The Next Ten: Emerging Market Tech Stocks That Could Soon Dominate the MSCI EM Index

Emerging market tech stocks now constitute 28% of the MSCI EM index, higher than the S&P 500 index

Innovation and technological advancement in emerging markets is steadily intriguing more investors. The US stock market benchmark index, the S&P 500 index (SPY) (IWM), has the largest share of its portfolio, with 23.2% (as of Sep 29) invested in information technology stocks (QQQ), followed by financials (XLF) which command 14.6% of the portfolio. The surge in the FANG stocks (FDN) over the past few years is one the primary reasons for the exceptional weighting. However, what usually remains unnoticed here is that the emerging market benchmark, the MSCI emerging markets index (VWO), has allocated an even higher weight to emerging market tech stocks than the S&P 500 index. Information technology stocks now command a 27.6% (as of September 29) of the MSCI emerging markets index portfolio. Furthermore, the iShares MSCI Emerging Markets ETF (EEM), which tracks the index, has 28% of its assets invested in technology stocks.

Will the tortoise win the race?

The behavior of global technology stocks over the past few years reminds us of the popular ‘hare and the tortoise’ fable by Aesop. While US-based tech stocks (XLK), much like the hare, were quick to pick up speed and race ahead, who is to say they may be approaching their resting point. Meanwhile, emerging market-based tech stocks (the tortoise in our analogy) have been slowly but steadily treading their path, unnoticed by many. Valuation data reveals that these emerging stocks are 35% cheaper than their developed market counterparts.

So, while it seems that emerging market tech stocks have established themselves as a point of interest for market participants, which ones merit our attention? The emerging markets index portfolio is currently invested in 844 securities, of which about 233 stocks (27.6%) belong to the information technology sector. So, here is a bird’s eye view of the top 23 (top 10% of the tech stocks) that are now commanding the highest allocation in the emerging market index. 

No. Ticker Top 23 tech stocks in the MSCI emerging markets portfolio Weight

(as of Sep 29)

1 TCEHY, 0700.HK Tencent Holdings Li (CN) 4.24%
2 SSNLF, 005930.KS Samsung Electronics Co 4.18%
3 TSM, 2330.TW Taiwan Semiconductor Mfg 3.63%
4 BABA Alibaba Group Holding ADR 3.01%
5 NPSNY Naspers N 1.95%
6 HNHPF, 2317.TW Hon Hai Precision Industry Co 1.16%
7 BIDU Baidu ADR 1.10%
8 000660.KS SK Hynix 0.63%
9 INFY Infosys 0.59%
10 JD JD.Com ADR 0.57%
11 NTES NetEase.com ADR 0.49%
12 035420.KS NAVER 0.45%
13 CTRP Ctrip Com International ADR 0.45%
14 TCS.NS Tata Consultancy 0.40%
15 3008.TW Largan Precision Co 0.34%
16 2454.TW MediaTek Inc 0.24%
17 AACAF, AACAY, 2018.HK AAC Technologies (CN) 0.17%
18 HCLTECH.NS HCL Technologies 0.16%
19 2474.TW Catcher Technology Co 0.15%
20 2357.TW ASUSTeK Computer 0.15%
21 LPL LG Display Co 0.14%
22 2382.TW Quanta Computer 0.13%
23 4938.TW Pegatron 0.13%

 

The surge amongst leading emerging market tech stocks over the past year is well documented. For example, the top five stocks in our list above had already delivered 68%, 72%, 40%, 77%, and 46% over the past 1 year in price return (as of October 30, 2017). Market participants have come to realize the potential of these companies and that seems to be priced into the blue-chips. Most of the top 10 stocks of those listed above have been surging and are trading at prices near about their 5-year highs.

However, for investors looking for cheaper bets, looking at the next 10 emerging market tech stocks may bring more value. Here are the key financial metrics {liquidity (current ratio), financial leverage (debt to equity ratio), profitability (gross profit margin)} and current (P/E) and expected (Fwd. P/E) valuation figures for the next 10 emerging markets information technology sector stocks (in accordance with the GICS classification) that could soon dominate the MSCI EM index.

The Next Ten

Company Price P/E Fwd. P/E Current Ratio Total Debt/Equity Margin%
NetEase.com (NTES) $276.51 18.43 17.63 2.56 9.92 56.74
NAVER (035420.KS) $793.26 33.82 34.53 2.33 9.14 NA
CTrip.com (CTRP) $47.01 157.76 56.02 1.52 55 75.40
Tata Consultancy (TCS.NS) $40.46 19.86 19.45 5.55 0.33 43.30
Largan Precision Co (3008.TW) $190.33 29.81 27.38 3.69 0.05 67.05
MediaTek Inc (2454.TW) $11.52 24.81 30.91 1.85 22.27 35.64
AAC Technologies (AACAF) (AACAY) (2018.HK) $17.75 NA 26.55 1.41 38.31 41.55
HCL Technologies (HCLTECH.NS) $13.12 14.09 13.61 2.33 1.34 34.21
Catcher Technology Co (2474.TW) $10.61 12.22 10.84 2.23 31.49 43.48
ASUSTeK Computer (2357.TW) $8.65 11.70 13.40 1.63 2.31 14.19

 

Price and return data as of October 30. Ratios as of FY 2016.

