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U.S. investors are very familiar with the FANG stocks – Facebook (NASDAQ: FB), Amazon.com (NASDAQ: AMZN), Netflix (NASDAQ: NFLX) and Google, which now goes by the name Alphabet (NASDAQ: GOOGL).
But many investors are unaware of the various Chinese iterations of FANG. These include Chinese technology stocks traded here in the U.S. One iteration is the BANTs – Baidu (NASDAQ: BIDU), Alibaba Group (NYSE: BABA), NetEase (NASDAQ: NTES) and Tencent Holdings (OTC: TCEHY).
Other popular China tech stocks include JD.com (NASDAQ: JD), Ctrip.com (NASDAQ: CTRP) and Sina (NASDAQ: SINA).
The common theme among these Chinese tech players is that they are growing rapidly thanks to both soaring demand from Chinese consumers and backing from the Chinese government.
High-Tech China
When people think of the Chinese government and technology, thoughts of the “Great Firewall of China” or Internet censorship come to mind.
But if your analysis doesn’t go any deeper than that, you are missing out on a world of opportunity. China’s “services” economy is far outpacing the old industrial economy, as these charts from the Financial Times show:
Source: Financial Times
The goal of President Xi Jinping is to have, as Bloomberg calls it, a “China dominated by high-value technology companies.”
That is moving closer to reality in stock market terms thanks to an upcoming move by benchmark index provider MSCI.
MSCI Reshuffling
MSCI is adding 14 U.S.-listed Chinese companies, including those mentioned above, into the MSCI Emerging Markets Index, the MSCI China Index and other indexes that include China.
The first stage of MSCI’s move was implemented in November. The second and final stage will occur next month.
Goldman Sachs estimated that MSCI’s move alone would push $78 billion into these U.S.-listed Chinese tech stocks. That was a quarter of the market capitalization of these stocks in November. Macquarie Group had an even higher estimate for money flow, at nearly $100 billion.
The index move will only add to the popularity of these stocks. Chinese corporations now account for 83% of emerging-market funds’ Internet holdings. And technology stocks overall, as of March, now account for 20.6% of holdings in emerging-market funds’ portfolios.
Nearly 80% of these funds now hold at least one of the BANT stocks.
What the Future Holds
I fully expect the Chinese tech stocks to continue moving up in price.
First, because of the continuing fears on Wall Street over China, these stocks are cheap on a relative basis. On a one-year forward earnings basis, Tencent is trading at 25 times earnings, Alibaba at 23 times and Baidu at 21 times.
That’s much cheaper than many of their American counterparts – especially when one considers these companies are expected to grow earnings by 25%-30% annually.
The reason for the fast growth was revealed by Richard Sneller, head of emerging-market equities at Baillie Gifford. He told the Financial Times, “The speed with which young consumers are adapting to technological change, in areas such as e-commerce and online shopping, is much faster than in the United States.” And let’s not forget how much larger China’s population is than the U.S.
My personal favorites among the Chinese tech stocks are Tencent, Alibaba and Ctrip.com. Alibaba and Ctrip.com are the respective leaders in China for e-commerce and online travel bookings.
Some of you may be unfamiliar with Tencent since it trades over the counter. The company is China’s largest and most used Internet service portal. But it is so much more. It is also an advertising, media and entertainment business. Its instant messaging service QQ has more than 850 million active users. Its WeChat messaging app has over 650 million active users. It is also battling U.S. tech giants for the latest advancements in chatbots.
An interesting side note is that emerging-market Internet and media group Naspers (OTC: NPSNY) owns about 34% of Tencent. Naspers is headquartered in South Africa.
An easy way for investors to capture the broad array of China’s Internet-related companies is through an exchange-traded fund. The KraneShares CSI China Internet ETF (NASDAQ: KWEB) includes the BANTs and all the rest of China’s tech stars. The largest positions in this fund are Tencent, Alibaba, Baidu, Ctrip.com and JD.com.
Even when (not if) Chinese stocks swoon again, I plan to continue building a position in KWEB.
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