On the ground in Shenzhen and high-speed rail to Xiamen – day 3

The weather continues to be hot, humid, and unforgiving, but so is our commitment to on-the-ground research.

As we kick off Day 3, we’re squeezing in three more company meetings in Shenzhen before hopping on the high-speed rail to Xiamen — because nothing says dedication like sweating through your second shirt before your second (Luckin) coffee.

Why Xiamen? This coastal city in Fujian province is a key node in China’s export engine, home to a dense network of supply chain players and logistics hubs. It’s also a rising star in tech innovation and cross-strait trade, making it the perfect place to take the pulse of both China’s manufacturing resilience and its evolving consumer tech ambitions.

Our first meeting in Shenzhen today was with Luxshare, a key Apple supplier and a company that, at least on paper, sits squarely in the crosshairs of U.S. tariffs and tech decoupling. But management was calm and well-prepared — none of this was a surprise. In the short term, the impact is minimal: the 90-day suspension of tariffs, combined with Apple’s strategic shift to assemble most U.S.-bound iPhones in India, means Q2 guidance remains unchanged. Luxshare confirmed that from April onwards, the majority of iPhones destined for the U.S. are now assembled in India, with China handling non-U.S. orders. It’s a clever workaround that underscores how global supply chains have already adapted to geopolitical risk.

Looking further out, Luxshare expects the current “China +1” model for China’s export customers to evolve into a more fragmented “China + N” strategy, where production is spread across multiple countries. For Luxshare, it probably means accelerated global capex, especially in Southeast Asia and the auto segment, in the next couple of years. Combined with stranded assets in China, this development implies lower return on assets overall for many industries.  Over the long term, they believe supply chains will consolidate around a few large players who can afford to operate globally — and Luxshare intends to be one of them. Interestingly, while the company hasn’t seen major labor shifts in China, they noted a spike in labor costs in Vietnam, as exporters rushed to front-load orders during the tariff suspension. The broader takeaway? Chinese manufacturers have been quietly preparing for this moment for years, and while the road ahead is complex, they’re not scrambling — they’re executing.

Our second meeting of the day was with Envicool, a 20-year-old thermal management company that’s quietly become a leader in data center and EV cooling solutions. Founded by veterans from Emerson and Huawei, Envicool thrives in one of the most brutally competitive sectors in China — where any innovation is copied within six months, and survival depends on relentless R&D. That pressure has forged a company that not only delivers cutting-edge cooling tech but does so at prices that are hard to match globally. In fact, management told us that even with 200% tariffs, their products would still be cheaper than U.S. competitors — if it can be verified later on, it’d be a testament to China’s manufacturing efficiency and Envicool’s cost discipline.

While domestic competition keeps them sharp, the real growth opportunity lies overseas. Envicool is already gaining traction in Southeast Asia, particularly Malaysia, and sees the U.S. as a long-term target — especially in AI data centers, where thermal solutions are more customized and margins are higher. Their cost advantage is amplified by the fact that the U.S. thermal market is largely closed and expensive, with little competition. Envicool’s strategy is to pair low-cost, high-performance hardware with a growing local service presence abroad. It’s a compelling example of how China’s industrial competitiveness is increasingly being exported, not just in volume, but in value-added innovation.

Our final Shenzhen meeting was with Shenzhen KTC, a long-time ODM manufacturer best known for producing smart TVs and display solutions for global retailers. With 86% of its revenue coming from exports, KTC has cleverly navigated U.S. tariffs by shipping components to Mexico for final assembly, qualifying for lower tariffs and keeping costs low for its customers. While the company offers a range of specialized products — from gaming monitors to smart communication devices — we left the meeting still unsure of its long-term competitive moat. But perhaps that’s the point: China’s industrial landscape is so vast and varied that not every business model needs to be flashy to be profitable.

Life on the road during our China research trip never really stops — it just shifts gears. After a packed day of meetings in Shenzhen, we boarded the high-speed rail to Xiamen, a welcome pause and a surprisingly comfortable way to take stock of everything we’ve seen and heard over the past two days. There’s something about cruising at 300 km/h that helps you process supply chain fragmentation, AI-driven cooling systems, and the economics of egg tarts.

Speaking of which, no train ride would be complete without the team’s long-standing tradition of sampling the latest Chinese snack brands (today’s winner: Weilong hot and spicy konjac. I’m not a fan, but I was outvoted) and, of course, KFC egg tarts — a staple of our fieldwork and a nod to Yum China, a listed stock we keep a close eye on. It’s hard work, but it’s also essential work — part of the grassroots, ground-level research that underpins our investment process. Next stop: Xiamen, where we’ll dive into China’s export pulse and innovation frontier.

Best,
John Lin
Chief Investment Officer – China Equities
AllianceBernstein

Click here to read about Day 2.
Click here to read about Day 4.

The views expressed / information contained here may change at any time after the date of this email. This email is provided by AllianceBernstein Australia Limited (ABN 53 095 022 718 AFSL 230 698) (“ABAL”). This email does not constitute “personal advice,” as defined in the Corporations Act 2001. This email content has been provided to you for use in a private and in confidence to discuss a potential or existing investment advisory relationship. This email is not an advertisement, is not intended for retail or public use or distribution beyond our private meeting and must be returned to us immediately upon demand.

References to specific securities are presented to illustrate the application of our investment philosophy and portfolio construction process and are not to be considered recommendations by ABAL. The specific securities identified and described in this presentation do not represent all of the securities purchased, sold or recommended for the portfolio, and it should not be assumed that investments in the securities identified were or will be profitable.  The views of any specific securities identified and described in this document are those of a specific portfolio management team and portfolio strategy at a point in time and which may differ from the views of other portfolio managers managing other strategies.

No reproduction of the materials in this email may be made without the express written permission of ABAL. This information is provided for persons in Australia only and is not being provided for the use of any person who is in any other country.

For wholesale use only. Not for inspection by, distribution or quotation to, the general public.