ACTIVE VIEWPOINT MARTIN CURRIE ASIA PACIFIC REAL INCOME JANUARY 2019 FOR PROFESSIONAL CLIENTS ONLY TALES FROM THE ROAD HOW CHINA S GREATER BAY AREA IS GREATER FOR REAL ASSETS China s Greater Bay Area (GBA) has seen phenomenal growth over the last 40 years. Now boasting two of the country s largest megacities, it is a shining example of urbanisation and population growth in Asia and provides excellent opportunities for listed real asset companies. Key findings from trip Daniel Fitzgerald, CFA Portfolio Manager, Martin Currie Australia Shenzhen and Guangzhou to see further strong population growth Evidence of the emergence of middle class apparent across key tier-1 cities in China Infrastructure projects continue to be built, providing opportunity for listed real asset companies. In our view, all real assets should benefit from the increased population in the region. www.martincurrie.com
THE GBA: BUOYANT, DYNAMIC AND ROOM TO GROW My recent visit to the Greater Bay area (GBA) gave me the opportunity to assess the potential for listed real asset companies 1 and the broader economic capability in the region. The GBA spans nine cities in the Guangdong province, as well as Hong Kong and Macau. Its development is part of a plan by the Chinese and Hong Kong governments to better link cities and provinces, and promote the region as a key manufacturing and financial hub, comparable with other notable bay areas worldwide, such as such as Tokyo and San Francisco. The GBA is already the most productive province in mainland China in terms of GDP square metre 2 and this looks set to continue, with further infrastructure developments on the horizon, ongoing strength in manufacturing, and continued population growth. The region also has room to grow with 700 square kilometres of new development land still available 2. As well as touring key utilities, infrastructure and property sites, I met with an eclectic range of Chinese companies to better understand the economic story of the region and how it supports ongoing population growth. I came away from my meetings feeling that the GBA economy is buoyant and dynamic, underpinned by growth in the finance and IT sectors, with large companies like Tencent 3 headquartered in Shenzhen. My visit took in three key cities within the region Hong Kong, Guangzhou and Shenzhen. Of those, I was particularly impressed with what I found in Shenzhen, which neighbours Hong Kong. Zhaoqing Guangzhou Foshan Dongguan Newly approved water project Express rail link (Hong Kong section) Express rail link (Mainland section) Huizhou Jiangmen Zhongshan Zhuhai Shenzhen Zhongshan Bridge Shenzhen Hong Kong Macau Hong Kong Zhuhai Macau Bridge West Kowloon South China Sea Area illustrated 1Real assets include utilities, infrastructure and property. 2Source: CBRE Research, 2018. The Guangdong-Hong Kong-Macuau Greater Bay Area. 3The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable. 02
URBANISATION AND POPULATION GROWTH IN ACTION For real assets, population growth is a critical part of our investment thesis. Quite simply, the more a population grows, the higher the volume of demand for real assets. Even where country-level population growth is modest, as it is in China, increasing urbanisation boosts city population growth rates. China's urban population is expected to continue to grow, with urbanisation going from 55% in 2015 to 80% in 2050 4. Shenzhen is a fantastic example of urbanisation and population growth in Asia. The city was essentially farm land 40 years ago and has developed into a megacity (a city with over 10 million inhabitants). Shenzhen population: UN estimates (thousands) 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2017: 11,275 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 2035 Past performance is not a guide to future returns. Source: Martin Currie Australia, UN Population Division; as at 30 November 2018 UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2018 Revision. While we have seen large growth in the population already in Shenzhen, it is interesting to note that UN estimates for actual population keep exceeding its forecasts. The UN s 2014 forecast of 11.3 million people for 2020 4 was largely met by 2015, five years ahead of forecast. It is expected that Shenzhen's urbanisation and population growth rates will continue, with the latest UN forecasts suggesting an attractive per annum growth of around 1.7% from 2015 to 2030 leading to a population of more than 14.5 million 4. Population growth 2015 to 2030 Shanghai Guangzhou Beijing Shenzhen Tianjin London São Paulo Mexico City New York 0.5% 0.9% 0.8% 1.1% 1.5% 1.7% 1.9% 2.1% 2.3% China tier-1 population growth rates impressive globally Past performance is not a guide to future returns. Source: Martin Currie Australia, UN Population Division; as at 30 November 2018 UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2018 Revision. For real assets, population growth is a critical part of our investment thesis. Quite simply, the more a population grows, the higher the volume of demand for real assets. And even where country-level growth is modest, as it is in China, increasing urbanisation boosts city population growth rates. 4UN Population Division Department of Economic and Social Affairs: World Urbanization Prospects: The 2014 and 2018 Revisions. ACTIVE VIEWPOINT: ASIA PACIFIC REAL INCOME 03
