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DBS Group Research • May 2019DBS Asian Insights74n

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SECTOR BRIEFING

Greater Bay Area In-depth Study

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DBS Asian Insights SECTOR BRIEFING 7402

Greater Bay Area In-depth Study

Produced by:Asian Insights Office • DBS Group Research

go.dbs.com/research @dbsinsights [email protected]

Wen Nan Tan EditorMartin Tacchi Art Editor

Carol WU

[email protected]

Dennis LAM

Mavis HUI

[email protected]

Danielle WANG, CFA

[email protected]

Tsz Wang TAM, CFA

[email protected]

Chris KO, CFA

[email protected]

[email protected]

Patricia YEUNG

[email protected]

Mark KONG, CFA

[email protected]

Vincent YANG

[email protected]

Jason LAM

[email protected]

Susanna CHUI

[email protected]

[email protected]

[email protected]

Rachel MIU

[email protected]

[email protected]

Ken SHIH

Manyi LU

Ken HE, CFA

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Executive Summary

New policies to support growth

Transform into a service driven economy

Growth and de-growth industries

Automobile Sector

Education

Environmental

Financial Services

Healthcare

Home appliances sector

Infrastructure and construction

Logistics and warehouses

Office

Telecommunication, Media & Technology (TMT)

Key challenges and risk

Policy support to power strong growth in the Greater Bay AreaThe Greater Bay Area (GBA), which consists of Hong Kong, Macau and 9 key cities in the Guangdong province, is a region that will become an economic powerhouse for China over the next decade. The GBA region, covering only 0.6% of national total land area, contributed c.12% of China’s GDP in 2017 and its economic size is greater than Canada. The latest policy initiatives announced in February will allow GBA to grow at a rate much faster than expected and transform into an innovation hub that is competitive to its global peers, such as San Francisco Bay, characterized by high connectivity of labor, capital and technology. The policy outline also clarifies the mid-term target (2022) and long-term target (2035) for GBA.

The key areas of focus include:

1. Forming an international innovation and technology hub in R&D, financing and commercialization

2. Fostering stronger bonds between Hong Kong and mainland financial systems

3. Accelerating infrastructural, human resources, and financial connectivity

4. Building an international competitive modern industrial system

5. Improving quality of life, work and travel

6. Participating in “Belt and Road initiative” (B&R)

Hong Kong and Guangzhou are given a bigger role to play

In terms of city positioning, Hong Kong takes a central role in being a financial, trade and service centre, and Shenzhen a technology innovative centre. Yet, what was not expected in the policy outline was Shenzhen’s expected role as an innovative area for insurance. Guangzhou will take a central role in developing the regional private equity (PE), property rights and commodities market, and Hong Kong to play a central role in international aviation and risk management. In addition, the outline has adjusted the sequence of key development areas and put innovation at top priority and added new contents to put ecological conservation on the agenda. While Shenzhen is well expected to lead innovation

Executive Summary


GBA to enjoy higher positioning compared to other two regional development plans in

China

GBA has great growth potential, benchmarking to

international bay areas

Population to grow from 70m to over

100m by 2030 with strong talent inflow


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in the region, we also expect Guangzhou and Hong Kong to play crucial roles in R&D and transforming the region into an innovation hub.

GBA is positioned to be an innovation hub, which is crucial for China Manufacturing 2025, especially under the backdrop of China-US trade war and US’s technology barriers. The key target for coordinated development of Jing-Jin-Ji (JJJ) region is to relocate non-capital functions out of Beijing and build up a modern Xiong’an New District. Regional integration of Yangtze River Delta (YRD) region has just been raised to national strategy with blueprint to be announced. We expect the key focus for YRD is to coordinate development in each city in the region to enhance competitiveness in global trade.

GBA is widely benchmarked to the three international bay areas, namely New York Bay (NY Bay), San Francisco Bay (SF Bay) and Greater Tokyo Area (Tokyo Bay). Compared to international peers, GBA’s GDP per capita is lower, due to a lower proportion of GDP contribution from the services industry. Yet, we believe GDP per capita will catch up with the industry upgrade. We project GBA’s GDP per capita to expand by > 5.3% CAGR during 2017-2030 (benchmarked to Guangdong Academy of Social Sciences’ projection for GDP per capital of Guangdong province during 2017-2035), translating into a GDP per capita of Rmb265k in 2030, double GBA’s 2017 level and similar to the current level in Tokyo Bay.

In addition, GBA’s population density is less than half of Tokyo Bay. There is a lot of room for population inflow, as we benchmark GBA to Tokyo Bay based on geographical and cultural proximity. In fact, GBA’s population grew at a CAGR of 2.1% in the past decade, much higher than the national average of 0.5%. In addition, Shenzhen and Guangzhou remain the top 1 and 2 cities in terms of population/talent inflow. We expect population in the entire GBA region to expand at a CAGR of over 2.2% during 2017-2030, translating into a population of over >100m in 2030. Therefore, GBA’s larger land area and talent base with higher GDP growth outlook will enhance its potential to be next innovation hub with global impact.

There may be some challenges but foundations already in place to drive growth

Some of the successful elements are also available in the GBA region:

1. Depth of the capital market in Hong Kong and Shenzhen

2. Strong presence of leading academic institutions in Hong Kong and Guangzhou

3. Development guidance from the state such as the GBA policy outline and China Manufacturing 2025 blueprint

Qualities absent are:

1. Culture willing to assume longer term risks for scientific projects (which explains the scarcity of venture capitalists)

2. Strong services economy to drive accelerated growth (though these have been addressed in the blueprint with Guangzhou to become a regional PE hub and numerous policy initiatives to boost the formation of a services-based economy)

GBA to transform to a services oriented economy

Excluding Hong Kong and Macao, serviced industry only accounts for 57% of GDP in the 9 cities in Guangdong. In our view, GBA will follow its global peers’ development path and gradually upgrade its industry cluster to become a services oriented economy. It took around 30 years for SF Bay and Tokyo Bay to move from a manufacturing driven to a services oriented economy, while it was only 15 years for Shanghai. We expect it will take less than 15 years for the GBA’s transformation. On our estimate, services industry’s contribution to GDP in GBA is projected to move from 66% (57% excl. Hong Kong and Macau) to 76% (72%) by 2030. We expect the growth in services industry’s GDP in PRD cities to be stronger than HK and Macao with each PRD city to see the ratio go up by c.10ppts on average during 2017-2030. Shenzhen and Dongguan will see the highest growth in services sector GDP over the next decade.

We have performed an analysis to identify the potential of each GBA industry based on near-term (2022) growth CAGR and long-term (2030) growth CAGR targets. Our rankings show higher value-added manufacturing, such as new energy vehicles (NEV), smart appliances, environmental products, consumer IoT hardware, will lead mid-term (2018-2022) growth, followed by online ads, healthcare, insurance, and education services. Over the longer term (2030), several segments under financial services will climb up the list, similar to the past experience witnessed in SF Bay and Tokyo Bay. Warehouse, logistics and office segments will also see strong growth, as the services industry flourishes.

For example, infrastructure accounted for c.20% of public expenditure in Tokyo Bay area back in the 1960s/1970s. We expect a similar trend for GBA, especially with the mega projects in the pipeline to improve connectivity and financial support from the Public Private Partnership (PPP) model. Infrastructure expenditure (fixed asset investments, FAI) is expected to grow at 8.6%/4.2% CAGR to Rmb1.1trn/Rmb1.3trn by 2022/2030. Major state-owned construction companies stand to benefit from the infrastructure project developments, including China Communications Construction, China Railway Construction Co, China Railway Group, China State Construction Engineering, and China State Construction International.

New energy vehicles and smart appliance

will post strongest growth in the mid-term

Infrastructure and construction usually

play an important role in early stage of

developing global bay areas


Guangdong houses two important automobile companies, GAC and BYD, with the former based in Guangzhou and the latter in Shenzhen. As China aims for higher electric vehicle (EV) penetration, GBA can become a pilot centre for smart EVs. Combined EV production by these two automakers is expected to grow at 44.2%/19.4% by 2022/2030. Hence, BYD and GAC are two key beneficiaries.

With rising penetration, smart appliances is likely to see CAGR of 25% in 2017-2021. GBA should offer better prospects for this sector, given continuous young population inflow and rising personal income. Smart appliances in the GBA region should stage faster growth than overall China, at a sales CAGR of nearly 30% by 2022 and 25-30% by 2030. Major players such as Midea, Gree and Hisense Kelon are based in GBA area and are well positioned to ride on rising spending power in GBA. Robotics nationwide is expected to grow by 22.7%/20% by 2022/2030, on improving affordability, and premiumisation and consumption upgrade, benefiting Midea with its acquisition of robot manufacturer, KUKA.

TMT is GBA key focus and competitive edge

Shenzhen already accommodates some high-profile hardware/software corporates, given its established talent pool, IT research and supply-chain capabilities. The city will retain its prime position as the preferred city for high-tech corporates to enjoy dense clusters of technology and tax benefits. Besides, we also expect Guangzhou and Hong Kong’s R&D capabilities to catch up. Guangzhou and Hong Kong have a target to increase R&D as a percentage of GDP from 2.4%/0.7% now to 3.0%/1.5% by 2020.

We project the hardware segment to post CAGR growth of 9.9%/7.9% by 2022/2030, with AAC Technologies as a beneficiary. Meanwhile, we expect higher growth for the software segment, driven by more start-up cultivation as well as synergies generated between internet companies. The CAGR growth is projected to be 11.3%/9.1% by 2022/2030. Tencent will continue to dominate.

We also expect consumer IoT (Internet of Things) hardware to achieve 19.0%/15.2% volume CAGR by 2022/2030, as 5G roll-out could drive internet connectivity from smartphones to other consumer products. We also expect online advertising to achieve higher growth of 21.3%/17.2% CAGR by 2022/2030, as advertisers are increasing their budgets towards online ads due to improving internet firms’ user data analytics capabilities.

Data centres in GBA is another area to see strong growth, driven by establishment of high-tech companies and rising economic activities, and improving network connectivity leveraging on Hong Kong’s position as global carrier hub. Based on linear regression between number of cabinets and GDP per capita, we project number of data centres in GBA to grow at 7.7%/6.5% by 2022/2030 respectively. GDS (GDS US) is expected to ride on the growth.

New energy vehicle continues to be a near

term growth driver

Smart appliances to lead growth in home

appliances sector

Hardware companies to shift towards

higher value-added manufacturing, with

favourable policy support


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K12 schools and tutoring expected

to grow faster than universities


Healthcare will benefit from rising population and personal income

We expect healthcare expenditure in Guangdong to accelerate from 19% CAGR in 2010-2016 to 20% in 2018-2022, driven by population increase and rising medical facilities. Judging from the data in 2010-16, Guangdong healthcare expenditure’s CAGR outpaced national healthcare expenditure CAGR by c.4ppts and national healthcare expenditure CAGR doubled GDP CAGR. Assuming a) national GDP CAGR in 2022-30 at 6%; b) national healthcare expenditure CAGR to double GDP CAGR; c) Guangdong’s healthcare expenditure CAGR to outpace the national expenditure by 3ppts, we come up with 15% CAGR growth in GBA healthcare expenditure in 2018-2030. We have also identified three ongoing trends: (1) rising demand for hospitals in Dongguan, (2) rising medical tours to Hong Kong for medical services and pharmaceutical products, and (3) elderly care facilities outside Hong Kong. Potential beneficiaries: Guangdong Kanghua, UMH, UMP, C-Mer Eye Care.

Education to play a key role in transforming GBA from labour-intensive to knowledge-driven economy

Global bay areas typically spent over 30% of public expenditure on education during the period transforming from a manufacturing base to an innovation driven economy. We expect GBA to follow suit. Currently, public spending on education is less than 20%, implying large potential ahead. In fact, during 2011-2016, education expenditure in Guangdong recorded 14.8% CAGR, outpacing GDP CAGR of 8.4%. We expect the high CAGR growth rate to continue given (1) a growing and younger population, (2) high economic growth and income, (3) higher penetration ratio for private education, and (4) improvement of enrolment ratio for higher education. We expect student numbers to expand by 1.5% CAGR by 2022 and a larger CAGR of 2.5% by 2030, due to higher birth rates translating to more student enrolment in the long term. We also project average spending on education to grow at 13.0% CAGR by 2022 and 11.0% by 2030.

We expect K12 schools and tutoring to grow faster than universities, as the sub segment will directly benefit from population inflow as a result of talent immigration programmes. Among the Hong Kong-listed companies, Wisdom Education and China Education Group are the main players in GBA. In terms of business opportunities in private education in each city in GBA, we prefer Shenzhen and Guangzhou, followed by Dongguan and Foshan, and then Huizhou and Zhongshan.

Financial industry to contribute >18% of GDP by 2030

Financial industry has played an important role in nursing global bay areas. Currently, the financial industry in Guangdong province (a proxy to GBA) only made up 8% of GDP in 2017. We expect this to ramp up to 18.5% in 2030, translating into a 16% CAGR growth during 2018-2022 and 13.5% CAGR during 2018-2030. The assets and loans of major listed China banks exposed to PRD (a proxy to GBA) grew 9%/12% CAGR in 2012-2017, vs. the national

Growth in insurance premiums per

capita can’t be underestimated

Peer-to-peer lending (P2P) segment and VC/

PE segment also hold good growth potential


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average of 13%/14%. Still, we expect growth to further speed up supported by robust demand for banking services arising from the regional integration and transformation into an innovation hub. We estimate growth in bank loans/assets located in the GBA area may reach 14%/13% CAGR by 2020 and 12%/11% CAGR by 2030F. Among major listed China banks, China Merchant Bank, China Construction Bank and Agricultural Bank of China have the highest loan exposure to PRD and we believe these three banks are better positioned to capture business opportunities from the GBA.

China insurers’ per capita premium growth in the Guangdong province reached 22% CAGR in 2012-17, as compared to China’s average per capita premium growth of 20% CAGR during the same period. Given growth in premiums per capita usually has an exponential relationship with individual wealth, this suggests that once per capita income has reached a certain level, growth in per capita premium will start to accelerate. We expect insurers’ premium to grow at 20%/16% CAGR by 2020/2030. Ping An, China Life and China Taiping have higher regional exposure.

GBA’s focus on innovation should offer huge room for the P2P segment. Currently, 20% of the operating P2P platforms are registered in Guangdong, and 5 of the top 20 platforms are from Guangdong. P2P loans are projected to grow at 5%/17% CAGR by 2020/2030. We also expect VC/PE to support new start-ups as growth engines shift. Currently, Guangdong province was ranked no. 4 in terms of VC/PE investments in China in 2018, after Beijing, Zhejiang, and Shanghai. Guangdong is looking at >3,000 PE firms with the number of technology incubators to grow from 399 in 2015 to 800 in 2020. Guangzhou is positioned as a regional PE hub.

Transportation and warehousing one of the longer-term growth drivers, benchmarking SF Bay experience

Improving connectivity and radiating downstream manufacturing to outer areas of GBA will drive growth in transportation and warehousing sectors. Per capita logistics space in GBA is only 0.07 square metres per capita, far below US’s 1.7 and Shanghai’s 0.31 square metres per capita. We expect such a level to grow at least 4 times to Shanghai’s current level, translating into 10% CAGR growth by 2022 and 9.8% by 2030. West GBA to be the major supply, as land supply is constrained in East GBA. Rental CAGR growth was 4-5% during 2013-2017, and we expect such growth to continue, supported by rising economic activities in the region while supply is limited. Rental CAGR is expected to be 3.0% by 2022 and 4.0% by 2030. Major players of warehouse sector headquartered in GBA include Vanke, Blogis (under CNDI), Guangzhou R&F and SF Express. Logistics companies in Hong Kong, such as Kerry, could deploy their extensive global network and IT management systems to Guangdong while utilising the latter’s cost competency and warehouse capacity.

Office sector to directly benefit from industry upgrade and talent inflow

Driven by higher growth in tertiary sector’s GDP, Shenzhen will replace Hong Kong to become the largest Grade-A office market. Our analysis shows strong correlation between

services industry GDP and occupied Grade A office space in the past 12-17 years. We believe this trend will continue. Based on the projected 2030 tertiary GDP for these mega cities, our model shows that Shenzhen’s occupied office space by 2030 will be 18.4m sqms, up 251% from 2017’s level, exceeding Hong Kong. In terms of rental growth, we expect Guangzhou to register the highest CAGR of 5.0% for Grade-A office rental rate in 2017-2030, followed by Shenzhen at 2.8%. Tertiary GDP per sqm for office space is the key ratio to drive future rentals. CR Land and Excellence Group are the major office suppliers in Shenzhen, while Yuexiu Property is the major players in Guangzhou.

Rising awareness of environmental protection.

“Taking forward ecological conservation” was newly added as a key development area in the GBA blueprint, highlighting its importance. In fact, Shanghai has also witnessed superior growth in environmental related industries. As environmental investments as a percentage of GDP will ramp up from 0.5% currently to 0.7%/1.0% in 2022/2030 , we expect the sector to grow at 18.0%/13.0% CAGR by 2022/2030. Canvest and Dongjiang have higher exposure to Guangdong.


History of the Greater Bay Area

Much more than PRD

New strategic mission

New strategic mission to drive strong economic growthThe concept of regional cooperation between Guangdong province and Hong Kong/Macao was firstly proposed in the” Outline of the Pearl River Delta (PRD) Reform and Development Plan” in late-2008. The concept has since been frequently mentioned in various government reports over the past years. On 1 July 2017, the “Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Bay Area” (深化粵港澳合作推進大灣區建設框架協議) was signed in Hong Kong, outlining targets and key development areas. The long-awaited “Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area” (粵港澳大灣區發展規劃綱要) was officially announced on 18 February 2019, beefing up content based on the framework agreement, plus including mid-term and long-term targets.

The well-known PRD region includes Guangzhou, Shenzhen, Zhuhai, Foshan, Dongguan, Zhongshan, Huizhou, Jiangmen and Zhaoqing. PRD was first proposed in 1985, at the initial period of reform and opening-up. The mission for PRD was to earn foreign exchange via exports, bring in advanced technology, drive up economic development in inland areas via a window demonstration effect. Over the past three decades (1991-2018), the economic size in the PRD region has grown 65 times to RMb 8.1 trillion in 2018.

With an area covering 56,000 square kilometres (sq km) and a total population of 70 million as of the end of 2017, the Greater Bay Area (GBA) is a geo-economic union of 11 cities, including nine cities (PRD) in Guangdong province and two special administrative regions of Hong Kong and Macao. With slightly broader geographic coverage, GBA is under “One country, two systems”, plus three currencies and customs. While the area accounts for only 5% of China’s total, it contributed 12% of China’s GDP, and the economic size is similar to Canada. Just Shenzhen alone, its GDP size is similar to Norway, and surpassed Hong Kong, Demark, and Singapore. In some areas within Shenzhen, the wealthy level in terms of GDP per capita, such as Nanshan, is similar to Singapore and higher than Hong Kong. Based on 40 years of success since opening up, the new mission for GBA is to build academic/R&D alliances inside the region, developing it into an international science and technology innovation centre and expand through China Manufacturing 2025 initiatives.


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New policies to support growth

Greater Bay Area

Source: DBS

Higher importance than Yangtze River

Delta Region (YRD) and Jing-Jin-Ji (JJJ) regions

with GBA’s focus on innovation

In our view, the GBA development is of higher importance than any other initiative as the aim is to develop the GBA into an international innovation and technology hub, which caters to China Manufacturing 2025. Among the three regions, Yangtze River Delta Region (YRD) is larger in terms of regional area, population and GDP. In addition, economic development is more balanced across the cities in YRD. Yet, GBA stands out in terms of GDP per capita, due to a higher proportion from the tertiary or services industry in Hong Kong and Macao. Regional integration of the YRD region has just been raised to national strategy level with blueprint to be announced soon. We expect YRD’s key focus is to coordinate development in each city in the region to enhance competitiveness in global trade. The key priority for the coordinated development of Jing-Jin-Ji (JJJ) region is to relocate non-capital functions out of Beijing and build up a modern Xiong’an New District. The JJJ region covers Beijing, Tianjin and Hebei province.

