[Ride the Tide] Growth Investment in Full Swing


[Ride the Tide] Focusing on major macro-economic development trends at home and abroad, sharing JD Capital’s insights from its participation in China’s economy.

[Sharer] Research Institute of JD Capital: Focusing on studies of corporate strategies and macro strategies, and continuously following the development trends of macro-economic policies and the capital market.

This is the second report of Chinese Economy and JD Capital’s Strategy in the New Normal: Growth Investment in Full Swing

As China’s economy shifts from high to mid-high growth, the era of easy money which we experienced in the first decade of this century is gone forever. 

However, the growth investment targeting new demands and emerging industries still has huge potential in China.

JD Capital believes that, even in an economy with a 5% annual growth, some sectors would still grow by 10% annually. And in these sectors, we can always find enterprises growing at 15%. These well-performing companies are exactly the investment targets of JD Capital.

Looking ahead into the next few years, the secondary industry in China will be further divided while the tertiary industry will contribute more to the national economy. For the secondary industry, as the government continues with the de-capacity effort, output value of resource-intensive industries (coal, steel, etc.) will undoubtedly decline in the long run; while that of high-tech manufacturing is expected to grow. As for the tertiary industry, the increasing demand for mid-high-level consumption will drive consumption upgrading and unlock the potential of e-commerce; we expect the tertiary industry to become the key driver for GDP.

Over the past two decades, China’s economy has been mainly fueled by the input of production factors, including labor force, capital and natural resources. However, such input can no longer sustain growth as the marginal benefit has begun to fall. It is, therefore, high time to shift the growth engine from additional factor input to improved productivity. This means that we need to drive economic growth by pushing up total factor productivity, given a fixed amount of production factors. To push supply-side reform in the new normal, it is essential to address the structural problems of supply and demand through de-capacity, de-stocking and de-leveraging in traditional sectors; and through technological innovation and productivity enhancement in emerging sectors so as to meet higher-end consumption demands. 

De-capacity in traditional sectors mainly relies on M&A so as to make the number smaller. However, in emerging sectors, we need to make the number bigger by fueling the establishment and expansion of innovative start-ups. 

Emerging consumption demand promises huge potential

China’s economic growth has long been driven by investment and export. However, the labor-intensive manufacturing export and capital-intensive infrastructure investment has started to weaken amid the supply-side reform. Therefore, consumption will naturally contribute more to economic growth. The new consumption trend marked by the upgrading of traditional consumption and the rise of new consumption, as well as new investments and supplies boosted by sci-tech innovation will create huge room for growth. 

In terms of consumer demand, income rise has driven up people’s spending on food, tourism, culture, entertainment and sports, especially the last three. Service consumption is expected to take up a larger part than commodities consumption and thus reshape China’s service industry. Japan’s experience shows that service consumption sees explosive growth as the Engel coefficient slips from 38% to 32%. In 2013, China’s Engel coefficient of urban/rural households came in at 35.0%/37.7%, marking the start of a critical growth period for service consumption. This will bring great opportunities to the equity investment sector. 

Additionally, consumption in two major areas — health care and education — will maintain steady growth, for both are rigid demands and the public have high expectations for higher quality in these regards. The in-depth reform of health care and education sectors, especially in payment and subsidy approaches, will enable more private institutions to grow faster. In return, these institutions will better meet varied public demands by diversifying market supply. 

As for the consumer group, people born in the 1980s and 1990s are fast gaining purchasing power. These young consumers tend to save fewer and spend more, and their money often goes to leisure. They are also a key target for Internet-based O2O platforms and “lazy economy” and their strong consumption demand will benefit the e-commerce sector. 

High-tech industry is expected to grow

In 2015, emerging industries in China maintained a basically strong growth. Though unlikely to offset the slowdown of sectors plagued by overcapacity (steel, coal, etc.) and FAI (fixed asset investment), their growth still shows great potential and proves the success of economic transformation.

The high-tech industry became a new driver for China’s industrial economy in 2015. According to the National Bureau of Statistics, the added value of high-tech industry in 2015 climbed 10.2% on a year-on-year basis, 4.1ppt/3.3ppt higher than large-scale industries/overall GDP growth. The high-tech industry’s share in large-scale industries amounted to 11.8%, 1.2ppt higher than year before (aerospace, spacecraft & equipment manufacturing +26.2%; electronic & telecommunication equipment manufacturing +12.7%; information chemicals manufacturing: +10.6%; pharmaceutical industry: +9.9%). 

Emerging technologies and industries will continue to boom in 2016. On the policy side, the integration between the Internet and manufacturing and the “Made in China 2025” strategy are the key measures to deepen structural reform, boost the new economy and accelerate the upgrading of domestic manufacturing. Emerging industries, a frontier for global competition, will affect China’s future role in the world’s industrial division and will thus gain greater government support. On the market side, investors’ wide attention on high-tech segments allows quality companies to be better recognized by the market. 

In the future, emerging industries like IT Internet, alternative energy, new material, energy conservation & environmental protection, advanced equipment and smart manufacturing will receive more recognition from both the government and the market. 

Looking back, JD Capital’s exit from multiple investment projects in emerging industries has contributed great earnings and its subsidiary Feitian Technologies was awarded as 2015 China’s Best PE Exit Case by VentureChina. As emerging industries grow stronger, we expect to see more high-growth innovation/start-up companies, which would become an excellent target for VC and growth investment.

JD Capital will continue to focus on growth investment driven by emerging industries and VC investment. Emerging industries are where the best opportunities lie. Policy support and the new round of sci-tech reform will cultivate a bunch of potential bellwethers with high growth. Investors will be rewarded with better return by JD Capital’s continued investment in emerging industries.