BankEl

AsiaStrategyDate

iKongChinaEquitydate

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Chinaeatstheworld

ResearchAnalyst

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China's,notAl's,SputnikPeterMilliken,CFA

moment

Wethink2025istheyeartheinvestingworldrealizesChinaisoutcompetingtherest

oftheworld.It'sbecomingimpossibletonotacknowledgethatitscorporatesare

deliveringsuperiorvalueformoney,andoftensuperiorquality,acrossmultiple

spheresofmanufacturingandincreasinglyservicestoo.Investorspayfor

dominance,andweexpecttheChinadiscounttodisappear.Furthermore,we

believeprofitabilitycansurprisetotheupsidethroughthecycle,duetopolicy

swingstofavourconsumptionoverproduction,andpotentiallyfromfinancial

liberalization.WebelievethebullmarketforHK/CHequitiesbeganin2024,andwill

exceedpriorhighsinthemediumterm.

Chinafirstrosetoglobalcorporatedominanceinclothing,textiles,andtoys.Itthen

dominatedinbasicelectronics,steel,shipbuilding,andmorerecently,whitegoods,

solar,andotherlessglamorousareas.Anditcameoutofnowheretodominate

industriesascomplexastelecomequipment,nuclearpower,defense,andhigh-

speedrail.Itstechnologicalachievementshavebeendiscountedbyinvestors.But

bylate2024Chinareceivedattentionforitsrapidascensiontoleadtheworldinauto

exports,withitfloodingtheworldwithhighfunctioning,attractiveEVsatpricesfar

belowequivalentexistingmodels.Thisgainedtheworld'sattention.Andin2025,

Chinainoneweeklaunchedtheworld'sfirstsixthgenerationfighterplaneandits

low-costAlsystem,DeepSeek.

MarcAndreessenreferredtoDeepSeek'slaunchas"Al'sSputnikmoment",butit

ismoreChina'sSputnikmoment,whereChinaIPgetsrecognised.Thelistofhigh

value-addareasChinaexcelsin,anddominatesthesupplychainin,isexpandingat

apacewithoutprecedence.

WeconsiderglobalinvestorstendtobeheavilyunderweightChina,justasthey

wereavoidingfossilfuelsseveralyearsago-untilthemarketpunishedthosetaking

non-marketbaseddecisions.Weseeparallelswithfunds'minimalexposureto

Chinatoday.Investorsthatlikeleadingcompanies,withmoats,cannotignorethat

itisChina'sfirmsthathavethewideanddeepmoatstoday,ratherthantheWestern

DeutscheBankAG/HongKong

IMPORTANTRESEARCHDISCLOSURESANDANALYSTCERTIFICATIONSLOCATEDINAPPENDIX1.DeutscheBankdoes

andseekstodobusinesswithcompaniescoveredinitsresearchreports.Thus,investorsshouldbeawarethatthefirmmay

haveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.Investorsshouldconsiderthisreportasonlyasingle

factorinmakingtheirinvestmentdecision.

5February2025

chinaEquitystrategy

companiestheyareeconomicallysuperiorto.

china'Smanufacturingstrengthisobvious,withdoubletheexportsofmerchandisethantheUs.Itdelivers30%ofglobalmanufacturingvalueadd,andit'Salsorisingrapidlyinservicesshare.peopleavoidchinaasaninvestmentdestination,citingitseconomicweakness,yetitstillgrowsatmorethandoubletherateofmostdevelopedmarkets,despiteacyclicalslowdown.

withworld-leadingcompaniesthataretakingshareacrossalmosteveryindustry,itlikelywillnotremainasasingle-digitpercentageofglobalmarketcapforlong.webelieveitisdawningonpeoplethatchinaiswhereJapanwas,notin1989,astheyperhapsthought,butintheearly1980s,whentheJapanesewereclimbingupthevalue-addladderrapidly,withbetterqualityproductsatlowerprices,andwithinnovationscomingthrough.Thewesthastograpplewithapotentialextinctioneventformanyofitscompaniesandindustries,Sowillneedtorepositiontheirholdingstoreflectthis.

