total rental costs divided by 2030 forecast occupied Grade-A office to calculate our rental rate projection for 2030. As such, we expect Guangzhou to register a higher CAGR of 5% for Grade-A office rental rates in 2017-2030, vs. 2.8% in Shenzhen.
2030 rental forecast and CAGR growth
Source: JLL, CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 104
Foshan and Dongguan may also benefit from spillover demand from Guangzhou and Shenzhen, given geographical proximity. According to CBRE, the combined supply of prime office areas in the two cities amounted to around 2m sm in 2018. A number of domestic and foreign companies have moved their back offices or R&D departments to Foshan and Dongguan, such as Huawei, KPMG, HSBC, and Kuehne & Nagel. We expect this trend to continue, given much lower rents in both cities and improving connectivity between both cities with key hub cities like Guangzhou and Shenzhen.
Range of prime office rents in key GBA cities
Source: JLL, CEIC, DBS HK
Key players in the region
CR Land and Excellence Group are the major prime office developers in Shenzhen. The GFA of completed office space and those under construction (including wholly-owned and those for strata-title sales) is estimated to be 1.11m sm and 1.04m sm for CR Land and Excellence Group respectively in Shenzhen. CR Land is also a key landlord in Nanshan district, where will likely accommodate leading domestic and international enterprises. We also expect more urban renewal potential projects for CR Land in Shenzhen. Yuexiu Property is the major office players in Guangzhou, with GFA of completed office space and those under construction (including wholly-owned and those for strata-title sales) at 0.85m sm.
Office should be among the key beneficiaries of development in GBA, benefiting from industry upgrades and talent inflow into the region. Shenzhen will likely to see higher office demand and supply over the next decade, while rents in Guangzhou is likely to have higher growth potential. Among the listed developers, we expect CR Land and Yuexiu Property to be the key beneficiaries in this segment. DBS Asian Insights SECTOR BRIEFING 74 105
We expect some spill-over demand to flow to Foshan and Dongguan from hub cities in the region, but we do not expect these two cities to be a big competitor to key hub cities in terms of office space, as city competition under GBA plans will be minimised, given different positioning for individual cities and strategic planning to promote synergies between cities in the region.
Tertiary GDP and as % of GDP, 2017
Source: CEIC, DBS HK
Tertiary GDP and as % of GDP, 2030
Source: CEIC, DBS HK DBS Asian Insights SECTOR BRIEFING 74 106
Forecast for grade-A office demand in Guangzhou and Shenzhen
Linear regression between occupiedGrade-A Total GDP forecast in 2030 office space and tertiary GDP
Tertiary industry’s GDP ForecastedGrade-A Tertiary industry’s GDP forecast in 2030 office demand in 2030 contribution forecast in 2030, based on historical pattern and our adjustment on regional financial/high- tech potentials Source: DBS HK
Forecast for grade-A office rental rate in 2030
Total Grade-A office annual Tertiary industry’s GDP in rents in 2017 2017
Tertiary industry’s occupancy cost in 2017
based on historical pattern
Tertiary industry’s Tertiary industry’s GDP occupancy cost in 2030 forecast in 2030
Forecasted total Grade-A Forecasted Grade-A office office annual rents in 2030 demand in 2030
Forecasted Grade-A office rental rate in 2030 Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 107
Telecommunication, Media & Technology (TMT)
Industry overview
In GBA, the PRD has served as the base for technology and manufacturing development in China, and accounted for 84% of Guangdong Province’s GDP in 2017. Contribution from the industrial sector to the region’s GDP stood at 51% in 2017, above the national average of 41%.
Computer, communications and other electronic equipment manufacturing segment grew at a CAGR of 13% in 2006-2016. It is the largest sector, accounting for 23% of the industry GDP in Guangdong. Representative technology (hardware) companies include Huawei, ZTE and DJI. on expectations of favourable policy support, we expect hardware companies to shift towards higher value-added products. We forecast this segment to register 10% CAGR over 2018-2022F.
