A View From Asia

China is experiencing a consumer recovery

Succinct Summary: China is experiencing a consumer recovery but foreign investors are reducing their exposure to the country. Mainland Chinese tourists are starting to travel abroad, with great impact on neighboring countries. The demand for semiconductors weakened from late 2022 enabling automakers to get the chips they need to ramp up production.

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Editor’s Note: This week’s newsletter has been produced in collaboration with Michael Fritzell of the Asian Century Stocks, and is available to all our subscribers. Asian Century Stocks is a newsletter providing financial journalism for companies and stocks in the Asia-Pacific. This week’s newsletter has an Asian flavor and perspective to it and incorporates some of the quotes we have seen in the last few weeks.

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Macro

There were some signs of recovery in China after the reopening

“We believe China is experiencing a broad-based consumption upturn. The upturn is not uniform across every category, but it's more pronounced for everyday low-ticket price items, more patch sheet for high-ticket price items.” - Tencent ($TCEHY) SEVP & Chief Strategy Officer James Mitchell

“In the first 2 months of this year, I've really been back to Mainland China twice. And from what I see on the ground, there's a strong recovery in economic activity in China.” - AIA Group Executive

But the recovery seems to have stalled

"China rebounded sharply from the end of COVID lockdowns at the beginning of this year, but it's already shown some signs of renewed weakness." - Federal Reserve Governor Christopher J. Waller

“And when I went there in March, they've just gone through the reopening in the COVID wave that came with that. And 90% of our employees had COVID at the same time. So it's hard against that backdrop, just to expect, "Hey, let's go." That's not what's happening. But expect the whole ecosystem is in a good place, and we'll continue to recover barring some other issue over time. There was also one more thing. There was also a second COVID wave about 4 weeks ago. So those who didn't get it the first time got it then. And so when you hear other companies talking about kind of mixed results, that's part of the equation as well” - The Procter & Gamble (PG 0.00%↑) CEO Jon R. Moeller

“The one thing that stands out in this chart is that the international traffic in and out of the PRC, China is still very subdued. You can see here, it's about 40% of what it was pre-pandemic” - Airbus Se ($EADSF Chief Commercial Officer & Head Of International Christian Scherer

The Chinese consumer has been cautious

“...the Chinese economy certainly has opened up. That's been a benefit, but Chinese consumers are still a little bit cautious” - General Mills (GIS 0.00%↑) Chairman & CEO Jeffrey L. Harmening

China’s reopening means better prospects for Hong Kong

“Whilst the macroeconomic environment remains challenging and uncertain, with the reopening of Mainland China, Hong Kong and our shared border, we are more optimistic about Hong Kong's financial market and its economy in 2023.” - Hong Kong Exchanges And Clearing Limited Board Chair May-Lung Cha

Some companies are choosing to reinvest outside of China

“I don't see anybody pulling investment out of China, but I do see companies preferring to make new investments in countries other than China. For example, Thailand for autos, Penang for electronics, some in Indonesia, and some in India. We're seeing a lot of that. But most of it, 90% plus from what I can see, maybe 100% is still in the region.” - DBS Group ($DBSDF) CEO Piyush Gupta

“Singapore, if you see that in the last year, you have so many family offices coming to Singapore to set up new offices. And then you have all the asset managers, all the people are coming.” - DBS Group ($DBSDF) Unnamed Analyst

Others like SoftBank are reducing their exposure to China

“3 years ago, our investment in China accounted for about 50%. This is Alibaba and others. And as a result of some monetization, I believe that we've been well-managed and balanced in terms of diversification among the regions. Now that China's proportion has been decreased to 15%” - SoftBank ($SFTBY) PR and Finance Director Yoshimitsu Goto

Overall, China-US relations are top of mind for boardrooms

“I think we've put in a risk now, a political risk on your capital investments that is digital. What happens if I need to exit? I think that's going to have long-term ramifications for investment in certain politically hot areas where China is right now. I think that's a problem. I think there's a lot of boardrooms in the world now asking, "Can we afford to be in China?" Can we afford, if somebody tells us we have to walk away from our asset base, how much asset base do we want to have? What can we afford to leave behind if a political confrontation -- I don't remember that being on the agenda in my first 30 years in this industry. Now, it's definitely a conversation...If you're in, let's say, a US-China investment program, and you're thinking about it, you have to wonder, over that time frame, will there be an event that causes a public outcry, governmental intervention, causes you to have to walk away from that investment. It's very hard to make your money back in 36 months. Most investments have a long-term, and that's a real risk right now. By the way, it might be a one in five chance that it happens. That's a significant-- look at the private assets that had to be forsaken and left behind as a result of a political confrontation” - Moelis & Company (MC 0.00%↑) CEO Ken Moelis 