Exchange rates used for conversion (as of October 31): 1 US dollar = 1120.69 Korean won = 64.80 Indian rupees = 30.16 new Taiwan dollars = 6.63 Chinese yuan

  1. NetEase.com (NTES)

NetEase, Inc. is a Chinese Internet Technology Company providing online services centered on content, community, communications, and commerce. NetEase Games is a leading provider of self‐developed PC‐client and mobile games to worldwide users.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol NTES. The stock commanded a market capitalization of $36.3 billion in the US stock market on October 30th. Year-end forward P/E for the depository receipt is estimated at 17.63. Estimated earnings-per-share stand at $15.68.

  1. NAVER (035420.KS)

Naver is a popular Web portal in South Korea. It was the first web portal to use its own proprietary search engine. Along with its search engine, the company provides other web portal services such as online games, and content development. The company also offers online marketing service through banner advertisement and e-commerce services.

The company’s stock is listed on the Korea stock exchange under the ticker 035420. The stock commanded a market capitalization of $26.24 billion in the Korean stock market on October 30th. Year-end forward P/E for the stock is estimated at 34.64. Estimated earnings-per-share stand at about $23.

  1. CTrip.com (CTRP)

Ctrip.com International, Ltd. is a leading provider of online travel agency services in China, including mobile applications, accommodation reservation, transportation ticketing, packaged tours and corporate travel management.

The company’s ADR is listed on the NASDAQ GS stock exchange under the symbol CTRP. The stock commanded a market capitalization of $24.1 billion in the US stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 56.02. Estimated earnings-per-share stand at $5.56.

  1. Tata Consultancy Services (TCS.NS)

India-based Tata Consultancy Services Limited, a division of Tata Sons Limited, is a global IT services organization that provides a comprehensive range of IT services to its clients in diverse industries. The company caters to finance and banking, insurance, telecommunication, transportation, retail, manufacturing, pharmaceutical, and utility industries.

The company’s stock is listed on the National Stock Exchange of India under the symbol TCS. The stock commanded a market capitalization of about $80 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 19.45. Estimated earnings-per-share stand at $2.08.

  1. Largan Precision Co (3008.TW)

Taiwan-based Largan Precision Company Limited a major supplier of camera lens modules for smartphones, tablet computers, and digital cameras, among other devices.

The company’s stock is listed on the Taiwan stock exchange under the ticker 3008. The stock commanded a market capitalization of $25.6 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 27.43. Estimated earnings-per-share stand at $6.95.

  1. MediaTek Inc (2454.TW)

MediaTek Inc. is a Taiwanese fabless semiconductor company that digital multimedia solutions.  for wireless communications, HDTV, DVD, and Blu-ray. The company is a market leader in developing tightly-integrated, power-efficient systems-on-chip (SoC) for mobile devices, home entertainment, network and connectivity, automated driving, and IoT.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2454. The stock commanded a market capitalization of $18.22 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the stock is estimated at 30.91. Estimated earnings-per-share stand at $0.37.

  1. AAC Technologies (AACAF) (AACAY) (2018.HK)

AAC Technologies Holdings Inc. designs, develops and manufactures a broad range of miniaturized components for mobile devices such as smartphones, tablets, wearables, ultrabooks, notebooks and electronic book-readers.

The company’s stock is listed on the US stock exchange under the symbol AACAF. The stock commanded a market capitalization of $21.7 billion in the US stock market on October 30th. Year-end Forward P/E for the stock is estimated at 26.55. Estimated earnings-per-share stand at $0.67.

  1. HCL Technologies (HCLTECH.NS)

HCL Technologies Limited is an Indian multinational IT services company. The company provides software development and related engineering services.  The Group’s technologies utilize a variety of technologies, including Internet and e-commerce, networking, internet telephony, and satellite and wireless communications, among others.

The company’s stock is listed on the National Stock Exchange of India under the symbol HCLT. The stock commanded a market capitalization of $18.71 billion in the Indian stock market on October 30th. Year-end Forward P/E for the stock is estimated at 13.60. Estimated earnings-per-share stand at $0.96.

  1. Catcher Technology Co (2474.TW)

Taiwan-based Catcher Technology Co., Ltd. is principally engaged in the manufacture, processing, and distribution of casings and components for computer and consumer electronic products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2474. The stock commanded a market capitalization of $8.17 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 10.84. Estimated earnings-per-share stand at $0.98.

  1. ASUSTeK Computer (2357.TW)

Asustek Computer Inc. is a Taiwanese multinational computer and phone hardware and electronics company. The company manufactures and markets computer motherboards, interface cards, notebook computers, and other related products.

The company’s stock is listed on the Taiwan stock exchange under the ticker 2357. The stock commanded a market capitalization of $6.43 billion in the Taiwanese stock market on October 30th. Year-end Forward P/E for the depository receipt is estimated at 13.40. Estimated earnings-per-share stand at $0.65.

Asia’s Share of Blockchain Deals Is Booming While North America’s Is Shrinking

Why are blockchain applications practical emerging markets?

The Bitcoin surge has put blockchain or distributed ledger technology on every investor’s radar. While market participants remain divided on the Bitcoin boom continuing or going bust, there are very few contesting the growth and potential of the blockchain technology behind it.

While the United States and Europe dominate the blockchain innovation landscape, the scale for its future growth potential could tilt towards emerging markets (EEM) (VWO).  With higher banking risks and lower banking penetration, developing economies offer the perfect setting for adoption of blockchain-based financial solutions. In fact, blockchain technology is already impacting the provision of financial economies in selected regions of Asia (AAXJ) (VPL), Africa (EZA), and Latin America (ILF).