Gross output of Communication Equipment, Computers and Other Electronic Equipment segment (2006-2016)
Source:National Development and Reform Commission, DBS HK DBS Asian Insights SECTOR BRIEFING 74 108
Guangdong industry GDP breakdown (2016)
Source:National Development and Reform Commission, DBS HK
The information transmission, software and information technology services segment grew at a CAGR of 13.5% in 2006-2016. It is the fifth largest segment, and accounted for 7% of tertiary service GDP in Guangdong in 2016. Representative technology (internet) companies like Tencent and Kingdee are based in Shenzhen. We expect this segment to deliver 11% CAGR over 2018-2022F, thanks to more start-up cultivation as well as synergies generated between internet companies.
Gross output of Information transmission, software and information technology services segment (2006-2016)
Source:National Development and Reform Commission, DBS HK DBS Asian Insights SECTOR BRIEFING 74 109
Guangdong tertiary service GDP breakdown (2016)
Source:National Development and Reform Commission, DBS HK
Sector development under GBA initiatives Trend #1: Technology focus
Innovation and Technology is one of the key focus areas of the GBA initiative. We expect a rising number of technology and internet companies in GBA, supported by government policies. GBA will also shift to focus on the services industry, which will drive up labour cost and other operating costs in general. We expect technology companies with high value-added products/services or profitability to stay in the region. These include leading or upstream companies in semi-conductors, telecom, big data, artificial intelligence, robotics, electric vehicles, medical, satellites, etc. In particular, for internet companies, the establishment of leading internet companies will favour start-up cultivation, due to clustering of potential business partners and talent supply.
Note that PRD accounted for 84% of Guangdong province’s GDP in 2017. Thus, the 13th Five-Year Plan for Guangdong province provides indicators for GBA development. The plan targets to increase: (1) knowledge-intensive service industry’s contribution to GDP from 16% in 2015 to 20% in 2020; (2) high-tech industrial production value-to-total industrial production value ratio from 40% in 2015 to 43% in 2020 (PRD: 50%+ in 2020); (3) the number of High and New Technology Enterprises from 11,105 in 2015 to 28,000 in 2020 (PRD: 14,000); and (4) the number of technology incubators from 399 in 2015 to 800 in 2020 (PRD: 600+). DBS Asian Insights SECTOR BRIEFING 74 110
The 13th Five-Year Plan for Guangdong Province
Guangdong Province Pearl River Delta
2015 2020F 2020F
Research and development expenses as 2.5% 2.8% 3.0% percentage of GDP Number of researchers per 1000 population 4.6 5.0 15.0+
Knowledge-intensive service industry 16.0% 20.0%
High-tech industrial production value to 40.2% 43.0% 50.0%+ total industrial production value Number of High and New Technology 11,105 28,000 14,000 Enterprises Technology incubator 399 800 600+
Source:National Development and Reform Commission, DBS HK
1. Talent pool
There are talent policies such as subsidies and housing allowances for the technology sector in some cities in GBA. For example, in Shenzhen, the High Level Professional Programme is offered to successful applicants (such as members of Academy of Sciences or Engineering of China, as well as winner of the Highest Science and Technology Awards, etc.) in the form of millions in cash awards or sufficient housing allowance. Shenzhen Peacock Programme offers a combination of signing bonus and housing subsidies. Other cities in GBA such as Guangzhou, Dongguan and Foshan have also introduced similar talent introduction programmes. Other policies such as children’s education will also attract talent. Going forward, we expect to see more high-level talent inflow to GBA, increasing the talent pool available to companies.
We noticed that there is a high density of top global universities in the San Francisco Bay (3) and Tokyo Bay (2), which are significant bay areas after transformation into technology centres. In GBA, Hong Kong has five “top 100 universities” which would provide a long-term supply of talent. For example, DJI’s founder WANG Tao is a graduate of the Hong Kong University of Science and Technology, and Sense Time’s founder, LI Xu, graduated from The Chinese University of Hong Kong.
