Artificial Intelligence (AI) is set to be a key driver of success in both developed and frontier markets, says John Malloy and James Johnstone, co-managers of the RWC emerging and frontier markets funds.
RWC’s emerging and frontier markets team, who joined RWC Partners in 2015 and now manages over $2.5bn for clients, believes AI will have a considerable impact on those companies best able to utilise it across the region.
Looking for longer-term opportunities, Malloy and Johnstone have identified a number of companies in emerging markets which are utilising AI to generate returns.
Below the duo, whose UCITS-structured RWC Global Emerging Markets Fund has delivered a return of 49% since December 2015 versus the MSCI Emerging Markets return of 33%1 – and raised $290m from investors – identify five companies who are taking full advantage of this trend.
Leveraging its vast amount of sophisticated, transaction-oriented consumer data, we believe Alibaba will be an ultimate beneficiary of AI development. AI allows the company to provide a more personalized experience for its customers; it can rapidly identify clusters and patterns in the information – such as similarities between customers, past purchasing behavior, credit checks and other common threads. Millions of transactions can be analyzed every day to target offers down to a single customer. With the strongest database, as well as the largest (by far) Cloud in China, Alibaba is gaining an upper hand among peers in the forthcoming AI competitive landscape. Trading at 23x 2018 earnings, Alibaba’s current valuation recognizes only its core e-commerce business, in our view. We believe Alibaba’s strategic investment in Cloud and AI could add an additional 20% upside (or roughly $60bn) to its current market cap.
Taiwan Semiconductor is the world’s largest and only fully-independent semiconductor foundry. Unlike leading competitors Intel and Samsung Electronics, Taiwan Semiconductor does not have both in-house products and technologies which compete with the chips designed by customers such as nVidia and Apple. Additionally, the firm has leap-frogged ahead of Intel in terms of technology leadership, offering the smallest cut die-sizes, by starting to tapeout 7nm projects for production in 2018. A nanometer (nm) is one-millionth of a millimeter: for perspective, a human hair is about 75,000nm! We model Taiwan Semiconductor continuing to compound earnings growth at 14%, ascribing some 30% upside to the shares over the next 12-18 months.
The other core area in chip capability and high performance computing is memory, including high-bandwidth memory. Hynix, with its pure-play memory focus, is our chosen portfolio holding for this theme, and is on track to achieve record levels of profits this year. Given the prohibitive costs of advance-node memory production, the industry has undergone a massive shakeout culminating in just three players from as many as 10 just a decade ago. As such, we are seeing unprecedented supply discipline (expressed in the strong contract and spot prices of DRAM) as well as shallower peak-to-trough cyclical volatility, which should help Hynix’s trading multiples re-rate back to the upper end of its historical range. While we continue to monitor the often intense ongoing debate on whether memory supply discipline can be sustainable, we view this memory super-cycle as one that will last into 2018. We see an additional upside of over 30% for the shares.
Another ‘enabler’ and potential winner in the upstream chip manufacturing arena is Win Semi in Taiwan. Win Semi is the largest independent gallium-arsenide (GaAs) foundry, with 60% global market share. Win Semi stands to benefit as 4G phones proliferate, and as we go further into 5G technologies. With the ongoing trend in increased GaAs foundry outsourcing, we believe Win Semi can generate industry leading growth. The company has strong relationships with key customers such as Murata, Broadcom and Skyworks. In addition, we also expect 3D sensing and laser image recognition as a potential new business (optical sensors – via Lumentum, the US based sensor and component manufacturer) to pick up traction starting next year. This is the key AI-related feature that has yet to reach mass-adoption. Despite its nascent stage, there is strong potential for this product to generate meaningful incremental upside for Win Semi’s growth rate in the medium term. We see at least 30% upside to shares with potential for upgrades to our estimates based on adoption of this technology.
Hikvision has been a portfolio holding for some time, and has proven to be a leader in the surveillance theme, as the world’s largest supplier of video surveillance products, commanding over 25% share of the growing Chinese market and 3% globally. In addition to surveillance cameras of all types, Hikvision is also heavily involved in facial-recognition analytics, surveillance drones and autonomous driving applications including autonomous parking warehouses. Our analysis suggests the company can continue to deliver over 25% earnings growth.
- As at 31 May 2017. Performance shown for the RWC Global Emerging Markets Fund USD B share class. Date of inception: 15 December 2015. Benchmark referenced is the MSCI Emerging Markets Index.