17 October Asia / China

China & HK Semiconductors: Fund Positioning Analysis

92 Asia Ex-Japan Funds, AUM $52bn, 115 China A-Share Funds, AUM $57bn, 117 MSCI China Funds, AUM $44bn, 45 Greater China Funds, AUM $15bn

China Semiconductors

With US sanctions hitting Chinese domestic Semiconductor stocks this week, we analyse allocations in the China & HK Semiconductor Industry group among Asia Ex-Japan, MSCI China, China A-Share and Greater China actively managed equity funds. Without the distraction of Taiwan technology or HK listed internet stocks, China A-Share funds are the most heavily exposed, whilst Asia Ex-Japan and Greater China funds have curtailed investment in recent months. On a stock level, LONGi Green Energy Technology is the high conviction holding by quite a margin, whilst Will Semiconductors has started to see closures from a number of managers. On the whole though, China & HK Semiconductor stocks do not represent a significant risk for the majority of managers in our analysis.

Ownership Growth

Exposure to the China & HK Semiconductor sector has seen strong growth over the past 10-years. The chart below shows the average fund weights among China A-Share, MSCI China, Greater China and finally, Asia Ex-Japan active funds since 2012. As we might expect, allocations in the sector are correlated to how exposed each fund group is to the domestic China market, with A-Share investors holding a 4.27% weight versus Asia Ex-Japan on 0.52%.
This correlation is evident when it comes to outright ownership too. China & HK Semiconductors are owned by 96.5% of China A-Share funds but just 31.5% of Asia Ex-Japan funds. There has been a divergence in recent months, with both MSCI China and China A-Share funds at maximum ownership, whist the percentage of Greater China and Asia Ex-Japan funds invested has reversed from the highs.

Country/Industry Analysis

For non-Ashare investors, Hong Kong listed internet software/services and internet retail companies are among the dominant industry groups, and for Asia Ex-Japan and Greater China, Taiwan’s Semiconductor sector is a significant allocation. Only among A-Share investors do Semiconductors represent a key allocation as the 4th largest average weight, behind Electrical Products, Alcoholic Beverages and Banks.
Changes in Industry level average weights over the last 6-months show China & HK Semiconductor exposure falling across all fund groups. Alongside Taiwan Semiconductors and China & HK Banks, China & HK Semiconductors were among the larger declines over the period, offset by rising weights in China & HK Alcoholic Beverages, Internet Retail and Motor Vehicles.

Fund Holdings Analysis

The fund holdings picture highlights the differing convictions each fund group has towards China & HK Semiconductor stocks. Of the 31.5% of Asia Ex-Japan funds who have exposure, most hold under a 2% allocation, with C Worlwide Asia the largest holder on 3.58%. Over the last 6-months, closures have dominated, led by Baring Eastern Trust (-1.86%), BlackRock Asian Growth (-1.26%) and Prisma Asianavigator (-1.12%). In contrast, A-Share funds are more heavily exposed, topping out at 19.37% for the Great Wall Made in China fund, with a large cohort above 5% and HSBC China A-Share Equity opening new exposure.
The holdings distribution among MSCI China active funds is concentrated between 1%-4.5%, with a long tail to the upside led by JSS All China (13.48%) and China Southern Core Growth (12.76%). Most funds saw weights decrease over the last 6-months, with AB China Low Volatility’s opening position one of the few positives. For Greater China, most hold below 4%, with closures by Cathay China Domestic Demand (-8.91%) and HSBC Greater China Equity dragging allocations lower over the period.

Stock Holdings

On a stock level, there is a clear winner across all fund groups. LONGi Green Energy Technology is held by 25% of Asia Ex-Japan and Greater China managers, 60% of China A-Share funds and 47.9% of MSCI China active funds, head and shoulders above the competition. It also accounts for the majority of the larger high conviction positions among all managers. The HK listings of Xinyi Solar Holdings and Hua Hong Semiconductors are prevalent among non A-Share investors, whilst Will Semiconductor and StarPower Semiconductor are among the most widely held across all fund groups. Special mention for Tianjin Zhonghuan Semiconductor Co, not a widely held name by any stretch, but held in big size by JSS All China (9.44%), Mackenzie All China (9.06%), NN China A-Shares (11.46%) and Great Wall Made in China (8.5%).

Stock Activity

Stock activity between 03/31/2022 and 09/30/2022 has favoured LONGi Green Energy Technology, with 2.2% of Asia Ex-Japan, 6.8% of MSCI China and 6.02% of China A-Share funds adding exposure over the period, though investment levels did fall for Greater China managers. StarPower Semiconductor Ltd saw ownership levels increase among MSCI China and Greater China funds, with Cathay China Emerging Industries (+2.44%), Fuh-Hwa Greater China (2.60%) and UPAMC Greater China (+2.43%) adding exposure over the last 6-months. On the negative side, Will Semiconductors lost investment from -7.6% of MSCI China managers, -3.26% of Asia Ex-Japan managers and -2.6% of China A-Share funds.

Conclusions

Whilst China & HK Semiconductor allocations have seen good growth over the last decade, the rate of that growth has either slowed (MSCI China/China A-Shares) or started to reverse (Greater China/Asia Ex-Japan).

Of our 4 fund groups, China A-Share investors are the most exposed and currently sit at record allocations, whilst Asia Ex-Japan and Greater China funds have curtailed investment in recent months. On a stock level, the list of potential investments runs quite deep, with 71 stocks receiving some form of investment across the 4 fund groups. In reality though, exposure is concentrated in a dozen or so names, highlighted in the heatmap opposite.

In light of the recent sanctions by the US on the Chinese domestic Semiconductor industry, once again investors have to navigate the effect of political interference in the China equity market. At least, as opposed to the costly sanctions that effected Alibaba and Tencent last year, Semiconductors represent a much small allocation for the majority of investors across our 4 fund groups.

Click on the links below for the latest data reports on China & HK Semiconductor positioning among active Asia Ex-Japan, MSCI China, China A-Share and Greater China funds.

For more analysis, data or information on active investor positioning in your market, please get in touch with me on steven.holden@copleyfundresearch.com