Looking forward, we expect rising commercialisation of innovation by high-tech enterprises though coordination with universities. DBS Asian Insights SECTOR BRIEFING 74 111
World’s top 100 universities
The world’ s top 100 Populat ion (m) universities Greater Bay Area 5 69.7
San Francisco Bay 3 8.8
New York Bay 3 20.2
Tokyo Bay 2 36.3
Source: QS University Ranking 2018, DBS HK 2. Tax benefits or government grants
In China, enterprises whose research and development expenses as a percentage of revenue exceeds 3% are classified as High and New Technology Enterprises and are entitled to enjoy preferential tax rate of 15%, versus statutory income tax rate of 25%, according to State Tax Bureau. Moreover, local governments may also launch discretionary grants to encourage innovation projects or establish technology enterprises. We expect that GBA will strengthen the policies to provide a more favourable environment, such as increase the R&D expenses as a percentage of revenue requirement, and lower the effective tax rate for companies such as Kingdee, Tencent, BYD Electronic and ZTE in GBA.
As a reference, the 13th Five-Year Plan for Guangdong province that covers PRD has a target to grow the number of High and New Technology Enterprises from 11,105 in 2015 to 28,000 in 2020 (PRD: 14,000), and research and development expenses as percentage of GDP to rise from 2.5% to 2.8% in 2020 (PRD: 3.0% in 2020).
3. Private equity to support start-ups
Private equity and venture capital are critical to cultivate technology start-up companies. China is the second largest private equity/venture capital investment market in the world after the US. Although Guangdong province is the fourth largest private equity/ venture capital investment market in China, the investment amount is far behind Beijing with a growth rate lower than that of Zhejiang and Shanghai. To meet the funding needs, the 13th Five-Year Plan for Guangdong province has a target that the number of private equity investment institutions should be 3,000+ with assets under management of Rmb1,500bn in 2020, and number of technology incubators to grow from 399 in 2015 to 800 in 2020 (PRD: 600+). The plan aims for the PRD to become one of the world’s leading start-up centres. We expect to see more investment funds attracted by the favourable policies and fast development of GBA. Hong Kong will also be a platform for IPO ultimately. DBS Asian Insights SECTOR BRIEFING 74 112
China’s top 5 VC/PE regions by investments (US$m)
Total VC/PE y-o-y PE VC
1H17 1H18 growth 1H18 1H18
Beijing 12,483 16,622 33.2% 12,627 29,249
Zhejiang 1,793 15,296 753.1% 3,231 18,527
Guangdong 1,582 4,864 207.5% 4,965 9,829
Jiangsu 1,567 2,900 85.1% 2,732 5,632
Shanghai 3,218 2,570 -20.1% 13,853 16,423
Total 25,278 53,486 111.6% 42,021 95,507
Source: China Venture, DBS HK
Case study 1
San Francisco Bay – from gold rush centre to technology centre, and as a junction of academia, enterprises and the U.S. government. In mid-1800s, San Francisco Bay had developed rich educational resources, which laid a solid foundation for technology institutions like University of California, Berkeley and Stanford University, and cultivated many Nobel Prize winners and leaders of giant technology companies. Other than the Fed policies on R&D protection, the California government launched programmes to secure funding of start-ups and career channels for college graduates. San Francisco initiated community benefit agreements in 2011 that 1.5% payroll tax was temporarily exempted for all new jobs created by companies which moved into Mid-Market. Companies that took advantage of the tax break included Twitter (TWTR US), Uber, Airbnb, etc. In the bay area, Silicon Valley and San Francisco are the largest venture capital investment markets in the US with 42% share in 2017. Nowadays many well-known technology companies including Google, Facebook (FB US), Twitter, Apple (AAPL US), Microsoft (MSFT US), Oracle (ORCL US), Uber, Airbnb and PayPal (PYPL US) are located in San Francisco Bay.
Trend #2: Shifting manufacturing companies with lower- value added to outer areas of Guangdong province
Guangdong province’s city planning serves a good reference for developments in GBA and surrounding areas. The planning encourages technology companies with lower valued- added to move to east, west, and north Guangdong (outside GBA , but within Guangdong province). These regions have per capita GDP of Rmb29.4k, Rmb36.8k, and Rmb28.0k DBS Asian Insights SECTOR BRIEFING 74 113
respectively in 2015, far lower than PRD’s Rmb100.4k. The relocated downstream manufacturing facilities will continue to support the manufacturing industry with geographical proximity and lower labour cost which in return backs R&D and innovation in Greater Bay Area. We believe that technology companies and manufacturers will first step up production efficiency through automation and process enhancement, in order to maintain the profitability under rising operating cost. This will trigger new round of capex cycle for machineries and systems. In case that they are “encouraged” to relocate, funding support is required by the government or financial sector.