Hong Kong

Shenzhen

HuizhouDongguan

Guangzhou

G U A N G D O N G

Zhaoqing

Jiangmen

Macau

Foshan

Zhuhai

Zhongshan

C H I N A


GBA GDP comparison 2017* in RMB bn

GBA GDP breakdown 2017* in RMB bn

Source: DBS HK, CEIC



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GDP comparison (2017)

GDP per capita comparison (2017)


Note: Nanshan is a district in ShenzhenSource: DBS HK


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% to the total GDP of mainland China, Hong Kong and Macau

Comparison of three coastal regions in ChinaSource: DBS HK, CEIC

Source: CEIC, CBRE, DBS HK

GBA YRD Jing-Jin-Ji

Core city Hong Kong, Macao, Guangzhou, Shenzhen

Shanghai, Hangzhou, Nanjing

Beijing, Tianjin

No. of cities 9+2 26 11National strategy Development Plan for the

Guangdong-Hong Kong-Macao Greater Bay Area

Regional Integration for the Yangtze River Delta

Region

Coordinated Development for the Beijing-Tianjin-

Hebei Region

Outline Announced Drafting AnnouncedKey target An international

innovation and technology hub

n.a. Relocating non-capital functions from Beijing

and building up a modern Xiong'an New

DistrictArea ('000 skm) 56 219 217Population (m) 69.6 128.3 112.5GDP (US$ trn) 1.6 2.6 1.3GDP per capita (US$ 000) 23 13 11Urbanisation 70% 69% 49%Tertiary as % of total GDP 66% 54% 59%Shortest intercity distance (km) 10 30 50

Macau-Zhuhai Suzhou-Wuxi Beijing-LangfangLongest intercity distance (km) 200 750 440

Zhaoqing-Huizhou Lianyungang-Wenzhou Chengde-ShijiazhuangNo. of airports (excl. military) 7 16 9No. of berths 1,817 1,828 373Length of highway (km) 218,085 289,649 227,221Free trade area (sq km) 116 241 120

China’s Central government aims to create a mega-hub, leveraging on each city’s competitive advantages. The fast development of the region in past decades have already laid a solid foundation for another breakthrough. The GBA region, covering only 0.6% of national total land area, contributed c.12% of China’s GDP in 2017. The GDP per capita in the area exceeded US$23,000 in 2017, far beyond national average of US$8,800, but the level is still lower than the three international bay areas. The key reason is tertiary industry’s contribution to GDP is relatively low at 66% vs. peers’ 82-89%. Excluding Hong Kong and Macao, the ratio for the rest of the cities in GBA is only 57%.

In terms of population density, GBA’s is higher than SF Bay and NY Bay, but is less than half of Tokyo Bay. Zhaoqing, Jiangmen, and Huizhou occupy 60% of total gross floor area (GFA) in GBA, yet only has 20% of the total population in the area. Even for Shenzhen, population density was slightly below 6.0k/sq km, below Tokyo’s 6.4k/sq km. Using Tokyo Bay as a benchmark based on geographic and cultural proximity, we think there is more potential for population density in GBA to go up further, by leveraging on improving connectivity inside the region.

Tokyo Bay witnessed rapid population growth in 1950s/1960s, with population CAGR of 4.0%/3.7%. In fact, the population growth was faster than expected during that time. In the late-1950s, the government was looking at a population of 26.6m for Tokyo Bay by 1975, which was raised to 33.1m in late-1960s. After the metropolitan area reached maturity in the 1980s/1990s, population CAGR slowed down to 1.8%/1.3%.

For GBA, population CAGR in the past decade (2007-2017) was 2.1%, much higher than national average of 0.5%. In addition, growth has been accelerating lately, as several municipal governments within the GBA have launched various talent immigration programmes over the past few years. Shenzhen has also initiated a favourable personal income tax scheme (Qianhai Pilot Zone) to attract overseas talent. Also, Shenzhen and

Comparison with international bay areas


GDP components inferior to global peers


GBA SF Bay NY Bay Tokyo Bay

Area ('000 km) 56.0 18.0 22.0 37.0

Population (m) 69.6 7.7 20.2 44.0

Population density (person/km) 1,185 434 686 2,617

GDP (US$ trn) 1.6 0.8 1.7 1.9

GDP per capita (US$ 000) 23 102 82 42

Tertiary as % of total GDP 66% 83% 89% 82%

More room for population density and GDP per capita to catch up, which implies

significant growth in population and

economic strength

Top 10 cities in terms of population absorption (2018)

Source: Baidu, DBS HK


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Guangzhou remain the top two cities in terms of population absorption, accordingly to Baidu’s research report on city vitality in China (中國都市活力研究報告). Shenzhen’s and Guangzhou’s municipal governments are targeting population CAGR of 2.4%/1.6% by

2017-2030, translating into a population of around100m in 2030.

With the industry upgrade in the region, GDP per capita will also catch up with its global peers. Guangdong Academy of Social Sciences (廣東省社科院) is expecting GDP per capita to expand at a CAGR of 5.3% in Guangdong province up to 2035. We expect GDP per

grew at a CAGR of 6.7% in the past decade (2007-2017). A similar growth rate during the next decade will allow GDP per capita in GBA to expand to Rmb265k in 2030, which is double 2017’s level and similar to the current level in Tokyo Bay. In fact, the growth in GBA has accelerated over the past two years, with y-o-y growth sprinting from 5.0% in 2015 to 8.4% in 2017. Population growth and the ramp-up in GDP per capita should be able to support a faster GDP growth trajectory.

Rank City

1 Shenzhen

2 Guangzhou

3 Beijing

4 Shanghai

5 Dongguan

6 Suzhou

7 Chengdu

8 Chongqing

9 Foshan

10 Hangzhou

2030. We expect population in the whole region to grow at a CAGR of >2.2% during

capita in GBA to achieve at least similar CAGR growth in 2017-2030. In fact, GDP per capita


Population of Greater Tokyo Area, 1950-2010

Population CAGR of Greater Tokyo Area

Source: Statista, UN, DBS HK

Source: Statista, UN, DBS HK

Blueprint released for GBA


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Source: CBRE, Governments’ website, DBS HK

To forge vibrant economic engineThe outline for GBA was unveiled lately, setting out goals and directions on key development areas to transform GBA into a world-leading centre of innovation, technology and economic activity. The outline also clarifies the mid-term target (2022) and long-term target (2035).

The key areas of focus include:

1. Forming an international innovation and technology hub in R&D, financing and commercialization

Various policies to attract talent to GBA

City Year Policy Highlights

Shenzhen 2010

2011

2012

2014

Overseas talent recognition

Overseas advanced talent plan (or “Peacock plan”)

Qianhai talent personal income tax incentive

Talent housing support plan

• Budget of Rmb4.4bn every year to attract talents

• Rental housing, affordable housing and monetary support

• Monetary support for overseas talents• Favourable personal income tax rate in Qianhai

Pilot Zone

Guangzhou 2017

2018

Advanced talent recognition/support/subsidy

Headquarter economy enhancementenhancement

• Budget of Rmb1.5bn over five years to attract talents

• Monetary support as well as other convenience such as child education, household registration, and etc.

Foshan 2018

2018

Reform on talent development system

Establishment of research centres and talent-hunting platform in Chancheng

• Budget Rmb500m every year to attract talents• R&D and housing subsidy for talents• Extra monetary support in Chancheng district

Zhuhai 2018 Talent scheme • Budget of Rmb6.7bn for 2018-2023• Monetary support, or subsidised housing, or

shared-ownership housing• Higher mortgage cap under housing provident

fund loan

Zhaoqing 2018 Xijiang talent scheme ‘1+10+N’ • Budget set at 1% of previous year’s fiscal income to attract talents

• Subsidy for start-ups• Housing/financial supports for talents

Key adjustments compared to previous

framework


2. Fostering stronger bonds between Hong Kong and mainland financial systems

3. Accelerating infrastructural, human resources, and financial connectivity

4. Building an international competitive modern industrial system

5. Improving quality of life, work and travel

6. Participating in “Belt and Road initiative” (B&R)

We have summarised the comparison between the outline and framework agreements in the table below.

The key adjustments include:

1. The outline puts more emphasis on innovation and technology and has raised it as the first development area

2. The outline also clarifies GBA’s participation in the B&R initiative

GDP per capita in GBA

Source: CEIC, DBS HK

Forging China’s version of “Silicon Valley”

Building academic alliances is a crucial

component to success of GBA


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3. The outline has more concrete disclosures of each city’s role. The international aviation hub and risk management centre are new roles for Hong Kong. The outline also defines Guangzhou as a transport hub and a technological, educational and cultural centre. Shenzhen, obviously, will take on the role of a technology innovative centre. Apart from these, some were unexpected, for example, Shenzhen to take on the role of an innovative centre for insurance, and Guangzhou taking a central role in regional private equity (PE), property rights and commodities market

In our view, the closest comparable to GBA is San Francisco Bay. The key contributing factors to replicate the GBA as China’s version of “Silicon Valley” are: (1) abundance of venture capital, (2) development guidance from the state, and (3) strong presence of leading academic institutions. In short, it is a junction point for academia, private sector, and the state. The private sector would provide the funding while universities to constantly inject talent flow, and the state would provide development guidance from time to time.

The concept to develop the “Guangzhou-Shenzhen-Hong Kong-Macao” innovation and technology corridor can be traced back to mid-August 2018, yet this was already highlighted as the first part in the “Developing an international innovation and technology hub” session, which is the first key development area in the recently released blueprint.

Shenzhen is well expected to drive high-tech and R&D in the region, given its established IT research capabilities, supply-chain and talent pool. Yet, we think Guangzhou and Hong Kong also have high potential in R&D and innovation. Firstly, most of China’s prestigious universities are located in Guangzhou and Hong Kong; Two out of 39 universities that are classified into the national 985 programs are located in Guangzhou, providing a continuous pipeline of new talent. In addition, Guangzhou’s cost of living is more reasonable compared to Shenzhen. Improving connectivity and the huge metro construction plan in Guangzhou will also attract talent and increase R&D activities in the city. Moreover, Guangzhou’s R&D as a percentage of GDP was relatively low at 2.4% (2015), and the city is looking to move this ratio up to 3.0% in 2020.

Hong Kong’s position is becoming more crucial, especially given the background of China-US trade tensions (with the focus on intellectual property in China, especially technology).

1. The US has concerns over innovation/technology flowing into mainland China . Yet, Hong Kong is still able to attract and connect global innovation resources, given its special administrative region (SAR) status. Plus, English is one of the official languages in Hong Kong. Therefore, the cross-boundary flow of innovation ideas is important for GBA to learn from international experience

2. Hong Kong also provides an efficient capital market for the region. The Hong Kong Stock Exchange’s recent implementation of Weighted Voting Rights allows tech

R&D as % of GDP in key cities in China

R&D as % of GDP comparison in global bay areas


entrepreneurs to gain easier access to the capital market, without weakening their control over their companies. Mainland corporates would also be able to raise funds in Hong Kong by issuing both CNY- and USD-denominated bonds

3. Hong Kong is a global carrier hub that is well connected with the rest of the world while China has limited international Internet bandwidth

4. Hong Kong is also catching up in R&D, and expects R&D as a percentage of GDP to double to 1.5% in 2020. This also explains why more and more China enterprises are setting up R&D centres in Hong Kong

Source: Local governments, CEIC, DBS HK

Source: Local governments, CEIC, DBS HK


23

China’s top 5 VC/PE regions by investments in 2018

Source: ChinaVenture, DBS HK

Province/City US$ bn

Beijing 50.7

Shanghai 27.5

Zhejiang 22.6

Guangdong 15.0

Jiangsu 10.8

Outline and key differences from previous frameworks or market expectation

Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area 粵港澳大灣區發展規劃綱要"

Framework Agreement on Deepening Guangdong-Hong Kong-Macao Cooperation in the Development of the Greater Bay Area 深化粵港澳合作推進大灣區建設框架協議"

Difference from framework or market expectation

Date 2019-2 2017-7

Principles • To be driven by innovation and led by reform To open up and cooperate and achieve a win-win outcome

• To coordinate development and plan holistically

• To pursue green development and ecological conservation

• To share the benefits of development and improve people's livelihood

• To adhere to 'one country, two systems' and act in accordance with the law

• To be guided by openness and driven by innovation

• To achieve a win-win situation through complementary

• To be led by the market and driven by the government

• To adopt the early and pilot implementation approach and make breakthroughs in key areas

• To prioritise ecology and pursue green development"

More emphasis on innovation and put 'driven by innovation' to the first

Positioning • A vibrant world-class city cluster

• A globally influential international innovation and technology hub

• An important support pillar for the Belt and Road Initiative

• A showcase for in-depth cooperation between the Mainland and HK/Macao

• A quality living circle for living, working and travelling

• A more dynamic economic region

• A quality living circle for living, working and travelling

• A showcase for in-depth cooperation between the Mainland and HK/Macao

• A first-class bay area and world-class city cluster"

Emphasis on its global influence in innovation and technology Regional participation on the Belt and Road initiative


Outline and key differences from previous frameworks or market expectation cont.

Targets • By 2022, the framework of an international first-class bay area and world-class city cluster

• By 2035, an international first-class bay area fully developed, supported by innovation, with strengthened international competitiveness and influence

Time table for mid-term and long-term targets

More clarification on the four core cities, especially for Guangzhou and Shenzhen

HK's role as an international aviation hub and international risk management centre

Layout • Driven by poles, supported by axes and radiating to nearby areas

• Four core cities: Hong Kong, Macao, Guangzhou and Shenzhen

Key areas 1. Developing an international innovation and technology hub

3. To build a global technology and innovation hub

Move to top development area

2. Expediting infrastructural connectivity

1. To promote infrastructure connectivity

3. Building a globally competitive modern industrial system

4. To build a modern system of industries through coordinated development

Add Shenzhen's role of innovative area for insurance, and Guangzhou's role in regional private equity, property rights and commodities

4. Taking forward ecological conservation

Newly added

5. Developing a quality living circle for living, working and travelling

5. To jointly build a quality living circle to provide an ideal place for living, working and travelling

6. Strengthening cooperation and jointly participating in the Belt and Road initiative

2. To enhance the level of market integration 6. To cultivate new strengths in international cooperation

7. Jointly developing Guangdong-Hong Kong-Macao cooperation platforms

7. To support the establishment of major cooperation platforms

Source: the State Council, DBS HK


25

GBA to mimic SF Bay’s development path, but at a faster pace

With the strong policy support, we expect GBA to follow its global peers’ development path and gradually transform its industry clusters and become a service oriented economy. It took 30-40 years for global peers to move from a manufacturing driven to a service oriented economy. The percentage of employees in the services sector in San Francisco Bay rose from 57% in 1969 to above 70% in 1999. A similar situation was seen in Tokyo Bay, as manufacturing as a percentage of total GDP dropped by 12ppts during 1955-1999.

Yet, it has taken Shanghai only 15 years to transform to a service driven economy. Given GBA’s position as a R&D hub and Central government’s support, we believe it will take less than 15 years for GBA to become a service oriented economy. On our estimates, the services industry in GBA will account for 76% of total GDP in 2030, a big jump from the current 66%. The huge increase will be from cities outside of Hong Kong and Macao. Services industry as a percentage of GDP in the PRD cities will increase from 57% to 72% during 2017-2030, with Shenzhen and Dongguan to see the biggest improvements.

R&D as % of GDP in key cities in China


GBA to become a service oriented

economy

Transform into a service driven economy


R&D as % of GDP comparison in global bay areas

Tertiary industry output as % of local GDP for each city in GBA , 2017 and 2030




27

Growth and de-growth industries

GBA to see similar growth pattern to Shanghai and San Francisco Bay areas

During past 15 years of Shanghai’s transformation, almost all manufacturing industries decelerated except for production of gas and medical/culture/sports related products. Some manufacturing sectors moved out of Shanghai, such as textile, wine/beverages, and extraction of oil/gas. Auto production was only in line with GDP growth while general industries and computer hardware recorded below GDP growth rates. Meanwhile, growth of all services industries witnessed higher growth during the period, especially finance, real estate and environmental segments.

As San Francisco Bay transformed to an innovation centre, transport/warehouse, education, healthcare, and IT services outperformed, while all manufacturing activities underperformed.

We expect GBA to ride on:

1. Industry upgrade, as GBA aims to be an innovation hub and advanced manufacturing centre,

2. Infrastructure upgrade to support connectivity and mobility

3. Consumption upgrade on rising population and income

The GBA blueprint encourages TMT downstream hardware and general industrial production with lower valued added to move to east, west and north Guangdong (outside GBA) or even outside Guangdong. In fact, we have seen some industries such as shoe and toy manufacturing moving to ASEAN countries and we expect such a trend to continue. Shanghai could also serve as a benchmark.

The move of certain manufacturing sectors out of Shanghai, such as textiles, was faster than expected, while lower value added manufacturing had radiated to outer areas of Shanghai. Yet, higher value-added manufacturing will still play an important role in GBA, such as:

Which industrial sectors to see the biggest decline?


1. TMT with focus on R&D and software development and upstream hardware manufacturing

2. New energy vehicles

3. Smart home appliances

4. Sports and entertainment/educational products

5. Water and electricity supply and production

6. Medical device/medicine manufacturing

Like the growth path of other bay areas, services especially professional services will dominate growth, such as:

• Transportation and warehousing (logistics)

• Real estate, especially office, warehouse, data centre and senior homes

• IT services

• Scientific research and technical services

• Financial services

• Healthcare and social assistance

• Environmental related

• Cultural, sports, and entertainment

• Education services

This scenario will apply to GBA as well. Using Shanghai as a benchmark, growth of all services industries will be higher than GDP growth except for wholesale/retail and hotel/catering segments. Warehouse segment growth was slower as it had moved out of Shanghai. This might not apply to GBA (GBA would be more similar to San Francisco Bay) given the larger footprint.

As GBA aims to improve connectivity inside the region, we believe infrastructure will benefit most in the early stage. At the early stage (1970s) of building Tokyo Bay, nearly 20% fiscal expenditure was invested into infrastructure. We should see a similar path in the GBA area. SF Bay experience has also shown that transport/warehouse, education, healthcare and information/tech services outperformed on its way to become an innovation center

Which services segments to see higher

growth?


29

New energy vehicles and smart appliance

will post strongest growth in the mid-term

We did an analysis to identify the potential of each industry based on near-term (2022) growth CAGR and long-term (2030) growth CAGR. Our rankings show higher value-added manufacturing, such as new energy vehicles (EV), smart appliances, environmental products, consumer IoT hardware, will lead mid-term (2018-2022) growth, followed by online advertising, healthcare, financial industry (insurance premium) and education services. Over the longer term (2030), several segments under financial services will climb up the list, similar to that witnessed in SF Bay and Tokyo Bay.

