Morningstar - Q3 2023 - 31

Dispatches
The scheme offers a range of financial products
that participants can choose from, including
term deposits, wealth-management products,
mutual funds, and insurance. As of February 2023,
there were 137 mutual funds, 19 insurance
products, 18 wealth-management products, and
465 deposit products available.
All Chinese citizens covered by public pensions
are eligible to participate in the private pension
program. Individuals can make voluntary
contributions by setting up a personal retirement
account through qualified commercial banks
and other financial institutions, such as brokerages,
third-party fund distributors, and insurance
companies. The annual contribution is capped at
RMB 12,000 (around $1,700). All contributions
made to the personal retirement account
are fully deductible from the participant's taxable
income for that year, and investors will be
taxed at a flat rate of 3% when withdrawing from
the account.
The primary benefit of contributing to the
personal retirement account is the tax deduction.
Because China has implemented a progressive
individual income tax system, the deductions
could also put taxpayers into a lower tax
bracket. Investors with high incomes stand to
benefit the most.
By Morningstar's analysis, based on a conservative
assumption of a 1.5% annualized investment
return (equivalent to the risk-free rate in China)
and an income level that remains the same until
retirement, those in the highest income
bracket have the potential to save RMB 118.3
million more through the tax-deferred personal
retirement account than they would in a normal
taxable account. However, those in the lowest
income tax bracket probably wouldn't see much
benefit from participating in the program.
Chloe Qu is a senior manager research analyst, China,
at Morningstar.
games, other key businesses under the Tencent
empire include WeChat, QQ, WePay, music
streaming, on-demand cloud, and a host of other
ventures. We see a tremendous amount of
untapped value in WeChat, as it continues to
increase monetization through advertising
and acts as a major gateway for other internet
services (payment, delivery, insurance, and
so on) looking to access WeChat's 1.2 billion-plus
users. There are ample advertising revenue
opportunities ahead, driven by rising advertising
inventory, higher ad loads, and improving
ad-targeting efficiency.
Wide-Moat Tencent
at a Wide Discount
At the end of June, Tencent 00700:HK traded at
less than half our HKD 704.00 fair value estimate
even as it is fueling growth on multiple fronts.
Over the past decade, Tencent has capitalized on
the industry shift toward mobile gaming. The
firm owns some of the world's most popular titles,
like Honor of Kings and PUBG Mobile. Games
are Tencent's primary monetization model; we
estimate more than 40% of the group's operating
income comes from this segment. Tencent
should continue to leverage its unrivaled access
to user data and financial capital to create
innovative, high-quality, and long-cycle games
with a mobile-first approach. Outside of
While games and advertising will remain Tencent's
core cash flow driver, investments in areas such
as cloud storage, business services, and enterprise
software also offer long-term value-creation
potential given the size of China's economy and
the prevalence of digital adoption. Tencent is also
an investment powerhouse. Once invested,
Tencent tends to add value through highlighting
investees' services on WeChat and other in-house
traffic platforms-reducing customer acquisition
costs while helping them scale rapidly. External
investments have generated an estimated internal
rate of return of above 20% over the past decade.
Tencent's wide moat is primarily based on network
effects around its massive user base, while
intangible assets, cost advantage, and switching
costs strengthen its competitive advantage.
Ivan Su is a senior equity analyst, China, at Morningstar.
Global Equity Returns Are Greater Before Being Translated Into U.S. Dollars
$25K
10
15
20
5
05/31/2008
05/31/2012
05/31/2016
Source: Morningstar Direct. Data from June 1, 2008, through May 31, 2023.
05/31/2023
Morningstar Global
Markets ex-US
Index GR EUR
22,884.31
Morningstar Global
Markets ex-US
Index GR USD
15,698.97
Currency leadership can also be cyclical.
Dollar dominance has diminished returns for
equities outside the U.S. when translated
into dollars. In euro terms, their performance has
been much better. There are good reasons
the dollar could stay ascendent and strong.
But the risk of dollar decline is worth
hedging. A portfolio should be prepared for
a range of scenarios.
31
https://www.morningstar.fr/fr/author/3032/chloe-qu.aspx https://www.morningstar.com/stocks/xhkg/00700/quote https://www.morningstar.com/authors/2179/ivan-su
Morningstar - Q3 2023

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