Asian technology firms offer growth potential

The region is home to some of the world’s leading companies in sectors like consumer, Internet and technology


US TECHNOLOGY companies have frequently gained the attention of global investors, while Asian tech firms remain undervalued which investors should not overlook.

Our view is that the 21st century is the Asian century and the evolution of Asia’s markets will offer diversification potential and structural growth opportunities. This will play out over many years and the Covid-19 pandemic will not change the bigger picture.

The region is home to some of the world’s leading companies in sectors like consumer, Internet and technology. Asia’s dominant technology companies tend to be listed in China, Korea, Taiwan and Japan, where each country has its own competitive advantages within the technology space.

China is Fast Becoming a Technology Powerhouse

With the rapid adoption of technology across industries, China is fast becoming a tech powerhouse. Its new economy stocks are set to outperform the old economy stocks in the future as Covid-19 has further accelerated technology adoption and growth of these companies.

As announced in its latest five-year plan in October 2020, China will focus on technology and innovation, and will strive for scientific and technological independence and self-reliance.

This will mean increasing research and development spending and investment in “new infrastructure” including 5G networks, artificial intelligence and data centres.

Investors can also look forward to capturing the growth of Asian technology-themed companies including those “homecoming” Chinese companies seeking a secondary listing on the Hong Kong Stock Exchange (HKSE) and unicorns looking to list on HKSE. These listings represent the new economy companies on the Hong Kong market.

Korea and Taiwan are Powering Global Technology

We are currently in the expansionary phase of the global semiconductor cycle — a continuous supply-demand mismatch amid technological upgrade cycles inherent to the semiconductor industry.

Demand is quickly outstripping supply due to (i) bitcoin mining rush (with bitcoin rising +70% year-to-date), (ii) 5G upgrade cycle in consumer smartphones, (iii) scaling up of electric vehicle production as automakers vie for greater market share and (iv) persistent demand for entertainment devices (PlayStation5 & Xbox) to curb stay-home boredom.

While the current global chip shortage is a major headache for chip buyers, it is a boon for Korea’s and Taiwan’s semiconductor sector.

Korean chipmakers like Samsung Electronics Co Ltd and SK Hynix Inc or Taiwanese chipmakers like Taiwan Semiconductor Manufacturing Co Ltd (TSMC) and United Microelectronics Corp will benefit from greater sales volumes as they are in a strong position to raise prices.

Foundries like Samsung and Taiwan’s TSMC have been operating at full capacity to fulfil rising orders from all around the world.

Lead times for semiconductors are extending beyond 14 weeks — the longest they have been since the last chip boom of 2018.

Japan is Home to Tech Giants in a Variety of Different Sub-sectors

The technology sector constitutes more than 48% of the Nikkei 225 Index in terms of the market cap, while five out of the top 10 companies are technology companies.

That being said, each Japanese tech company is distinct and therefore by delving deeper into the top technology companies will give us a better idea of the Japanese technology industry.

The biggest technology company in the index is Softbank Group Corp, which is categorised in the technology sector due to its strategic investment holdings in notable tech companies like chip designer ARM, ride-hailing players Grab Holdings Inc and Uber Technologies Inc, e-commerce giant Alibaba Group Holding Ltd, US telecommunication company T-Mobile, and office sharing firm The We Co, now known as WeWork Co Inc.

It also runs the world’s largest technology-focused venture capital fund — the Vision Fund — which has more than US$100 billion (RM411 billion) in capital.

Japan is also represented in the semiconductor space by chipmaker Tokyo Electron Ltd and semiconductor testing equipment manufacturers Advantest Corp and Lasertec Corp, which would be beneficiaries of the semiconductor upcycle.

Meanwhile, FANUC Corp is the largest maker of industrial robots in the world, which are powering the automation of factories globally. FANUC could be the beneficiary of the boom in electric vehicles as the setup of more production lines would increase the need for their top-of-the-line industrial robots.

Asian Tech is Much Cheaper Than Global Tech!

Asian tech, as represented by the MSCI AC Asia Pacific Information Technology Index, has returned an impressive 286% (14.5% per annum (pa)) in the past 10 years.

However, this pales in comparison to its global counterparts represented by the MSCI World Information Technology Index which has rallied 450% (18.6% pa) over the same period.

In terms of earnings-per-share (EPS) growth, global technology’s 124% (8.4% pa) growth slightly outpaced Asian technology’s 108% (7.6% pa).

In other words, this suggests that global technology has outrun Asian technology in the past decade. Based on trailing EPS, the relative valuation of global technology to Asian technology has increased to 1.4, which is above the historical average of 1.17.

This means that even at current prices based on trailing EPS, global technology is 40% more expensive than Asian technology.

Asian technology is expected to grow faster than global technology in the next few years!

Going forward, earnings for Asian technology is expected to be much stronger than global technology. Asian technology earnings are expected to balloon 76.6% by end of 2023, while global counterparts are “only” expected to grow by 56%.

Based on 2023 earnings forecasts and current prices, Asian technology is trading at a price-to-earnings (PE) valuation of “only” 15.23 times, which is a few multiples cheaper than the historical average of 20 times.

Moreover, due to stronger earnings growth, Asian tech’s forward PE is also cheaper than global tech’s forward PE of 24.51 times (38% cheaper in fact)!

Our view is that the continuing evolution of Asia’s markets will offer diversification potential and structural growth opportunities. This will play out over many years and the pandemic does not change the bigger picture.

Cheaper valuation relative to global peers and historical average coupled with strong earnings growth makes Asian technology an attractive proposition that investors should not miss out.

The views expressed are of the research team and do not necessarily reflect the stand of the newspaper’s owners and editorial board.