ab19 February 2024Global Research and Evidence LabPowered byUBS Evidence LabYESChina Industrials"China+1" expansion: How can Chinese corporates benefit from "China+ASEAN"?Capacity expansion and collaboration makes a win-win for China and ASEANChina and ASEAN have been each other's largest trading partners since 2020, laying a solid foundation for mutual cooperation. ASEAN's population, as a whole, is half of China's with high market demand potential. Chinese corporates' capacity expansion into ASEAN is also promoted by geographic proximity and similar cultural backgrounds. China's supply chain expansion has in turn resulted in industry upgrades in ASEAN, as ASEAN-China trade is increasingly focused on developing high value-added supply chains. ASEAN has increasingly added value domestically by embedding itself in China's final demand chain, while simultaneously China has been growing its importance as a value-added contributor to the rest of Asia. Why do Chinese companies go to ASEAN?We attribute ASEAN's attractiveness to: 1) potential for higher demand locally; 2) ASEAN as a whole is more attractive and competitive when compared with other emerging markets; 3) lower labour costs and a young sizeable working population; 4) increasing share of global exports; 5) policy support (eg, ASEAN's duty-free trade vs US/EU's trade restrictions on China); and 6) abundant natural resources which are highly complementary to China's imports in many aspects.In ASEAN, which countries and industries do Chinese enterprises invest in? China has been actively investing into ASEAN 10 countries over the past 10+ years. Top destinations for China's greenfield overseas direct investment (ODI) between 2019 and H123 are Indonesia, Cambodia and the Philippines. According to listed Chinese corporates' investment plans announced in 2022 and 2023 to set up subsidiaries and factories in ASEAN, the number and value of projects increased by 214%/8% YoY in 2023; among which Vietnam, Indonesia and Malaysia dominate in terms of investment value. Investment plans became more diversified in 2023 and the three industries with the highest investment project numbers and investment amounts are technology hardware and equipment, materials, and auto and auto parts. Our most-preferred sectors and stocks We expect China's construction and construction machinery sectors to benefit from ASEAN's infrastructure opportunities; and home appliance, sportswear, EV, Internet data centre (IDC) and electric two-wheeler industries in China to benefit from rising demand from ASEAN markets. ASEAN sector beneficiaries will include Indonesia nickel and Malaysia construction. Our preferred stocks under this theme are shown below.Our most-preferred "China+ASEAN" stocks 2024E2025E2024E2025E2024E2025E2024E2025E2024E2025EBYD1211.HK70.7 Buy360.00 190.00 227 11.6x9.3x29%3.0x2.4x28.5 28.3 3.2 1.6 1.7 2.2 Hengli601100.SS9.9 Buy72.00 54.50 37...