Mid-term CAGR growth comparison (2017/8-2022), GBA

Long-term CAGR growth comparison (2017/8-2030), GBASource: DBS HK

Source: DBS HK


Shanghai Industrial sectors 5 year CAGR

10 year CAGR

15 year CAGR

Gross Domestic Product 8.0% 10.3% 11.9%

Manufacture of Automobile 8% NA NA

Manufacture of Railway, Ship,Aeronautics and Other Transport equipment 0% NA NA

Comprehensive Utilization of Waste -6% 5% NA

Manufacture of Metal Products,Machinery and Equipment Maintenance 21% NA NA

Production and Supply of Gas 16% 18% 21%

Manufacture of Furniture 5% 6% 15%

Tobacco Products 6% 15% 15%

Total Manufacture of Auto + Railway, ship and other transport equipment 6% 13% 14%

Manufacture of General-purpose Machinery -1% 5% 13%

Manufacture of Special-purpose Machinery -2% 9% 12%

Production and Supply of Electric Power and Heat Power -6% 6% 12%

Manufacture of Raw Chemical Materials and Chemical Products -1% 7% 12%

Manufacture of Communication Equipment, Computers and Other Electronic Equipment -3% 3% 12%

Manufacture of Medicines 10% 11% 11%

Manufacture of Food 4% 10% 10%

Manufacture of Electrical Machinery and Equipment -1% 5% 10%

Manufacture of Cultural, Educational,Sports and Entertainment Articles 21% 9% 10%

Smelting and Pressing of Nonferrous Metals 0% -1% 9%

Rubber and Plastic Products 1% 5% 9%

Production and Supply of Water 8% 9% 9%

Processing of Farm and Sideline Food 2% 8% 9%

Manufacture of Instruments and Meters -1% 2% 8%

Nonmetal Mineral Products 0% 4% 8%

Papermaking and Paper Products -3% 4% 8%

Leather, Fur, Feather, Down and Related Products 3% 4% 8%

Metal Products 0% 3% 7%

Petroleum Refining, Coking and Nuclear Fuel Processing -9% 1% 7%

Printing and Record Medium Reproduction 0% 3% 6%

Smelting and Pressing of Ferrous Metals -9% -3% 3%

Manufacture of Wine, Beverage and Refined Tea -12% -2% 2%

Manufacture of Textile Garments, Footwear and Headgear -6% -2% 2%

Other Manufactures -30% -5% -1%

Textile Industry -13% -6% -2%

Timber Processing, Bamboo, Cane, Palm Fiber & Straw Products -5% -2% -2%

Manufacture of Chemical Fibers -3% -3% -2%

Extraction of Petroleum and Natural Gas -13% -11% -6%

Shanghai industrial sectors’ CAGR growth over the past 15 years


31

Shanghai Industrial sectors 5 year CAGR

10 year CAGR

15 year CAGR

Gross Domestic Product 8.0% 10.3% 11.9%

Leasing and Business Services 12.3% 17.2% 17.9%

Information Transmission, Computer Services and Software 16.0% 14.6% 16.0%

Finance Intermediation 15.9% 19.2% 15.8%

Scientific Reseach and Technical Services 17.6% 15.7% 15.6%

Health Care and Social Work 14.9% 13.5% 14.8%

Wholesale and retail services 6.3% 16.1% 14.3%

Resident Services and Other Services 9.0% 10.7% 13.7%

Real Estate 15.8% 11.9% 13.3%

Education 14.9% 10.9% 13.2%

Public Administration and Social Organizations 8.5% 11.1% 12.6%

Culture, Sports and Recreation 12.6% 9.0% 10.9%

Hotels and Catering Services 6.8% 7.2% 3.2%

Transportation, Storage and post 7.3% 6.3% 8.9%

Water Conservancy, Environment and Public Facilities Management 16.6% 7.4% 8.8%

Shanghai industrial sectors’ CAGR growth over the past 15 years cont

Source: DBS HK Source: CEIC, DBS HK


San Francisco Bay Area (employment) 5-year CAGR

10-year CAGR

15-year CAGR

Transportation and Warehousing 15.57% 7.34% 5.32%

Educational services 5.38% 3.82% 3.65%

Health care and social assistance 6.34% 4.22% 3.26%

Forestry, fishing, and related activities -0.83% 1.33% 2.88%

Utilities -0.93% 4.26% 2.68%

Real estate and rental and leasing 1.79% 0.70% 2.61%

Accommodation and food services 4.40% 2.71% 2.16%

Arts, entertainment, and recreation 4.30% 3.06% 1.90%

2.47% 2.05% 1.83%

Mining, quarrying, and oil and gas extraction 0.40% 4.40% 1.60%

Other services (except government and government enterprises) 3.02% 1.62% 1.35%

Information 7.48% 4.07% 1.13%

Finance and insurance 1.18% 1.38% 1.04%

Admin support and waste management/remediation services 4.10% 1.66% 0.94%

Wholesale trade 3.51% 2.11% 0.60%

Construction 5.54% -0.44% 0.01%

Retail trade 1.78% 0.17% -0.03%

Military -0.40% -0.25% -0.52%

Federal civilian -0.67% -0.99% -1.01%

Farmproprietors employment 0.27% 0.59% -1.11%

Management of companies and enterprises 3.82% 2.60% -1.11%

Manufacturing 1.69% -0.17% -1.83%

Total employment (number of jobs) 3.71% 1.79% 1.05%

SF Bay sectors’ CAGR growth over the past 15 years



33

Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector

Key drivers 2017/8-2022 CAGR

2017/8-2030 CAGR

Projection basis / benchmark

Stock ideas

Warehouse GFA Improving connectivity, rising young population, online retail sales

10.0% 9.8% Benchmarking warehouse per capita in Shanghai

Vanke (000002 CH/2202 HK), Guangzhou R&F (2777 HK), CNDI (002314 CH), Kerry Logistics (636 HK)

Warehouse rental Decent demand while limited future supply

3.0% 4.0% Benchmarking CAGR growth in the past

Office GFA - Guangzhou

Industry upgrade, talent inflow

8.0% 7.2% Linear regression between office space and teriary GDP

Yuexiu Property (123 HK)

Office rental - Guangzhou

6.0% 5.0% Teriary industry's occupancy costs

Office GFA - Shenzhen

11.5% 10.8% Linear regression between office space and teriary GDP

CR Land (1109 HK)

Office rental - Shenzhen

0.0% 2.8% Teriary industry's occupancy costs

Guangdong healthcare expenditure

Increasing population resulting from relaxation of birth control and increasing migration into the province. Increasing medical facilities.

20.0% 15.0% National healthcare expenditure CAGR doubles the GDP CAGR; and Guangdong should outpace

Guangdong Kanghua (3689 HK), UMH (2138 HK), UMP (722 HK), C-Mer eye care (3309 HK)

Student number growth

Population inflow, increasing new birth, increase in higher education enrolment ratio

1.5% 2.5% Accelerated trend in past 5 yrs; larger population inflow; 2‰ higher birth rate in 2016/17 will translate to student enrolment in long term

Wisdom (6068 hk) and China Edu Group (839 hk)

Avg spending on education

Higher GDP per capita, higher disposable income

13.0% 11.0% Recorded 13-14% growth in 2014-16. A slowing down trend as we expect GDP growth to down by 1-2ppt

China Data Centre

(1) establishment of new technology companies and rising economic activities (2) improving network connectivity leveraging on Hong Kong’s position as global carrier hu

7.7% 6.5% Linear regression between number of cabinets and GDP per capita

GDS (GDS US)


Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector cont.

Communication Equipment, Computers and Other Electronic Equipment

Expecting favourable policy support, we expect hardware companies to shift towards to higher value-added products

9.9% 7.9% Industry value as percentage of GDP in Guangdong

AAC Technologies (2018 HK)

Information transmission, software and information technology services

More start-up cultivation as well as synergies generated between internet companies


Tencent (700 HK)

Consumer IoT hardware sales

5G roll-out catalysing Internet connectivity from smartphones to other consumer products

19.0% 15.2% Benchmarking national growth of consumer IoT hardware sales


Online advertising

Advertisers spending a greater part of their budget on online advertising, with improving Internet companies' user data analytics capabilities

21.3% 17.2% Benchmarking national growth of online advertising

Tencent (700 HK)

Online value added services (i.e. online games and online content)

Higher paying ratio for digital content

14.4% 11.6% Benchmarking national growth of online value added services

Tencent (700 HK)

Home appliances

Improving household income; rising population

7.0% 6.9% Euromonitor; GDP & population growth of Greater Bay Area; a case study of San Francisco Bay Area

Operators based in the Greater Bay Area, including Midea (000333.CH), Gree (000651.CH), Hisense Home Appliances (921.HK / 000921.CH), Vatti (002543.CH), etc.

Smart appliances Improving affordability; consumption upgrade; rising young population

c.30% 25-30% IHS Markit; penetration rates; GDP & population growth of Greater Bay Area; a case study of San Francisco Bay Area

Players with stronger edge in R&D and premiumization, including Qingdao Haier (600690.CH), Haier Electronic (1169.HK), Midea (000333.CH)

Robotics (Nationwide)

Improving affordability; premiumisation and consumption upgrade; talent inflow

22.7% c.20% OCN; GDP & population growth

Midea (000333.CH), who has acquired the robot manufacturer KUKA (KU2.DE)


2017/8-2030 CAGR


Stock ideas


35

Source: DBS HK

Expected sectors’ CAGR growth in the mid-term and long-term in the GBA and industry leaders in each sector cont.

Communication Equipment, Computers and Other Electronic Equipment

Expecting favourable policy support, we expect hardware companies to shift towards to higher value-added products



Information transmission, software and information technology services

More start-up cultivation as well as synergies generated between internet companies


Tencent (700 HK)

Consumer IoT hardware sales

5G roll-out catalysing Internet connectivity from smartphones to other consumer products

19.0% 15.2% Benchmarking national growth of consumer IoT hardware sales


Online advertising

Advertisers spending a greater part of their budget on online advertising, with improving Internet companies' user data analytics capabilities

21.3% 17.2% Benchmarking national growth of online advertising

Tencent (700 HK)

Online value added services (i.e. online games and online content)

Higher paying ratio for digital content

14.4% 11.6% Benchmarking national growth of online value added services

Tencent (700 HK)

Home appliances




Smart appliances Improving affordability; consumption upgrade; rising young population







Home appliances (Nationwide)


5.0% 4.9% Euromonitor; GDP & population growth of China

Leading players in China including Qingdao Haier (600690.CH), Haier Electronics (1169.HK), Midea (000333.CH), Gree (000651.CH)

China/HK bank Improving integration and connectivity

13.0% 11.0% Financial service industry as a percentage of GDP to catch up Tier-1 cities

CMB (3968 HK), CCB (939 HK), BOC HK (2388 HK)

China/HK insurance

Premium/capita to improve with wealth effect

20.0% 16.0% Continue the same population growth rate, along with the increase in premium penetration

Ping An (2318 HK), China Taiping (966 HK), AIA (1299 HK)

P2P “underserved” consumer lending market

5.0% 17.0% Rising penetration and increasing consumer leverage

Lexin (LX US)

Automobile investment - Guangdong

Investments into NEV production and capacity expansion

2.5% 2.0% Government policy on NEV development

Guangzhou Auto (2238 HK)

Automobile production -Guangdong

Rise in consumption power and new car model launches

3.5% 3.0% Government supportive measures on automobile production hub development

Guangzhou Auto (2238 HK)

Automobile industrial output - Shenzhen

Increase in automobile investment on car battery and NEV development

12.0% 8.0% Rapid development of the NEV eco-system

BYD Co (1211 HK)

Transport fixed asset investment - Guangdong

Anticipate rise in transportation demand within GBA and government plans on metro network expansion

7.0% 4.0% Projected new metro line expansion and other infrastructure investments

CRCC (1186 HK); CRG (390 HK); CSCI (3311 HK)

Metro operating length projections - Guangdong

Development plan on metro network expansion

7.6% 2.5% Past metro passenger traffic demand

CRCC (1186 HK); CRG (390 HK)


2017/8-2030 CAGR


Stock ideas


Automobile sector critical to Guangzhou and Shenzhen’s developmentGuangdong is one of the major automobile manufacturing clusters in China. Its automobile sector has flourished over the years and the province is the leader in new energy vehicle (NEV) development. The province houses two important automobile companies, Guangzhou Automobile Co, Ltd (GAC) and BYD Co Ltd (BYD).

The auto sector is an important economic driver to Guangdong’s GDP, as it involves a huge supplier network. The automobile gross industrial output ballooned from approximately Rmb16bn in 1995 to Rmb406bn in 2015, at a CAGR of 19%. As a percentage of GDP, it increased from 2.3% in 1995 to 5.6% in 2015. In fact, Guangdong’s automobile gross industrial output is ranked second in China, only after Shanghai.

Automobile Sector

Automobile gross industrial output ranking

Automobile gross industrial output ranking

Source: CEIC



37

The fixed asset investment (FAI) into Guangdong’s automobile sector has been trending upwards over the years, in tandem with the sector’s development and economic performance. In 2018, the automobile FAI surged sharply to over Rmb40n, compared to about Rmb12bn in 2014. The new investments point to automakers’ (both domestic and foreign players) confidence in the industry’s prospects and the huge growth opportunity, given the low automobile penetration rate in China.

In terms of disposable income per capita trend, Guangdong has performed well. In 2017, disposal income per capita reached approximately US$6,000, almost five times higher than in 1997. As a result, the rising disposal income lifted new motor vehicle registrations from 340,000 units in 2002 to 2.7m units by 2018, translating into a penetration rate of 24 vehicles per 100 households.

The overall motor vehicle penetration rate in Guangdong is relatively low. But in the case of Guangzhou and Shenzhen, the two wealthiest regions within the Guangdong province, the government had imposed automobile sales restriction back in 2012 to control the rapid rise in vehicle population. In fact, the motor vehicle penetration per 100 households in Shenzhen is the highest among the cities in Guangdong, and the penetration rates in Shenzhen and Guangzhou would have been even higher if not for the automobile sales restriction policy in those cities.

New motor vehicle registrations projections – Guangdong (2002-2030F)

Motor vehicle penetration rates in Guangdong, Guangzhou, and ShenzhenSource: CEIC, DBS Bank

Source: CEIC


GBA push for high value-added manufacturing, especially in new energy vehicle development

Guangdong houses two important automobile companies, GAC and BYD. GAC is the fifth largest automobile group in China, based on 2018 volume sales. The company has collaborations with several foreign global automakers in Guangzhou. Its joint ventures with Japanese auto brands - Honda, Toyota and Mitsubishi - form the bulk of its sales. Apart from the Japanese auto brands, GAC also works with Fiat Chrysler Auto to produce the famous Jeep vehicles. In addition, GAC produces its own vehicles under the local brand Trumpchi. Combining the various joint ventures and its local brand, GAC achieved volume sales of about 2.2m vehicles nationwide in 2018, up 7.3% y-o-y despite major market challenges as a result of the trade war impact and slowdown of the Chinese economy.

GAC’s total vehicle sales

BYD’s EV sales performance

Source: Company

Source: Company


39

Together with its Japanese partners, GAC is embarking on a strategy to accelerate electric vehicle (EV) development. In fact, the Japanese partners are leveraging on GAC’s low-cost EV technology for self-applications. Toyota and Mitsubishi have introduced some EV models to the Chinese consumers for future mass production. This indicates that GAC’s self-developed EV technology is being accepted by major global automakers. Besides, GAC is investing in a Rmb4.7bn new energy vehicle hub in Guangzhou with an initial capacity of 200,000 units. By 2020, GAC plans to achieve EV sales of 1m units, accounting for about 20% of total sales volume.

Shenzhen has the largest EV production base in China, which is undertaken by BYD. China is leading in the NEV field and it is now the largest NEV market in the world, accounting for about half of the total production last year. China produced approximately 1.3m units of NEVs in 2018. Among the Chinese automakers, BYD has emerged as the largest EV maker in the world. Last year, BYD commanded about 20% of the domestic EV market and 10% globally.

The development of the EV sector is an important directive of the Chinese government, and Shenzhen is riding on the industry uptrend and positive policies. As China aims for higher EV penetration, GBA can become a pilot centre for smart EVs. Government financial incentives are also lending support to encourage electric car purchases especially in Shenzhen, where the public transportation sector is highly electrified. The GBA should become the testbed for auto companies to engage in EV and smart vehicle development.

The rapid development of high-value vehicle manufacturing activities would need the support of a vibrant supplier network. There are many automotive parts suppliers located in the GBA and they support a number of large automakers. The table below shows some of the automotive parts companies in Guangdong province.

Due to the substantial production scale and economic representation of Guangzhou and Shenzhen, we believe the automobile industry will continue to flourish under the GBA initiative. Both Guangzhou and Shenzhen will continue to be key production centres for high-value vehicles. They will also play a pivotal role in vehicle consumption in the cities within GBA. Other than Guangzhou and Shenzhen which have a relatively decent vehicle penetration rate, the other cities have very low penetration rates of about 10 vehicles per 100 households. Hence, the automobile market potential is huge in GBA.


Shenzhen’s automobile industrial output

Source: CEIC


41

Source: Companies

Automotive parts suppliers in GBA

Principal Business Location Customers

Shock Absorbers, steering gear, muffler, parts and moulds Foshan Guangzhou Honda and Dongfeng Honda, BYD, fauercia, Midea

Instrument Desk Table, Mould, Inferiors GuangZhou GAC

Seating System, Inferior System Huadu,Guang Dong BYD, Dong Feng, Greatwall, Geely, SAIC-GM, Ford, Changan, SAIC-Volkswagen

Car carpets, car seat covers, steering wheel covers, GuangZhou GAC, FAW

Soundproofing material for Automobile GuangZhou Honda, GAC, Dongfeng Honda, GAC Honda, Hino, GAC Hino

SuspensionSpring, Valve Spring, Horizontal Stabilizer, Seat Frame Assembly, TorsionalBar-Hinge Assembly, Support Rod and Shardped Spring includingnap,Tension,torsional Spring

GuangZhou GZ Honda Toyota, GAC, Nissan, BYD, FAW, SGM, BAIC, ChangAn, SGMW, Dongfeng, GAC Mitsubishi, GreatWall, FAW

Plastic Moulds Shenzhen

Wiring Harness Assembly, Connectivity System GuangZhou GM, SAIC-Volkswagen, FAW-Volkwswagen, Chery, Ford, Toyota, Dong Feng Nissan

Sale to China of Speaker products, Mobile Audio products

GuangZhou

Auto chemicals (stone guard coatings, bending and structure adhesives, anti-freezing auto oils, welding sealants for auto projects, and shock absorbing adhesives; vehicle welding adhesives, such as auto bottom coatings, SGC products, PU glass glues, and anti-corrosion waxes) ,Auto Parts , auto mats

GuangDong Dong Feng, GAC Toyota, GAC Honda, SAIC GM, Dong feng Nissan, Buick, Cadiliac, (GM), Chevrolet, Lotus, Toyota Motor, ACURA, GAC Mitsubashi, BAIC-Hyundai

Rubber parts , auto parts and accessories (excluding automotive engine), automotive parts design services; vehicle engineering technology research and development; motorcycle parts and accessories manufacturing; mold manufacturing; hardware accessories manufacturing and processing

GuangZhou Honda, GAC Honda, GAC-Toyota, Nissan, ISUZU, Mitsubashi, Dongfeng Honda, Haima

Camera for Automobile, reversing image system, microwave radar anti-collision system, 3D aroundview monitor system

GuangZhou BAIC-Mercedez, Ford, Toyota, Cadiliac, Volkswagen, GM

Aluminum alloy die casings GuangDong Nissan, Honda, Chrysler, GM, Chery

Automotive rearview mirrors, door handles, interior dome lights, window lifter rails,

Foshan FAW-VW; FAW; Jinbei; Citreon; BAIC; BJ-Benz; Guangqi-Honda, DF-Honda; SAIC-GM; Chery Auto; Hafei Auto; iianghuai; FAW-Toyota; Guangzhou-Toyota; Huachen; Chongqing Qingling-Isuzu; Beiqi Foton; Great Wall Motor


Guangdong’s education market is the largest and still growing The demand for education is mainly driven by population and economic growth. In China, parents are willing spend on education. According to research studies done in 2016 by iResearch and TAL on education, in Chinese families, the higher the household income, the higher portion of income was spent on education.

