Since the US-China “tech war” rages on, investors are betting on China’s attempts to substitute and/or clone US technologies with native applications to operate networks in the state sector.
Recently, local governments and state firms such as China Telecom have announced plans and procurements directed at fostering a home-grown tech ecosystem to displace gear from the likes of Intel, Microsoft, Oracle and IBM.
An index tracking Chinese IT stocks has soared nearly 30% this year, doubling blue-chip gains.
“We’re seeing more US actions against China, and the future tends to be’one world, two systems’,” said Wu Kan, portfolio manager at Soochow Securities Co, who has invested in local tech leaders such as China National Software & Service Co Ltd, China Greatwall Technology Group and Beijing Kingsoft Office Software.
“Any segment that faces decoupling risks represents big investment opportunities.”
Some market watchers warn valuations of China tech stocks are getting frothy at roughly 60 times trailing earnings, noting Chinese firms could take years to catch-up to established international players. But Wu said price levels are warranted by growth potential and direct government backing.
The Trump administration has just strengthened restrictions on China’s Huawei Technologies and sanctioned China-owned apps TikTok and WeChat. Washington also rolled out a”Clean Network” initiative to exclude Chinese technology firms perceived as threatening national security.
Under US pressure, Chinese vendors are poised to gain local market share, said Jie Lu, Robeco’s China research thoughts.
Dongxing Securities predicted a retooling would create a 1 trillion yuan (approximately $144.46 billion) chance during the next three years for local sellers.
Local governments are rushing to form business federations to promote the use of Huawei’s Kunpeng processing technologies.
Last week, China Unicom’s Wuchang subsidiary struck a partnership with Huanghe Technology, which makes servers and PCs using Kunpeng technologies. In May, IT distributor Digital China said it was building plants to create PC’s and servers utilising Kunpeng CPUs.
Also in May, China Telecom said it would procure up to 56,314 servers in 2020, one-fifth of these using Kunpeng and Hygon Dhyana chips, which rival US manufacturers Intel and AMD in a move seen as a gesture of Beijing’s localisation push.
“China must promote domestic replacement to avoid being strangled, even as its current technology lags by far,” Zhang Chi, chairman of Xin Ding Capital said during an investor roadshow for Haigon Information Technology, manufacturer of Hygon Dhyana chips.
Some 95 percent of Chinese servers use CPU’s from Intel.
It would be tragedy, Zhang said, “if one day, Trump bans Intel from selling CPU’s to China.”
Zhang expects Chinese government agencies to replace all computers using US chips in the next five decades, echoing views of many analysts.
National Software & Service, which makes operating systems that compete with Windows and middleware that aims to rival IBM and Oracle, expects revenue this year to jump 70 percent to 10 billion yuan.
Beijing Kingsoft Office Software this week posted a 143% jump in first-half profit and stated China’s requirement for information security is boosting sales.
Beijing Baolande Sotware also sees authorities and fund customers as new growth engines thanks to replacement requirement, investor relations official Guo Xing said.
However, Brian Bandsma, New York-based portfolio manager in Vontobel Asset Management, said the opportunities in replacement demand could be restricted, given less competitive local offerings and what might be longer-than-expected adoption rates.
Companies like Microsoft have been around for decades and have a very complex piece of software that’s being heavily used by multiple industries.
“There’s probably too much optimism baked into valuations in terms of what these local companies are going to get out of China’s focus on domestic suppliers.”
The team at Platform Executive hope you have enjoyed this news article. Initial reporting via our content partners at Thomson Reuters. Reporting by Samuel Shen and Josh Horwitz. Editing by Tony Munroe and Kim Coghill.
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