Tosurvive,itscorporateswillneedto:1)Massivelyautomate,and/or2)Erecttradebarriers.Thesecondroutehasbeenadownwardpathforeconomiesinthepast,andwhileitishappening,itdoesn'tnecessarilyhelpthewest,asinautosforexample,themajorexportmarketsforchinatendtobetheapproximately7bnpeoplenotintheG10.

Figure1:Globaltradeinmanufacturedproducts

source:WT0,worldTradestatisticalReview,223

Figure2:china'Sexportshare

source:WTO,worldTradestatisticalReview,2023

Lookingatthemajorcategoriesofinternationaltrade,chinahasbeentakingshareinall(butclothing,whichithaddominated,beforeexpandingoperationsoffshore).Itislargerthantheusinthekeymerchandisecategories,androutinelymanytimeslarger.Theexceptionhasbeenautos(nowwearetalkingvaluenotvolume)-butislikelyalreadyaheadtheretoo-andwithFord'SCEodrivingaxiaomi,it'Shardtoseethetrendchanging.Evenonservices,chinahasbeencatchingup,addingabouto.5pointssharep.a.ontransportforexample.

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Figure3:Exportmarketsharebymajorcategory

source:WTO,worldTradestatisticalReview,223*Excludesintra-Eurpetrade

patentsasproxyforIP

chinabringsthefullvaluechain,andcreateslocalclustersofexpertise,withmultiplesiliconvalleylikeareasofexpertiseforkeyindustries,andalignswellwithitsuniversitiesinresearch.IntheEvsector,chinaownsaround70%ofpatents,and5Gand6Gtelecomequipmentissimilarlypositioned.

chinaaccountedfornearlyhalfofallpatentsappliedforduring2023.withmoreSTEMgraduatesthantherestoftheworldexIndia,that'Slikelytocontinue.Alsoconsiderthatmanygraduatesinthoseothercountriesarechinesetoo.Sotheriseinchina'SCorporatedominancewilllikelynotbestoppedanytimesoon,withoutexceptionalcircumstancesoccurring.

chinadoesfacetradebarriers,withtheUsandEutariffsonEVVehiclesbeinganobviousexample,butthewestislimitedinwhatitcandowithoutpayingforconsequencesthatareperhapsworse(e.g.,inflation,fallingcompetitiveness,andretaliation).TheUsattemptedtoholdJapanbackinthe1980s,tosomesuccess,butwethinkchinaisnotwhereJapanwasin1989,butyearsearlier.

Figure4:patentsfiled(2023)

source:worldIntellectualpropertyorganization

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chinaVs.Japan1980s

Throughoutthe1970s,JapanhadthesecondlargestGNP,justbehindtheUs,andwhenconsultingwithwikipedia,weweresurprisedtorealizeitsrealGDpgrowthaveragedjust4%inthe1980s,andthatwasstillconsideredalargepartofitseconomic"miracle".comparethattotheangsttodayoverwhetherchinawillgrowat4%or5%,andthatiscriticizedas"slow"now,butthisviewmayevolvetowardsitbeinga"miracle"inhindsight.

TheplazaAccordmandateda40%yenstrengthening,slowingJapan'Sindustriallead.Thatledtoaslowdownthatthegovernmentdealtwithbyaloosemonetarypolicy.Growththenrevivedin1987-89to5%,andthatperiodwasassociatedwithstrongequitygainsasbubbleconditionsoccurred.Thepickupingrowthcausedsteelandconstructiontorevive,andliftedsalariesandemployment.Domesticdemand,ratherthanexports,wastheeconomicdriverinthelate1980s.Thiscouldbecomethecaseinchinatoo.

Japaninthe1980s

paraphrasingwikipedia,Japan'Sgrowthwasachievedthroughdeployingabundantcheaplabour,andintensiveuseofcapital,alongwithproductivitygains.Domesticinvestmentwasmorethan30%ofGDP,helpedbyfinancialrepressionthatkeptinterestrateslow.JapanacquirednewtechnologiesbyJVs.savingsreached40%ofGDPintheearly1970s,beforedippingtonear30%intheearly1980s.Japanstartedsettingupplantsoverseasinthe1970stoavoidtradefriction.chinaonlyrecentlystartedmakingsuchmoves.

