Russell Index Finally Discovers Chinese Tech Stocks, As More U.S. Investors Pile In
Lookout world, here come the Chinese tech companies. FTSE Russell finally discovered them. That means major mutual funds and ETFs will now hold U.S. listed China tech stocks. Other than China becoming a major lender to emerging markets, China’s tech story is the one story investors are still learning about. We are maybe in the second inning.
The Hang Seng Index in Hong Kong is up a 25% this year, as measured by the iShares MSCI Hong Kong. The China A-Shares (ASHR) fund, which tracks listed shares in Shanghai and Shenzhen, is up 23.3%. The iShares FTSE China (FXI) is up 26%. MSCI China (MCHI) is up 42.6%, beating the emerging markets benchmark. But no one is crushing it like Chinese tech funds. The KraneShares China Internet Fund (KWEB) is up 63.42% this year even as the ChiNext, the Chinese Nasdaq, is down.
“ChiNext is really within the Shanghai and Shenzhen equity market and we hold U.S. listed Chinese stocks,” explains Brendan Ahern, chief investment officer at KraneShares in New York. ChiNext is more small and micro caps and KWEB holds mega large and mid-cap stocks like Alibaba ($436 billion market cap) and Cheetah Mobile ($1.2 billion). Plus ChiNext has a high valuation, with the index trading at 53.32 times earnings. KWEB’s price-to-earnings multiple is currently 39. VanEck’s ChiNext ETF (CNXT) tracks the Chinese companies listed on ChiNext but is a tiny representation of that index. It’s much cheaper, at around 30 times.
“This uptrend in China tech stocks has been under the radar, but it’s not news for us,” says Ahern. “The FANG stocks of China have been the train engine for the domestic consumption story. You add that to the come back in emerging market equities this year and you have investors rebalancing their portfolios, just starting to discover China tech.”
Individual Chinese tech stocks are a total gamble, as is the norm in China for anything new and exciting. Mid-cap company 21Vianet Group (VNET) jumped 19.63% on heavy volume on Tuesday, and fell 14% on Wednesday.
Social media platform YY Inc (YY) rose 8.97% yesterday and another 1% on Wednesday on rumors that it wants to spin off its video streaming service in a Hong Kong IPO. The stock is up 116% this year and 653% over five years in dollar terms. That’s better than Google, Apple and Facebook. Only Netflix, the N in the U.S. FANG stocks, has done better (like almost two times better).
The FTSE Russell Index added China large cap tech stocks to the popular benchmark on Sept 19, finally including Baidu and Alibaba. There will be a four tranche inclusion of tech stocks in those indices holding China, with the first tranche occurring last week, and the next one in December. The last two will take place in March and June.
This means that all the FTSE Russell Indices that have China equities in them will now add China tech stocks. Funds that track those indices will have to buy those stocks. The $299 billion Vanguard Total International Stock Index (VGTSX) mutual fund will be buying top China tech names for the next 9 months, for instance. Within the universe of the large cap China tech firms, Vanguard Emerging Markets (VWO) ETF only holds Tencent because the fund’s focus is on Hong Kong listed companies and does not buy Chinese stocks listed here.
Tencent has made Vanguard some nice returns.
When Tencent listed in Hong Kong in June 2004, its shares were offered at HK$3.70, or around $0.50 in today’s terms. Following a 5-for-1 split over the years, Tencent shares are trading at HK$338, or $43 a share, as of Sept. 27.
Not wanting to miss out on China’s honest-to-God tech boom, Wells Fargo initiated coverage on Alibaba, JD.com and Baidu with an “outperform” rating on Wednesday. All three companies have put their founders Jack Ma ((BA)(BA)), Liu Qiangdong (JD) and Robin Li (BIDU) on the Fintech Zoom billionaire list.
See: Sorry Haters, Your China Hard Landing Story Is A Fail — Fintech Zoom
China Economic Transition Under Way; Hard Landing Spared Again — Fintech Zoom
Are China Tech Stocks Better Than FANG? — CNBC
Take a look inside the KraneShares China Internet Fund at Morningstar.
The market’s little acronym for Chinese tech stocks is (BA)T: Baidu, Alibaba and Tencent. It should be more like (BA)TS at the very least, including the $8 billion Sina Corp, whose stock price is up 85% this year. It trades on the Nasdaq.
Alibaba, one of the world’s largest e-commerce companies, and Tencent, an online gaming company and WeChat operator (China’s Whatsapp with 900 million users), have left their smaller counterpart, Baidu, lagging in the last two to three years. Baidu, the country’s Google, has had less success with its new business initiatives to date and was hard-hit by a medical advertising scandal. As a result, Baidu has underperformed both of these tech titans over the last 12 months by a ratio of about two-to-one.
Despite that, sales are rising for China’s tech titans.
Online retail sales on Singles Day — held each year on Nov. 11 — is bigger than Cyber Monday. Alibaba reported $17.8 billion of sales last year on that day alone compared to Cyber Monday’s $3.5 billion.
The Chinese are increased logged in and paying for goods and services via mobile devices. Total mobile payments from third-party providers in China last year hit a whopping $5.5 trillion, much larger than the U.S., which still has a culture of mall shopping. To put that into perspective, more Chinese consumers bought goods on line than the entire Brazilian and Russian economies combined.
From ordering a latte at Starbucks to requesting a ride with China’s Uber copy-cat, Didi, the tech economy in booming in China.
See: Five Charts Explain The Rise Of China Tech — Schroders
China’s annual consumption is expected to grow from $4.4 trillion in 2016 to $9.7 trillion by 2030, according to Morgan Stanley economists. Smaller cities are growing. Tech’s reach is no longer just Guangzhou, Shanghai, Shenzhen and Beijing.
Companies are also investing in the future, says Toby Hudson, a fund manager with Schroders in London.
Alibaba is investing in warehousing and logistics for e-commerce. Tencent is investing in gaming apps. Both have made significant investments overseas and are opening offices in Asia and Russia. Like Apple, both of these companies have huge cash reserves on their balance sheets, allowing them to acquire or take strategic stakes in emerging businesses in other geographies.
One new battleground is Southeast Asia, where the opportunities of the online economy in countries such as Singapore and Indonesia are spurring a flurry of deals, most notably Alibaba’s acquisition of leading e-commerce platform Lazada.
“This opens a whole new leg of growth for the Chinese companies as the internet, payments and logistics infrastructure catches up in other emerging economies,” says Hudson. “It’s allowing (China) e-commerce penetration to rise more rapidly”