China cyber security: the tech stocks investors have overlooked

China’s tech sector has grown far faster than the Chinese cyber-security industry. Stimulus for the latter comes as much from a government policy push as external threats, exemplified in the US by ransomware attacks. This should give a boost to overlooked local cyber-security stocks.

Beijing’s new cyber-security plan requires key industries such as telecoms to spend at least a tenth of IT budgets on cyber security in the next two years. The same applies to government agencies and state-owned enterprises. Meanwhile, a new data security law creating a comprehensive legal framework for data usage comes into effect in September.

The push is part of a broader effort to tame the tech sector, which previously grew amid benign neglect. Denying spies access to Chinese data is likely to be a bigger driver than protecting the privacy of citizens. The rising cost of hacking to business is a further issue.

A government agency few had heard of until this month is leading the fight — painfully so for Didi Chuxing. The cyber space Administration of China ordered the ride-hailing giant to take its apps down from local online stores. That threatened future revenues just days after Didi’s initial public offering in New York.

This is a golden opportunity for the local cyber-security industry. The sector has long been overshadowed by glamorous consumer businesses. Stocks have steeply underperformed local social media and ecommerce giants. Shares in Venustech, one of the biggest Chinese security groups, have fallen a fifth in the past year despite gains in the benchmark CSI300 index.

As a result, its stock and that of rival Nsfocus Technologies now trade below 30 times forward earnings. That is less than half US peers such as Fortinet and Palo Alto Networks.

As Beijing hands over more power to its aggressive data watchdogs, local companies are likely to see higher costs from non-compliant systems. China accounts for only about 1 per cent of the world’s cyber-security service expenditure, according to research company EqualOcean. That figure is set to rise, a trend investors should expect to benefit from.

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