Thequestionis:whereischinaonthatpath?LikeJapan,chinahashadanextremepropertybubble,butnotnearlyasextreme.Moreover,wearesixyearsonfromcreditbeingwithdrawn,andthesector'Sdownturnbeginning.Homepricesareoffone-third,mortgageratesdownbyhalf,andnominalGDpisupapproximatelyone-third,Soaffordabilityhasbeenresettolevelsnotseeninmanyyears.Equityvaluationsarelow,duetolowmarginsandlowmultiples.SothisisnotbubbleJapan1989(whenequityvalueshadrisen50xintheprior20years).

IthasbeenwidelyassumedthatchinawillnotfollowthepathofJapantowardsaconsumerheavyeconomy,itwillonlyfollowJapantoeconomicsluggishness.chinadoesappearonapaththathasbeentrodbytheUs,Japan,singapore,HK,Taiwan,southkorea,spain,andmanypartsofEasternEurope.othershaveobviouslystumbledinthemiddleincometrap,butunlikethosethathavestruggled,chinahasbecomeagloballeaderinmanufacturing,andincreasinglyservices,acrossallindustries.

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Figure5:standardprogresstoanadvancedeconomy

DeutscheBankAG/Hongkongpage5

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Butwhataboutchina'Sdecliningpopulation?

Thecountry'sdecliningpopulationisadragongrowth,butmanynationssharethatproblem.wethinkthisentirelymissesthebigpicture,thatchinahastwoadvantages:1)Automationleadership,witharound70%ofinstalledindustrialrobotsbeinginchina,drivingaproductivityadvantage,andSowealthpercapita,and2)Effectivelyamassivehinterlandthatitisbringingintoitsorbit.TheBeltandRoadinitiativeopensuptheareasincentralandwesternAsia,theMiddleEastandNorthAfrica,buildingandexpandingitspotentialmarket.

whilecentralAsiahasonly80mpeople,itisrichinresources,whilewestAsiaislargelywealthywith310mpeople.southAsiahas2.1bnpeople,(althoughtwo-thirdsareinIndiawhich,fornowatleast,heavilyrestrictstradeandinvestmentfromchina-butthatcouldchangeinthemediumterm).Andthenthere'SAfrica,with1.4bn.Toputitdifferently,there'SasmanypeopletoselltoinAfricaasthereisinchina,asmanypeopletoselltoincentral,westandsouthAsia(exIndia),asmanypeopletoselltoinASEAN+LatinAmerica,andifthingsgetmorefriendly-asmanypeopletoselltoinIndia.Sofocusingonchina'Sdomesticpopulationmayleadpeopletothewrongconclusiononchina'Sfuture.

china'Sexportsrose7%in2024,withexportstoBrazil,UAE,andsaudiArabiaup23%,19%and18%,respectively,andASEANnationsintheBeltandRoadup13%.china'SexportstoASEANPlusBRICS+isnowequivalenttoitsexportstotheUsplustheEU,withthemarketshareofexportstothosedestinationshavingconvergedbytwopercentagepointsp.a.overthelastfiveyears.EveninLatinAmerica,chinaismakingstronginroads.sowhilechinagetshurtiftheusimposeshightariffs,DB'Seconomicsteamsees10%tariffsin1Hand10%tariffslatein2Hascreatingan0.5%GDPheadwindforchina,givenUsexportsrepresent3%ofchina'SGDP.That'Samanageablehit.

Thedownsideofchina'sexportdominanceisprotectionistmeasuresinmanyoftheworld'Slargestnations,evenwithinBRICS+,Sothecountryispartiallyconstrainedinitsexportgrowth,butwilllikelyincreaseitscorporatefootprintonewayortheother,whethersettingupinothermarkets,orsellingitemsforassembly,duetothequalityofitsIpandmanufacturingvalue-add.TheweaponizationoftheUSDmakesinvestinginoffshoreinfrastructureandplantslookincreasinglyattractiveVs.treasuries,Sothepathforwardlooksfairlyclear.

