It doesn’t make sense.
China has four times the population of the U.S., a fast-growing middle class and a huge tech sector.
These China Tech stocks have a much bigger market potential.
Yet is now cheaper than their U.S. counterparts?
Putting dividend growers aside, if you don’t own Chinese Tech stocks now, I’d say it’s a great time to be buying them.
But before I tell you what’s interesting, let me share why the whole of China Tech is down 33% from its all-time high.
(And this is a bigger drop than the S&P 500 — during the COVID pandemic — crash back in March 2020).
As usual, the stock market has emotions.
Sometimes, it’s happy. Prices go up.
Sometimes, it’s scared. Prices go down.
Now it’s going crazy. Crazily scared.
For the first time, China Tech stocks are experiencing the single, largest sell-off since 2018. In fact, US$1 trillion worth of China Tech’s market capitalization (63 tech ADR and HK-listed stocks) got wiped off.
Market capitalization is the total value of a company’s entire shares combined.
In this case, market capitalization is the total value of all China Tech shares combined.
Imagine: China Tech stocks’ US$1 trillion sell-off is like the entire collapse of Facebook’s market capitalization.
Why is the market scared?
First, China wants to stop Chinese companies from listing in the U.S.
Because China is afraid U.S. can access to China’s user data once Chinese companies list in the U.S.
Security issues and politics.
For example, China made an example of Didi Group’s IPO. It even stopped Didi from registering new users after China’s biggest hailing cab service IPO-ed.
Didi shares sunk 20% since early July 2021.
Second, and more important is this: China continues to clamp down on China Tech companies’ monopolistic behaviour. Regulations.
At this point, the market is throwing all fundamentals out of the window.
That’s why, you’re seeing a “sell first, talk later” market moment.
Anyway, this is not the first time China has tried to regulate monopolistic behaviour or have a fight with the U.S.
In fact, China has always controlled industries with an iron fist.
But stock markets continue to go up.
Think about it.
In 2013, China fined CNY669 million (US$100 million) on six formula milk companies on price monopoly.
In 2014, China fined 12 Japanese companies including Mitsubishi on price monopoly of auto parts.
In 2018, China stocks got hit in the U.S. China trade war.
Yet stocks continued to make all-time highs.
China’s “anti-corruption” campaign? Done. Started 10 years ago.
Today, China wants to make sure China Tech companies “behave”.
I find this a rare opportunity to buy some of the fastest-growing Chinese internet companies at bargain prices.
And this whole anti-trust clamp down is delaying the growth potential of many China Tech companies.
Here’s the thing.
China’s digital economy already represents 40% of its GDP. Much higher than 15% back in 2005.
China is not going to force a collapse of these profitable, fast-growing tech businesses.
But what China wants to do is make sure these companies don’t abuse their monopoly status.
That’s why Ant IPO got called off.
I think it’s to make sure everyone plays a fair game.
But that also means weaker China Tech companies will get weeded out.
Only the strongest China Tech companies survive.
Even if I’m concerned with the U.S./China conflict, here’s the thing.
Chinese internet companies are domestics businesses with little U.S. exposure.
If there’s a huge U.S./China fight, it will have little profit impact on these Chinese Tech companies listed in the U.S.
Even Charlie Munger, long-time partner of Warren Buffett also started buying China Tech.
Dividend growers aside (for now), here’s what I believe some interesting names to buy.
China Tech Stock #1: Buying the Google of China
This is one of the earliest internet companies in China. In fact, I call it the Google of China.
Baidu Inc (HKSE:9888) has built a robust, dominating search engine.
According to Big Data Research, Baidu takes up 70% market share in China’s search engine provider (followed by Sogou 10%and Shenma 8%).
What’s interesting about Baidu is it has built up a “network effect”.
A network effect is this: The more people use Baidu’s platform to search for stuff online, the more Baidu can collect and analyze these data. And Baidu improves its search engine capabilities.
This allows people to receive better ‘search’ results when finding online information.
More people will stick to Baidu this way. This allows the internet giant to grow bigger and bigger.
That’s not all.
Baidu is also making sure mobile users get access to Baidu’s search engine.
And mobile usage has become a huge part of China’s population.
In fact, Mobile Baidu Search and Baidu Map are both ranked top in their own niches — monthly active users of 544 million and 640 million users respectively.
These are as big as ASEAN’s entire population.
Baidu’s powerful search engine allowed it to grow revenues from CNY14.5 billion in 2011 to CNY107 billion in 2020.
And this tech giant produced free cash flow of CNY12 billion per year.
Baidu has a market cap of HK$504 billion. Share’s down 29% since March 2021.
China Tech Stock #2: How to Own China’s ‘Group-Buy’ Online Empire
Who doesn’t love a good discount when they buy stuff online?
Enter the power of “group buys”.
Group buys are huge in China.
And this is how it works — Think about an app that lets you buy and collect your stuff from a nearby location. That’s not all.