Shifting lower-value added manufacturers to outer Guangdong
North Guangdong
GUANGDONG East Guangdong
Guangzhou Zhaoqing Huizhou Foshan Dongguan Zhongshan Jiangmen Shenzhen Zhuhai West Guangdong Hong Kong Macau
CHINA
Source: DBS HK DBS Asian Insights SECTOR BRIEFING 74 114
Case study 2
Tokyo Bay: from general industrial production to technology. In 1960s, Tokyo began to relocate general industrial production to Yokohama City and Kawasaki City, and focus on technology development. Now, Tokyo Bay comprises of 6 sub-bay areas with Chiba for energy import, Yokohama for end-product export, Kawasaki for raw material process, etc. University of Tokyo and Tokyo Institute of Technology also cultivate talents for technology development. Tokyo Bay is the high-end industrial production centre in the world, with many well-known technology companies, including Sony (6758 JT), Toshiba (6502 JT), Renesas (6723 JT), Taiyo Yuden (6976 JT), and SoftBank (9984 JT).
Trend #3: Data centre – the backbone of new technology and economic development
In GBA, we expect higher demand for data centres mainly driven by (1) establishment of new technology companies and rising economic activities; and (2) improving network connectivity leveraging on Hong Kong’s position as a global carrier hub. The increasing demand will be partly met by supply from revitalisation of manufacturing plants.
1. Technology and economic driven
Based on our study, the demand for data centres will be mainly driven by cloud and internet applications which are expected to grow by 50%+ and 20%+ p.a. respectively in the next three years. In the long term, demand for data centre services will also be driven by the Internet of Things (IoT), Artificial Intelligence (AI) and Virtual Reality (VR) applications.
In Guangdong, there are a number of policies promoting the development of cloud, big data and industrial internet. Examples are “Guangdong Province Action Plan for Promoting Big Data Development 2016-2020”《广东省促进大数据发展行动计划 2016-2020》, “Guangdong Province Cloud Computing Development Plan (2014- 2020)”《廣東省雲計算發展規劃(2014—2020年) 》 . Guangdong province has been ranked number one for Big Data development index in China. The cities within PRD form the majority of GBA to be chosen as the National Big Data Comprehensive Experimental Area (国家大数据综合试验区) according to “Construction of the National Big Data Comprehensive Experimental Zone in the Pearl River Delta”《建设珠江三角洲国家大 数据综合试验区实施方案》.
Our study also finds that data centre demand is concentrated in a few of China’s top- tier DC cities where economic activities are robust and network resources are abundant. It is also highly correlated to GDP per capita. As cities in GBA develop high technology and high value-added industries, we expect economic activities to flourish and GDP per DBS Asian Insights SECTOR BRIEFING 74 115
capita to increase. More enterprises will emerge to drive demand for data centres. We forecast the data centre market in GBA in terms of number of cabinets to grow at a CAGR of 7.7% for 2017-2022 and a CAGR of 6.5% for 2017-2030.
2016 Data centre capacity in operation (number of cabinets)
Source: MIIT, National Bureau of Statistics of China, DBS HK
2. Hong Kong as a hub connecting GBA with the rest of the world
Hong Kong is a global carrier hub well connected with the rest of the world while China has limited international internet bandwidth. We expect data centre demand in GBA to further increase, driven by the improving connectivity between Hong Kong and GBA.
In China, there are four international submarine cable landing stations, located in Qingdao, Shanghai Nanhui, Shanghai Chongming and Shantou. Fuzhou and Xiamen also host two submarine cable landing stations connecting Taiwan. In Hong Kong, there are a total of eight submarine cable landing stations which allow Hong Kong to be a major connection point between China and other countries. The total international internet bandwidth (which is supported by submarine cable connections) only reached 6.8 Tbps in China while that in Hong Kong has achieved 9.2Tbps. Hong Kong is a major carrier hub in Asia with vast connections through submarine cable systems.