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Figure6:chinareachingouttoanewecononnicworld(inmillions)

source:DeutscheBank,wikipedia

DeutscheBankAG/Hongkongpage7

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china-Ustra·deissuesmayshocktoupside

TheconsensusonUs'chinatariffsliessomewherenorthofDB'shouseviewof20%tariffsbeingimposedduring2025intwosteps(oneofwhichhasbeenannouncedalready).Therealitymayendupbeingfarmorefavorablethansuchbearishbeliefs.TheTrumpadministrationisobviouslykeenontariffsasafundingsource,andseeschinaastheprimarysourceofsuchrevenueforeconomicandstrategicreasons.However,presidentTrumpappearstovaluetacticalwins,perhapsmorethanclingingtoideologicalpositionsthatarestrugglingfortraction.Inourindustry,wehaveinvestors,andwehavetraders.Thetradershadbeenintheascendancyinrecentyears.perhapspresidentTrumpismoreapoliticaltraderthaninvestor(inideology).IfSo,expecthimtorunafairlytightstop-losslimit.

Deepseekhasunsettledtheworldbeliefthattheycouldcontainchina.Bettertofocusonstimulatingbusiness,throughlowerregulation,cheapenergy,andrelativelylowbarrierstoimportofintermediateproductsthatcannotbeproducedcompetitivelydomestically.Thatlastpartmaytakelongertogetto,butwewouldexpecttherewillbeinternaldemandstogettoamoreclassicRepublicanpositionontrade,fromHouseandsenatemembersandbusinessleaders.Thatmaytakesomeback-and-forthing,butthisanalystexpectsamorepro-tradepositiontoultimatelybecomepartofthedevelopingAmericaFirstagendabeforethemid-terms.

wethinkapoliticaltraderwouldlooktolockinpositionsearly,andSogetachinatradedealinthefirsthalfof2025-andmoveontofocusingonwesternHemisphereissues.Aquickdealmayinvolvelimitedtariffs(asDBexpects),back-trackingonsomecurrentrestrictions,alongwithsomemega-contractsbetweenUsandchinesecorporations.Ifthisoccurs,(andthisanalystdoes),expectarallyinchinastocks.

Tradeandmarketsnotthatcloselyaligned

Tradeandeconomicstrengthhavegonehand-in-handthroughouthistory.Soweweresurprisedtofindalackofresearchlinkingexportsandstockmarketperformance.china'Sexportshave,however,closelytrackedglobalmoneysupplygrowth,whichhasbeenrising,butnowslowing.whenwepromptedDB'SAlplatformtofindsuchstudies,ittoldus:"someresearchindicatesthatincreasingexportscanboostcorporateearnings,leadingtohigherstockvaluations(but)somestudiessuggestthatfocusingsolelyonexportgrowthcansometimescomeattheexpenseofdomesticdemand,potentiallyhinderingoveralleconomicgrowthandthusimpactingthestockmarketnegatively."

So,potentially,fallingexportscouldparadoxicallybooststocks,atleastforsometime.china'Sascenttodominanceacrossindustrieshascomewithaheavydoseofoverinvestmentinmanyareas.Insolar,thereisnowanefforttocurtailsupply,andifreplicatedinotherindustriesthiscouldbepositiveforequities,andpotentiallyalsoreleasesomecapitalfordomesticconsumption.

HouseholddepositgrowthhaseasedtodoubletherateofnominalGDpgrowth,buttheUSD10tnriseinsavingssince2020,weexpecttogetunleasheddisproportionatelyintospendingandequitiesinthemediumterm,andseeHK/CH

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stocksashavingsubstantialroomtorunfromearningsaccelerationandmultiplere-rates.

