China was the only major economy to grow last year as the world struggled with the pandemic, and it is on pace to become the world’s largest economy by 2028. During the annual parliamentary meeting last week, China released the long-discussed draft of its 14th five-year plan which includes the country’s vision for 2035.
The 70,000-word document develops several key themes:
- Strengthen domestic consumption and investments
- Digitisation – agricultural and industrial supply chains, manufacturing, government functions
- Digital economy will become increasingly important, specifically “cloud computing, big data, AI, IoT and connected industry” – expected to reach 10% of GDP by 2025
- Boost research and development spend – expected to grow 7% annually
Implications for our portfolio holdings: Alibaba and Tencent
In contrast to pessimistic market sentiment focusing on the impact of updated fintech and antitrust policies on Alibaba and Tencent, we believe it is important to see beyond short-term uncertainties and evaluate their clearer and longer-term growth prospects.
Alibaba’s and Tencent’s services undoubtedly underpin China’s digital economy, facilitating communication and the movement of goods and services in the digital age. Over one billion users rely on Tencent’s WeChat to communicate with others while over 700 million people actively purchase goods through Alibaba’s online marketplaces.
In addition, the companies play pivotal roles in supporting talent and technological innovation through R&D and investments. In 2020, Alibaba and Tencent spent around $12 billion and $10 billion respectively in R&D and capital related expenditures. Moreover, the companies support technological innovation and competition through their expansive investment portfolios. Both have investment portfolios in start-ups and businesses valued at more than $30 billion each, putting them on par with the largest global venture capital funds.
The bigger picture
While these roles will continue to grow in importance under the government’s strategic mandates, we want to highlight the bigger opportunity of cloud computing.
Cloud infrastructure is the crucial foundation for building a digital economy. Alibaba and Tencent command over 55% of the cloud infrastructure market in China and both companies’ cloud businesses are among their fastest growing segments. Alibaba Cloud grew 55.7% in 2020 to over $9 billion and is expected to reach profitability this year. Over the next three years, Alibaba is investing $28 billion to expand its Cloud’s infrastructure and technology. Tencent Cloud is estimated to have grown more than 80% in 2020 to over $2 billion. Tencent is investing $70 billion over the next five years in technology infrastructure including cloud computing, AI and cybersecurity.
Cloud adoption in China is estimated to be around five years behind the United States and is expected to reach $60 billion by 2024, highlighting a significant runway for cloud companies. Additionally, with digitisation being a strategic imperative for the nation rather than just for individual companies, adoption will likely accelerate at a greater pace than in other markets.
As long-term investors, we look beyond uncertain concerns and instead focus on long term tailwinds that drive business growth. And the tailwinds here are very clear for Alibaba and Tencent: a massive and growing cloud market underpinned by a large and expanding economy and government directives on digitisation.
About the Author
The Education of a Value Investor by Guy Spier
The Digitisation of Everything - Retail
The Digitisation of Everything - Entertainment
The Digitisation of Everything - Automotive
The Digitisation of Everything - Payments