With the largest population and high average disposable income of more than Rmb 33,000 in 2017, Guangdong is the largest education market among all provinces. There are five provinces including Beijing and Shanghai with higher disposable income than Guangdong, but their population size is much smaller, leading to a smaller potential market size. During 2011-2016, GDP from education in Guangdong expanded by 14.8% CAGR, reaching Rmb 244.2bn, while total GDP CAGR was 8.4%.

Provincial population and income

Source: National Statistics Bureau, DBS HK

Education


43

Looking into the next 3 years, we expect the market to continue growing at a similar pace i.e. 15%. GDP growth slowed to 7.5% in 2017 Assuming 7% GDP growth CAGR in 2017-2022, the impact could be well offset by a 1-2ppt higher growth in student numbers. Meanwhile, the supply side would be supported by higher private education penetration and higher university enrolment quota.

In the longer term, we expect the growth in the education market to slow slightly based on the assumptions of (i) GDP CAGR to decline to 5%; partly offset by (ii) 2-3% higher population growth rate supported by the recent increase in the birth rate in Guangdong.

Details of our assumptions are below:

Growing and younger population

In 2017, the permanent resident population in Guangdong increased by 1.7 million or 1.55%, mainly led by Guangzhou and Shenzhen, to reach 111.69 million. The increase is the highest among all the provinces in China, and more than double that of the first runner-up, Zhejiang, which saw an increase of 670,000.

Looking forward, we believe the strong population growth trend in these cities will continue as there are 1) more employment opportunities in Tier 1 cities like Guangzhou and Shenzhen; and 2) more appealing policies in Tier 2 cities like Zhuhai and Dongguan to attract talent.

The birth rate is also increasing, especially after the relaxation of the demographic policy allowing a second child. In 2017, the birth rate reached 13.68‰ after five years’ of consecutive growth. The number of newborns in recent years provides visible demand for kindergartens and early education in the next few years.

Population increase and birth rate in Guangdong

Source: Guangdong Statistics Bureau, DBS HK

15% growth to sustain in 2018-22

Slight slowdown to 14% CAGR in

2018-2030


Guangdong GDP growth forecast

Source: Guangdong Academy of Social Sciences, DBS HK

High economic growth

Guangdong has been China’s largest provincial economy for 29 years. The total GDP reached Rmb 9tn in 2017, which is a similar level to that of Russia. According to a study made by Guangdong Academy of Social Sciences, Guangdong’s GDP is expected to reach Rmb 26tn, or 12.4% of the national total by 2035.

The per capita GDP is projected to exceed Rmb 100,000 in 2022 and reach close to Rmb 200,000 by 2035. The per capita GDP growth is projected to be at the 5% CAGR level between 2017 and 2035.

The robust economic growth will create more employment opportunities and attract students at the university level. Meanwhile, disposable income will improve from GDP growth as well as urbanisation, which would make parents more willing to spend on education services. Schools at all stages and after-school tutoring will benefit from higher pricing power.

Higher penetration ratio for private education

Private education is playing an increasingly important role in China, especially premium institutions which are now offering more options to parents. They charge much higher tuition fees than public schools. This is especially true for primary to high schools, where parents are willing to pay more than double to gain a better score for the National College Entrance Examination, popularly known as Gaokao.

Private fundamental educa-tion revenue in Guangdong


45

National average tuition fees 2016/17

Private fundamental education revenue in Guangdong

Source: China Institute for Educational Finance Research, DBS HK

Source: Frost & Sullivan, DBS HK

Private fundamental educa-tion revenue in Guangdong

As the starting point of private enterprises in China, Guangdong has the highest private education penetration ratio by student enrolment in China. In 2015, the penetration ratio of private fundamental education in Guangdong reached 28.7% while the national level was 7-12% for primary to high schools.

The high private education penetration ratio in the province has supported the strong growth in private education in the fundamental education segment. Frost & Sullivan estimates that revenue CAGR of private fundamental education in Guangdong was 13.1% in 2012-2015, and will continue to expand at double digit growth rate in the years to come with 11% CAGR in 2016-2020.

Improvement of enrolment ratio for higher education

The growth opportunities of private universities is mainly from the improvement in the gross enrolment ratio (GER) of higher education. In 2017, Guangdong’s higher education GER was c. 35%, much lower than the national average of 42.7%, indicating there is large room for future growth.


As laid out in Guangdong’s 13th Five-Year Plan (FYP), the government’s GER target is 50% by the end of 2020. It is difficult for public universities to further expand their scale because of the limitation from government fiscal spending. The higher student numbers will be mainly supported by private universities. Predictably, there will be greater demand for private higher education unleashed ahead.

Vocational education is also a focus for future development. In the 3-year plan of Guangdong’s vocational education from 2019 to 2021, Guangdong’s government plans to have 50,000 to 70,000 more vocational students in 2019, and 120,000 increase in vocational enrolment capacity by 2021.

K12 schools and tutoring show higher growth than universities. The population policy relaxation will first benefit the junior level of schools. According to Guangdong province’s 14th FYP, student enrolment will show the highest growth in the kindergarten to middle school stages, while high school and higher education would show low or negative growth. Altogether, K12 education will see 3% growth in student numbers from 2015 to 2020 and higher education at 0.1%. With the higher pricing power of K12 institutions compared to universities, we also expect spending on K12 education to increase more than universities. K12 after-school tutoring institutions will also benefit from the K12 student enrolment increase, and higher income.

Among the Hong Kong-listed companies, Wisdom Education and China Education Group are the main players in GBA. The former is a K12 player based in Dongguan and the latter is involved in higher education in Guangzhou.

GBA link: more co-operation and communication

The impact of GBA on education growth is indirect rather than direct. We see some direct co-operation opportunities in the GBA area on education, but it is mostly academic

Guangdong student enrolment target

Source: Guangdong government, DBS HK


47

communication between public schools which will benefit in the longer term with a high quality talent pool. In the short term, the direct impact on private education is limited.

The main education co-operation plans are as follows:

Six high schools sign co-operation memo

In Jan 2018, the GBA education co-operation forum was held in Guangzhou to promote the GBA co-operation and communication in K12 education. During the forum, six high schools signed a co-operation memo to further improve communication in school management, teaching methods, student exchange and parent visits. The six participants were (i) two of the best high schools in Guangzhou - Guangdong Experimental High School and Guangzhou Zhixin High School, and (ii) one school each from Hong Kong and Macau.

Education officials from Guangdong, Macau, and Hong Kong believe that fundamental education plays an important role in training talent for GBA. More of such education co-operation initiatives may be implemented, bringing new opportunities in education development.

28 universities plan to set up GBA education community

Universities within the GBA are also working more closely together. In 2016, the “Guangdong-Hong Kong-Macau Higher Education Alliance” was established. Now, it has a total of 28 universities including the best universities in the three regions - 12 are from Guangdong including Sun Yat-Sen University, nine are from Hong Kong, and the balance 7 from Macau.


GBA education community

Guangdong

1 Sun Yat-Sen University 中山大學

2 SouthChina University of Technology 華南理工大學

3 Jinan University 暨南大學

4 South China Agricultural University 華南農業大學

5 Southern Medical University 南方醫科大學

6 Guangzhou University of Chinese Medicine 廣州中醫藥大學

7 South China Normal University 華南師範大學

8 Guangdong University of Technology 廣東工業大學

9 Guangdong University of Foreign Studies 廣東外語外貿大學

10 Shantou University 汕頭大學

11 Shenzhen University 深圳大學

12 Southern University of Science and Technology 南方科技大學

Hong Kong

1 The Chinese University of Hong Kong 香港中文大學

2 Lingnan University 嶺南大學

3 The University of Hong Kong 香港大學

4 The Open University of Hong Kong 香港公開大學

5 City University of Hong Kong 香港城市大學

6 The Hong Kong University of Science & Technology 香港科技大學

7 Hong Kong Baptist University 香港浸會大學

8 The Hong Kong Polytechnic University 香港理工大學

9 The Education University of Hong Kong 香港教育大學

Macau

1 University of Macau 澳門大學

2 University of Saint Joseph 聖若瑟大學

3 Institute For Tourism Studies 旅遊學院

4 City University of Macau 澳門城市大學

5 Macau University of Science and Technology 澳門科技大學

6 Macao Polytechnic Institute 澳門理工學院

7 Kiang Wu Nursing College of Macau 澳門鏡湖護理學院

Source: DBS HK


49

Population of 3-6 year olds

Guangdong

1 Sun Yat-Sen University 中山大學

2 SouthChina University of Technology 華南理工大學

3 Jinan University 暨南大學

4 South China Agricultural University 華南農業大學

5 Southern Medical University 南方醫科大學

6 Guangzhou University of Chinese Medicine 廣州中醫藥大學

7 South China Normal University 華南師範大學

8 Guangdong University of Technology 廣東工業大學

9 Guangdong University of Foreign Studies 廣東外語外貿大學

10 Shantou University 汕頭大學

11 Shenzhen University 深圳大學

12 Southern University of Science and Technology 南方科技大學

Hong Kong

1 The Chinese University of Hong Kong 香港中文大學

2 Lingnan University 嶺南大學

3 The University of Hong Kong 香港大學

4 The Open University of Hong Kong 香港公開大學

5 City University of Hong Kong 香港城市大學

6 The Hong Kong University of Science & Technology 香港科技大學

7 Hong Kong Baptist University 香港浸會大學

8 The Hong Kong Polytechnic University 香港理工大學

9 The Education University of Hong Kong 香港教育大學

Macau

1 University of Macau 澳門大學

2 University of Saint Joseph 聖若瑟大學

3 Institute For Tourism Studies 旅遊學院

4 City University of Macau 澳門城市大學

5 Macau University of Science and Technology 澳門科技大學

6 Macao Polytechnic Institute 澳門理工學院

7 Kiang Wu Nursing College of Macau 澳門鏡湖護理學院

Source: Local Statistics Bureau, DBS HK

The GBA will establish a higher education community in 2035 to support technology and economic growth. For now, there are around 190 co-operation initiatives in the undergraduate program in GBA. In the future, the co-operation programmes will be largely focus on resource sharing, joint operation of schools, talent mobility, and application of scientific research.

Cities with the largest business opportunities

As discussed, fundamental education is mainly driven by population and economic growth. In terms of the different schooling stages, kindergarten and primary schools are more influenced by local birth rates. Middle/ high schools and K12 tutoring are related to growth in student numbers, which is affected by both population growth and teaching quality. Cities with better schools would attract more students as middle and high school students leave their hometowns to study in other cities in the province. Household income is also a critical factor in this stage. Demand for tutoring increases as Gaokao approaches.

To dig deeper into business opportunities in each city, we see that Tier 1 cities such as Guangzhou and Shenzhen will still have the largest market and high growth. Dongguan and Foshan also have good growth potential for education among the rest of the cities in GBA.

Population of 3-6 year olds from 2018-2021

Based on the birth rates and population in recent years, we can roughly gauge the population size of 3-6 year olds in 2018-2021, which would determine the demand for kindergartens and primary schools.

Among all the nine cities in GBA, Guangzhou has the largest population base as well as high growth. Shenzhen also has a large market with 6-7m of 3-6-year-old kids though growth is slower than in Guangzhou. Dongguan and Foshan follow in terms of young population and growth.


Number of primary/middle student students in each city

Not surprisingly, Shenzhen and Guangzhou have the largest student numbers for both primary and secondary schools, followed by Dongguan and Foshan. Shenzhen has the highest growth in primary school student enrolment at 5.6% CAGR in 2015-17. Foshan and Huizhou were next with 5.3% and 5.1%.

Middle and high school student enrolment


Primary school student enrolment



51

Student number growth vs Gaokao performance

Bubble area represents 2017 secondary student numbers in each city Source: Local Statistics Bureau, DBS HK

The growth of middle and high school student numbers was lower than that of primary school in all the nine cities during 2015-2017. Some cities like Jiangmen and Zhaoqing recorded a declining trend. Shenzhen had again reported the highest CAGR of 5.3% in student numbers, followed by Dongguan 4.9% and Foshan 4.6%. Zhongshan’s growth was also decent at 3.9%, but the absolute number was much lower, making the potential market smaller.

In general, we see a positive correlation between secondary school student growth and the Gaokao exam performance. Cities with high growth like Shenzhen, Foshan, Dongguan and Zhongshan also have higher Tier 1 university admission ratio. Part of the reason might be that these cities have better education resources, e.g. higher quality schools and teachers to attract students.

A special case is Guangzhou, which has the top schools in the province but has seen a slight decrease in student numbers in past years. This could be because of the already-high population base and full capacity utilisation.

Average salary and GDP growth

Guangzhou and Shenzhen have the highest average salary levels with strong growth momentum, followed by Zhuhai, Foshan and Zhongshan. Among all the nine cities, Zhongshan had the highest growth in average salary in 2017 at 14.3%.


In 2017, all cities in GBA except for Zhaoqing reported over 7% y-o-y growth in GDP. All the nine cities are targeting for 7-8% y-o-y GDP growth in 2018.

GDP growth


Average salary growth



53

To conclude, we have ranked the cities in GBA in terms of business opportunities in private education:

• Tier 1: Shenzhen and Guangzhou – largest population, best economic and income growth, largest market for fundamental education and higher education. The two cities have the best education resources and will continuously attract students

• Tier 2: Dongguan and Foshan – decent population growth and birth rates, good teaching quality in middle and high schools with good performance in Gaokao. More room for smaller players in the after-school training segment which has lower competition

• Tier 3: Huizhou and Zhongshan: Good teaching quality, increasing number of middle school students but the total population is much smaller than Tier1/2 cities, creating robust but smaller markets

City and segment comparison

Source: DBS HK

Guangzhou Shenzhen Dongguan Foshan Huizhou Zhongshan

3-6 yr population in 2020 (m) 640 700 300 310 166 100

3yr CAGR (%) 11 7 0 9 0 14

Primary school enrolment 2017(m) 1004 965 765 544 557 297

3yr CAGR (%) 3.5 5.6 3.1 5.3 5.1 3.7

Secondary school enrolment 2017 (m) 509 418 310 328 288 155

3yr CAGR (%) -0.6 4.1 3.9 3.5 3.1 3

2016 Average salary (Rmb 000) 89 90 58 67 65 67

yoy growth (%) 9.8 10.8 8.3 8.7 10.5 14.3


Increasing investment in environmental protection Thanks to the government’s strong determination in addressing environmental issues, its investments to combat environmental pollution in China increased from Rmb711.4bn in 2011 to Rmb922bn in 2016. Guangdong province had also put in significant efforts in environmental protection with a total investment of Rmb36.8bn in 2016. With strict implementation of environmental regulations, demand for environmental services, such as treatment for sewage, household waste, industrial solid waste, hazardous waste and soil remediation, has been increasing.

Environmental

Investment in environmental protection in China

Sewage treatment rateSource: China Statistical Yearbook on Environment

Source: China Statistical Yearbook on Environment


55

Positive results from the huge amount of investments in environmental protection are reflected in the rising sewage treatment rates, reduction in carbon emissions, etc. In particular, the improvement in air quality in Guangdong province in recent years has outperformed the national average. While emissions of industrial gas in China climbed 1.6% during 2011-15, that in Guangdong province dropped 2.9%. The drops in emissions of sulphur dioxide and nitrogen oxide in Guangdong province has been 4-5ppts higher than China’s overall figure.

Emission of industrial waste gas

Investment in environmental protection as % of GDP




Notwithstanding the positive results in the improvement in the environment, we believe investment in environmental protection as a percentage of GDP in Guangdong province is still low compared with the national average. There is still a large gap between the current environmental condition and the one under a well-off society. We reckon relatively more funding will be put not only into the urban sector but also industrial sector, particularly solid waste and hazardous waste, areas that have been under invested in the past few years.

Assuming the investment percentage gradually climbs to 0.7% of GDP in 2022, investments in environmental protection in Guangdong province will see CAGR of 18% between 2018-22. The CAGR between 2022-30 will slow down to 10.5% assuming 1% of GDP will be spent on environmental protection by 2030.

Green development and green economy in Greater Bay Area

While the development of GBA will provide strong support for an upgraded economy in China, in particular driving the economic development in southern China, environmental protection rather than robust economic growth is now the first priority. This means that economic growth must not be achieved at the expense of the environment. In particular, as stated in the 13th Five Year Plan (FYP) in environment protection of Guangdong province, PRD’s competitiveness will rely on industrial upgrades to become more environmentally friendly with the adoption of energy conservation and reduction in carbon emissions. A

Breakdown of investment in environmental protection (2016)



57

well-developed ecological environment in the PRD, which is part of GBA, will be a showcase not only for the rest of Guangdong province but also for the rest of China. Thus, the development of GBA, particularly a series of infrastructure projects to be unfolded at the early stage, will have to be “green and sustainable”. And it has to comply with various targets set in the 13th Five Year Plan in environmental protection with regards to air quality, water quality, waste treatment (both household and industrial), soil remediation, ecological environment, etc. Some of those targets are listed in the following table:

Guangdong government has made good progress in developing a sound ecological environment in various development zones. The PRD is one of the first major city that has achieved PM2.5 target for three consecutive years. Over 80% of water resources in Guangdong province has reached quality above category III. A well-operated waste-to-energy plant in Nanhai, Foshan, has improved the environment of the nearby region substantially which now has become one of the sightseeing spots. These are the results of good environmental planning and the implementation of strict environmental regulations.

In fact, the GBA development plan even steps up the effort in ecological conservation where environmental protection regulations in GBA would be the strictest with the highest

Targets of 13th FYP for environmental protection

Source: State Council, Department of Environmental Protection of Guangdong Province

China Guangdong province

% 2015 2020 2015 2018 2020

Percentage of days reaching good air quality 76.7 >80 91.5 92 92.5

Reduction in PM2.5 - -18 - - -10

Percentage of surface water with quality below category V 9.7 <5 8.45 7 0

Percentage of surface water with quality above category III 66 >70 77.5 81.7 84.5

Percentage of black and stinky water - - - <15 <10

Reduction in emission of sulphur dioxide - -15 - - -15

Reduction in emission of COD - -10 - - -10

Household sewage treatment rate

City 91.9 95-100 - 90 95

County 85 >85 - 80 85

Household waste treatment rate (major cities) 80-90 95-100 90 95 98

Percentage of recovered contaminated farmland - 90 - - 90

Treatment of hazardous waste of selected key enterprises - - 100 100 100


requirement in terms of the levels of conservation and efficient use of resources. Emphasis will be put on regulating the pollution in PRD and drainage facilities at river outlets, as well as strengthening the pollution management at coastal areas. Draft guidelines that call for a ban on new industrial capacity for a range of businesses in the PRD region was also issued. These businesses include steel, petroleum, petrochemicals, glass, ceramic and non-ferrous metal smelting. This will also support GBA in eliminating traditional low-end production and shift towards high-tech industries with high added value. Thus, demand for more environmental services for industrial sectors is anticipated, such as solid waste/hazardous waste treatment, emission reduction, industrial wastewater treatment, pollution monitoring services, recycling of industrial waste services, industrial water recycling systems, etc.

In particular, secondary pollution arising from solid / hazardous waste and soil contamination could cause even more serious health problems than other kinds of pollution but attention has not been put into these areas until recent years. In China, qualified treatment capacity is also under-supplied but the shortage in Guangdong province is not as serious as other provinces. Nevertheless, we expect capex will still be needed in these segments as more industrial parks are built.

The 13th FYP states that consumption of coal in the PRD has to be contained at 85m metric tonnes by 2020 and the construction of new coal-fired generators will be prohibited in certain development zones. Thus, the use of renewable and clean energy sources will be preferred in GBA, which will encourage the use of integrated energy systems, particularly in industrial parks. This is positive to local gas distributors.