Asia has emerged as a key player in blockchain technology

Asia has emerged as a key player in this regard (chart above). The region, for its part, brings together regulatory activism, a dynamic technological/fintech ecosystem, the collaboration of industry and entrepreneurial players, and sustained access to venture capital, which is key for any economy that wishes to leapfrog on innovation. Over the years, Asia’s share of global Bitcoin (ARKW) (ARKK) and blockchain deals has risen from 8.5% (2013) to 22.7% (2016), according to data provider CBInsights.com. At the same time, North America’s dominance has reduced from 78.7% to 49.2% over the same period.

Moreover, an increasing number of emerging and frontier (FM) (FRN) market companies are now dominating the Bitcoin and blockchain space (see chart above). Asia especially, with its forward-looking regulatory environments, is steadily emerging as a leader in the testing of, and investment into, blockchain technology.

Leading the blockchain-based solutions for the financial services industry

Asia is currently the leader for emerging markets in blockchain-based solutions for the financial services industry. Markets such as China (FXI) (YINN) and India (EPI) in particular have facilitated the adoption of the technology by massive digitization of payment solutions. Cryptocurrency is already being tested and adapted to facilitate trade finance, and the technology is being levered to improvise on processes such as e-proxy voting, land registry management, and supply chain management.

In the next article we’ll take a quick look at the current state and future potential of blockchain technology in emerging economies such as Asia, Africa, and Latin America.

Electric Vehicle Battery Makers Are Disrupting Global Mining of These 3 Metals

World’s top battery makers have a plan…

With cobalt prices soaring, the world’s top battery makers, a majority of which are based in emerging Asia (AAXJ) (VPL), are looking to tweak the ratios of raw materials used in the manufacture of lithium-ion batteries. More specifically, they’re attempting to reduce the amount of one of the more expensive components, cobalt, being used in the production process. The rare metal has more than doubled in price over the past year on strong demand accompanied by a supply shortage. We’re now seeing car giants rushing to lock in supply deals with cobalt miners. The Volkswagen (VLKAF) (VLKAY)-CATL-Glencore (GLNCY) (GLCNF) deal in just one example.

…with the demand for EVs to jump 20x by 2025

With the demand for electric vehicle batteries predicted to jump 20-fold from 2015 to 2025, emerging market  (EEM) (VWO) battery makers are currently testing a new recipe.

Panasonic (PCRFF) (PCRFY), the world’s leader in battery production, is working on reducing cobalt consumption in its battery production process. With customers including Tesla (TSLA), Panasonic currently employs NCA (nickel-cobalt-aluminum) technology in battery production. The two companies are now together working to develop a battery with 85% nickel composition.

South Korea (EWY) based Samsung SDI (SSDIF) and LG Chem (LGCLF) are developing new power packs that use more nickel and less cobalt. Samsung SDI expects the industry-wide amount of cobalt per battery unit to decrease to about half of current levels over the long term.

Change is good

Currently, the more popular NMC (nickel-manganese-cobalt) formula employs a 6:2:2 ratio; that is, a ratio of 60% nickel to 20% cobalt and 20% manganese. SK Innovation, another of South Korea’s top battery makers, is working to change the composition of these cathode materials to 80% nickel, 10% cobalt and 10% manganese; so an 8:1:1 ratio.

Consequently, depending on the success of efforts to change the ratio of lithium-ion batteries inputs from the current 6:2:2 to 8:1:1, the demand for nickel may grow by 10-40% from its current level by 2025 (according to a UBS report).

Meanwhile, China’s (FXI) (YINN) EV battery producers such as BYD (BYDDF) (BYDDY) are focused on cheaper lithium-iron-phosphate (LFP) batteries that don’t use either nickel or cobalt.

This Next-Gen Internet ETF Has Returned 2X More Than The FANG ETF

The next-gen internet ETF, ARKW has returned 60% YTD

As of October 13, 2017, the next-gen internet ETF, the ARK Web x.0 ETF (ARKW) has returned 60% to investors on a year-to-date basis. Over the same period the FANG-stocks tracking First Trust Dow Jones Internet ETF (FDN), has delivered half of the ARKW return at 29%.

The Web x.0 ETF ARKW “Next Generation Internet” ETF (ARKW) focuses on companies that are expected to benefit from the shifting of the bases of technology infrastructure to new-age themes such as cloud computing, big data, machine learning ,internet of things, blockchain, e-commerce, and digital media, among other areas.

Meanwhile, the First Trust Dow Jones Internet Index Fund (FDN) has a large portfolio allocation to each of the FANG stocks. The FANG stocks, which usually attract a lot of investor attention, comprise the top four technology companies in the US. FANGs is an abbreviation representing Facebook Inc. (FB), Amazon (AMZN), Netfix Inc. (NFLX) and Google (GOOG) parent Alphabet Inc. Currently, these stocks command an 8.18%, 8.23%, 5.54%, and 9.93% weight in the FDN portfolio.

Price Return: 2X the FDN ETF

Nonetheless, the ARKW has delivered more than double the price return generated by this FANG stocks-tracking ETF so far this year. Looking beneath the surface, there are 3 key reasons why the ARKW was able to generate such exceptional returns for investors.

  1. Focus on next-gen technology companies

While the FDN is invested in the present day top-performing blue-chip technology stocks, the ARKW is invested in companies that are poised to benefit from the next-generation of technology infrastructure. With technology changing and adapting at sonic speed, future returns, which seem to be more promising from companies in the ARKW portfolio, matter more to investors. Moreover, while the FDN stocks seem to have ridden their surge, many of the ARKW stocks have their growth paths lying ahead of them.