You can buy almost everything — from food, booking hotels, flights, taxis and buying daily essentials.
Then simply collecting them from a nearby “community leader” that could be a convenience store, or the leader’s house.
Like a tribe hunting for discounts together.
This is what Meituan (HKSE:3690) exactly does.
Meituan is China’s third most valuable internet company at HK$1.7 trillion.
Only behind Tencent Holdings and Alibaba Group.
Why is Meituan so powerful?
China is big, and Meituan makes it easier and cheaper for people to buy their stuff, book public transports and make restaurant reservations. All without having to walk out of the house.
And by helping people organize their purchases into group buys, it’s easier to get people to join Meituan’s community. This saves Meituan tons of money “acquiring customers”.
It also saves Meituan on spending too much money on delivery services. Just send the products to a central location for collection. Cost savings.
Now Meituan grows fast — its revenues jumped from CNY4 billion in 2015 to CNY114 billion in 2020.
What is more interesting is it recently achieved net profits in 2019.
Meituan’s shares fell 34.6% since Feb 2021.
China Tech Stock #3: The Grand-Daddy of China Tech
You can say this is like the Amazon of China.
Only bigger and better.
In its latest financial results, Alibaba has an annual active consumer of 811 million.
Annual active user measures the number of people using a website, game, or online service like Alibaba.
It’s an important metric for e-commerce business to show how much traffic gets to this website every year.
If I compare Alibaba’s annual active user to Amazon, Alibaba’s annual active user is three times the size of the U.S. population and Alibaba’s growth is not stopping there.
Alibaba’s operates its most popular online marketplace — Taobao and Tmall.
This is where people can easily buy and sell stuff online.
And you can find almost anything on Alibaba’s dominant online marketplace.
Alibaba’s growth is impressive.
Its revenues grew from CNY6.4 billion in 2011 to CNY510 billion last year. And unlike many China Tech stocks, Alibaba is highly profitable.
It makes CNY140 billion net profits last year and generated CNY135 billion of free cash flow.
At some point, I know Alibaba will start paying dividends.
Alibaba was slapped with a US$2 billion fine recently and the market was frightened by this.
But I think this is one-off.
Alibaba shares fell 22.7% since Feb 2021.
China Tech Stock #4: Buying China’s Online Gaming Dominator
If China cannot survive on one thing, it has to be WeChat.
This is the quintessential app of all apps. It’s infectious, immersive and integrated.
WeChat has a wide spectrum of services — from news to banking and social messaging.
At least 30% of internet time in China is spent on WeChat.
Last year August, the U.S. government banned WeChat because of security risks.
But to be honest, it doesn’t matter since the messenger is used mostly in China.
And the ban is just causing more harm for the U.S. as more people use it for business, social and entertainment.
Today, Tencent Holdings (HKSE:0700) is the second biggest China Tech company, spotting a market capitalization of HK$5.4 trillion.
But Tencent is more than WeChat.
Tencent started as a game creator. Today, it’s the single, largest mobile game producer with over 100 game titles and a 47% market share — a gaming empire.
It recently released its biggest update on top-downloaded mobile game, Honour of Kings last quarter.
And plans to launch a mobile version of its highly popular — League of Legends.
Right now, this is a good pulse check on Tencent — Tencent shares fell 18.3% since Jan 2021.
Yet, it’s businesses are still growing.
China Tech Stock #5: Why JD(dot)com Looks Like a Buy
JD(dot)com Inc (HIKSE:9618) is a disruptive force in China’s retail sector.
They are the second largest online retailer after Alibaba based on “transacted volume”.
Transacted volume is the value of products people buy online.
JD’s mobile shopping market is now 27% market share.
The difference between Ali Baba and JD is this — like a supermarket, JD keeps its own products and sell them to customers.
Alibaba is a marketplace to connect buyers and sellers. Alibaba doesn’t own any products.
What’s unique about JD is it invests heavily in logistics like warehouses and delivery services more than any other China e-commerce players.
JD has more control over how their inventories move from their online shops to their customers’ location this way.
In fact, the company owns the largest self-built fulfilment network.
This allows it to deliver products to customers in a timely, reliable manner.
And over the years, JD has improved their supply chain processes.
It owns the largest drone delivery system, infrastructure in the world.
And recently started its robotic delivery services and building drone delivery airports.
What’s more is it’s operating driverless delivery by unveiling its first self-driving truck.
In 2020, it produced CNY745 billion in revenues, and made CNY49 billion net profits.
It recently turned positive free cash flow, producing CNY30 billion of free cash flow.
JD has a market capitalization of HK$922 billion. Its shares fell 29% since Feb 2021.
I think the best days are ahead for China Tech.
And picking the good one will result in paying good dividends in the future.
Sometimes, investing can be simple.
Always here for you,
Willie Keng, CFA
Founder, Dividend Titan
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