SINGAPORE--Asian tech firms make for poor long-term investment bets due to the highly competitive regional market, poor performance track records, and cost pressures from rising wages and intellectual property (IP) disputes.
This was the opinion of Stuart O'Gorman, director of technology equities at Henderson Global Investors. He said during a briefing held here on Thursday that the Asian tech sector used to have "bright spots" for investors, such as China's Internet market, but several factors have diminished the region's attractiveness.
Stiff competition in the Chinese Web scene, for example, with "everyone entering each other's businesses" has led to market saturation and similar products with no clear industry leader, he explained.
"Huge cost headwinds" is another reason given by O'Gorman for people to avoid investing in Asian tech companies. Rising wages in the region and lack of intellectual property rights, which then leads to higher costs due to having to pay royalties or being involved in lawsuits, were cited by him as the two main factors causing these companies to increase capital expenditure.
Taiwanese handset maker HTC is one example, he noted, saying that it had infringed on patents owned by Microsoft, Oracle, and Apple, and is now embroiled in several lawsuits.
Others manufacturers in areas such as liquid crystal display (LCD), PCs, feature phones, printers and other consumer electronics are all no longer doing well in today's competitive market too, the director pointed out.
For these reasons, O'Gorman reckoned long-term investors should look elsewhere to grow their wealth. "Most Asian technology stocks are like someone you date, but if you are looking for someone to marry, you should not buy them," he said.
There are exceptions, though. Samsung, he noted, is one Asian company that is doing well and dominating the handset market together with Apple at the moment, he acknowledged.
Flexibility, stability make tech a good bet
The technology industry in general, however, remains a good arena to invest in, the director pointed out. This is because the sector has the "cleanest" balance sheet compared to others, and has high cash balances and little debt, he explained.
Furthermore, the industry is increasingly driven by software and services companies, which have highly variable cost base, while the hardware manufacturers can rely on outsourcing to lower their fixed cost base, he noted. This means the IT sector is less capital-intensive, and thus more flexible, in the short- to medium-term, allowing it to react easier and faster in an economic downturn, he elaborated.
O'Gorman did point out that the industry is often viewed as "high risk" but this is due to the hype surrounding "hot" IPOs in niche sectors.
However, this view is wrong and the IT industry is not as cyclical as it seems. He backed up his assertion by noting that among software and services companies, there is revenue stability as much of it is derived from long-term maintenance and service contracts.
Identifying right investment targets
As for spotting a tech company worth investing in for the long-term, the director pointed out that that are a few areas to consider.
For one, the company must have growth potential and a strong product, he said. This means the company's product must solve a pressing challenge for customers, while its management team should be investing in the right growth areas, he added.
The company should have also established strong barriers to entry in areas such as having a strong brand that influences consumers, strong market valuation, and is distributed widely, he noted, citing Apple as an example.
O'Gorman also pointed out that companies in the e-commerce, online advertising, data growth, connectivity and paperless payment sector are "relatively safe" for investing because growth is expected in these areas and they will be able to attract and retain a substantial customer base.
Companies that provide products or services to "digital natives" are worth monitoring, too, as this consumer demographic offers strong growth potential for tech companies, he added.