BIG INVESTMENT IN INFRASTRUCTURE China continues to spend big on infrastructure projects across road and rail, to keep up with the growing citybased population. This can be clearly seen in the GBA: HIGH-SPEED RAIL The new high-speed rail link between Hong Kong and Guangzhou, not only links the two cities, but effectively links Hong Kong with the broader Chinese national highspeed rail network. Managed by MTR Corp 5 (held in the strategy), the new rail link has reduced the travel time between the two cities from around three hours to less than 50 minutes, with impressive speeds upwards of 300 kilometres per hour. While some of these transport projects are currently government owned, we expect asset recycling (where government-owned brownfield assets are privatised to generate funds for new infrastructure) over time, leading to some of these assets finding their way into listed real asset companies. Given the notable growth in the regional population going forward, we would also expect many more real assets to be developed. A good example of a population-driven project is the new Pearl River Delta Water Resources Allocation Project under construction in Guangdong that will address the potential for water shortages by pumping water from the Xijiang River to the Dongjiang River. This US$5 billion project is currently being built by the sponsor of Guangdong Investments (held in the strategy). BRIDGE PROJECTS The 34-mile Hong Kong-Zuhai-Macau bridge has recently been completed, making it the longest road bridge in the world. It effectively connects Hong Kong, Macao and Zhuhai to all major cities in the Pearl River delta. Another bridge, to link Shenzhen and Zhongshan is under construction. This will make it easier for Zhongshan and Zhuhai to better service e-commerce hubs and industries around Shenzhen. These projects help further ingrate the region and will improve travel times and connections to the region. RISING MIDDLE CLASS LEADS TO MORE CONSUMPTION Shenzhen felt more like Singapore than Beijing. Its wide streets, space and good town planning meant that traffic flowed well. The shopping malls and the cars being driven also felt very middle class. 5The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable. 04
Nio, a domestic electric car manufacturer, has retail showrooms across China. The US$80,000 price tag, three months wait time, and sales of around 50 cars a day 6, indicate a healthy middleupper class in China. I also saw a number of examples of the burgeoning growth in the middle class throughout the GBA, with very healthy trading in the mid- to high-end shopping malls such as Swire Properties Taikoo Hui Mall, Guangdong Investments Teemall both in neighbouring Guangzhou, and Wharf REIC s 7 Harbour City in Hong Kong. Both Guangdong Investments and Wharf REIC are held in our Asia Pacific Real Income strategy. Swire Properties 7 Taikoo Hui Mall, while still relatively new (opened 2011), is already a top-10 mall in China by revenues. In fact, four of the top 10 malls in China are based in the GBA 8. Growth in the middle class is a key demand driver for real assets. For example, the wealthier a population, the more likely it is to travel, so demand for better rail networks and airports will increase as incomes rise. Travel demand per capita vs. income levels GNI per capita (thousands, log scale) 100.0 10.0 Japan Europe Korea USA Malaysia China Thailand Indonesia Philippines Australia New Zealand India 1.0 0.0 1.0 2.0 3.0 4.0 5.0 6.0 Air transport per capita * Singapore Hong Kong Source: Martin Currie Australia, World Bank: national accounts data, OECD National Accounts data files, United Nations Population Division World Population Prospects, International Civil Aviation Organization, Civil Aviation Statistics of the World and ICAO staff estimates, IATA air passenger market analysis; latest available as of 31 December 2017. *Air passengers carried include both domestic and international aircraft passengers of air carriers registered in the country. Discussions with management at manufacturing firms during my trip also highlighted the positive outlook for the middle class. In particular, management noted that wage growth in skilled manufacturing roles was very high and the job market was tight. TRADE TENSIONS PROMOTING INTRA-REGION INVESTMENT Companies cited rising wages but also higher US tariffs as key reasons why they are actively looking at the Asian region as an alternative manufacturing source, alongside China. While many were in early stages of their investigations, key countries of interest include Malaysia, Singapore, Thailand and Vietnam. This provides a positive backdrop to more investment in the region. It should be noted that the portfolio s exposure to trade-related companies remains minimal, with demand driven by local population growth as opposed to trade or cyclical business-cycle driven growth. 6Based on discussions with Nio car dealership staff. 7The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable. 8Source: Linkshop; compiled by Fung Business Intelligence. ACTIVE VIEWPOINT: ASIA PACIFIC REAL INCOME 05
SUMMARY In our view, all real assets should benefit from the increased population in the region, bolstering the prospects and demand for highways, airports, water, property and other utility services (waste, power, etc). My trip has given me increased confidence in the GBAexposed companies already held in our Asia Pacific Real Income strategy, including Guangdong Investments, Yuexiu Transport, and our Hong Kong-based names such as Wharf REIC and MTR 9, as well as presenting a range of potential new investment opportunities to be investigated further. My trip has given me increased confidence in the GBA-exposed companies already held in our Asia Pacific Real Income strategy. 9The information provided should not be considered a recommendation to purchase or sell any particular security. It should not be assumed that any of the security transactions discussed here were, or will prove to be, profitable. ACTIVE VIEWPOINT is just one part of our range of investment materials. To access further perspectives on our strategies and key investment themes, visit: www.martincurrie.com FIND OUT MORE For further information on the Martin Currie Australian equities range please visit our website www.martincurrie.com You can find your local contact at www.martincurrie.com/contact_us Alternatively please call our global offices, press office or global consultant team on the numbers below: Edinburgh (headquarters) 44 (0) 131 229 5252 Global consultants 44 (0) 131 479 5954 London 44 (0) 20 7065 5970 New York 1 (212) 805 6000 Asia and Australia (61) 3 9017 8640 Media 44 (0) 131 479 5892 06
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