SHANGHAI (Reuters) – As China’s ‘tech war’ escalates, investors are betting on China’s efforts to replace U.S. technologies with domestic applications to run state-owned networks.
PHOTO PHOTO: Chinese and American flags fluttering at The Bund, before US trade delegation meets Chinese counterparts for talks in Shanghai, China July 30, 2019. REUTERS / Aly Song
In recent months, local governments and state-owned companies such as China Telecom have announced plans and acquisitions aimed at encouraging a home-grown tech ecosystem to replace the likes of Intel, Microsoft, Oracle and IBM.
An index that tracks Chinese IT stocks .CSIINT has jumped nearly 30% this year, doubling profits with blue chip .CSI300.
“We see more US actions against China, and the future has ‘one world, two systems,'” said Wu Kan, portfolio manager at Soochow Securities Co., which has invested in local tech leaders, including China National Software & Service Co., Ltd (600536.SS), China Greatwall Technology Group (000066.SZ) and Beijing Kingsoft Office Software (688111.SS).
“Every segment that decouples risks represents great investment opportunities.”
Some market watchers warn that tech stock valuations in China are slashing to about 60 times backward revenue, noting that Chinese companies could take years for established global players. But Wu said price levels are justified by growth potential and direct support from the government.
The Trump administration recently tightened restrictions on China’s Huawei Technologies and owns China-owned TikTok and WeChat apps. Washington also called for a “Clean Network” initiative to exclude Chinese tech companies that are seen as a threat to national security.
Under pressure from the US, Chinese suppliers are ready to gain local market share, said Jie Lu, Robeco’s research manager at Robeco.
“China will increase investment and R & D intensity for critical industries such as semiconductors,” Lu said.
Dongxing Securities predicted that a renewal would create a 1 trillion yuan ($ 144.46 billion) opportunity in the next three years for local sellers.
KUNPENG PUSH
Local governments are rushing to form federation companies to promote the use of Huawei’s Kunpeng processing technology.
Last week, China Unicom’s subsidiary Wuchang entered into a partnership with Huanghe Technology, which makes servers and PCs using Kunpeng technologies. In May, IT distributor Digital China (000034.SZ) said it was building plants to make PCs and servers with Kunpeng CPUs.
Also in May, China Telecom said it would purchase a maximum of 56,314 servers by 2020, one-fifth of which used Kunpeng and Hygon Dhyana chips, which competing with US brands Intel and AMD in a move seen as a gesture by Beijing’s localization push.
“China needs to promote domestic replacement so as not to be surprised, even as its current technology leaves far behind,” Zhang Chi, chairman of Xin Ding Capital, said during a roadmap for investors for Haigon Information Technology, maker of Hygon Dhyana chips.
Some 95% of Chinese servers use Intel CPUs.
It would be a disaster, Zhang said, “if Trump one day bans Intel from selling CPUs to China.”
Zhang expects Chinese government agencies to replace all computers with U.S. chips over the next five years, reflecting the views of many analysts.
National Software & Service, which makes operating systems that compete with Windows and middleware that aims to compete with IBM and Oracle, expects revenue to jump 70% to 10 billion yuan this year.
Beijing Kingsoft Office Software posted a 143% jump in profit in the first half this week, saying China’s need for information security is boosting sales.
Beijing Baolande Software Corp (688058.SS) also sees governments and finance clients as new growth engines thanks to replacement demand, said official investor relations Guo Xing.
But Brian Bandsma, New York-based portfolio manager at Vontobel Asset Management, said the opportunities in demand for replacement would be limited, given less competitive local offerings and which could be longer than expected adoption rates.
“Companies like Microsoft have been around for decades and have a very complex piece of software that is heavily used by multiple industries. There is a reason why Microsoft is in the position, “said Bandsma.
“There’s probably too much optimism built into valuations in terms of what these local businesses will get out of China’s focus on domestic suppliers.”
(This story corrects to correct typographical error in company name in 4th to last paragraph)
Report by Samuel Shen and Josh Horwitz; Edited by Tony Munroe and Kim Coghill
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