2. Includes emerging and frontier market stocks

100% of the FDN portfolio is comprised of US-based stocks, while the ARKW portfolio has a 10% allocation to emerging market (EEM) (VWO) stocks, 2% to the frontier markets (FM) (FRN), and another 7% to ex-US developed markets (VEA). Stocks of emerging and frontier market growth-oriented companies, albeit riskier, also have a higher return potential than their mature developed market counterparts.

3. Has exposure to bitcoin

The ARKW has about 5.4% of its assets invested in the Bitcoin Investment Trust (GBTC). The GBTC, up 400% for the year, enables investors to gain exposure to the price movement of bitcoin through a traditional investment vehicle, without the challenges of buying, storing, and safekeeping bitcoins. Bitcoin, from its humble beginnings, has now grown to a $91 billion market (as of October 16).

Investors, however, must bear in mind that the ARKW comes with a higher expense ratio of 0.75%, as compared to the FDN which charges 0.54%.

ETF Comparison: The Top Five US-Listed Emerging Market Funds Versus Non US-Listed Counterparts

A frequent conversation amongst market participants in 2017 is the continued rise of emerging market assets. However, performance is not a barometer of investor interest, only the perceived value of the underlying securities.

In order to assess investor interest, let’s first look at the following graph which plots the top five US-listed ETFs in terms of the net inflows witnessed in YTD 2017. Along with net inflows, their asset sizes have been presented to give a visual comparison of where the net inflows stand compared to their size.

In total, emerging market equity ETFs traded on US exchanges have attracted net inflows worth $30 billion in YTD 2017 according to Bloomberg data. In the past one year to the end of September, this number stands at $31.8 billion.

The iShares Core MSCI Emerging Markets ETF (IEMG) has seen the highest inflows for YTD, one year and three year periods and leads by a substantial margin. For instance, in the past three-year period, net inflows witnessed by the fund are over twice the amount seen by the second ranked fund – the Vanguard FTSE Emerging Markets ETF (VWO).

On the other end of the spectrum is the iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV), which has seen net outflows amounting to $66 million in YTD 2017.

Investor interest in emerging markets equities is not limited to US-listed funds. ETFs listed on exchanges outside the US also show a similar trend.

The graph above shows the same data points as the previous graph for non-US listed ETFs.

If we combine all emerging markets equity funds listed on exchanges around the world, net inflows stand at $37.4 billion in YTD 2017 according to Bloomberg data. For the past one year until September 27, this number stands at nearly $40 billion.

Further, investor interest is not limited to the equities space. Emerging markets bonds have seen some traction too.

The graph above plots the top five ETFs investing in emerging market bonds by net flows in YTD 2017 along with their asset sizes, whether listed in US, UK, or elsewhere.

The London-listed iShares JP Morgan EM Local Government Bond UCITS ETF is a shade ahead of the US-listed iShares J.P. Morgan USD Emerging Markets Bond ETF (EMB) – the largest fund investing in that asset class. Interestingly, this shows that while local currency emerging market bonds have been popular with foreign investors, US investors have preferred dollar-denominated bonds.

Local currency denominated bonds have far outperformed dollar-denominated bonds this year as several emerging market currencies have strengthened against the greenback.

After looking at these trends on investing in emerging markets assets – let’s take a quick look at the countries and sectors that have driven these ETFs in the next article.

These Three Frontier Markets Countries Have Already Launched Their Own Cryptocurrencies

Economies are increasingly adopting cryptocurrencies

Bitcoin’s humble beginning in 2009 and its subsequent growth to a $76 billion market cap (as of October 9) bears testimony to the conviction of blockchain technology as a means of payment. Blockchain technology and its product, cryptocurrencies, are gaining acceptance amongst a handful of sovereigns that are now considering the idea of developing their own digital currency. Cryptocurrencies together now command over $150 billion in market capitalization.

There are approximately 50 countries globally (ACWI) (VTI), which currently do not have or do not use their own sovereign currency. This is resulting in some governments beginning to consider the creation of a digital currency of their own. The prospect of decreased transaction costs and ease of ownership make the option increasingly appealing, particularly for use in international transactions.

Presently, there are three frontier markets (FM) (FRN) that are already using digital currencies (ARKW), and a fourth is preparing to do so. Emerging markets (EEM) (VWO) such as China (FXI) and Russia (RSX) are also considering various applications in this regard. Meanwhile, the emirate of Dubai recently launched its own blockchain-based cryptocurrency known as emCash.

Here are the 3 frontier markets that are already using digital currencies, and the fourth which is preparing to join the list:

1. Ecuador

In 2014, Ecuador became the first country in the world with its own digital currency. The small Latin American (ILF) nation is the first to have a state-run electronic payment system known as Sistema de Dinero Electronico. The system allows Ecuadorian residents to pay for public services via their mobile wallets. The scheme intends to help begin to reduce government spending of more than $3 million a year to exchange old notes for new dollars. The 5-year goal for the digital currency is to reach over 4 million users registering around $80 million.

2. Tunisia

Since 2015, Tunisia has been using the universal contracting platform, Monetas, to boost its eDinar (aka Digicash and BitDinar) digital currency using the blockchain. The Monetas platform is an advanced crypto-transaction technology that uses a Blockchain secured digital notary to enable all kinds of financial and legal transactions, public or private, globally. With the La Poste Tunisienne android application powered by Monetas, Tunisians use their smartphones to make instant mobile money transfers, pay for goods and services online and in person, send remittance, pay salaries and bills, and manage official government identification documents.

