China Sector Analysis: Communication Services

The Communication Services sector was introduced in September 2018, following changes to the Global Industry Standard Classification System (GICS). The changes included renaming the ‘Telecommunications’ (Telecoms) sector as ‘Communication Services’ and broadening its exposure to include firms from the media, entertainment, and interactive media & services industries. Upon implementation, these changes established a Communication Services sector in equity markets globally, including China. This sector is one of the largest by market cap in China, and is widely viewed as a long-term, high-growth play that seems well-positioned to benefit from China’s trends of rising consumption and technological prowess.

In this piece, we take an in-depth look at the key stats, notable companies, and thematic tailwinds affecting this sector.

Key Stats

Communication Services ranks as the third largest GICS sector in China by market cap, which is similar to its fourth-place ranking in the US. The largest industry group within the sector, making up over 37%, is Interactive Media & Service. This industry group consists of many of the country’s most innovative companies, including those running search engines and social media networks. Overall, analysts anticipate that China’s Communication Services will deliver higher revenue growth versus its US counterpart, owing to several thematic tailwinds, including deepening internet penetration, rising wages & consumption, changing consumer habits to favor new technologies, and government support – all of which is discussed in greater detail later in this piece. Despite higher growth expectations, valuations appear cheaper than its US counterpart, across price-to-earnings, price-to-sales, and price-to-book metrics.

Key Stats on China Communication Services Sector

While nearly half of the sector is listed in the United States via ADRs, the recent inclusion of onshore China-listed A shares into MSCI’s indexes greatly broadened foreign investor access to the Communication Services sector in China. Over half of the sector is comprised of A shares, H Shares, P Chips and Red Chips.

American Depositary Receipts (ADRs) are stocks of Chinese companies listed on American stock exchanges. A shares are listed on domestic stock exchanges in China and have been historically difficult to access. P Chips are stocks of companies operating in China, listed in Hong Kong, and incorporated in the Cayman or British Virgin Islands. Red Chips are stocks of companies based in China, incorporated abroad, and listed in Hong Kong. H shares are stocks of companies incorporated in China and listed in Hong Kong.

Notable Companies

China’s Communication Services sector includes a host of innovative internet, social media, streaming, gaming, and telecom companies that have been driving the country’s efforts to become a global technology powerhouse. Given the size of China’s middle class, many of these companies have built among the largest user bases in the world and are often compared to similar well-known firms in the US. The table below shows the top 5 companies by market cap in the Communication Services sector and provides a look at their core businesses and comparable firms in the US.

For Top 10 Holdings of the fund please click here. Holdings are subject to change. Current and future holdings are subject to risk.

Thematic Tailwinds Powering Growth

The Communication Services sector seems well-positioned to benefit from a confluence of powerful tailwinds, happening at the consumer, government, and international levels.

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