How ETF Investors Can Be Part of China’s Booming Technology Sector Ong Zi Yang Equity Analyst | Stocks & ETFs Research Page 1 China – 2nd Largest Economy in the World GDP By Country (1980-2018) China vs US: Real GDP Growth Comparison 25,000 20,000 15,000 USD Billions USD 10,000 5,000 0 1980 1990 2000 2013 2018 United States Japan UK China Source: WorldBank, IMF World Economic Outlook. Source: IMF World Economic Outlook. Page 2 China in Transition: Consumption-Driven • China has shifted from Industrial/Investment-drivenapproach towards a consumption-driven economy starting this decade. The Shifting Composition of GDP Growth Across this Decade (2010-2018) 100 90 80 70 60 50 40 30 20 10 0 -10 -20 2010 2011 2012 2013 2014 2015 2016 2017 2018 Consumption Investment Net Export Source: China National Bureau of Statistics. Page 3 Consumption is Key to China’s Future Growth China's GDP Per Capita vs Rate of China's Domestic Consumption as % Consumption (2000-17) of GDP Growth (2003-19E) 10,000 65% 90% 9,000 82% 80% 8,000 60% 7,000 70% 35% 6,000 55% 60% 5,000 50% USD 4,000 50% 40% 3,000 30% 2,000 45% 1,000 20% 0 40% Growth GDP%Contribution to 10% 0% GDP Per Capita %Spending on Consumption 2003 2005 2007 2009 2011 2013 2015 2017 2019E Source: China National Bureau of Statistics. Source: China National Bureau of Statistics. Page 4 Consumption Increasingly Digitalised • Online shopping increasingly the mainstream way consumers shops for products. E-Commerce Driving Retail Consumption Online in China (2011-21E) 50 40 30 20 25% 27% 23% 10 20% 16% 17% 11% 14% GrossMerchandise Value (RMB Trillion) 5% 7% 9% 0 2011 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E 2021E E-Commerce GMV Total Gross Merchandise Value Source: iResearch China, China National Bureau of Statistics. Page 5 Consumption Increasingly Digitalised • Paradigm shift in consumer behaviour led to emergence of on-demand online services industry. • Food delivery, taxi booking, online grocery shopping, etc. China's Fast-Emerging Online Consumer Services Market (2013-23E) 35 30 25 20 15 10 24% 24% 22% 23% 18% 20% 5 15% GrossTransactional Volume (RMB Trillion) 11% 4% 6% 8% - 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E 2022E 2023E Online Consumer Service GTV Total Consumer Service Market GTV Source: iResearch China Page 6 Supercharged Growth in Internet Usage • China’s Internet usage has grew exponentially over the last few years. • Increasingly More Internet users + Longer duration spent using the Internet per user. Total Mobile Internet Traffic in China (2013-18) 30,000 26,630 25,000 20,000 15,700 15,000 Usage Usage (million GB ) 10,000 8,890 5,630 MobileData 5,000 3,750 2,510 1,680 580 690 870 1,190 - 1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17 2H17 1H18 Source: China Internet Network Information Centre (CNNIC) GB stands for gigabytes. Page 7 China Now Dwarfs US In The Internet Space Source: CNNIC, China National Bureau of Statistics, SCMP. Page 8 Ample Room For Growth in China Internet • More than 98% of Chinese Internet users access the Internet by mobile. • China’s under-penetration of Internet provides ample room for growth for the sector. Number of Internet Users in China Internet Users as % of Total (2007-18) Population (2018) 57% 900 56% 100% 93.3% 53% 89.0% 50% 87.9% 87.0% 800 48% 83.6% 46% 700 42% 80% 38% 600 34% 56.7% 500 29% 60% 400 23% 300 16% 40% InternetUsers (Millions) 200 100 20% 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 0% China US Taiwan Hong Kong Singapore Japan Internet Users (Million) %Penetration Source: China National Bureau of Statistics. Source: WorldBank.org Page 9 Smartphones Enabled Access to the Internet • Affordable smartphones produced by China makers like Huawei, Xiaomi, Oppo, Vivo have greatly lower barrier to entry to Internet services. Page 10 Two Groups of Users Fuel Growth of Internet • Changing demographic trends are leading growth and usage of technology and internet services in China. Core Internet Users: Emerging Internet Users: Millennials and Gen Z Rural China (Post-80s) population Page 11 Core Internet Users – Millennials Millennials Make Up 25% of China’s Population China Internet Usage Demographic Breakdown (2017-18) 50% • Total of 351 million – and is 20M more than entire population of US. 40% Close to 60% The ‘IT’ Crowd 30% • Socially-conscious individuals who grew up 20% using the Internet and Social Media. 10% • Born during the “One-Child Policy”. 