3. Senegal

In December 2016, this West African country launched its own national digital currency, eCFA, valued at par with the CFA franc. The eCFA was developed by the Banque Regionale de Marches (BRM) and eCurrency Mint and is compatible with other digital cash systems in Africa. The blockchain-based currency has been designed to be compatible with other digital currencies in Africa (EZA). The drive for its very own digital currency perpetuated from the fact that Senegal’s CFA franc is shared by 14 countries in West and Central Africa, and its value is guaranteed by the French government.

Estonia

This European country (VGK) (EZU) is among the most tech-friendly countries in the world. The economy already has an e-Residency programme in place where the government stores its data on the blockchain. Now, the Baltic country is on track to creating its own digital currency, Estcoins, which will be available for use by members of its e-Residency programme. The project is being advised by Ethereum founder, Vitalik Buterin.

Asian Stocks to Watch: Korean and Chinese Electric Vehicle Battery Makers

Chinese and Korean EV batteries makers are poised for growth

A recent Credence Research report estimates the market for lithium-ion batteries to reach $95.9 billion by 2025. No doubt, global electric vehicle (EV) batteries makers are already scrambling for position in this high-growth market. While Japan’s (EWJ) Panasonic is currently leading the world (ACWI) (VTI) in supplying batteries to electric vehicles (EVs) manufacturers; we’re increasingly seeing Chinese and Korean EV batteries makers getting engaged in the battle for dominance in the global automotive lithium-ion battery sector. China (FXI) (YINN) and Europe (VGK) (EZU) are considered the key battle-grounds for EV sales.

 

Chinese batteries makers are already working towards high targets set for 2020 with notable government support. According to Bloomberg New Energy Finance estimates, if Chinese batteries makers deliver on their targets, the economy should be in a position to produce 121 GWh (gigawatt hours) of battery power by 2020; enough to charge over 4.8 million electric cars to each travel 100 kilometers.

On the other hand, South Korea’s three leading EV battery manufacturers, LG Chem, Samsung SDI and SK Innovation, have together pledged to invest a combined $1.77 billion to expand EV and hybrid battery production capacity in South Korea by 2020. With domestic demand limited, these battery makers are expanding their global manufacturing footprints trying to cash-in on Europe’s fast-growing EV market.

For emerging market (EEM) (VWO) investors, here’s a quick list of the top Chinese and Korean EV batteries makers.

China

In China, the list of EV batteries makers is led by BYD, CATL, and Tianjin Lishen Battery. BYD and CATL have seen particular benefit from government support.

BYD or “Build Your Dream” (1211.HK) (BYDDF) (BYDDY) is China’s largest battery maker. The company produced approximately 100,000 EVs or plug-in hybrids in 2016. Consistent with BYD’s strategy of vertical integration, the company currently has 20 GWh of battery cell capacity. The company’s target for 2020 is set at 34 GWh. Warren Buffet’s Berkshire Hathaway has a 10% stake in the company.

CATL or Contemporary Amperex Technology Ltd. focuses on the production of lithium-ion batteries and the development of energy storage systems. CATL currently has 7.7 GWh of battery capacity and plans to reach a battery production capacity of 50 GWh by 2020.

Tianjin Lishen Battery Co., Ltd. engages in the development, manufacture, and sale of lithium-ion batteries. The company plans to have 20 GWh of battery cell capacity by 2020.

To allow electric cars to go further on a single charge, a critical factor for batteries is their energy density. For now, China lags behind Korean makers in terms of the technology to provide greater energy density. South Korean companies have been involved in high-performance batteries manufacturing for over 15 years now, long before China got into it.

South Korea

In South Korea, the list of EV batteries makers is led by LG Chem, Samsung SDI, and SK Innovation.

LG Chem or LG Chemical (051910.KS) (051915.KS) (LGCLF) is the largest Korean chemical company. The company is principally engaged in the manufacture of petrochemical materials. The company also provides lithim-iion batteries for laptops, phones and electric vehicles (EVs). The company has plans to start production at a newly-built EV battery factory in Poland which has a capacity to produce battery packs for 100,000 EVs per year, in addition to existing plants located in South Korea, China, and the USA.

Samsung SDI (006400.KS) (006405.KS) (SSDIF) manufactures and sells batteries worldwide. It manufactures and sells small-sized lithium-ion batteries of various kinds and uses, including automotive batteries. The company has completed the construction of a new EV battery plant in Hungary in May with an initial capacity to produce 50,000 EV battery packs per year. When operative (2018), the new plant will serve to strengthen Samsung SDI’s global EV production network which already includes facilities in South Korea and China.

SK Innovation (096770.KS) (096775.KS) is a Korea-based holding company principally engaged in the manufacture and distribution of petroleum products. It is Korea’s first and largest energy and chemical company, now also engaged in future energy. As an EV batteries maker, it is the smallest of the three in South Korea. Nonetheless, the company’s South Korean production capacity is estimated to rise to about 150,000 EV battery systems per year.

The competition ahead

What remains to be seen is how the above listed Chinese and Korean EV batteries makers will fair compared to their Eastern and Western competitors. In the East, established Japanese batteries makers such as Panasonic, AESC, and GS Yuasa (GYUAF) stand in competition, and in the West, industry giants such as Johnson Matthey (JMPLY) (JMPLF), Bosch, and Johnson Controls (JCI) are also vying to become major suppliers of EV batteries globally.