Production and treatment capacity of hazardous waste (2016)

Source: Annual report on solid waste treatment


59

More environmental services along with urbanisation

As China aims to develop GBA as a quality place for living, working and traveling, more environmental services will be required for urban areas. These include water purification services, treatment for household sewage, household garbage, kitchen waste, city sanitation, black and stinky water body, etc. Assuming each person consumes 300 liters of water per day, we estimate that a 10% increase in the population in Guangdong province will require additional treatment capacity of 2.7-3.0m tons per day for each of water purification and water sewage, implying a capex of at least Rmb4.5-6.0bn and Rmb5.5-6.5bn respectively. Investment will be even larger if upgrades and extensions to the existing water pipeline network are taken into consideration.

While landfill used to be the major method in treating household waste, the risk of secondary pollution and the lack of land resources have prompted Guangdong government to shift to incineration or waste-to-energy operations. Assuming each person produces 1kg of household waste each day, a 10% increase in the population will require additional capacity of 10,000 tons per day for waste-to-energy operations, implying a capex of at least Rmb5.0bn. Additional investments will be required for some auxiliary services, such as waste sorting, logistics arrangement, city sanitation, etc.

In addition, coal to gas conversion in residential areas also plays a part in government’s structural change in energy consumption. The penetration rate of natural gas in Guangdong was only 26.8% in 2016, compared with the national average of 38.7%. The difference was even larger when comparing with some Northern cities, such as Beijing (77%) and Tianjin (68.8%). Although the use of natural gas is more popular in the northern region (particularly for heating purposes), we expect penetration rate in Guangdong province will continue to climb given that it is far lower than that in other countries, such as the US, the UK and Japan, which varies from 80-90%. We expect gas distributors in Guangdong province will continue to extend the gas pipeline to increase connectivity. Assuming penetration rate increases by 30ppts, capex required is estimated to be Rmb17bn.


Penetration rate of natural gas

Source: Wind


61

Business opportunity for Financial service industryThe increased connectivity and integration of the 9+2 cities within Greater Bay Area (GBA) is expected to enhance business activities and movement of goods and services, people, capital and information flow within the region. With GBA’s key focus to transform into an innovative and technology hub, we believe this paves the way for the financials services industry in the region to further prosper. Taking also the advantage of Hong Kong’s position as a major international financial center and as the largest renminbi offshore market, and two well-established equity markets (HKSE and SZSE) within the GBA region, we believe this will stimulate business opportunities including cross-border trade finance and settlement, renminbi on-shore and off-shore financing, currency exchange, digital payment and consumer financing services, and various individual financial services, which ultimately will benefit financial intermediaries including banks, insurance companies, wealth management companies and P2P providers.

Financial industry to contribute > 18% of GDP by 2030F

Financial services industry accounted for 8% of Guangdong province’s (as a proxy to GBA) GDP in 2017, up from 4% in 2007 (10 years ago) and 6% (5 years ago) in 2012 and has grown at 16%/19%/21% CAGR for the past 5/10/15 years. Compared to Tier 1 cities such as Beijing and Shanghai, where financial services industry accounted for 17% of GDP in 2017, we believe GBA’s level is low. Even with Shenzhen which is considered as a more developed city among the 9 Guangdong cities within the GBA, its financial services industry only accounted for 14% of its GDP.

Guangdong financial services industry and GDP growth in the past

Source: WIND, DBS HK

Financial Services


To expand by 16% and 14% CAGR by 2020F and 2030F

On the back of the forecast that the services industry will contribute 76% to the GBA economy (including Hong Kong and Macau) by 2030F, we expect financial services industry to contribute at least 18% of GDP by 2030F, implying the segment’s CAGR will outpace GBA region’s GDP CAGR by 6.9ppts during the period. This also implies the financial services industry in the GBA may grow at 16% CAGR during 2018-2020F, and 14% CAGR during 2018-2030F.

Bank assets to grow by 13% and 11% CAGR by 2020F and 2030F

By using the exposure to PRD region as a proxy to GBA, assets and loans at major listed China banks grew at 9%/12% CAGR during 2012-17. Compared to the entire China banking system where assets/loans (Rmb) has grown at 13%/14% CAGR during the period, the growth rates recorded by major listed China banks in the GBA in the past 5 years does not seem to be particularly strong. We believe the main reason for the slower growth was due to the impact from Rmb depreciation, especially since 2015, and China’s capital controls, as a large portion of businesses in the GBA area are export-oriented industries. This is also evidenced by the gradual decline in offshore Rmb trade settlements in Hong Kong.

Nonetheless, with GBA’s more integrated and connected economic zone accompanied by its focus to transform into an innovative and technology hub, we believe growth for various banking services and demand will continue to grow. Among major listed China banks, China Merchant Bank, China Construction Bank and Agricultural Bank of China have the highest loan exposure at 17%/15%/15% of total loans and 18%/14%/16% of pre-tax profit to the PRD region. We thus believe CMB, CCB and ABC are better positioned to capture business opportunities from GBA.

Service and financial services industry as %GDP in GBA

Source: WIND, DBS HK


63

On the back of the assumption that financial services industry is set to grow at 16% and 24% CAGR by 2020F and 2030F, reaching a scale of Rmb14.1tn and Rmb37.2tn, respectively, we estimate growth in bank loans/assets located in the GBA area may hit 14%/13% CAGR by 2020F and 12%/11% CAGR by 2030F, respectively.

Offshore Rmb trade settlements in Hong Kong

China banks’ asset and loans exposure in GBA

Source: HKMA, DBS HK

BOC and BoComm figures refer to exposure in Central and Southern China; other banks figs refer to exposure to Pearl River Delta region

Source: Company data, DBS HK


Insurers premium grew by 22% CAGR in the past 5 years

China insurers’ per capita premium growth in Guangdong province reached 22% CAGR during 2012-17. Compared to China’s average per capita premium growth of 20% CAGR during the same period, Guangdong’s premium growth has outperformed the sector. We believe this is on the back of Guangdong’s faster GDP per capita growth of 9% during the past 5 years, compared to 8% for the whole country. More importantly, Guangdong’s GDP per capita has reached Rmb82,278, which is at the higher-mid end compared to other provinces (China’s GDP per capita at Rmb63,163). Given growth in premium per capita usually has an exponential relationship with one’s wealth, this suggests that once income per capita has attained a certain level, per capita premium growth will start to accelerate. This can be evidenced by looking at China’s Tier 1 cities such as Beijing and Shanghai, where GDP per capita is twice of China’s average, while premium per capita is 3-4 times higher than the country’s average.

Guangdong’s premium per capita and GDP per capita reached Rmb 2,244 and Rmb82,278, respectively, in 2017, which is above national average. With GDP growth from GBA estimated to accelerate in the long term, we believe this paves the way for the life insurance segment within the region to grow further. This may also explain why China insurers have relatively high premium exposure in the Guangdong area.

China major province/cities premium growth

Source: CBIRC, DBS HK


65

Premium growth projected to be 20%/16% CAGR by 2020F/2030F

Assuming the population growth rate in the GBA area is in line with Guangdong’s population growth in the past 5 years, along with the increase in premium penetration and GDP per capita, we estimate insurance premium growth may reach 20% CAGR by 2020F and 16% CAGR by 2030F in the GBA area.

Ping An, China Life and China Taiping have higher exposure to GBA

Among the listed China insurance companies, Ping An generates 18% of its premium from Guangdong, the highest among China life insurers, followed by China Life’s 9%. In the case of P&C insurance, Ping An P&C derive 16% of premiums from Guangdong province, followed by China Taiping at 14% (include Taiping HK and Taiping Macau). In addition to Guangdong, China insurers also have higher premium exposure to Beijing, Henan, Jiangsu, and Shandong provinces/ cities. A common characteristic of these provinces is that GDP per capita are all relatively high. In addition to the China insurers, we also see good opportunity for AIA to capture business opportunities from GBA, given the new initiatives introduced by HKMA to promote the” insurance connect scheme”, its leading marketing positioning in HK, and strong product know-how and brand franchise.

China major cities/provinces insurance premium per capita to GDP per capita

Source: CBIRC, National Bureau of Statistic of China, DBS HK


Great potential for P2P segment

We believe GBA’s focus in transforming into an innovative and technology driven economy hub paves the way for the P2P (peer-to-peer) segment to grow. Despite China’s P2P sector has been impacted by stricter regulations and market consolidation is still expected within the next 1-2 quarters, the P2Ps are well positioned itself to serve the banks’ “underserved” consumers in China. We believe the addressable market in China’s P2P segment should reach Rmb8tn to Rmb10tn, with some 400m-500m individuals as target customers. Once the regulation and compliance procedures are completed by Jun-2019, we believe the segment should return to its normal growth pattern going forward.

China’s P2P and loan breakdown by province

China’s P2P outstanding loans and y-o-y growth (%)




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According to the data from WDZJ, the number of operating P2P platforms reached 1,591 as of July 2018, which is down from the peak level of 3,473 platforms in November 2015. Of this, 20% of the platforms are registered in Guangdong, which contributes 16% of the outstanding loans. We believe this reflects the fact that Guangdong, more precisely Shenzhen, is considered as a cradle to innovation and technology development in China.

Total P2P loan outstanding has been on a clear upward trend in the past 4 years and reached a peak of Rmb1.3tn in May 2018 before declining to Rmb789bn in December 2018 due to policy headwinds. We believe loan growth is likely to reaccelerate once the compliance procedure completes, and we believe Guangdong will serve as one of the major areas to witness such growth (next to Beijing and Shanghai). Among the top 20 P2P platforms in China in terms of loan origination, 5 of the platforms originated in Guangdong whereas 8 and 5 platforms are from Beijing and Shanghai. Leading platforms in Guangdong include Tuandaiwang, Xiaoying, PPmong, Xiaoniu and Fffax, with loan origination in the Rmb10bn to Rmb16bn range. We see these five platforms as better positioned to capture the business opportunities from GBA.

P2P loan growth to reach 5%/17% CAGR by 2020F/2030F

As China’s P2P industry has been consolidating since the beginning of 2017 driven by regulatory tightening, loans outstanding has declined to Rmb789bn in 2018, from Rmb1tn in 2017, and we estimate loans outstanding will continue to shrink to Rmb650bn in

Major P2P platforms in Guangdong

Source: WDZJ, DBS HK

Rank Platform name Loan outstanding

(Rmb bn)

Volume (Rmb bn)

Avg yield (%)

Duration (month)

1 Xiaoying (小贏網金) 15.8 4.5 7.6 10.3

2 PPmoney (PP網貸) 11.8 1.7 9.8 14.7

3 Tuandaiwang (團貸網) 11.5 4.7 10.2 2.1

4 Xiaoniu (小牛在線 ) 7.4 0.8 8.2 12.3

5 Tounawan (投哪網) 5.4 0.6 9.1 17.1

6 ZhongYeXingRong (中業興融) 2.8 0.2 13.2 27.4

7 Ren Ren Ju Cai (人人聚財) 2.8 0.4 10.7 19.1

8 Min Dai (民貸天下) 1.5 0.3 10.6 32.0

9 Myerong (e融所) 1.4 0.1 12.0 30.1

10 Rong Jin Suo (融金所) 3.0 0.3 9.6 7.0


2019F. Nonetheless, as the penetration in China’s “underserved” consumer lending market remains low, we believe P2P loan origination will resume growth momentum after industry consolidation completes in 2020F. That said, with the assumption of rising penetration and increasing consumer leverage, we estimate P2P loan growth to reach 5% CAGR by 2022F and 17% CAGR by 2030F. As Beijing, Shanghai and Guangdong are expected to be the three major P2P hubs in the future as a result of industry consolidation, we thus expect P2P loan growth in the GBA to be in line with the industry growth level.

New initiatives to drive growth

From the recently released GBA Development Plan guideline, policy support to develop the financial services industry in the GBA is in three areas: 1) to promote E-signature certification and e-payment system in GBA, 2) to promote mutual financial market access between Hong Kong, Macau and Shenzhen, with initiatives to allow wider Rmb usage (on/offshore), develop cross-border Rmb interbank market, open up on-offshore Rmb bond issuance, open up cross-border Rmb investment products, allowing qualified Hong Kong and Macau banks and insurance companies to establish operating branches in GBA, and to develop featured finance (i.e. aircraft leasing, financial technology and green financing), and 3) to promote and develop cross-border innovative motor and health insurance products and supporting China, Hong Kong, Macau insurance companies to develop cross-border reinsurance business.

In addition to CMB, CCB and ABC already having a meaningful exposure in the GBA, many HK banks such as BOCHK, The Bank of East Asia (BEA) and Hang Seng Bank (HSB), are launching new initiatives including dual currency cards to facilitate on cross-border payments, cross-border RMB cash pooling services, expansion in wealth management/private banking business and establish integrated system to fulfil cross-border business needs. Among which, BOCHK seems to be the most aggressive and better positioned.


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HK banks’ initiatives to tap on GBA opportunities


Company name

Initiative details

BOCHK Launched mobile payment service of BOC PAY & a dual currency card to facilitate cross-border payment

Promoted cross-border two-way RMB cash pooling services

Commenced mutual recognition programme for its Wealth Management Brand to offer consistent experience to customers

Implemented point-to-point port strategy by becoming the only bank to provide branch services in Terminal 1 of Hong Kong International Airport, set up a self-service banking centre at Hong Kong West Kowloon Rail Station and automated banking site at the Hong Kong-Zhuhai-Macao Bridge

Strengthened collaboration with BOC Group's entities in the Greater Bay Area and established an integrated system for marketing and service aiming to provide full range of financial services. Focus in servicing technological innovation industry

BEA Focus in Private Banking opportunity by leveraging its banking network in the Greater Bay Area to source new clients/business opportunities. Mainland clients now account for 47.1% of Private Banking’s total net income.

The Greater Bay Area currently accounts for 19.6% of Private Banking’s total AUM from the Mainland. Aims to double over the next three years.

Well positioned to serve the country’s new economic priorities and capitalise on opportunities arising from national strategies, in particular the Belt and Road Initiative and the development of the Greater Bay Area

DSB Expect for stronger funding needs from both domestic and offshore investments in the Greater Bay Area, including the investment in Belt and Road countries.

HSB Leveraging it well-integrated cross-border infrastructure to grow our core banking business on the Mainland and capitalise on new opportunities arising from major developments such as the Guangdong-Hong Kong-Macao Greater Bay Area and ‘One Belt, One Road

CHB As a core member of the Guangzhou-based Yuexiu Group, CHB will seize the opportunities brought about by the planning of the Greater Bay Area and take advantage of the group's strength, to continuously enhance the strategic position of its Mainland operations and capitalise on its advantageous positions in the unique cross-border business, so as to become an active financial player in the development of the Greater Bay Area.


HK banks’ initiatives to tap on GBA opportunities

Source: HKIA, DBS HK

Initiative Details

E-signature certificates

To facilitate mutual recognition of e-signature certificates in public services, finance, e-commerce areas

To promote Greater-Bay Area electronic payment system with mutual access

Mutual financial market access

Progressively widening cross-border renminbi usage. Banking institutions can develop cross-border renminbi interbank market, renminbi forward foreign exchange trading business and renminbi-related derivatives business and cross-selling wealth management products business

Corporate within Greater-Bat Area can issue cross-border renminbi bonds. Widen the scope of Hong Kong and Mainland Chinese residents and institutions for cross-border mutual investment products (funds and insurance) and channels

To support investment institutions in Hong Kong to raise renminbi for investing into Hong Kong capital market and participating in private equity and venture capital funds

To improve Shanghai-HK, Shenzhen-HK stocks and bonds market access

To support qualified HK & Macau banks and insurance institutions to set up operating branches in Qianhai Shenzhen, Nansha Guangzhou and Hengqin Zhuhai

To develop Greater-Bay Area financial regulators from setting up communication mechanism, strengthening cross-border supervision and liquidity monitoring

To focus on developing featured finance including shipping finance, financial technology, aircraft and ship leasing etc

To facilitate anti-money laundering, anti-terrorism financing, anti-tax evasion co-operation and information sharing mechanism

Insurance To support Guangdong, Hong Kong and Macau insurance institutions to co-operate and develop innovative cross-border motor insurance and health insurance so as to offer effective underwriting, due-diligence and claims etc

To support China, HK and Macau insurance institutions to develop cross-border renminbi reinsurance business

To support Hong Kong and Macau financial institutions co-operate and co-develop offshore finance business and research international shipping insurance etc.


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Financial institutions current landscape and exposure in GBA

Note: PRD = Pearl River Delta; GD = Guangdong; SZ = Shenzhen; GZ =Guangzhou; ZH= Zhuhai; FS = Foshan; Above indicates mainly the exposure to China and Macau portion of GBA and excludes HK exposure


Initiative Details

E-signature certificates

To facilitate mutual recognition of e-signature certificates in public services, finance, e-commerce areas

To promote Greater-Bay Area electronic payment system with mutual access

Mutual financial market access

Progressively widening cross-border renminbi usage. Banking institutions can develop cross-border renminbi interbank market, renminbi forward foreign exchange trading business and renminbi-related derivatives business and cross-selling wealth management products business

Corporate within Greater-Bat Area can issue cross-border renminbi bonds. Widen the scope of Hong Kong and Mainland Chinese residents and institutions for cross-border mutual investment products (funds and insurance) and channels

To support investment institutions in Hong Kong to raise renminbi for investing into Hong Kong capital market and participating in private equity and venture capital funds

To improve Shanghai-HK, Shenzhen-HK stocks and bonds market access

To support qualified HK & Macau banks and insurance institutions to set up operating branches in Qianhai Shenzhen, Nansha Guangzhou and Hengqin Zhuhai

To develop Greater-Bay Area financial regulators from setting up communication mechanism, strengthening cross-border supervision and liquidity monitoring

To focus on developing featured finance including shipping finance, financial technology, aircraft and ship leasing etc

To facilitate anti-money laundering, anti-terrorism financing, anti-tax evasion co-operation and information sharing mechanism

Insurance To support Guangdong, Hong Kong and Macau insurance institutions to co-operate and develop innovative cross-border motor insurance and health insurance so as to offer effective underwriting, due-diligence and claims etc

To support China, HK and Macau insurance institutions to develop cross-border renminbi reinsurance business

To support Hong Kong and Macau financial institutions co-operate and co-develop offshore finance business and research international shipping insurance etc.

Hong Kong

Shenzhen

HuizhouDongguan

Guangzhou

G U A N G D O N G

Zhaoqing

Jiangmen

Macau

Foshan

Zhuhai

China Banks exposure:

China insurance:

Hong Kong Banks exposure: Regional Banks exposure:

34/4 branches in GD/Macau (GZ/SZ/Zhuhai 13/13/7)

86 branch outlets( incl. HSB and Rural bank)Total bank staff at 2,800 1 Security JV with staff at 1101 Life insurance with staff at 20

5/16 branch/sub-branch in GD (SZ/ZH/FS/GZ 1 brand; SZ/ZH/GZ 8/2/5 sub-branch)

2/3 branch/sub-branch in GD (GZ/ZH 1 brand; GZ/SZ 1/2 sub-branch)

4/14 branches in GD/Macau

19/1 branches in GD/Macau (GZ/SZ at 7/6)

3(+3 sub-branch)/1 branches in GD/Macau

26 %of loans in central and southern China

18%/16 of life/P&C of premuium in GD

6%/12 of life/P&C of premuium in GD

6%/14 of life/P&C of premuium in GD/GBA

9% of life premuium in GD

8% of P&C premuium in GD

5% of P&C premuium in GD

15 %of loans in PRD

15 %of loans in PRD

15 %of loans in PRD

17% of loans in PRD & West Side of Taiwan Strait

14% of loans in Southern China

15% of loans in PRD and West Strait

19% of loans in Central and Southern China

19% of loans in PRD


Healthcare expenditure growth in Guangdong province to accelerateHealthcare expenditure in Guangdong expanded by 19% CAGR in 2010-16 to Rmb419bn, and outpaced the national growth by 4ppts. Healthcare expenditure ‘s contribution to Guangdong province’s GDP surged from 3.3% to 5.2% in 2010-16. The strong momentum should continue. We expect CAGR to accelerate to 20% in 2018-22 and then stabilise at 15% in 2022-30, driven by 1) population growth accelerating from 0.68% in 2015 to 0.86% from 2018 onwards, due to relaxation of birth control and increasing migration into the province resulting from expanding economic activities; 2) expanding medical facilities, as planned by the Guangdong provincial government, for example, the number of beds per thousand of permanent population will increase from ≤4.80 in 2018 to ≤6.0 in 2020.