“Over time there'll be less trade [in China, but] it'll take years for this thing to take place. This is not de-coupling, this is de-risking, the world's change a little bit” - JPMorgan Chase (JPM 0.00%↑) CEO Jamie Dimon

Financials

The Asian Venture capital industry is sitting on unrealized losses

“For Vision Fund 2, which is still facing a difficult time, it started 3 years ago, and they started investing 3, 2 years ago. And investment costs so far, JPY 50 billion. And according to our conservative valuation, currently, fair value is around JPY 31 billion.” - SoftBank ($SFTBY) PR and Finance Director Yoshimitsu Goto

But that has not stopped the Softbank founder from being bullish

"A huge revolution is coming...SoftBank Group won’t be deterred by a few short-term losses. We will rule the world in the end...We will not rest. We will be ever more fierce....I’ve made many, many mistakes in my AI investments, some of them embarrassing. But among the many failures, there are a number of buds that will blossom very soon" - Softbank ($SFTBY) Founder Masayoshi Son 

Hong Kong’s insurance industry is recovering slowly from the pandemic

“As cases subsided, we have seen new business recover and a return to positive VONB growth in the first 2 months of 2023. In Hong Kong, VONB was up compared with 2021. We achieved growth across all distribution channels and Mainland Chinese visitor business more than in 2022, and strong momentum has continued into the first 2 months of 2023.” - AIA Group CEO Yuan Siong Lee

China’s insurance industry started recovering from February/March onwards

“At the same time, in terms of recruitment and customer visits, some of the offline activity was hampered, which put difficulty of business expansion, which is why NBV was down by 24% year-on-year. In 2023, with the consumption warming up and lifting of the COVID control, the adverse conditions have been reversed. So you can see in terms of NBV, February and March, they have returned to positive growth and with strong momentum.” - Ping An Insurance Co-CEO Bo Yao

Consumer

There has been a Post-COVID lull in 7-Eleven superstore operations

“The superstore operations experienced a decrease in stay-at-home demand which it had registered during the COVID-19 pandemic, meaning that operating income results corresponded to 64.4% of the previous fiscal year, reflecting a challenging business environment.” - Seven & Holdings CEO Yoshimichi Maruyama

The Chinese consumers are highly knowledgeable about beauty products

“Chinese consumers are becoming more and more, if not highly knowledgeable and sophisticated regarding beauty products and particularly the science behind skincare products. In our consumer studies and even in-home visits I've done in March, and I'll be there in the coming 2 weeks, it was very clear that Chinese consumers want skincare products that are first and above all science-backed, and dermatologists approved. This is a big change versus what was done just 2 years ago. In some ways, this is also driving some fatigue with what is usually called heritage brand” - Coty (COTY 0.00%↑) CEO Sue Y. Nabi 

There are too many players in the Telco business in Europe compared to America and Asia

“...let's be honest, the big issue in the European telecom industry is competition and regulation, and competition is a derivative of regulation. Clearly, I'm an operator who's been in the market for a long time. I would observe, I think it's 150 telcos in Europe, and let's call it around #6 to 10 in America. 4 to 5 in China, I mean, it's not -- you don't have to be a genius to spot that there's too many players, and that is driving down returns, but it's also providing -- and I would say, as well regulators, providing lower investment and lower quality products than you will get in the other markets” - Liberty Global (LBTYA 0.00%↑) EVP & CFO Charles H. R. Bracken

Domino’s Pizza margins are improving in Australia

“Our margins are improving because we’re selling more pizzas and because food costs, which really skyrocketed last year, are coming back down, with cheese, wheat and some of our proteins moving into a better space” - Domino’s Pizza Enterprises ($DPE) CEO Don Meij 

Technology

We are still early in the AI journey

“You ask yourself the question—where are the different runners three steps into a 10K race? Does it really matter? The point is, you’re three steps in, and it’s a 10K race.” - Amazon (AMZN 0.00%↑ ) AWS CEO Adam

Baidu is launching its own version of ChatGPT

“Since its launch in the mid of March, we have received hundreds of thousands of beta testing requests for the ERNIE Bot from enterprise customers across a range of sectors, such as nance software, education, online travel and so on. So this overwhelming interest indicates a promising start for the ERNIE Bot's debut.” - Baidu (BIDU 0.00%↑) EVP Dou Shen