Moreover, a number of global vehicle manufacturers are now developing their own EV battery capabilities. German Daimler’s (DAI.DE) (DDAIF) (DMLRY) Li-Tec Battery subsidiary and Japanese Toyota’s (TM) Primearth EV Energy are prime examples. Tesla (TSLA) is also building its own multi-gigawatt hours battery plant in partnership with Panasonic (PCRFY) (PCRFF) in the US.

These Two African Countries Account For 60% Of the World’s Cocoa Production

World cocoa production is dominated by the emerging and frontier markets

The list of world’s top 10 cocoa producers is comprised of all emerging (EEM) (VWO) and frontier (FM) (FRN) market nations. Ivory Coast and Ghana top the list with about 1.5 million and 0.8 million tons of cocoa beans produced, annually. Together, they account for approximately 60% of the world’s cocoa production.

Ivory Coast and Ghana produce 60% of the world’s cocoa

In Ivory Coast, leader of the top cocoa producers in the world, the cash crop accounts for over 60% of its trade revenue. Chocolate manufacturers such as Nestle and Cadbury receive much of their cocoa from Ivory Coast.

Ghana is the second leading cocoa manufacturing country. Cocoa is critical to the country, accounting for 1/6th of the economy’s GDP. Next in line are Indonesia (EIDO), Nigeria (NGE), Cameroon, Brazil (EWZ), Ecuador, Mexico (EWW), Peru (EPU), and the Dominican Republic, all contributing an outsized share of world cocoa production.

Now, the price of cocoa has been sliding over the past year on account of a supply glut, leaving a bitter taste in these nations, which are exceptionally dependent on the soft commodity.

Cocoa farmers earn just 6.6% of the price of chocolate

Ivory Coast and Ghana currently have a combined GDP of $69.3 billion, according to World Bank data. Meanwhile, chocolate manufacturers such as Nestle have annual sales of about $90 billion. Farmers employed towards producing 60% of the world’s key chocolate ingredient end up earning about 6.6% of the final price of chocolate.

However, these two frontier markets are now looking to capture a larger share of the earning, and have more influence on world cocoa prices. In the next section, we will take a closer look at their strategies.

Saudi Bank Stocks Are At Their Most Attractive Valuations in 10 Years

Saudi banks: good value at attractive prices

Part 1 of this series took a closer look at Saudi stocks and their value at current prices. Now, while Saudi Arabia (KSA) appears poised to continue to deliver small victories in its long-term diversification and transformation agenda, the markets remain skeptical at present about its growth and earnings outlook. The banking sector is seen as a good value point (for reasons discussed in Part 1) at present, with Saudi banks currently trading at historically low price-to-book ratios.

Moreover, the book value per share for the sector has been rising steadily over the past 10 years. These facts are evident in the forward valuation metrics of the S&P Saudi Arabia Banks price in the LCL Industry Index, charted above.

Potential FTSE upgrade may boost Saudi stocks

Saudi Arabia’s financial sector stocks such as Al Rajhi Bank (1120.SR) are being looked at in a favorable light by market analysts and investment bankers globally (ACWI) (VTI). Goldman Sachs (GS) upgraded the stock to BUY, citing improving net interest margin estimates, lower funding costs and reduced risk expenses at the bank. The stock also found a place in Deutsche Bank AG (DB) and Dubai-based Arqaam Capital’s top stocks list.

FTSE Russell announced on 30 September that it would not be adding Saudi Arabia to its index of emerging market (EEM) (VWO) countries. Kuwait, however, did make the cut, and was upgraded to emerging as part of the index provider’s country classification annual review.

We drilled through the universe of financial sector stocks on the Tadawul Exchange to filter out three stocks currently trading at attractive valuations. The next part of this series provides insights into the current and future financial valuations for these stocks.

The World’s 5 Largest Solar Power Plants Are In These Two Asian Countries

The 5 largest solar power plants are in the emerging markets

Emerging markets (EEM) (VWO) house the 5 largest solar power plants in the world. India (EPI) and China (FXI) (YINN) in particular have risen to become the leaders in solar power generation globally. The top 5 power plants (by generation capacity) are housed in these two Asian (AAXJ) (VPL) economies. The chart below depicts the top 5 photovoltaic power stations of the world. The 6th, Solar Star, is based in the US and has a solar power generation capacity of 579 -megawatt (MW).

Iran is poised to overtake Solar Star

Iran is now poised to move into the 6th largest slot with its 600 MW plant, scheduled to be built in stages over the next 3 years. Iran’s Energy Ministry recently signed a $600 million financing and development agreement with UK-based specialist renewable energy investor, Quercus, for creating the project together. Lower oil prices and air pollution have been shifting the economy’s focus from natural gas and oil-based power generation to renewables. The project falls in line with the economy’s commitment to develop 5 GW of new renewable energy capacity by 2020. The country’s current installed solar energy capacity stands at 53 MW.

Emerging markets are increasingly investing in renewables

In our recent series, Solar Power in the Lead, as Future Energy Takes Center Stage in the Emerging Markets, we highlighted how emerging markets are currently leading the charts in renewable energy (ICLN) (PBW) (QCLN) attractiveness, with solar energy (TAN) holding enormous potential. Investment flows to the industry are picking up backed by attention and funding from international agencies such as the USTDA, World Bank, and BRICS Bank.