We identify three areas with great potential in the Great Bay Area (GBA):

1. Surging demand for hospitals in Dongguan. The population growth in Dongguan could be faster than other GBA cites after its metro network is connected to Shenzhen and Guangzhou in 2020-22, thus increasing demand for hospitals. Meanwhile, medical resources there are currently very tight as evidenced by the higher ratio of population/doctors in medical institutes than the average for Guangdong province (2017: 463 vs 431), particularly in the areas of paediatrics, oncology and psychiatry. Thus, there is huge opportunity from establishing hospitals that focus on these therapeutic areas

2. Increasing medical tours to Hong Kong, which has medical services of international standards, e.g. its survival rate after lung transplant surgery is higher than the US, Canada, and Singapore. Hong Kong hospitals can also supply medicines for treatment of serious diseases which Mainland may not be able to supply. This may attract more and more people from GBA to Hong Kong as transportation connectivity improves

3. Demand for clinics in GBA cities from Hong Kong retirees living there should increase as Hong Kong government is considering to allow healthcare vouchers issued to the elderly to be used in GBA cities. UMP and C-Mer eye care are expanding their clinic networks to the GBA to capture the demand. We believe more Hong Kong healthcare companies will do the same to ride on the trend

Healthcare


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Surging demand for hospitals in Dongguan

As discussed above, the population is set to increase in GBA. This would underpin the development of hospital services, particularly in cities facing a supply shortage. Among the GBA cities, we estimate that supply shortage of hospital services is more acute in Jiangmen, Zhaoqing, Dongguan as the ratio of population/number of doctors in medical institutes is higher than Guangdong province’ average (see the following table), implying medical resources are tighter than other cities in Guangdong.

Healthcare expenditure in Guangdong (Rmb bn)

Planned increase of medical facilities in Guangdong

Source: Health & Family Planning Commission of Guangdong Province

Source: Health & Family Planning Commission of Guangdong Province

2015 2018 2020

Number of medical institute's bed per thousand of permanent population

4.02 ≤4.80 ≤6.0

Number of practicing (assistant) doctor per thousand of permanent population

2.11 2.41 2.8

Number of registered nurse per thousand of permanent population

2.35 2.69 3.5

Number of general practitioner per thousand of permanent population

1.41 2 3


The medical facilities in Dongguan, in particular, will be even tighter in future as its population growth will accelerate after its metro network connects to Shenzhen and Guangzhou by 2020 and 2022. The population of these two cities could then spill over to Dongguan. In terms of population in 2017, Guangzhou (14.5m), Shenzhen (12.5m), Dongguan (8.3m) are the top three populated cities within Guangdong province. In terms of residential property prices as measured by price per square meter in Sep 2018 according to E-House, Dongguan’s prices were 68% and 16% lower than Shenzhen and Guangzhou (Rmb17,700, Rmb54,697, Rmb21,000 per square metre respectively). Therefore, as stated above, the expansion of the metro network could lead to migration from Shenzhen to Guangzhou to Dongguan due to better transportation connectivity and more affordable property prices, thus creating more demand for hospital services.

To develop the hospital business in Dongguan, focusing on services areas with supply shortage is an easier and faster way to grow revenue. Dongguan’s government pointed out three therapeutic areas that are facing a supply shortage:

Population to number of doctors in medical institutes

Source: http://www.gdhealth.net.cn, DBS HK

2017 Number of doctors in

medical institutes (,0000)

Population (,0000) Population / Number of

doctors in medical institutes

Guangdong province 25.9 11,169 431

Guangzhou 5.0 1,450 290

Shenzhen 3.3 1,253 380

Foshan 1.8 766 426

Dongguan 1.8 834 463

Jiangmen 1.0 456 456

Huizhou 1.3 478 368

Zhaoqing 0.8 412 515

Zhongshan 0.8 326 408

Zhuhai 0.6 177 295


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1. Paediatrics Source: Chinese People’s Political Consultative Conference Dongguan Committee.

After the relaxation of birth control in 2016, the shortage should get more severe.

2. Oncology Source: Dongguan Municipal Health & Family Planning Bureau.

3. Psychiatry Source: “Dongguan municipal 13th Five-Year Plan for hygiene and health” issued by

Dongguan government.

Increasing medical tours to Hong Kong for Mainlanders

As infrastructure and transportation among GBA cities improves, we believe there will be more mainlanders travelling to Hong Kong to seek medical services and pharmaceutical products because:

1. Hong Kong can supply crucial medicine for treatment for serious diseases which Mainland may not be able to supply.

Example 1: Human Papillomavirus 9-valent Vaccine produced by Merck (MRK US), for prevention of cervical, vaginal, vulvar, and anal cancers, and genital warts caused by 9 types of human papillomavirus. This product is well-known and welcomed by mainlanders. Hong Kong started to supply this in Mar 2016. Mainland China approved this product in Apr 2018 for launch. There is a two-year time lag before the drug is sold on the Mainland.

Example 2: PD-1 (programmed cell death protein 1) inhibitors. This is a new generation of anti-cancer drugs based on immunotherapy. It is used to treat certain cancers in the final stages where traditional treatment has been ineffective. The medicines were registered in Hong Kong by Merck and Bristol-Myers Squibb (BMY US) in Dec 2015 and launched afterwards. Mainland China approved this product in June 2018. There is time lag of over two years before the drug is sold on the Mainland.

The reason of the time lag, we believe, is due to the shorter time it takes for imported drugs to be registered in Hong Kong. Based on our discussions with a drugs distributor in Hong Kong, in terms of average time taken for registration, it is c.4 years in Mainland China, Singapore c.2-3 years, and Hong Kong c.1-2years. As long as the drug is approved to be marketed in developed countries, the time for approval in Hong Kong can be shortened. We estimate another reason for the shorter registration and approval time in Hong Kong (comparing to Mainland China) is that medical institutes in Hong Kong use English as their formal communication language.

2017 Number of doctors in

medical institutes (,0000)

Population (,0000) Population / Number of

doctors in medical institutes

Guangdong province 25.9 11,169 431

Guangzhou 5.0 1,450 290

Shenzhen 3.3 1,253 380

Foshan 1.8 766 426

Dongguan 1.8 834 463

Jiangmen 1.0 456 456

Huizhou 1.3 478 368

Zhaoqing 0.8 412 515

Zhongshan 0.8 326 408

Zhuhai 0.6 177 295


It is easier for them to understand the medicines being marketed in English-speaking developed countries.

2. There are areas of medical services where Hong Kong is better than Mainland China.

As mentioned above, Hong Kong can provide some crucial medicines for treatment of serious diseases which Mainland China may not be able to provide. This enables Hong Kong to provide medical services better than Mainland China in certain aspects, for example, precision medicine (targeted to make a more accurate diagnosis). According to some media reporting, as of Jul 2017, Hong Kong has approved 23 targeted therapy medicines in this aspect while Mainland China has only approved 10. This allows Hong Kong to provide better level of service in this aspect.

Also, the medical services in Hong Kong is up to international standards. We have two examples here.

Example 1: Heart transplant surgery. The 1-year and 5-year survival rate after surgery are standards used to judge the quality of the surgery. The survival rate after surgery in Hong Kong is higher than certain developed countries.

Example 2: Lung transplant surgery. The survival rate after surgery in Hong Kong is higher than certain developed countries.

Survival rate after heart transplant surgery

Survival rate after lung transplant surgery

Source: National Heart, Lung & Blood Institute (U.S.), The Hong Kong Society of Transplantation, Singapore Heart Foundation

Source: www.hkgolden50.org, Public Health Agency of Canada, SingHealth

Survival rate after heart transplant surgery 1 year 5 years

Hong Kong 85% 80%

U.S. 88% 75%

Singapore 80% 70%

Survival rate after lung transplant surgery 1 year 5 years

Hong Kong 100% 78%

U.S. 88% 54%

Canada 80% 60%

Singapore 76% 60%


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There are listed companies actively arranging medical tours for Mainlanders to travel to Hong Kong to enjoy its advantages in imported medicine supply and medical services, like UMH. We believe there will be more and more healthcare companies that will participate in this business.

Expanding clinic network to capture demand from Hong Kong retirees living in GBA cities

According to some media reporting, the Hong Kong government is considering allowing healthcare vouchers issued to elderly aged 65 and above (annual amount: HK$2,000 per person) to be used in GBA cities. As such, demand for healthcare services from Hong Kong retirees living in GBA cities will increase. We estimate there are c.20,000 Hong Kong retirees living in GBA cities currently. As infrastructure and transportation among GBA cities improve, we believe there will be more and more from Hong Kong retiring there.

For treatment of serious diseases, we estimate those retirees will still return to Hong Kong for that. But for treatment of less serious illnesses like colds and body checks, they may do them in Mainland, thus boosting demand for clinic services there.

Compared to mainland clinic companies, we believe that retirees are more confident to visit clinics operated by companies with a Hong Kong background. Therefore, Hong Kong companies are in a better position to capture this source of demand. UMP and C-Mer eye care are expanding their networks in Guangdong province to seize the opportunity. We estimate more Hong Kong healthcare companies will do so.

Other than demand from Hong Kong retirees, we estimate these clinics would also attract demand from the mainland population as medical resources in China are facing supply shortages. According to Frost & Sullivan, a patient in China spends on average 3 hours on an outpatient visit, in which the effective time dedicated to the patient’s diagnosis is only 8 minutes. To avoid a long waiting time and obtaining better quality medical services, we believe some mainland patients will seek help from clinics operated by Hong Kong companies.

Survival rate after heart transplant surgery 1 year 5 years

Hong Kong 85% 80%

U.S. 88% 75%

Singapore 80% 70%

Survival rate after lung transplant surgery 1 year 5 years

Hong Kong 100% 78%

U.S. 88% 54%

Canada 80% 60%

Singapore 76% 60%


Growth via premiumisation and volume

The Home appliance industry in China sustained healthy sales CAGR of 6.1% in 2010-2017, entirely driven by volume growth (7.2% volume CAGR). In the coming 5 years, the sector could see decent 5% sales CAGR, to be partly lifted by higher average selling price (ASP), and partially from volume CAGR of 3.5% (source: Euromonitor).

In recent years, we have already come across a rising trend of premiumisation. According to AVC (奥维云网), the proportion of sales of mid- to high-end products in key segments in 2014-2017 has expanded, such as refrigerators (+28.9ppts to 72.7% of total), washing machines (+18.1ppts to 73.9%), and air conditioners (+9.7ppts to 78.9%). As household affordability in China continues to grow in the medium-term, we expect the increase in ASP along with moderate volume growth to support expansion of the home appliance market.

In particular, smart appliances should have the highest growth potential. At this early stage of development, penetration of smart home appliances in China was only in the high-teens in 2017 among the key product categories, and there is ample room to expand. IHS Markit projects the average penetration rate of smart appliances for air conditioners, washing

Home appliances sector

Home appliance sales growth in PRC

Source: Euromonitor

Smart appliances leading way


79

machines and refrigerators to reach over 35% by 2021, and sees further scope to expand in the longer term. This could translate into an average volume CAGR of c.25% for smart appliances in 2017-21, comprising nearly 40% CAGR for refrigerators, over 20% CAGR for washing machines, and over 15% for air conditioners.

GBA to see better prospects

The GBA should hold even better growth potential. As we refer to the historical development of major economic hubs worldwide, such as the San Francisco Bay Area (SFBA), we specifically look at the wage level of staff working in the home furnishing & appliances stores that mainly earn commission-based salaries, and compare with the overall US market. On average, the income level in SFBA expanded at a faster 2ppt CAGR throughout the 3 decades during1970-2000 against the overall US market based on metropolitan areas. Accordingly, we expect the home furnishing & appliances sector in China’s GBA to enjoy a better performance relative to the national average in the mid- to long-term.

Anticipating a faster progress on GBA development in the next 5-10 years compared to SFBA’s progress, we project home appliance sales in the GBA to grow by about 7% CAGR during 2018-2022, which could be c.2ppt ahead of the sector’s national growth rate during the same period. Smart appliances in the region should also stage faster growth than China overall, at a sales CAGR of nearly 30% based on our projections.

Life cycle of smart home appliances

Source: IHS Markit (May 2018), DBS HK

Introduction Growth Maturity

2010-2020 2021-2030 2031-

Unit shipment

Production definition Cloud platform

Smartphone control Large data

Standard issue Low penetration

Conventional business Model

Online sales channels

Smart home Operation System

IoT automation and Services

Grow quickly New business model

Brisk competition Large players Better profit

Hardware makers Integrated service

Providers Higher industry entry

Barrier Low growth ratio

Dominators


Who could be the major beneficiaries in GBA?

The home appliance manufacturing sector (represented by “the manufacture of electrical machinery & equipment industry”) was ranked as the second largest manufacturing industry in Guangdong province, and contributed 10% of total industrial gross output value in the province as stated in the 2017 Guangdong Statistical Yearbook. Going forward, we believe the sector should sustain its importance. Among the nine GBA cities in Guangdong province, Foshan, Shenzhen, Zhongshan, Guangzhou, and Zhuhai altogether produced 83% of the province’s gross output value. Major Chinese home appliance players such as Midea, Gree, Hisense Kelon, etc. are all based in these cities. Riding on better GBA spending power ahead, we should see these companies enjoying rapid business expansion.

Home appliance sales growth in PRC

Note: Home furnishing & appliance stores include retail stores selling goods used for furnishing the home, such as furniture, domestic stoves, refrigerators, gas appliances and

other household electrical, floor coverings, draperies, glass and chinaware, etc.Source: US Bureau of Economic Analysis

CAGR 1970-1980 1980-1990 1990-2000

US (Metropolitan Portion) 8.9% 9.2% 6.4%

San Francisco-Oakland-Hayward, CA (Metropolitan Statistical Area)

10.9% 10.3% 8.5%


81

GBA electrical machinery and equipment industry gross output value

Source: Guangdong Statistical Yearbook 2017, Wind

Source: Guangdong Statistical Yearbook

CAGR 1970-1980 1980-1990 1990-2000

US (Metropolitan Portion) 8.9% 9.2% 6.4%

San Francisco-Oakland-Hayward, CA (Metropolitan Statistical Area)

10.9% 10.3% 8.5%

City "Industrial Gross Output Value above

Designated Size (RMB 100m)"

"Manufacture of Electrical Machinery

and Equipment Industry Gross Output

Value (RMB 100m)"

Industrial Gross Output Value Contribution

from Manufacture of Electrical Machinery

and Equipment Industry

Home Appliance Company Example & Remarks

Foshan 21,187 4,727 22% Midea (000333.CH), Hisense Kelon (000921.CH/921.HK), Macro (000533.CH), Vanward (002543.CH), Galanz

Shenzhen 27,292 2,329 9% Mainly electronic equipment manufacturers

Zhongshan 6,615 1,205 18% Vatti (002035.CH), Homa (002688.CH)

Guangzhou 18,907 1,147 6% Mainly electronic equipment manufacturers

Zhuhai 4,353 1,124 26% Gree (000651.CH)

Dongguan 14,692 1,033 7% Mainly electronic and optoelectronic equipment manufacturers

Huizhou 7,617 546 7% Mainly battery manufacturers

Jiangmen 4,274 429 10%

Zhaoqing 4,022 85 2%

GBA 9 cities 108,961 12,627 12%

Guangdong 133,768 13,613 10%

Production of major white goods in Guangdong province

Source: IHS Markit (May 2018), DBS HK


Notably, Midea should benefit the most among major peers based in the GBA. Aside from strong growth prospects of smart appliances, the group’s earlier acquisition of KUKA – a key manufacturer of industrial robots and solutions for factory automation – should also pay off. The overall market size of machinery robots in China is projected to grow by 22.7% CAGR, from US$2.2bn in 2018 to US$5.1bn in 2022, predominantly driven by volume growth (source: OCN). Coupled with synergies from KUKA in terms of further automation & technical advancement for Midea’s production systems and business operations, we should see plentiful opportunities for the group to expand market share in both the home appliance industry as well as automation & technology sector.

Source: OCN

Source: OCN

China machinery robot sales (by volume)

China machinery robot market (by sales value)


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While Haier is headquartered in Qingdao rather than the GBA region, the group stands tall among smart appliance leaders across China, with high demand for its products within GBA. The group is ahead of the industry, as Haier had rolled out China’s first magnetic central air-conditioner in 2006 for installation in the Shenzhen China Merchants Real Estate Project and saw good results. This year, the group will launch its air-cooling heat bump magnetic central air-conditioner in April, which also leads the industry as the only smart energy-saving solution (for connection and inter-operation) in the PRC, reinstating Haier’s leading position in research & development of smart appliances.

In view of the robust prospects in GBA, on Sep 30, Haier Group also unveiled plans to build the world’s most advanced air-ecology intelligence & manufacturing centre in Nansha, Guangzhou (GBA). Therefore, we believe Haier Group should have sufficient capacity to enjoy strong growth in medium to longer run.

Lingering trade war concerns?

At the moment, one of the hottest global topics include whether the trade war between China and the US would accelerate further in the near-term. While some in the market have started to pencil in the worst-case scenario, we note that total exports of Guangdong province to the US market was 23% in 2016, which is a much higher proportion that some would expect. Besides, given the bulky nature of home appliances, the sector is still selling more of its local-made products in the domestic or Asian markets relative to most other industries (e.g. textiles, apparels). Hence, we believe the home appliance sector in China should do well in the medium to longer run.

Note: Assume all Hong Kong re-exports to the US are directly come from Guangdong Source: Guangdong Statistical Yearbook, Hong Kong Census and Statistics Department

Guangdong exports: 23% channeled to the US (2016)


1. Market share held by various players in major home appliance segments in China

Key drivers 2018- 2022F sales CAGR

2018- 2030F sales CAGR


Stock ideas

Home appliances (Nationwide)


5.0% 4.9% Euromonitor; GDP & population growth of China

Leading players in China including Qingdao Haier (600690.CH), Haier Electronics (1169.HK), Midea (000333.CH), Gree (000651.CH)

Home appliances (Greater Bay Area)




Smart appliances (Greater Bay Area)

Improving affordability; consumption upgrade; rising young population







Industry CAGR (2018-2030F): nationwide vs. GBA

Refrigeration Appliance Market Share By Sales Volume (PRC)

Source: Euromonitor, IHS Markit, OCN, US Bureau of Economic Analysis, GDASS, YCWB, DBS HK

Source: Euromonitor


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2. Smart appliances: penetration by segment in China

Air Conditioner Market Share By Sales Volume (PRC)

Washing Machine Market Share By Sales Volume (PRC)

China domestic smart room air conditioner unit shipments forecast, 2018-2021

Source: OCN

Source: Guangdong Statistical Yearbook 2017, Wind

Source: Euromonitor* Little Swan is owned by Midea Group. Sanyo was acquired by

Panasonic in 2008 and then bought by Whirlpool in 2013.


FAI spurs economic growth

Guangdong’s economic growth is highly correlated to the fixed asset investment (FAI) trend. Total FAI in Guangdong grew at a CAGR of 14% from 2008-2017. This rapid expansion was attributable to the growing importance of the southern region and huge investment inflows to tap the robust outlook. As a result, Guangdong’s GDP expanded at a relatively strong pace in the past decade.

