Sector may see considerable upside potential on back of 5G gains, reforms

Chinese technology shares may continue to offer considerable upside potential next year, on the back of profit gains from 5G commercialization and deepening capital market reforms, analysts said.

"We expect policy support for technological industries will only strengthen next year. Technology sectors should still be a key focus for next year's A-share investment," said Zhang Xia, chief strategist with Shenzhen-based China Merchants Securities.

This policy stance was signaled by a recent high-profile meeting that stressed the need to improve scientific and technological capabilities and innovation capacity in 2020, Zhang said.

In terms of company fundamentals, the communications technologies sector has entered a new uptrend of its business cycle after China had granted 5G licenses to telecom carriers in June, according to Zhang.

The same may be the case for semiconductor and other tech sectors as 5G commercialization is fueling various new technologies and applications, he said.

Tech shares have been in the limelight recently on expectations of stronger profitability, better investor sentiment and accelerating capital market reforms, analysts said.

"This year marks an inflection point in China's capital market reforms, which had pressed the accelerator of fundamental reforms aimed at quality market development, instead of scale expansion," said Dong Dengxin, director of the Finance and Securities Institute at Wuhan University of Science and Technology.

Last month, the top securities regulator assigned an action plan to improve the fundamentals of listed firms, after allowing reverse mergers on the ChiNext board in October, which could encourage mergers and acquisitions involving listed firms in the innovative enterprise-heavy board.

This followed the debut of the sci-tech innovation board in July, which shows greater inclusiveness to tech firms than older peers and pilots the registration-based new share sales system.

The ChiNext index went up by 5.57 percent as of Wednesday since the beginning of the fourth quarter, outperforming a 0.66 percent increase in the benchmark Shanghai Composite Index over the same period.

On Wednesday, the ChiNext index went down by 0.91 percent to close at 1718.26 points, after ending at an eight-month high in the previous session, according to market tracker Wind Info.

Looking ahead, China's capital markets will become more supportive for tech firms to raise funds, as part of the nation's efforts to boost high-quality capital market development, Dong said.

One major goal of improving listed firm quality－the key to quality market development－is to enhance their research and development capacities and ensure that they are the cutting-edge players in their respective industries, he said.

Cheng Shi, managing director and chief economist at ICBC International Holdings, said sectors that lie on the intersection of advanced technology and consumption upgrade would rank among the most valuable investment opportunities in 2020.

"With the basis of 5G communications equipment, a new series of consumption scenarios and niche markets may emerge and focus on the areas of culture and entertainment, medical care, education, and housekeeping services," Cheng said.

Zhang said that virtual reality, augmented reality, as well as cloud gaming, computer and smartphones, may be the tech segments that have the highest possibility of strong market performance, given their shorter timeline to realize higher margins.