Declining costs of solar panels and wind turbines are making renewable power a more attractive option in the Middle East, Africa, and Asia.

While China and India have already established themselves as the dominant players in the renewable energy market, sub-Saharan Africa (EZA) is also showing immense potential in the renewable energy space, particularly in solar.

5 Auto Manufacturers in BRICS Nations Making Major Investments In Electric Vehicles

Electric vehicle manufacturers to rise with the tide

Electric vehicles (or EVs) continue to grab headlines as various governments worldwide announce new legislation and strategies to reduce vehicles powered by gasoline and diesel engines. Indeed, Bernstein research predicts that EVs could represent 40% of auto sales and 30% of the global car market in 20 years. UBS Group (UBS) believes that a growing global electric vehicle fleet will begin to be disruptive to gasoline demand by 2031.

Surprisingly, emerging markets (EEM) (VWO), are in many cases keeping pace with their developed market peers in the drive away from traditional auto engines. Tracking new technology and related products in these markets is an investment theme set to attract major fund flows.

The 5 biggest vehicle manufacturers in BRICS

We ran a filter on all the automakers currently selling products into the electric vehicle space, and originating from the BRICS nations (being the prominent area of focus within the emerging markets due to size and scale), to arrive at 5 largest automakers foraying into the EV space. Here’s the list of the five biggest auto manufacturers (by revenue) from BRICS nations (Brazil (EWZ)-Russia (RSX)-India (EPI)-China (FXI)-South Africa (EZA)) that are currently cashing in on growing demand in the electric vehicle space:

Company Name (Ticker) Country Revenue T12M ($bn) Market Cap ($bn) Total Return YTD (Sep 21) P/E
SAIC MOTOR CORP LTD-A (600104.SS) China 793.7 341.5 36.6 10.4
MAHINDRA & MAHINDRA LTD (M&M.BO) India 740.0 802.7 10.0 18.8
MARUTI SUZUKI INDIA LTD (MARUTI.BO) India 669.2 2452.9 54.6 32.5
HERO MOTOCORP (HEROMOTOCO.BO) India 282.8 770.0 31.2 21.1
AVTOVAZ PJSC (AVAZ.ME) Russia 200.3 48.5 13.8  N/A

 

As is evident from the table above, all of these firms have delivered strong returns to investors so far this year. Maruti Suzuki’s stock is up about 55%, while SAIC Motor and Hero Motocorp have delivered over 36% and 31% returns to investors, respectively.

SAIC Motor Corp (600104.SS)

SAIC Motor Corp is China’s largest automaker. With over $341 billion in market capitalization, the company’s stock is listed on the Shanghai stock exchange under the ticker 600104. The stock has returned 36.6% YTD (as of September 21) and currently trades at a P/E of 10.4.

The company is keen on the plug-in hybrid electric vehicle (PHEV), electric vehicle (EV) and fuel cell technologies. Its electric drive unit (EDU) was awarded first place at the 2016 China Automotive S&T Award Ceremony. In 2016, sales of new energy vehicles under SAIC’s self-owned brands increased 84% year-on-year to surpass 25,000 units. In 2017, SAIC Motor plans to launch more new brands to improve the sales of new energy vehicles to over 80,000 units.

The company has founded the Global Car Sharing & Rental Co Ltd to offer timeshare leasing of electric cars. In 2016, the car-sharing company launched 8,400 new energy cars and built 2,800 charging stations in 20 cities. The service is scheduled to cover 100 cities in 2020, with 300,000 vehicles.

Mahindra & Mahindra Ltd. (M&M.BO(MAHMF)

Currently, Mahindra & Mahindra is the only manufacturer of electric cars in India (INDA) (INDY). The company’s stock is listed on the Bombay Stock Exchange with the symbol M&M and also on the NYSE’s OTC market under the ticker MAHMF. With $802 billion in market capitalization, the India-listed stock of the company trades at a P/E of 18.8 currently. The stock has returned 10% to investors YTD.

Mahindra Electric, the company’s electric vehicles division, has the e20plus, eVerito and eSupro in its stable. The company expects EV sales to triple in 2017. It has already partnered with shared mobility platforms, rental firms (such as Zoomcar) and cab aggregators to promote the usage of electric cars.

The company has a current capacity to make 400-500 EVs/month and seeks to increase this capacity to 5,000 vehicles a month over the next 2 years. Mahindra is also working on a high-end electric powertrain technology, which will allow cars to run for 200-300 km with a single charge from the existing range of 100-140 km. A luxury electric sedan could also come from the M&M stable, targeting international markets.

The company has also entered into a partnership with Ford Motor Co. (F) to cooperate in areas including driverless and electric cars. For M&M, there’s money to be made in a nascent EV sector. “This is not a trade-off. This is the single biggest business opportunity for the next couple of decades,” said Anand Mahindra, the company’s chairman on clean technology, at the Bloomberg Global Business Forum in New York on September 20. The company is also currently looking for a joint venture partner in the world’s biggest EV market, China (YINN).

Maruti Suzuki India Ltd. (MARUTI.BO) (MRZUY)

This Indian automaker’s stock is listed on the Bombay Stock Exchange with the symbol MARUTI and also on the NYSE’s OTC market under the ticker MRZUY. The company boasts of a $2.5 trillion in market capitalization on the Indian exchange. The stock is expensive at a P/E of 32.5 currently. However, the stock has returned 54.6% to investors YTD.