Out of the total FAI in Guangdong, basic government infrastructure investments cover a broad range of projects, including all aspects of transportation, amenities, and other government public projects undertaken by SOEs.

Within the GBA, total FAI reached Rmb2.8tr in 2017. The property, manufacturing, transportation and environmental segments accounted for the bulk of the total FAI, as shown in the following chart:

Infrastructure and construction

FAI-driven GDP growth in Guangdong

Source: CEIC, Wind


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Transportation links crucial to GBA’s future prospects

In the last decade, the Guangdong government had spent massive amounts on the transportation sector. The transport FAI has increased substantially over the years, as this is critical for economic development. From 2003-2018, transport FAI surged from around Rmb100bn to Rmb940bn.

FAI split in GBA (2018)

Guangdong transportation FAI projections (2003-2030F)

Source: Guangdong government, DBS HK

Source: Wind; DBS HK


Guangdong’s transportation network is well connected to Hong Kong and Macau. The super network, including mega projects such as the Zhuhai Macau Bridge and the High-Speed Railway Link from Hong Kong, is one of the important transportation investments in recent years. The upcoming transportation projects such as the Shenzhen Zhongshan Bridge and Humen Second Bridge should further facilitate inter-city connectivity in Guangdong. The goal is to achieve the “one-hour” living circle within the GBA by 2030. Given China’s expertise in construction of mega projects, achieving this goal is not an issue.

We also see other opportunities in the public transportation sector – metro and subway systems development. The proportion of passengers travelling on metro systems within the whole public transportation sector has been on the rise post the global financial crisis. In 2016, metro systems accounted for about 36% of the total passenger traffic. The Guangdong government has been focusing on metro and subway network development in the past ten years. The total operating length of the metro system in Guangzhou had increased from 135km in 2008 to 742.1km in 2017. Based on existing metro projects under construction, by 2022, Guangdong’s metro systems will operate a total of 955km, an approximate 40% increase from 2017’s level.

Share of passenger traffic on Guangdong’s metro system to public transportation sector

Guangdong passenger traffic and metro operating length projections (2003-2030F)

Source: Wind

Source: Wind; DBS HK


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While China is seeking greater social participation in infrastructure developments, the public-private partnership (PPP) model is becoming an important funding source for future infrastructure developments. Since the start of the PPP model, the total value of transportation projects under this had reached Rmb140bn as at end-July 2018.

Guangdong PPP investment values

GBA transportation network extension

Source: Wind

Source: The HK Economic Digest, DBS HK

Humen Pearl River Bridge (虎門大橋)

Hong Kong- Zhuhai - Macau Bridge

Shenzhen-Zhongshan Passage/Bridge (深中通道)(under construction)

(港珠澳大橋 )

Qianhai New District

(前海新區)

Foshan(佛山)

Jiangmen (江門)

Shunde(順德)

Zhongshan(中山)

Guangzhou(廣州 )

Dongguan(東莞)

Shenzhen(深圳)

Hong Kong (香港)

Macau (澳門)

GuangzhuWest Line (廣珠西線)

Outer Harbour Ferry Terminal

(外港碼頭)

Zhuhai (珠海)

Zhongshan-KaipingExpressway

(中開平高速)(under planning)

Werstern Coastal Expressway (西部沿海高速)

HK -MacauFerry Terminal

(港澳碼頭)

China HK City Ferry Terminal

(中港城碼頭)

Zhongshan Port Terminal

(中山港碼頭)Jiuzhou Port Terminal

(九洲港碼頭)Intercity MRT Cuiheng Station

(城軌翠亨站)

Intercity MRT Nanlang Station

(城軌南朗站)

Intercity MRT Zhongshan Station(城軌中山站)

Intercity MRT Guangzhou South Station(城軌廣州南站)

Intercity MRT Shunde Station (城軌順德站 )

Intercity MRT Jiangmen Station


The Guangdong government has mapped out a massive transportation network that comprises highways, bridges, railways, and metro systems, as shown in the chart below. For instance, the travelling time from Zhongshan to Shenzhen will take merely 30 minutes upon completion of the Shenzhen-Zhongshan Bridge in 2024. The Zhongshan-Kaiping Expressway which is in the planning stage, could also shorten the travelling time between Jiangmen and Shenzhen to one-and-a-half hours.

The development of mega infrastructure projects underpins the construction sector’s future robust outlook based on planned infrastructure projects and financial support from the PPP model. Major state-owned construction companies stand to benefit from infrastructure project developments, including China Communications Construction, China Railway Construction Co, China Railway Group, China State Construction Engineering, and China State Construction International.

Guangdong’s automobile gross industrial output

Source: CEIC


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Logistics sector is one of the key sectors that China has been trying to push through in the past decade. Logistics cost as a percentage of GDP in China has seen significant improvement from 23.7% in 1991 to 14.6% in 2017 (and 14.3% based on our estimate), but is still much higher than US’ and Japan’s 8-9%. Therefore, development of the logistics sector is key to improving cost effectiveness in China, and the sector is highly leveraged on production, consumption and export. GBA is one of the key logistics and warehouse markets in China. Guangdong province’s logistics cost as a percentage of GDP is slightly lower than China’s average but still has room to improve. Guangdong targets to reduce the ratio to around 14.5% by 2020 from 14.7%.

Key drivers

Logistics demand is largely from e-commerce and retail sales, third party logistics, manufacturing, and export. The former two are major growth drivers for modern logistics properties.

1. Online retail sales has plenty of room to grow

Guangdong’s online retail sales reached Rmb1.3trillion in 2017, higher than Alibaba’s homebase in Zhejiang province. Despite a slowdown in the growth rate, current online retail sales is still growing at double the speed of total retail sales growth in the region. Guangdong’s online retail sales as a percentage of total retail sales was 35% in 2017 (vs. 16% for China). Compared with Beijing’s 48%, Shanghai’s 47% and Zhejiang’s 42%, Guangdong’s online retail sales still has plenty of room to grow.

2. Third party logistics in Guangdong is growing at faster pace than peers

Third party logistics sector is growing at a fast pace along with e-commerce. It is also the main driver of demand for modern warehouse properties. Third-party logistics companies in GBA recorded higher annual revenue and growth rates than Shanghai, Zhejiang and Beijing.

3. Exports and manufacturing might be affected by trade war but still keeping pace with economic restructuring progress

Guangdong’s exports amounted to USD646m, up 8% y-o-y in 2017 following 7% y-o-y decline in 2016. Industrial value-added growth slowed down from 16.8% in 2010 to 7.2% in 2017. The region has been restructuring its economy and targets to enhance its services sector to focus on the higher value-added portion of the production value chain.

Logistics and warehouses


Modern logistics space forecast

Modern logistics space is the key bottleneck of e-commerce development as reported by e-commerce players. Constrained by supply in the market, Alibaba, JD, etc. are building their own warehouses to support their operations. Guangzhou, Foshan, Dongguan, and Shenzhen are key markets supplying modern logistics space.

Our data shows that existing modern warehouse supply (in GFA term) in Guangdong and Hong Kong amounted to 7.3m sm (or 4.5m sm in Guangdong), which translates into 0.11sm per capita (0.07sm per capita in Guangdong), which is significantly lower than US’s 1.17sm per capita and YRD’s 0.16sm per capita. Even in YRD, we continue to see supply shortage, evidenced by lowest vacant level and highest rental growth in the region. Therefore, we expect warehouse per capita in Guangdong to ramp up to at least the level in YRD, especially after improving connectivity in GBA.

We expect limited future supply in Hong Kong and the majority of supply will come from Guangdong province. Benchmarking YRD’s current space per capita and factoring population growth, Guangdong will need 15.5m sm of modern warehouse space in 2030, or 3.4x the existing space. Total GFA in Guangdong and Hong Kong will likely go up to 18.3m sm in 2030, vs. YRD’s existing level of 19.9m sm.

At present, Guangzhou, Dongguan, and Foshan are the current major gateways from Guangzhou to the provinces in central China including Hunan, Jiangxi, Hubei, etc due to their matured transportation networks. Along with the development of infrastructure in the region and lower land cost, we believe Zhaoqing and Zhongshan may have the highest growth in the warehouse market in the region.

Given land supply constraints, we believe the rentals has good growth potential. Rental growth of warehouses in the GBA was the among the highest compared to key cities at 4-5% y-o-y during 2013-2018. There is a significant price difference between East GBA and West GBA, which may continue.

The ability to provide nationwide or even a global warehouse network is the key competitive advantage in the warehouse sector. The assets under management of the top players is significantly larger than the second-tier players. After privatising SGX-listed Global Logistics Property (GLP), Vanke with its headquarters in Shenzhen, has been growing its warehouse business at full speed. Blogis, which is under Shenzhen Chiwan, also has its headquarters in Shenzhen. Guangzhou R&F has sizeable warehouse land in Guangzhou to develop into modern logistics facilities. SF Express, China’s largest 3PL company, is also headquartered in Shenzhen.

Logistics space per capita is lower in

Guangdong than YRD and much lower

than US

Major players in the warehouse sector

headquartered in GBA are Vanke, Blogis, Guangzhou R&F,

and Kerry


93

Retail sales, Guangdong province

Retail sales, Guangdong province

Guangdong online retail sales and growth

Source: Wind, DBS HK




Guangdong online retail sales as % of total retail sales

Revenue of third party logistics sector

Revenue growth of third party logistics sector





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Export comparison

Export growth comparison

Modern logistics space per capita



Source: Cushman & Wakefield, CBRE, Wind, DBS HK


Retail sales per square meter

Rental CAGR growth (2013-2017): YRD tops the list, followed by GBA

Manufacturing sector growth

Source: Cushman & Wakefield, CBRE, Wind, DBS HK


Source: CBRE, Wind, DBS HK


97

Difference in rentals between East and West GBA

Key logistics property market

Source: CBRE, Wind, DBS HK

Source:DBS

Hong Kong

Shenzhen

HuizhouDongguan

Guangzhou

G U A N G D O N G

Zhaoqing

Jiangmen

Macau

Foshan

Zhuhai

Zhongshan

C H I N A

Foshan, a satelite hub providing more warehouse spaces

Guangzhou, existing logistics centre and gateway to Hunan, Jiangxi, and

Hubei, future to Chongqing

Zhaoqing, Jiangmen and Zhongshan, emerging makets

Future gateway to Guangxi and Guizhou, further to Yunan and Sichuan

Shenzhen, high demand but limited land supply


Warehouse companies Chinese name Code (if applicable) Headquarters GFA (m sm)

GLP 普洛斯 NYSE: GLP Shanghai 31.2

Goodman 嘉民管理咨詢 ASX: GMG Australia 2.8

Blogis 寳灣物流 N/A Shenzhen 2.5

CNLP 中國物流資產控股 HKSE: 1589 HK Shanghai 2.4

ESR (E-Shang) 上海益商倉儲服務 N/A Shanghai 2.3

Cainiao 菜鳥物流 N/A Shenzhen 2.2

Mapletree 豐樹物流信托 SGX: M44U Singapore 2.2

Prologis 安博 NYSE: PLD Shanghai (HK HQ) 1.9

Vanke 万科 HKSE: 2202 HK / SZ: 000002 CH Shenzhen 1.5

Vipshop 唯品會 NYSE: VIPS Guangzhou 1.5

Major warehouse users and owners English name Headquarters Warehouse (mn sm)

京東物流 JD Logistics Beijing 6.33

蘇寧物流 Suning Nanjing 6

安得智聯科技 Annto Foshan 5.85

青島日日順 Qingdao 4.83

廈門象嶼 XMXYG Xiamen 3.22

招商局物流 China Merchat Logistics Shenzhen 1.51

中遠海運物流倉儲 COSCO Shipping Logistics Beijing 1.5

山東蓋世國際物流 Gaishi Group Jinan 1.5

嘉里大通物流 Kerry Logistics (636 HK) Hong Kong 1.5

深圳富泰通国际物流 Shenzhen 1.33

Company English name Stock code Headquarters

順豐控股 SF Express 002352 CH Shenzhen

韻達股份 Yunda Express 002120 CH Shanghai

申通快遞 STO Express 002468 CH Shanghai

中通快遞 ZTO Express ZTO US Shanghai

圓通速遞 YTO Express 600233 CH Shanghai

德邦股份 Deppon Logistics 603056 CH Shanghai

天天快遞 TTKD Express Nanjing

晟邦物流 Chengbang Logistics Nanjing

百世快遞 Best Express Hangzhou

京東物流 JD Logistics Beijing

中國郵政速遞物流 EMS Beijing

宅急送 ZJS Express Beijing

Major players

Major 3PL players

Source: Companies, DBS HK

Source: DBS HK


99

Strong correlation between tertiary or services industry’s GDP and occupied office spaceWe have run a linear regression on historical nominal GDP from the services industry against occupied Grade A office space for Shenzhen for the past 12 years, and observed strong correlation coefficient of 99%. We believe this trend will continue.

As discussed above, service industry’s contribution to GDP in GBA is still low when compared to global bay areas, as manufacturing remains a key industry cluster in GBA. This could reflect its lower GDP per capita vs. the three global bay areas. We expect key cities in GBA (especially Guangzhou and Shenzhen) to continue to experience industry upgrades after fast urbanisation over the past decades. Tertiary industry as a percentage of local GDP has risen by 0.9-1.3ppts in Guangzhou and Shenzhen each year in the past several years and we use this trend as a key assumption to forecast service industry’s local GDP contribution in 2030.

Linear regression between tertiary GDP and occupied Grade A office space: Shenzhen

Source: JLL, DBS HK

Office

Room for industry upgrade


Factors to support industry upgrades in GBA will include government support in the three Free Trade Zones (FTZ) in Guangdong and its plan to transform GBA into a hub similar to Silicon Valley, together with financial innovation, tax incentives, and talent immigration programmes.

After the first free trade zone (FTZ) in Shanghai in 2013, the central government approved a further three FTZs in Guangdong province in late-2014 - Nansha in Guangzhou, Qianhai/Shekou in Shenzhen and Hengqin in Zhuhai. The three FTZs aim to collaborate with the two special administrative regions in GBA in the fields of business ties, financial innovation, talent management and tax agreements. By the end of 2017 (or three years after establishment), the number of newly-registered companies in the three FTZs has exceeded 210k, according to Guangdong FTZ’s official website. The three FTZs have also attracted 9,639 foreign companies, with total foreign investments of US$13bn during 2015-2017.

Becoming China’s ‘Silicon Valley’

According to Deloitte’s report, there are 115 unicorns (privately held start-up companies that are valued at over US$1bn) in Asia, accounting for 46% of the global total. China was ranked second in terms of the number of unicorn companies (98), followed by India (10), Korea (3), Singapore (2), and Indonesia (1). In China, the unicorn companies are also concentrated in the three mega regions and tier 1 cities. We expect them to be the next generation corporations, which will be big GDP contributors and Grade-A office occupiers. Shenzhen is expected to be China’s tech hub, benefiting from China Manufacturing 2025 initiatives and government’s aim to enhance its global competitiveness.

According to official websites, 229 enterprises in GBA had signed for cross-border Rmb loans, with cumulated amount of cross-border loans withdrawn at Rmb42.9bn as at end-2017. We also expect gradual financial liberalisation, rise of Fintech, market connect (SZ-HK stock connect and bond connect, etc.) and more financial products (upcoming C-REITs) to continue to enable Shenzhen to become a financial hub.

Comparison of tertiary industry as % of GDP, 2017

Source: CBRE, CEIC, DBS HK

Three FTZs in Guangdong to

stimulate economic integration and attract

companies


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Eligible corporates and foreign talents (including those from Hong Kong, Macau, and Taiwan) could enjoy 15% corporate income tax or personal income tax rate in Qianhai.

Several municipal governments in GBA have launched various talent programmes over the past years. In addition, Shenzhen also initiated favourable personal income tax (15%, even lower than that in Hong Kong) scheme to attract overseas talents (including those from Hong Kong, Macau and Taiwan).

Given improving infrastructure in GBA and business ties inside the region, we expect the proportion of tertiary industry to GDP to accelerate in the key cities such as Guangzhou and Shenzhen, while manufacturing will be relocated to West GBA or outside GBA. As mentioned above, tertiary industry as a percentage of local GDP has risen by an average of 0.9ppt and 1.3ppts p.a. in Shenzhen and Guangzhou respecitvely over the past several years. We expect the ratio to accelerate to 1.3ppts for Shenzhen in the next decade while we expect Guangzhou to remain its historical trend. As such, we expect teritary industry contribution’s to local GDP to improve to 75.8% and 79.0% in Shenzhen and Guangzhou respectively. At the same time, we expect Shenzhen and Guangzhou to outpace Hong Kong in terms of tertiary industry’s contribution to GDP.

Demand for office space in core areas in Shanghai is still on the rise, driven by high-tech firms, domestic financial services, and professional services companies. Total Grade-A office stock in Shenzhen and Guangzhou stood at 6.4m sm and 5.3m sm respectively as at end of June 2018, still lower than international hub cities. We expect both cities to enjoy more demand for prime office areas from high-tech firms, domestic financial and professional service firms ahead.

Prime office stock and rental rate comparison, 2Q18

Source: JLL, DBS HKNote: rents are for CBD areas only, shown as net effective rents, in Rmb/sm/month. London stock is inclusive

of Grade B office. New York stock is Grade A for Manhattan

Expecting Shenzhen to accelerate services

industry development

Solid demand from industry upgrade


We have made an estimate of 2030 Grade-A office space in Guangzhou and Shenzhen in China, based on the regression relationship between historical occupied Grade-A office space and local tertiary GDP, as well as our forecast of 2030 tertiary GDP. For matured markets like Hong Kong, we used occupied Grade-A office space as a proportion of tertiary GDP in 2017 multiplied by our estimated 2030 tertiary GDP to forecast demand for 2030 office space. Based on our abovementioned regression model, we expect tertiary industries to occupy 19.8m sm and 11.9m sm of space in Shenzhen and Guangzhou respectively in 2030 (up 278% and 147% respectively from 2017 level). New supply will primarly come from Bao’an/Nanshan districts in Shenzhen and Pazhou/Nansha districts in Guangzhou. Meanwhile, we also expect a certain portion of supply coming from redevelopment of old factories or buildings in Futian/Bao’an/Longgang districts in Shenzhen and Tianhe/Haizhu/Baiyun districts in Guangzhou.

As shown from the chart above, rental rate in Guangzhou is much lower than international gateway cities and its peers in China and we expect the city to catch up with peers and enjoy higher rental rate growth over the next decade.

As Grade-A offices are mainly occupied by tertiary industry players, we use total office rental costs (occupied Grade-A office space multiplied by annual rents) divided by tertiary GDP as a proxy to gauge tertiary industry’s occupancy cost for each city. This ratio ranged from 0.6-1.2% for Guangzhou and Shenzhen in 2018, and was 1.0% for Singapore and 5.6% in Hong Kong. Also, this ratio edged up by an average of 0.07-0.08ppt per annum for both cities over the past decade and we have assumed that this trend will continue. Based on this, we expect tertiary industry’s occupancy cost to go up to 1.7-1.9% for both cities in 2030.

Occupied office space (or office demand), 2017 & 2030F

Source: JLL, DBS HK

Guangzhou to enjoy higher rental rate

growth


103

Then, we derived the total Grade-A office rental costs in 2030 for each city based on our forecast of 2030 tertiary industry’s occupancy cost ratio multiplied by forecast of 2030 tertiary GDP. Thereafter, we used total rental costs divided by 2030 forecast occupied Grade-A office to calculate our rental rate projection for 2030. As such, we expect Guangzhou to register a higher CAGR of 5% for Grade-A office rental rates in 2017-2030, vs. 2.8% in Shenzhen.