Figure7:chinesehouseholdbankdeposits

source:BloombergFinanceLP

Figure8:Us&EUM2Vschinaexportgrowth

source:BloombergFinanceLP

DeutscheBankAG/Hongkongpage9

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pricingthemarketleaders

Figure9:MedianP/BVs.ROE

source:BloombergFinanceLPDB

Figure10:P/BVSROENasdaq

source:BloombergFinanceLP,DB

Theproblemofinvestingintechnologyisthatprofitsareconcentratedinthemarketleader,andsoanintensebattletoachievethatpositioncanoccur.Investorsinchinaarefullyawareofthisissue,butthesamewastrueforleadingtechstocks,likeAmazon,atonepoint.IfwecomparetheCSI300toNASDAQ,bothofwhicharefullofgloballeadersintheirfield,weseethattheUsisgeneratingdoubletheROE,butinvestorsarepayingfourtimesthebookvalue(8.2xVs.2.ox).MostofthechineselargecapsarealsolistedinHK,wheretheycantypicallybeboughtaround40%cheaper,Sonear1x.IfwelookattheMsclchinaIndex,itistradingatarecorddiscounttotheworldindexof10p/Epoints,whilealsobeingverynearthelowendofitsvaluationrange.

Aschina'SCorporatesareeatingtheworld,itseemsthatthisvaluationdiscountshouldatsomepointreturntobeingapremium.Investorswebelievewillhavetopivotsharplytochinainthemediumterm,andwillstruggletogetaccesstoitsstockswithoutbiddingthemup.wewerebullish,butweretroubledbythedifficultyinfindingwhatwouldmaketheworldwakeupandbuy,andwebelievechina'ssputnikmoment(ormomentswithEvdominanceaswell)isit.weexpectHK/CHtocontinuetobeleadingmarketsinthemediumterm,justastheywerein2024.

Figure12:ForwardP/EOfMSCChinaVsMSCWorld

source:BloombergFinanceLPDB

Figure11:P/BVS.ROEcsl300

source:BloombergFinanceLP,DB

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Figure13:APACmodelportfolio

source:BloombergFinanceLPDB

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Appendix1

ImportantDisclosures

*otherinformationavailableuponrequest

*pricesarecurrentasoftheendoftheprevioustradingsessionunlessotherwiseindicatedandaresourcedfromlocalexchangesviaReuters,Bloombergandothervendors.otherinformationissourcedfromDeutscheBank,subjectcompanies,andothersources.Fordisclosurespertainingtorecommendationsorestimatesmadeonsecuritiesotherthantheprimarysubjectofthisresearch,pleaseseethemostrecentlypublishedcompanyreportorvisitourglobaldisclosurelook-uppageonourwebsiteathttps://research.db.com/Research/Disclosures/EquityResearchDisclosures.Asidefromwithinthisreport,importantriskandconflictdisclosurescanalsobefoundathttps://research.db.com/Research/Disclosures/Disclaimer.Investorsarestronglyencouragedtoreviewthisinformationbeforeinvesting.

Analystcertification

Theviewsexpressedinthisreportaccuratelyreflectthepersonalviewsoftheundersignedleadanalyst(s).Inaddition,theundersignedleadanalyst(s)hasnotandwillnotreceiveanycompensationforprovidingaspecificrecommendationorviewinthisreport.peterMilliken.

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Equityratingdispersionandbankingrelationships

EquityRatingandDispersionkey

TheEquityRatingDispersionchartdepictsthefollowing:

Theproportionofrecommendationsthatarerated"buy","sell"and"hold"overtheprevious12months.Thisisshownforsecuritiesissuedinthestatedregione.g."Europeuniverse".seeratingdefinitionsbelow.Thisisrepresentedbythe

"companiescovered"barsinthechart.Thepercentagevaluedisplayedabovethebaristheproportionasapercentage.E.g.50%abovethe"buy"I"companiescovered"barmeansthat50%ofDB'Sequityresearchcoveredcompaniesoverthepast12monthshavea"buy"rating.

Nexttoeachofthethreerespectivebarsshowingtheproportionof"buy","sell"and"hold"recommendationsweprovidetwoadditionalbarstoshow:

-Theproportionof"buy","sell"or"holdrecommendationswhereDeutscheBankandor/AffiliatesprovidedMIFIDInvestmentorAncillaryservicesinthepast12months.Thisisrepresentedinthe"MIFIDInvestmentandAncillary

services"bar.ThepercentagevaluedisplayedabovethebarshowstheproportionofcompaniescoveredwiththegivenratingwhereDBhasalsoprovidedMIFIDInvestmentandAncillaryservicesinthepast12months.E.g.50%abovethe

"Cos.W/MIFIDInvestmentandAncillaryservices"barmeans50%ofthecompaniescoveredwiththeratingstatedhavealsoreceivedMIFIDInvestmentandAncillaryservicesfromDB.