TSMC revenues are set to drop by around 10% in H1 23  

"The company is undergoing an inventory adjustment period, but customers are lowering their inventories and we are seeing recovery in some end markets. We may see our sales drop slightly this year, but our company is ready to capture strong growth starting next year." - TSMC (TSM 0.00%↑) Chair Mark Liu

PlayStation 5 will likely outsell its predecessors

“We aim to continuously accelerate the penetration of PS5 and aim for PS5 sell-in units for the current fiscal year to be 25 million units, the highest ever for any PS console in history.” - Sony (SONY 0.00%↑) CFO Hiroki Totoki

SK Hynix expects memory prices to bottom in the second half of 2023

“In the second half, we expect inventories to gradually decline and ASPs to stabilize, in which case we could even expect a reversal in the losses that we saw prior as we sell undervalued inventory, and this would be contributing to our P&L recovery.” - SK Hynix

Alibaba’s 6 new subsidiaries will be run by independent CEOs

“In March, we announced a major organizational transformation, restructuring Alibaba Group into 6 business groups and other investments. As a result, we are transforming from operating multiple group businesses into a holding company that focuses on capital management. Each business group will operate with a high degree of independence led by its own CEO.” - Alibaba (BABA 0.00%↑) CEO Daniel Zhang

Industrials and Transport

China is becoming a key player in the EV industry

“...from a passenger car standpoint, let's say, it's really important to stay connected because China is moving very fast on that digital interface and what that digital architecture and what you can do in the vehicle. So it's important to stay close to that. But Jim has been pretty consistent about the strength we see in the BEV capability of the Chinese OEMs, and they are exporting now to Europe in large numbers. So I think we're past the point there that you can say, are they going to, are they not? They're formidable BEV players. You look at BYD, et cetera. So that's there” - Ford Motor Company (F 0.00%↑) CFO John T. Lawler 

“In the first quarter of this year, no one noticed, but we noticed that something monumental happened in our industry where China became the #1 exporter of vehicles globally. It had always been the Germans and the Japanese. They exported more than 1 million units away from China. Increasingly to Europe, 50%, 60% of the Chinese market is going to be EV digital products. They have a different digital ecosystem, as you know, so that will require some transition for them. But companies like SAIC, Geely, BYD, these are going to be global players now.” - Ford Motor Company (F 0.00%↑) President, CEO & Director James D. Farley 

China dominates the rare earth industry globally

“So we currently represent 15% of global rare earth content. The rest of the industry other than one player is domiciled in China. What's important about this supply chain is that if you can mine the material and refine it, we're still sending it all to China to be made into magnets. And so the material gets mined refined, but then 90-plus percent of the magnetics are made in China. We produce that content today, and we send it to China, but we are in the process of moving downstream, what we call our Stage 3, where we're building a magnetics facility in Fort Worth, Texas” - Litinsky Mp Materials CEO James Henry 

The Chinese rare earth industry to focus more on serving its EV industry 

“...what I expect to happen is Chinese industry will focus on the Chinese industry. And in order to ensure that BYD, Xiaopeng, Nio, their OEMs have the requisite amount of rare earth materials to continue to gain market share in electric vehicles, Chinese industry will focus on themselves and making sure that they've got that security of supply for themselves. I think overall, that's actually probably bullish for pricing because this stuff is not free. It doesn't grow on trees. The cost curve is sloping upward in China, certainly. And with -- and to their credit, more focus on environmental control and pollution control and things like that, that's certainly been the upward pressure that we've seen” - MP Materials Corp CFO Ryan S. Corbett

Honda expects the auto semiconductor shortage to recover by 2025

“Toward the end of the fiscal year or in the second half of the year, specifically, the supplies of semiconductors will improve finally. And we still have the 4.35 million unit sales forecast. And it is not going to be an abrupt recovery, but it is going to be a gradual recovery from the middle of the year till the second half of the year. And full recovery is expected to be found in the fiscal year '25.” - Honda Motor (HMC 0.00%↑) Chief Officer for Automobile & Business Development Operations Shinji Aoyama

Toyota’s management team is impressed by the speed at which Chinese OEMs are innovating in EVs

“We went to the Shanghai Motor Show. Frankly, I was totally amazed. The electrification of battery EV was progressing very rapidly, not only that but that's already taken for granted and that differentiation and competition over differentiating through adding intelligence was much faster than we expected.” - Toyota Motor (TM 0.00%↑) President of Mid-Size Vehicle Company Hiroki Nakajima

Falling lithium prices having an impact on the EV space

“On the demand side, while it is true that falling metal prices can result in a drop in our battery ASP, but actually, this may ultimately have a positive impact on EV market growth by expanding EV demand as EV prices decline as well.” - Samsung SDI