Chinese telecom operators are expanding the bandwidth connecting Hong Kong and other GBA areas. In April 2018, China Mobile built an optical fibre cable along the Hong Kong-Zhuhai-Macao Bridge. This was one of the initiatives to increase communication network connectivity in GBA. China Mobile now has five Guangdong-Hong Kong data transmission channels, namely Wenjindu, Luohu, Futian, Western Corridor and Hong Kong-Zhuhai-Macao Bridge, of which 12Tbps of bandwidth has been opened between Shenzhen and Hong Kong. DBS Asian Insights SECTOR BRIEFING 74 116
Meanwhile, China Telecom also signed a contract with HGC to build a cross-border transmission system along the Hong Kong-Zhuhai-Macao Bridge. It aims at increasing the communication capability in the region to echo the GBA strategy. China Telecom has connected five ports in China with 10 telecom operators in Hong Kong and Macau, to offer cross boarder bandwidth of 17Tbps. This accounts for 60% of the total communication volume between China and Hong Kong & Macau.
Comparison of submarine cables between China and major countries in the world
China US Japan UK Singapore
Number of submarine cables 10 80 23 53 24
Total International bandwidth 43,445 201,527 38,799 151,066 46,544 in 2017 (Gbps) Per Capita international 0.031 0.618 0.306 2.289 8.297 bandwidth (Mbps) Source: CAICT, DBS HK International Internet Broadband Bandwidth in Tbps (2016)
Source: China Academy for Information and Communications Technology (CAICT), DBS HK DBS Asian Insights SECTOR BRIEFING 74 117
3. Increasing supply by converting manufacturing plants
As for the supply side, we expect manufacturers with low value-added products/services to move away from GBA. In Guangzhou and Shenzhen, there were c.130,000 data centre cabinets in 2016 according to Ministry of Industry and Information Technology (MIIT). It is also estimated that there will be a shortage of 36,000 cabinets in Guangzhou and Shenzhen in 2018. We expect old industrial buildings to be converted into data centres to meet rising demand, in view of the general supply shortage. The power supply for production plants and machineries can also be redeployed for data centre operations.
GBA will be more technology-driven with the gradual demise of traditional sectors. More private equity and venture capital inflow is expected to support the establishment and cultivation of new technology start-ups. Hong Kong also provides a platform for IPO. On the other hand, manufacturing companies with lower valued-added products/services will be relocated to other parts of Guangdong (outside GBA). We see the start of an investment cycle for machinery upgrade or relocation. Compared to San Francisco Bay and Tokyo Bay, GBA’s larger land area and talent base with higher GDP growth rate will enhance its potential to be the next innovation hub to make a global impact.
DBS Asian Insights SECTOR BRIEFING 74 118
Key challenges and risk
Challenges and issues to tackle on its way to success
While the future for GBA is promising, there are also some challenges that need to be tackled and addressed. First of all, unlike Tokyo Bay, San Francisco Bay and New York Bay areas, the GBA area is operated under the “One Country Two System” political framework. Hong Kong, Macao and Guangdong (where the nine GBA cities are located) have their own currencies, immigration controls and tax systems. More importantly, each city government has its own agenda to drive growth. While there are breakthroughs lately to further open up tax equalization programs to encourage talent flow and offer each city a clear role to play, strong efforts from central, local governments and private sector still need to be made to ensure a successful GBA transformation.
Culture change and talent development are key issues to be addressed, too. It is well known that GBA has possessed some of the successful elements to drive growth: (1) the depth of the capital market in Hong Kong and Shenzhen, (2) strong presence of leading academic institutions in Hong Kong and Guangzhou, (3) development guidance from the state such as the GBA policy outline and China Manufacturing 2025 blueprint. Yet, there are also qualities absent: (1) a culture willingly to assume longer term risks for scientific projects. That explains the scarcity of venture capitalists , (2) an education system that promotes innovation. The mainland educational system is regimented and there is insufficient focus placed to promote creativity, innovation and critical thinking. While some of the issues have been addressed in the blueprint with Guangzhou to become a regional PE hub, there is still long way to go to promote an innovative culture. DBS Asian Insights SECTOR BRIEFING 74 119 DBS Asian Insights SECTOR BRIEFING 74 120 DBS Asian Insights SECTOR BRIEFING 74 121 DBS Asian Insights SECTOR BRIEFING 74 122 DBS Asian Insights SECTOR BRIEFING 74 123
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