China’s getting wired, and investors are very excited about it. The country is already the world’s second-largest broadband market, and it’s expected to become the largest this year when it overtakes the US.
China’s IT sector is still catching up to the West. We’ve already had our tech boom, but China’s is only just beginning. Just look at the money that’s pouring into the sector – China spent US$46 billion on IT last year, a massive 16.4% increase from the year before. Around 200 million Chinese are now online – a sizeable market, but in a country of 1.3 billion, it’s a market that still has plenty of room to grow.
We can expect that growth to be rapid. This is a typical ‘catch up’ story – the technology already exists, having been pioneered elsewhere. It just needs to be rolled out to meet growing demand.
There’s a ready supply of skilled personnel, too, with 50,000 new software engineers entering the labour market each year. Less skilled, more labour-intensive processes can also be ramped up very easily thanks to China’s low labour costs.
Get ready for tech boom, China style!
All this makes for exciting times in Zhongguancun – Beijing’s answer to Silicon Valley. Some of this excitement is certainly misplaced, and has a definite whiff of our dot com boom about it. Unprofitable websites with dubious business models are hoovering up cash from excitable investors. I suspect these will end in tears, and my advice is to steer clear of this sort of thing.
Instead, look to China’s burgeoning SME sector, where I expect the real profits to be made. SME stands for small and medium enterprises, and it’s these that will be the driving force behind China’s technology boom. Until 1992 such private businesses were anathema to the Chinese government. The 14th Party Congress that year acknowledged for the first time their vital role in society, and support of SMEs became official policy in 1997.
Since then, China’s small and medium-sized businesses have flourished. They now account for 60% of China’s GDP, and employ 75% of the workforce. But this rapid growth has created a problem. In order to grow further, these businesses desperately need the right software.
They need the sort of business management solutions that small and medium Western companies take for granted – accounting software, payroll software and the like. This presents a great opportunity for the shrewd penny share investor.
SME spending on IT in China is slated to grow by 14% each year between now and 2010. And with our own economy looking less than rosy, now is the perfect time to buy into companies not exposed to UK or US markets.
Invest abroad – while keeping your money at home!
But don’t worry, that doesn’t mean going through the Shanghai phonebook to find a new broker. Because the company I’m recommending is listed right here in Britain, on London’s Alternative Investment Market (AIM). You can buy it, for pounds sterling, as easily as any other UK share.
I’ve taken a “picks and shovels” approach to my play on this sector. For those unfamiliar with the metaphor, it refers to those canny businessmen who made a fortune from the Californian gold rush not by striking gold, but by selling picks and shovels to prospectors. Similarly, we’ll seek our tech boom profits by investing in a “Silicon Valley” firm that’s supplying the much needed SME software.
The company I’m backing is like a Chinese version of Sage. They already supply proven, easy to use software to some of the biggest companies in China. Now they’re expanding into the all important SME sector, spreading their wings beyond Beijing and Shanghai to up-and-coming “second tier” cities like Guangzhou, Hangzhou, Chengdu and Wuhan.
This represents a great way to invest in a thriving industry, in one of the world’s fastest growing economies. If this one hits my price target we’ll be looking at a gain of at least 83% over the next year.
I’ll be bringing you the full story tomorrow, in a special edition of the Penny Sleuth. It should be with you around 5pm, so make sure you don’t miss it!
Regards,
Tom Bulford
for The Penny Sleuth
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