“We'll start to see improvements in our overall sell prices towards the end of this year. There is a bit of a lag effect related to how quickly we'll realize some of those cost benefits or savings, but those will be significant savings for us as we've gone through this period of significant sell price inflation, and now we're seeing a moderation in the backdrop” - Rivian Automotive (RIVN 0.00%↑) CFO ​​Claire McDonough

Indians are increasingly buying SUVs though

“The larger shift is the move towards premium cars, towards SUVs. SUVs are now a large part of the overall market, I think we are at 43%. And this may increase further. So there is clearly a shift towards SUVs. And fortunately, we have also launched a number of very exciting products in this segment. So that is the biggest trend that we are seeing as of now.” - Maruti Suzuki SVP of Corporate Planning & Government Affairs Rahul Bharti

Little hope for Australia to produce EV batteries 

“You’re competing with established value chains in Japan, Korea and China, which have been running this business for the last 30 years. The first laptop computer was built because it had the battery technology in Japan. It was Panasonic who came up with the first portable battery. That was 35 years back. If we are pretending that we’re going to catch up and start making batteries here, I think we’re kidding ourselves. What we can do is go a step further, from extracting the ore to processing it, putting it in saleable form, and then sending it to India or any other markets” - Orica CEO Sanjeev Gandhi

Materials & Energy

A recovery in China means better prospects for the oil industry

“I think that really China demand is kind of the missing link out there for a catalyst for recovery. And it's -- the performance of the Chinese economy, I think, is disappointing on a number of fronts. And if they -- if their recent announcement of more stimulus for the economy kicks in gear, that would be, I think, beneficial to petrochemical in particularly polyethylene demand. But I think our view is that we'll wait and see” - Phillips 66 (PSX 0.00%↑) CEO Mark E. Lashier

There is strong demand for aluminium and China’s supply is not enough  

"...there simply aren't enough projects, new supply projects that are available as China gets to this 45 million tons per year cap and the fact is they've not deviated from the need for an operating permit and now you need to buy the operating permit from an already existing smelter rather than just ask for it from the government. That says that that cap is real and so China will eventually either only convert old technology to new technology and we've seen that in Yunnan as an example. and they're very efficient, very good technology, but they had a lot of infrastructure provided, that doesn't hold true outside of China. And so it's the same game that we've played for a number of decades and it's challenging. So when I look at continued growth and I match that up against challenge supply, it tells me aluminum has a really bright future because it's part of a decarbonized world. We have to move pretty quickly towards decarbonized energy sources and these new breakthrough technologies. And I think we can go after that challenge, but I also see that aluminum is going to be a great commodity to be for the future." - Alcoa (AA 0.00%↑) Director of Investor Relations Rob Harvey

The energy industry “trilemma”

“The energy industry today is facing a kind of a trilemma, where we are needing to address the 3 challenges of energy security, affordability and sustainability simultaneously.” - Inpex ($IPXHY) CEO Takayuki Ueda

Key performance targets for Chinese state-owned enterprises are shifting

“[State holding company] SASAC has changed its performance appraisal metrics in relation to SOEs. So in the past, there were 2 key performance indicators but now there are 4. So as regards our growth in terms of the growth that we need to achieve, First of all, we have to achieve efficient growth. That is high growth with efficiency. At the same time, we must be able to generate cash flow.” - CNOOC (CEO 0.00%↑) CFO Weizhi Xie

Real Estate

Hong Kong shopping malls are likely to recover with inbound tourism

“The performance of the group's retail portfolio is bottoming out with gross rental income down only 1% year-on-year, which is the lowest decline since the pandemic outbreak in early 2020… Visitor arrivals have been increasing recently, following the full resumption of normal travel between Hong Kong and Mainland, driving further recovery in footfall at our shopping malls.” - Sun Hung Kai Properties ($SUHJY) General Manager, Corporate Planning & Strategic Investment Hong-ning Sum

Nuggets of Wisdom

Companies should embrace changes in technology

“In the year 2000, when I joined SoftBank Group from my previous job in a big bank, e-mail addresses were not displayed on business cards. It was very surprising to me that the banks prohibited employees from having their own e-mail addresses… And now that we see a variety of generative AI services, including Chat GPT, my thinking is that we should try to use that technology [rather than fight the trend]. Why don't we use ChatGPT so that we will be able to tell what's good and what's bad about it? And that's something that we should share amongst our employees, amongst our people, so that we want to be the first mover to use such technology.” - SoftBank ($SFTBY) PR and Finance Director Yoshimitsu Goto