SYNC. Global investment themes: technology, media and telecoms Issue No. 141 China’s Tech Sector 5 December 2016 The China Syndrome China’s government is intent on upgrading its manufacturing sector and Inside leading the world in a range of advanced technologies. Implicit in its “Made . Players in China 2025” 10-year plan is the notion that China will displace the US as . Trends the world’s dominant technological power. Value Chain . Industry analysis When we last looked at this issue, back in August 2015 (see “Tech Wars - Electric vehicles 2020: China vs US”), we concluded that the US was likely to remain a - Shared transport leader in all major advanced technologies over the next decade, with Baidu - Robotics the only Chinese player equipped to challenge the US’s lead in next - Consumer electronics generation technologies such as AI. Eighteen months on, the signs are that - Semiconductors China is closing the overall gap faster than we expected. - High perf. computing - Artificial intelligence Conclusions - Internet platforms This report researches the state and thrust of Chinese technology over the - Cloud infrastructure next two to five years and what it implies for global technology investors. - Genomics Here is what we found: . China Tech Scorecard - Who’s who . Electric vehicles: BYD (Hold) is the Chinese market leader, but - Thematic Screen competition from Alibaba, Baidu, Tencent and LeEco will disrupt things. - Valuation Screen - Risk Screen . Robotics: HollySys (Buy), Estun (Avoid) and Siasun (Avoid) are the . Stock Watch List domestic leaders, but best to play this theme via the Japanese parts . Private companies makers: Harmonic Drive, Keyence, Nachi-Fujikoshi, Omron and Daihen. Consumer electronics: Component makers AAC Tech (Buy) and GoerTek (Buy) are the best way to play this sector. Semiconductors: SMIC (Buy) is China’s leading foundry and should benefit from “Made in China 2025”. High performance computing: Dawning (Avoid), Inspur (Avoid) and Lenovo (Sell) are leaders in HPC, but whilst they may gain market share, margins are likely to fall under pressure for global domination. Artificial intelligence: Baidu (Buy) is the leader in China, although iFlytek (unrated) looks interesting too. Internet: Baidu (Buy), Tencent (Buy), Alibaba (Avoid), LeEco (Avoid) all benefit from a protected home market and overseas expansion plans. Report type . Cloud infrastructure: Alibaba (Avoid) is the leader in China, but we Single theme . prefer to lay this theme globally via Amazon and Microsoft. Multi-theme . Sector Scorecard . Genomics: China’s BGI (unlisted) is the world’s largest gene . Best Ideas sequencer. But the US’s Illumina, the world’s largest gene sequencing equipment maker, is the way to play this theme. Cyrus Mewawalla Mike Orme Elgen Strait www.researchcm.com Managing Director, Research Senior Analyst, Research Managing Director, Sales [email protected] [email protected] [email protected] +44 (0) 20 3393 3866 +44 (0) 20 3393 3867 +44 (0) 20 3744 0105 High quality research requires investment Please do not copy or forward © CM Research 2016 SYNC, Issue 141 Chinese Tech 5 December 2016 Contents PLAYERS ................................................................................................................................................................................................ 3 TRENDS ................................................................................................................................................................................................. 4 CHINA AND THE INDUSTRIES OF THE FUTURE ...................................................................................................................... 8 Shared transportation ...................................................................................................................................................... 8 Electric vehicles ................................................................................................................................................................ 9 Robotics ......................................................................................................................................................................... 10 Consumer electronics .................................................................................................................................................... 12 Semiconductors ............................................................................................................................................................. 12 High performance computing ........................................................................................................................................ 13 Artificial intelligence ...................................................................................................................................................... 14 Internet platforms .......................................................................................................................................................... 15 Cloud infrastructure ....................................................................................................................................................... 16 Genomics ....................................................................................................................................................................... 17 THE CHINA SYNDROME ................................................................................................................................................................. 19 Why tech investors cannot ignore China ....................................................................................................................... 19 The Millennial effect ...................................................................................................................................................... 20 The Trump effect ............................................................................................................................................................ 21 China by the numbers .................................................................................................................................................... 22 M&A activity .................................................................................................................................................................. 23 STOCK WATCH LIST ........................................................................................................................................................................24 PRIVATE COMPANIES .....................................................................................................................................................................28 CHINA TECH SCORECARD .............................................................................................................................................................30 Who’s who ..................................................................................................................................................................... 30 Thematic screen ............................................................................................................................................................. 31 Valuation screen ............................................................................................................................................................ 32 Risk Screen ..................................................................................................................................................................... 33 APPENDIX: OUR “THEMATIC” RESEARCH METHODOLOGY ............................................................................................. 34 www.researchcm.com 2 SYNC, Issue 141 Chinese Tech 5 December 2016 Players Most of China’s dominant technology players operate in the hardware and Internet sectors. Within hardware, semiconductors remain an area where Chinese firms significantly lag the world’s best, both in chip design and high quality foundry operations. Within the Internet space, China’s champions – Alibaba, Tencent and Baidu – are largely domestic players operating in a protected market, preparing for a period of overseas expansion. Software remains a weakness for China’s technology sector, although China is a world leader in genomics and making serious inroads into artificial intelligence and autonomous driving. The table below identifies the dominant Chinese players in several important next generation technologies. Many unlisted companies are highly influential on the global technology scene, including Huawei, DJI, WuXi AppTec, BGI and Didi Chuxing. Who are the big technology players in China are who are their global rivals? China Tech Chinese Tech Leaders Global Tech Leaders Listed companies Private companies Tsinghua Unigroup Intel Semiconductors SMIC RDA Microelectronics Samsung Spreadtrum Qualcomm HiSilicon (Huawei) ARM (Softbank) Lenovo Huawei Alphabet High Performance Inspur Electronic HP Enterprise Computing Dawning (formerly Sugon) IBM Estun Automation Aviation Ind. Corp. of China ABB Industrial Robotics Midea (Kuka) GSK CNC Fanuc Hardware HollySys Kawasaki Siasun Robot Yaskawa Consumer robotics DJI iRobot Rokid Parrot Ninebot (Segway) Softbank Consumer AAC Technologies Oppo Apple Electronics Foxconn Xiaomi Sony Hikvision