How to Bet on Urbanisation

In 1978, China’s urban population stood at 172 million. In 2012, its urban population was 695 million. In 2030, there will be one billion Chinese (70% of the population) living in cities, with 221 cities boasting over a million inhabitants. As the urbanisation rate moves from 51% now to 70% by 2030, over 300 million Chinese will migrate from the countryside and into cities. This urbanisation indicates the advent of the Chinese middle-class, which currently composes 23% of the country’s total population, with that ratio around 40% in Beijing and Shanghai. The vast mechanisms of urbanisation have an enemy in the hukou, the household registration system which categorises Chinese people as either urban or rural dwellers. This categorisation is important as it determines their entitlements to social security programs such as pensions, education, unemployment benefits and healthcare. Easing the hukou system would fast-track urbanisation by providing better social security for de facto urban residents possessing a rural hukou.

Chongqing's Rise: A Symbol of Chinese Flash Urbanisation

Generally, urban residents consume about three times as much as rural dwellers. With a projected 270 million middle-class consumers in China by 2020, urbanisation will sharply increase domestic consumption with the expected growth in domestic consumption between now and 2030 equivalent to creating a market the size of Germany’s currently. Additionally, for the first time in 2013 consumption will drive China’s growth more than investments as China’s service sectors expand and single children become adults more accustomed to consumption than their cultural revolution-era parents. Further expected benefits of urbanisation by 2030 include an expected 5 billion square meters of paved roads merely in China’s cities, 170 new mass-transit systems (double the number of all mass transit systems in Europe currently), 40 billion square meters of floor space in 5 million buildings, and 50,000 skyscrapers (equivalent to building two Chicagos every year). There will also be efforts to enhance sewers and garbage management, strong real estate development, healthcare and education. There are evidently many opportunities with Chinese urbanisation, yet geographically the focus must be on China’s midsize cities away from China’s currently fast-growing eastern seaboard, as that will be where much of the burgeoning middle-class will arrive.

One opportunity to invest in companies that will benefit from the Chinese urbanisation story is in the healthcare sector. As China’s population ages, the hukou system is eased, and the public become more aware of the dangers of air pollution, healthcare will play an increasingly crucial role. Two companies to invest in are Shandong Weigao and Shanghai Fosun.

Shandong Weigao, founded in 2000, specializes in manufacturing medical devices such as syringe needles, intravenous catheter needles, blood sampling needles, blood sampling products, blood bags, blood component segregator consumables, syringes, and infusion sets. Its orthopaedic products include steel plates and screws trauma products, spinal implants, and artificial joints. Its blood purification consumables consist of extracorporeal blood circuit for blood purification sets, and dialyzes. Shandong Weigao manufactures medical PVC granules, plastic packing bags, carton boxes, moulds, and industrial automatic equipments and parts. They also engage in research and development of medical devices, orthopaedic products and blood purification products. Shandong Weigao sells their products to hospitals, blood stations, other medical units, and trading companies specializing in selling medical products, both in China and internationally. It is currently listed on the Hong Kong stock exchange and trading at HKD7.620 within a 52 week range of HKD6.5-11.38. Interestingly Shandong Weigao has a 5-year dividend growth of 23%.

Conversely, Shanghai Fosun Pharmaceutical Group specializes in manufacturing and distributing pharmaceutical products as well as their research and development. Main products include those used to in treatment of metabolism and digestive tract system, cardiovascular system, central nervous system, bloody system and anti-infection diseases. Its products, distributed in China and internationally, include Atomolan, MoluoDan, and Composite Aloe. Through a 70% stake in Shenyang Hongqi, it has gained access to their anti-tuberculosis products and through Guilin Pharma they have access to their anti-malarial drugs. Furthermore, Shanghai Fosun holds a 10% stake in Californian Handa Pharmaceuticals who recently got approval from the US FDA for their generic ANDA for quetiapine extended release tablets. Shanghai Fosun Pharmaceuticals is currently trading at CNY12.55 on the Shanghai stock exchange and is planning a Hong Kong listing.

Another opportunity is in telecommunications, which has become a major part of generation Z’s lives. Two interesting investments here are Lenovo and ZTE, which combine world-class technology with the vast underdeveloped Chinese domestic market which will allow them a sheltered environment to grow quickly and perfect themselves before challenging for world domination in their sectors.

Lenovo, founded in 1984, has operations in more than 60 countries and sells its products in around 160 countries. Their world operations have been boosted by their 2005 acquisition of American company IBM’s personal computer division. Therefore today Lenovo are the world’s second-largest PC vendor by unit sales and the largest seller of PCs in China with a 31% market share. Lenovo are also the third-largest vendor by sales in the Germany PC market and control more than 40% of the USA’s market for Windows PCs priced above US$900. Interestingly Lenovo only established a mobile phone division in 2009 yet it is now the second largest vendor of smartphones in mainland China (better than Apple but not as good as Samsung) with a 10.5% market share and its LeGarden online app store has more than 2,000 programs available after two years of operations. Lenovo are aggressively angling to replace Samsung as mainland China’s top smartphone manufacturer, evidenced by their US$793 million mobile phone manufacturing and R&D facility in Wuhan that will be able to produce 30 to 40 million phones per year once construction is finished later in 2013. Additional strategies such as developing a smart television product that was released this year called LeTV also distinguish Lenovo. Their shares are currently trading at HKD$6.85 on the Hong Kong stock exchange, within a 52-week range of HKD$6.35-9.07.

            ZTE Corporation is a Chinese telecommunications equipment and systems company founded in 1985. ZTE is the world’s 4^th largest mobile phone manufacturer by unit sales and the world’s 5^th largest telecoms equipment maker by revenues. They are also the number one vendor globally for CDMA equipment, manufacturing around 40% of global CDMA equipment, and the third-largest vendor of GSM telecom equipment globally, accounting for 20% of the world market. ZTE hold 7% of the key 3GPP Long Term Evolution patents worldwide and also launched the world’s first smartphone with dual GPS/GLONASS navigation, the MTS945. ZTE’s main products are wireless, exchange, access, optical transmission and data telecommunications equipment and software, mobile phones, streaming media and video on demand. ZTE utilizes 10% of its annual revenues on R&D each year and was ranked world number one in Patent Applications by the World Intellectual Property Organisation in 2012 for the second year running. ZTE’s shares are trading at HKD$14.04 on the Hong Kong stock exchange, within a 52 week range of HKD$9.23-18.04.