-Theproportionof"buy"(or"sell"or"hold)recommendationswhereDeutscheBankandor/AffiliateshasprovidedInvestmentBankingservicesinthepast12monthsforwhichithasreceivedcompensation.Thepercentagevalue

displayedabovethebarshowstheproportionofcompaniescoveredwiththestatedratingwhereDBhasalsoprovidedInvestmentBankingservicesinthepast12months.E.g.50%abovethe"Cos.wlInvestmentBankingrelationship"barmeans50%ofthecompaniescoveredwiththeratingstatedalsohaveanInvestmentBankingRelationshipwithDB.

BuY:Basedonacurrent12-monthviewofTSR,werecommendthatinvestorsbuythestock.sell:Basedonacurrent12-monthviewofTSR,werecommendthatinvestorssellthestock.

Hold:wetakeaneutralviewonthestock12-monthsoutand,basedonthistimehorizon,donotrecommendeitheraBuYOrsell.

TSR=TotalshareholderReturn.percentagechangeinsharepricefromcurrentpricetoprojectedtargetpriceplusprojecteddividendyield

Newlyissuedresearchrecommendationsandtargetpricessupersedepreviouslypublishedresearch.

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researchreferstoanyparticularfinancialproductrecipientsoftheresearchshouldconsideranyproductdisclosurestatement,

prospectusorotherapplicabledisclosuredocumentbeforemakinganydecisionaboutwhethertoacquiretheproduct.In

preparingthisreport,theprimaryanalystoranindividualwhoassistedinthepreparationofthisreporthaslikelybeenincontact

withthecompanythatisthesubjectofthisresearchforconfirmation/clarificationofdata,facts,statements,permissiontouse

company-sourcedmaterialinthereport,and/orsite-visitattendance.withoutpriorapprovalfromResearchManagement,

analystsmaynotacceptfromcurrentorpotentialBankingclientsthecostsoftravel,accommodations,orotherexpenses

incurredbyanalystsattendingsitevisits,conferences,snocial,events,andthelike.similarly,withoutpriorapprovalfrom

ResearchManagementandAnti-Briberyandcorruption(ABC)team,analystsmaynotacceptperksorotheritemsofvalue

fortheirpersonalusefromissuerstheycover.

Additionalinformationrelativetosecurities,otherfinancialproductsorissuersdiscussedinthisreportisavailableuponrequest.Thisreportmaynotbereproduced,distributedorpublishedwithoutDeutscheBankSPriorwrittenconsent.

Backtested,hypotheticalorsimulatedperformanceresultshaveinherentlimitations.unlikeanactualperformancerecordbasedontradingactualclientportfolios,simulatedresultsareachievedbymeansoftheretroactiveapplicationofabacktestedmodelitselfdesignedwiththebenefitofhindsight.Takingintoaccounthistoricaleventsthebacktestingofperformancealsodiffersfromactualaccountperformancebecauseanactualinvestmentstrategymaybeadjustedanytime,foranyreason,includingaresponsetomaterial,economicormarketfactors.Thebacktestedperformanceincludeshypotheticalresultsthatdonotreflectthereinvestmentofdividendsandotherearningsorthedeductionofadvisoryfees,brokerageorothercommissions,andanyotherexpensesthataclientwouldhavepaidoractuallypaid.Norepresentationismadethatanytradingstrategyoraccountwillorislikelytoachieveprofitsorlossessimilartothoseshowvn.Alternativemodelingtechniquesorassumptionsmightproducesignificantlydifferentresultsandprovetobemoreappropriate.pasthypotheticalbacktestresultsareneitheranindicatornorguaranteeoffuturereturns.Actualresultswillvary,perhapsmaterially,fromtheanalysis.

ThemethodforcomputingindividualE,S,GandcompositeESGScoressetforthhereinisanovelmethoddevelopedbytheResearchdepartmentwithinDeutscheBankAG,computedusingasystematicapproachwithouthumanintervention.Differentdataproviders,marketsectorsandgeographiesapproachESGanalysisandincorporatethefindingsin