Tertiary industry’s occupancy cost forecast for Shenzhen

2030 rental forecast and CAGR growth

Source: JLL, CEIC, DBS HK



Foshan and Dongguan may also benefit from spillover demand from Guangzhou and Shenzhen, given geographical proximity. According to CBRE, the combined supply of prime office areas in the two cities amounted to around 2m sm in 2018. A number of domestic and foreign companies have moved their back offices or R&D departments to Foshan and Dongguan, such as Huawei, KPMG, HSBC, and Kuehne & Nagel. We expect this trend to continue, given much lower rents in both cities and improving connectivity between both cities with key hub cities like Guangzhou and Shenzhen.

Key players in the region

CR Land and Excellence Group are the major prime office developers in Shenzhen. The GFA of completed office space and those under construction (including wholly-owned and those for strata-title sales) is estimated to be 1.11m sm and 1.04m sm for CR Land and Excellence Group respectively in Shenzhen. CR Land is also a key landlord in Nanshan district, where will likely accommodate leading domestic and international enterprises. We also expect more urban renewal potential projects for CR Land in Shenzhen. Yuexiu Property is the major office players in Guangzhou, with GFA of completed office space and those under construction (including wholly-owned and those for strata-title sales) at 0.85m sm.

Office should be among the key beneficiaries of development in GBA, benefiting from industry upgrades and talent inflow into the region. Shenzhen will likely to see higher office demand and supply over the next decade, while rents in Guangzhou is likely to have higher growth potential. Among the listed developers, we expect CR Land and Yuexiu Property to be the key beneficiaries in this segment.

Range of prime office rents in key GBA cities



105

We expect some spill-over demand to flow to Foshan and Dongguan from hub cities in the region, but we do not expect these two cities to be a big competitor to key hub cities in terms of office space, as city competition under GBA plans will be minimised, given different positioning for individual cities and strategic planning to promote synergies between cities in the region.

Tertiary GDP and as % of GDP, 2017

Tertiary GDP and as % of GDP, 2030




Forecast for grade-A office demand in Guangzhou and Shenzhen

Forecast for grade-A office rental rate in 2030

Source: DBS HK

Source: DBS HK

Total GDP forecast in 2030

Forecasted Grade-A office rental rate in 2030

Total Grade-A office annual rents in 2017

Tertiary industry’s GDP in 2017

Tertiary industry’s occupancy cost in 2030

Tertiary industry’s GDP forecast in 2030

Forecasted total Grade-A office annual rents in 2030

Forecasted Grade-A office demand in 2030

Tertiary industry’s occupancy cost in 2017

Linear regression between

occupiedGrade-A office space and

tertiary GDP

based on historical pattern

Tertiary industry’s GDP contribution forecast in

2030, based on historical pattern and our adjustment on regional financial/high-

tech potentials

Tertiary industry’s GDP forecast in 2030

ForecastedGrade-A office demand in 2030


107

Industry overview

In GBA, the PRD has served as the base for technology and manufacturing development in China, and accounted for 84% of Guangdong Province’s GDP in 2017. Contribution from the industrial sector to the region’s GDP stood at 51% in 2017, above the national average of 41%.

Computer, communications and other electronic equipment manufacturing segment grew at a CAGR of 13% in 2006-2016. It is the largest sector, accounting for 23% of the industry GDP in Guangdong. Representative technology (hardware) companies include Huawei, ZTE and DJI. on expectations of favourable policy support, we expect hardware companies to shift towards higher value-added products. We forecast this segment to register 10% CAGR over 2018-2022F.

Telecommunication, Media & Technology (TMT)

Gross output of Communication Equipment, Computers and Other Electronic Equipment segment (2006-2016)

Source:National Development and Reform Commission, DBS HK


The information transmission, software and information technology services segment grew at a CAGR of 13.5% in 2006-2016. It is the fifth largest segment, and accounted for 7% of tertiary service GDP in Guangdong in 2016. Representative technology (internet) companies like Tencent and Kingdee are based in Shenzhen. We expect this segment to deliver 11% CAGR over 2018-2022F, thanks to more start-up cultivation as well as synergies generated between internet companies.

Guangdong industry GDP breakdown (2016)

Gross output of Information transmission, software and information technology services segment (2006-2016)




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Sector development under GBA initiatives

Trend #1: Technology focus

Innovation and Technology is one of the key focus areas of the GBA initiative. We expect a rising number of technology and internet companies in GBA, supported by government policies. GBA will also shift to focus on the services industry, which will drive up labour cost and other operating costs in general. We expect technology companies with high value-added products/services or profitability to stay in the region. These include leading or upstream companies in semi-conductors, telecom, big data, artificial intelligence, robotics, electric vehicles, medical, satellites, etc. In particular, for internet companies, the establishment of leading internet companies will favour start-up cultivation, due to clustering of potential business partners and talent supply.

Note that PRD accounted for 84% of Guangdong province’s GDP in 2017. Thus, the 13th Five-Year Plan for Guangdong province provides indicators for GBA development. The plan targets to increase: (1) knowledge-intensive service industry’s contribution to GDP from 16% in 2015 to 20% in 2020; (2) high-tech industrial production value-to-total industrial production value ratio from 40% in 2015 to 43% in 2020 (PRD: 50%+ in 2020); (3) the number of High and New Technology Enterprises from 11,105 in 2015 to 28,000 in 2020 (PRD: 14,000); and (4) the number of technology incubators from 399 in 2015 to 800 in 2020 (PRD: 600+).

Guangdong tertiary service GDP breakdown (2016)



1. Talent pool

There are talent policies such as subsidies and housing allowances for the technology sector in some cities in GBA. For example, in Shenzhen, the High Level Professional Programme is offered to successful applicants (such as members of Academy of Sciences or Engineering of China, as well as winner of the Highest Science and Technology Awards, etc.) in the form of millions in cash awards or sufficient housing allowance. Shenzhen Peacock Programme offers a combination of signing bonus and housing subsidies. Other cities in GBA such as Guangzhou, Dongguan and Foshan have also introduced similar talent introduction programmes. Other policies such as children’s education will also attract talent. Going forward, we expect to see more high-level talent inflow to GBA, increasing the talent pool available to companies.

We noticed that there is a high density of top global universities in the San Francisco Bay (3) and Tokyo Bay (2), which are significant bay areas after transformation into technology centres. In GBA, Hong Kong has five “top 100 universities” which would provide a long-term supply of talent. For example, DJI’s founder WANG Tao is a graduate of the Hong Kong University of Science and Technology, and Sense Time’s founder, LI Xu, graduated from The Chinese University of Hong Kong.

Looking forward, we expect rising commercialisation of innovation by high-tech enterprises though coordination with universities.

The 13th Five-Year Plan for Guangdong Province


Guangdong Province Pearl River Delta

2015 2020F 2020F

Research and development expenses as percentage of GDP

2.5% 2.8% 3.0%

Number of researchers per 1000 population 4.6 5.0 15.0+

Knowledge-intensive service industry 16.0% 20.0%

High-tech industrial production value to total industrial production value

40.2% 43.0% 50.0%+

Number of High and New Technology Enterprises

11,105 28,000 14,000

Technology incubator 399 800 600+


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2. Tax benefits or government grants

In China, enterprises whose research and development expenses as a percentage of revenue exceeds 3% are classified as High and New Technology Enterprises and are entitled to enjoy preferential tax rate of 15%, versus statutory income tax rate of 25%, according to State Tax Bureau. Moreover, local governments may also launch discretionary grants to encourage innovation projects or establish technology enterprises. We expect that GBA will strengthen the policies to provide a more favourable environment, such as increase the R&D expenses as a percentage of revenue requirement, and lower the effective tax rate for companies such as Kingdee, Tencent, BYD Electronic and ZTE in GBA.

As a reference, the 13th Five-Year Plan for Guangdong province that covers PRD has a target to grow the number of High and New Technology Enterprises from 11,105 in 2015 to 28,000 in 2020 (PRD: 14,000), and research and development expenses as percentage of GDP to rise from 2.5% to 2.8% in 2020 (PRD: 3.0% in 2020).

3. Private equity to support start-ups

Private equity and venture capital are critical to cultivate technology start-up companies. China is the second largest private equity/venture capital investment market in the world after the US. Although Guangdong province is the fourth largest private equity/venture capital investment market in China, the investment amount is far behind Beijing with a growth rate lower than that of Zhejiang and Shanghai. To meet the funding needs, the 13th Five-Year Plan for Guangdong province has a target that the number of private equity investment institutions should be 3,000+ with assets under management of Rmb1,500bn in 2020, and number of technology incubators to grow from 399 in 2015 to 800 in 2020 (PRD: 600+). The plan aims for the PRD to become one of the world’s leading start-up centres. We expect to see more investment funds attracted by the favourable policies and fast development of GBA. Hong Kong will also be a platform for IPO ultimately.

World’s top 100 universities

Source: QS University Ranking 2018, DBS HK

The world’ s top 100 universities

Populat ion (m)

Greater Bay Area 5 69.7

San Francisco Bay 3 8.8

New York Bay 3 20.2

Tokyo Bay 2 36.3


Case study 1

San Francisco Bay – from gold rush centre to technology centre, and as a junction of academia, enterprises and the U.S. government. In mid-1800s, San Francisco Bay had developed rich educational resources, which laid a solid foundation for technology institutions like University of California, Berkeley and Stanford University, and cultivated many Nobel Prize winners and leaders of giant technology companies. Other than the Fed policies on R&D protection, the California government launched programmes to secure funding of start-ups and career channels for college graduates. San Francisco initiated community benefit agreements in 2011 that 1.5% payroll tax was temporarily exempted for all new jobs created by companies which moved into Mid-Market. Companies that took advantage of the tax break included Twitter (TWTR US), Uber, Airbnb, etc. In the bay area, Silicon Valley and San Francisco are the largest venture capital investment markets in the US with 42% share in 2017. Nowadays many well-known technology companies including Google, Facebook (FB US), Twitter, Apple (AAPL US), Microsoft (MSFT US), Oracle (ORCL US), Uber, Airbnb and PayPal (PYPL US) are located in San Francisco Bay.

Trend #2: Shifting manufacturing companies with lower-value added to outer areas of Guangdong province

Guangdong province’s city planning serves a good reference for developments in GBA and surrounding areas. The planning encourages technology companies with lower valued-added to move to east, west, and north Guangdong (outside GBA , but within Guangdong province). These regions have per capita GDP of Rmb29.4k, Rmb36.8k, and Rmb28.0k

China’s top 5 VC/PE regions by investments (US$m)

Source: China Venture, DBS HK

Total VC/PE y-o-y PE VC

1H17 1H18 growth 1H18 1H18

Beijing 12,483 16,622 33.2% 12,627 29,249

Zhejiang 1,793 15,296 753.1% 3,231 18,527

Guangdong 1,582 4,864 207.5% 4,965 9,829

Jiangsu 1,567 2,900 85.1% 2,732 5,632

Shanghai 3,218 2,570 -20.1% 13,853 16,423

Total 25,278 53,486 111.6% 42,021 95,507


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respectively in 2015, far lower than PRD’s Rmb100.4k. The relocated downstream manufacturing facilities will continue to support the manufacturing industry with geographical proximity and lower labour cost which in return backs R&D and innovation in Greater Bay Area. We believe that technology companies and manufacturers will first step up production efficiency through automation and process enhancement, in order to maintain the profitability under rising operating cost. This will trigger new round of capex cycle for machineries and systems. In case that they are “encouraged” to relocate, funding support is required by the government or financial sector.

Shifting lower-value added manufacturers to outer Guangdong

Source: DBS HK

Hong Kong

Shenzhen

HuizhouDongguan

Guangzhou

G U A N G D O N G

Zhaoqing

Jiangmen

Macau

Foshan

Zhuhai

Zhongshan

C H I N A

West Guangdong

North Guangdong

East Guangdong


Case study 2

Tokyo Bay: from general industrial production to technology. In 1960s, Tokyo began to relocate general industrial production to Yokohama City and Kawasaki City, and focus on technology development. Now, Tokyo Bay comprises of 6 sub-bay areas with Chiba for energy import, Yokohama for end-product export, Kawasaki for raw material process, etc. University of Tokyo and Tokyo Institute of Technology also cultivate talents for technology development. Tokyo Bay is the high-end industrial production centre in the world, with many well-known technology companies, including Sony (6758 JT), Toshiba (6502 JT), Renesas (6723 JT), Taiyo Yuden (6976 JT), and SoftBank (9984 JT).

Trend #3: Data centre – the backbone of new technology and economic development

In GBA, we expect higher demand for data centres mainly driven by (1) establishment of new technology companies and rising economic activities; and (2) improving network connectivity leveraging on Hong Kong’s position as a global carrier hub. The increasing demand will be partly met by supply from revitalisation of manufacturing plants.

1. Technology and economic driven

Based on our study, the demand for data centres will be mainly driven by cloud and internet applications which are expected to grow by 50%+ and 20%+ p.a. respectively in the next three years. In the long term, demand for data centre services will also be driven by the Internet of Things (IoT), Artificial Intelligence (AI) and Virtual Reality (VR) applications.

In Guangdong, there are a number of policies promoting the development of cloud, big data and industrial internet. Examples are “Guangdong Province Action Plan for Promoting Big Data Development 2016-2020”《广东省促进大数据发展行动计划2016-2020》, “Guangdong Province Cloud Computing Development Plan (2014-2020)”《廣東省雲計算發展規劃(2014—2020年) 》 . Guangdong province has been ranked number one for Big Data development index in China. The cities within PRD form the majority of GBA to be chosen as the National Big Data Comprehensive Experimental Area (国家大数据综合试验区) according to “Construction of the National Big Data Comprehensive Experimental Zone in the Pearl River Delta”《建设珠江三角洲国家大数据综合试验区实施方案》.

Our study also finds that data centre demand is concentrated in a few of China’s top-tier DC cities where economic activities are robust and network resources are abundant. It is also highly correlated to GDP per capita. As cities in GBA develop high technology and high value-added industries, we expect economic activities to flourish and GDP per


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capita to increase. More enterprises will emerge to drive demand for data centres. We forecast the data centre market in GBA in terms of number of cabinets to grow at a CAGR of 7.7% for 2017-2022 and a CAGR of 6.5% for 2017-2030.

2. Hong Kong as a hub connecting GBA with the rest of the world

Hong Kong is a global carrier hub well connected with the rest of the world while China has limited international internet bandwidth. We expect data centre demand in GBA to further increase, driven by the improving connectivity between Hong Kong and GBA.

In China, there are four international submarine cable landing stations, located in Qingdao, Shanghai Nanhui, Shanghai Chongming and Shantou. Fuzhou and Xiamen also host two submarine cable landing stations connecting Taiwan. In Hong Kong, there are a total of eight submarine cable landing stations which allow Hong Kong to be a major connection point between China and other countries. The total international internet bandwidth (which is supported by submarine cable connections) only reached 6.8 Tbps in China while that in Hong Kong has achieved 9.2Tbps. Hong Kong is a major carrier hub in Asia with vast connections through submarine cable systems.

Chinese telecom operators are expanding the bandwidth connecting Hong Kong and other GBA areas. In April 2018, China Mobile built an optical fibre cable along the Hong Kong-Zhuhai-Macao Bridge. This was one of the initiatives to increase communication network connectivity in GBA. China Mobile now has five Guangdong-Hong Kong data transmission channels, namely Wenjindu, Luohu, Futian, Western Corridor and Hong Kong-Zhuhai-Macao Bridge, of which 12Tbps of bandwidth has been opened between Shenzhen and Hong Kong.

2016 Data centre capacity in operation (number of cabinets)

Source: MIIT, National Bureau of Statistics of China, DBS HK


Meanwhile, China Telecom also signed a contract with HGC to build a cross-border transmission system along the Hong Kong-Zhuhai-Macao Bridge. It aims at increasing the communication capability in the region to echo the GBA strategy. China Telecom has connected five ports in China with 10 telecom operators in Hong Kong and Macau, to offer cross boarder bandwidth of 17Tbps. This accounts for 60% of the total communication volume between China and Hong Kong & Macau.

Comparison of submarine cables between China and major countries in the world

International Internet Broadband Bandwidth in Tbps (2016)

China US Japan UK Singapore

Number of submarine cables 10 80 23 53 24

Total International bandwidth in 2017 (Gbps)

43,445 201,527 38,799 151,066 46,544

Per Capita international bandwidth (Mbps)

0.031 0.618 0.306 2.289 8.297

Source: CAICT, DBS HK

Source: China Academy for Information and Communications Technology (CAICT), DBS HK


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3. Increasing supply by converting manufacturing plants

As for the supply side, we expect manufacturers with low value-added products/services to move away from GBA. In Guangzhou and Shenzhen, there were c.130,000 data centre cabinets in 2016 according to Ministry of Industry and Information Technology (MIIT). It is also estimated that there will be a shortage of 36,000 cabinets in Guangzhou and Shenzhen in 2018. We expect old industrial buildings to be converted into data centres to meet rising demand, in view of the general supply shortage. The power supply for production plants and machineries can also be redeployed for data centre operations.

GBA will be more technology-driven with the gradual demise of traditional sectors. More private equity and venture capital inflow is expected to support the establishment and cultivation of new technology start-ups. Hong Kong also provides a platform for IPO. On the other hand, manufacturing companies with lower valued-added products/services will be relocated to other parts of Guangdong (outside GBA). We see the start of an investment cycle for machinery upgrade or relocation. Compared to San Francisco Bay and Tokyo Bay, GBA’s larger land area and talent base with higher GDP growth rate will enhance its potential to be the next innovation hub to make a global impact.


Challenges and issues to tackle on its way to successWhile the future for GBA is promising, there are also some challenges that need to be tackled and addressed. First of all, unlike Tokyo Bay, San Francisco Bay and New York Bay areas, the GBA area is operated under the “One Country Two System” political framework. Hong Kong, Macao and Guangdong (where the nine GBA cities are located) have their own currencies, immigration controls and tax systems. More importantly, each city government has its own agenda to drive growth. While there are breakthroughs lately to further open up tax equalization programs to encourage talent flow and offer each city a clear role to play, strong efforts from central, local governments and private sector still need to be made to ensure a successful GBA transformation.

Culture change and talent development are key issues to be addressed, too. It is well known that GBA has possessed some of the successful elements to drive growth: (1) the depth of the capital market in Hong Kong and Shenzhen, (2) strong presence of leading academic institutions in Hong Kong and Guangzhou, (3) development guidance from the state such as the GBA policy outline and China Manufacturing 2025 blueprint. Yet, there are also qualities absent: (1) a culture willingly to assume longer term risks for scientific projects. That explains the scarcity of venture capitalists , (2) an education system that promotes innovation. The mainland educational system is regimented and there is insufficient focus placed to promote creativity, innovation and critical thinking. While some of the issues have been addressed in the blueprint with Guangzhou to become a regional PE hub, there is still long way to go to promote an innovative culture.

Key challenges and risk


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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd (the “Company”). It is based on information obtained from sources believed to be reliable, but the Company does not make any representation or warranty, express or implied, as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions expressed are subject to change without notice. Any recommendation contained herein does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee.

The information herein is published for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate legal or financial advice. The Company, or any of its related companies or any individuals connected with the group accepts no liability for any direct, special, indirect, consequential, incidental damages or any other loss or damages of any kind arising from any use of the information herein (including any error, omission or misstatement herein, negligent or otherwise) or further communication thereof, even if the Company or any other person has been advised of the possibility thereof.

The information herein is not to be construed as an offer or a solicitation of an offer to buy or sell any securities, futures, options or other financial instruments or to provide any investment advice or services. The Company and its associates, their directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking or financial services for these companies.

The information herein is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation.


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