0% Gen Z Millennials Core Population Seniors • Travelled more and are better educated (Post-95s) (Post-90s) (Aged 30-50) (Aged 51 and than previous generations. above) 9M'2017 9M'2018 Source: QuestMobile China Page 12 Core Internet Users – Millennials • Millennials starting to make up the substantial part of the workforce and have higher spending Breakdown of Users of Food Delivery power at their disposal. Services in China, By Age Group 14,000 • High propensity to spend – progressively 12,000 +26% China’s biggest source of consumers. 10,000 2533 • Constant pursuit of fast, simple and convenient 8,000 1818 options – “easy way out”. 6,000 4,000 7231 • Digital natives – paying for products and 6173 services online comes naturally. 2,000 0 • Main reason to the emergence of food delivery, 2017 2018 taxi booking, online grocery shopping, etc. Age 24 and below Age 25-30 Age 31-35 Age 36-40 Age 41 and above Source: QuestMobile China Page 13 Two Groups of Users Fuel Growth of Internet • Changing demographic trends are leading growth and usage of technology and internet services in China. Core Internet Users: Emerging Internet Users: Millennials and Gen Z Rural China (Post-80s) population Page 14 Emerging Users – Rural China • Urbanisation of rural China still underway. Rural Lagging Behind In Internet Penetration 300 40% • China pushed big Telcos to speed up 35% 33% 32% 35% construction of infrastructure for Internet in the 250 29% remote areas of China. 28% 30% 200 24% 25% 21% 19% 150 20% • Internet penetration grew from 7% to 35% 16% between 2007-17. 12% 15% 100 – Still lags behind city level’s 69.4%. 7% 10% 50 5% • Disposable income per capita of rural China is 0 0% 2008 2011 2014 2017 2009 2010 2012 2013 2015 2016 now up more than 50% since 2012. 2007 Internet Users in Rural China (LHS, Millions) Internet Penetration Rate (RHS, %) Source: CNNIC, China National Bureau of Statistics Page 15 Emerging Users – Rural China • China wants to utilise technology to bridge the gaps in quality and quantity of essential services available to top-tier and lower-tier cities. e-Commerce e-Education e-Healthcare 50% 8% 200 Million of poor villages to be minimum of local govts’ elderly (aged 60 and equipped with e- annual budget to be above) by 2020, with commerce capabilities spent on digitalisation most residing in rural by 2020 of education China Page 16 The Backbone of China’s New Economy • Paradigm shift in consumer behaviour is influencing how retailers attract customers. Global Ad Spending by Medium (1999-2018) 250 200 150 USDBillions 100 50 0 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017 Internet Ad TV Ad Newpapers and Prints Page 17 The Backbone of China’s New Economy • Paradigm shift in consumer behaviour is influencing the way merchants conduct businesses. Page 18 The Backbone of China’s New Economy • Financial services like wealth management and personal insurance increasingly accessible online – pushing traditional industries like banking to keep up with the pace. Page 19 Technology Permeates Everyday Life in China Page 20 Usage Duration of Internet Continue Rising • Internet usage duration doubled between 2014-2018, driven primarily by rising consumption of entertainment and media content. China Mobile Internet Daily Hours by App Top 10 Internet Subsectors in China by (Nov-14 to Apr-17) Usage Duration (2018) 40% 33.4% Content and Media 30% 21.1% 20% 10% 8.6% 8.2% Average Daily Hours Daily Hours (Millions)Average 3.9% 3.3% 2.8% 1.6% 0.9% 0.9% 0% t News ce Video Social Music Media Online Online Mobile Games Transpor Services Finances eBook Domestic Ecommer Reading Source: QuestMobile China Source: QuestMobile China Page 21 Top Three Players Dominate the Scene Total Internet Usage Time in China by Companies (2018) 0% 10% 20% 30% 40% 50% Tencent 47.3% (NYSE: BABA) Alibaba 10.4% %Usage Jinri Toutiao Duration 9.7% (HKEX: 700) Baidu 7.0% Others 25.6% (NASDAQ: BIDU) Source: QuestMobile China Page 22 Alongside Many Other Exciting Tech Players (NYSE: BABA) (HKEX: 700) (NASDAQ: BIDU) Page 23 Too confusing? Fancy something simpler? Here’s ONE ETF that will capture the massive growth potential of the industry! Page 24 NYSE:CQQQ – Invesco China Technology ETF 0% 2% 4% 6% 8% 10% Tencent Holdings Alibaba Group Baidu Inc A Simple Package to Invest In China Tech! Meituan Dianping JD.com • Listed in NYSE as CQQQ since 2009 NetEase Inc Ctrip.com • 0.7% Expense Ratio International Ltd Sunny Optical AUM of USD 563 Million Technology • 58.com Inc • 27 US and 43 HK-listed Tech Stocks Autohome Inc • Year-To-Date return of +28%. Source: Bloomberg, Invesco. Portfolio weighting data as of May-2019. Page 25 NYSE:CQQQ – Invesco China Technology ETF Breakdown of CQQQ's Top Holdings Tencent Holdings • BAT Trio weigh close to 30% of ETF. Others 10% 41% Alibaba • Top ten holdings account for close to BATJ Group 60% of ETF. 32% 9% Baidu Inc • High-quality tech giants with strong 8% growth potential.