While the company currently does not offer a pure electric vehicle, its product offerings include hybrid cars – Ciaz SHVS and Ertiga SHVS. These smart hybrid vehicle offerings of the company have record cumulative sales of over 100,000 units a month and participate in the government of India’s FAME India* scheme, which aims to promote Faster Adoption and Manufacturing of Hybrid and Electric vehicles in India.

Hero Motocorp (HEROMOTOCO.BO) (HRTQY)

Hero Motocorp is a leading motorcycle and scooter manufacturer based in India. The company’s stock is listed on the Bombay Stock Exchange with the symbol HEROMOTOCO and also on the NYSE’s OTC market under the ticker HRTQY. With $770 billion in market capitalization, the India-listed stock of the company trades at a P/E of 21.1 currently. The stock has returned over 31% to investors YTD.

The company currently offers a range of electric 2-wheelers and 3-wheelers. Hero Electric began developing electric vehicles over ten years ago which resulted in the first electric scooter products launched in the Indian market in 2007. Since then the company has sold over 100,000 vehicles in India. With over 50% market share in the electric scooter market, the company is the dominant player in India’s electric two-wheeler market.

The company has also been very active in promoting the electric vehicle industry through the formation of an industry association and by approaching the government to provide subsidies of up to 20-25% on all electric scooter sales.

Avtovaz PJSC (AVAZ.ME)

AvtoVAZ is the Russian automobile manufacturer formerly known as VAZ: Volzhsky Avtomobilny Zavod, but better known to the world under the trade name Lada. The VAZ factory is the largest car manufacturer in Russia, and one of the largest in the world. The company is the single Russian company pursuing electric cars, with their electric Lada Vesta.

The company’s stock trades on the MICEX exchange under the ticker AVAZ, commanding a market cap of $48.5 billion. The stock has returned 13.8% YTD.

Tata Motors (TTM)

While the above five top the list of BRICS automakers that have forayed into electric vehicles, the overall biggest automaker BRICS nations by revenue, Tata Motors (TTM), is set to zoom into the electric vehicle space as well. There’s talk of Tata Motors launching an all-electric Tiago. The UK-based subsidiary Tata Motors European Technical Centre (TMETC) hinted that the Tiago EV might deliver 100 km on one full electric charge, will accelerate from 0-100 kmph in about 11 seconds in sports mode, and would be capable of a top speed of 135 kph.

Stock Watch: 5 Of The World’s Largest Smartphone Memory Chipmakers Are In Emerging Markets

How upgrading smartphones are benefitting emerging market memory chipmakers

The unprecedented rise in the usage and demand for smartphones globally has led to an increase in demand for smartphone components. Higher storage needs coupled with the urge to outperform competitors has led to rising demand for upgraded memory content. The demand for memory chips has been following a rising trend, benefitting prominent players from the global memory semiconductor market (SMH) (SOXX). Currently, emerging market (EEM) (VWO) (IEMG) memory chipmakers dominate the space with South Korea-based companies Samsung (005930.KS) (SSNLF) and SK Hynix (000660.KS) alone commanding nearly 70% of the global memory semiconductor market.

These two global giants have been rising with the tide and are poised to record upwards of $42 billion in profits for 2017. At the South Korean Exchange, electronics are up 68% YTD, while SK Hynix has climbed 85% so far this year.

Increased demand and price should bode well for these chipmakers

For emerging markets baron Mark Mobius, executive chairman of the Templeton Emerging Market Group, technology is a major investment theme currently. From the memory segment, he sees upgrading smartphones driving the demand and pricing of dynamic random access memory (DRAM) chips. DRAM chips brought about a revolution in the IC (integrated circuits) market. These chips have gained popularity on the back of their structural simplicity, which requires only one transistor and one capacitor per bit, to fit billions on a single memory chip. The source of demand for DRAM chips currently ranges from smartphone manufacturers to data centers. Moreover, prices have been rising, spurred by rising demand, leading to increased revenues for DRAM manufacturers. The chart above depicts the trend in DRAM producer revenues worldwide over the past 6 years. Emerging market memory chipmakers such as Samsung Electronics and SK Hynix clearly lead the pack, with US-based Micron (MU) at number 3 in terms of DRAM revenues.

5 of the Top 7 DRAM chip manufacturers are based in emerging markets

Here’s a list of the top 7 DRAM manufacturers along with their financials:

Ticker Company Country YTD % (Sep 20) P/E EPS Growth rate (1Y) Operating Margin
005930.KS, SSNLF Samsung Electronics South Korea 46.28%, 68% 12.41 25.1% 14.5%
000660.KS SK Hynix South Korea 84.79% 8.86 -30.3% 19.1%
MU Micron Technology US 64.1% 14.91 NA NA
2408.TW Nanya (2408.TW) Taiwan 76.81% 7.51 22.6% 20.5%
2344.TW Winbond (2344.TW) Taiwan 181.34% 31.9 -10% 8.8%
Private company Powerchip Taiwan NA NA NA NA
Acquired by Micron Elpida Japan NA NA NA NA

 

Samsung and SK Hynix stocks sport favorable valuations

Samsung Electronics and SK Hynix, the top two DRAM chip producers, have delivered good price returns to investors so far this year. These stocks are currently trading at a P/E of 12.41 and 8.86, respectively. Forward valuations for these companies also look favorable:

Poised to grow with the market

Given the fact that the DRAM market is expected to at least double over a decade (according to a SEMI whitepaper, chart below), these emerging market memory chipmakers should see brighter days ahead.