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Here’s why I’m buying the dip on Chinese Tech Stocks

by Dissecting the Markets 10 months ago in investing
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Rockefeller once said, "the way to make money is to buy when blood is running in the streets."

Here’s why I’m buying the dip on Chinese Tech Stocks
Photo by Li Yang on Unsplash

Before you read, I have a few things to tell you:

  • Do your own research before making any investment decisions
  • Go talk to a financial advisor
  • I’m just spewing opinions here, like always
  • This situation is volatile. It’s best to take your time and not rush anything.

It’s been a wild ride for Chinese stocks this summer as regulators in Beijing are cracking down on monopolistic behaviors among the tech giants. For many years, China’s regulators have been hands-off with its business environment because they didn’t want to impede on the growth of its businesses. In other words, it wanted to ensure that the principles of the free markets can continue to go in their favor.

Over the past few years, China’s tech giants have taken the spotlight on the world stage. With China’s booming middle class as the focus of the business world, the founders of Chinese tech giants like Jack Ma of Alibaba or William Li of Nio have been seen as rockstars.

While China has experienced immense growth, it has been dealing with increasing backlash from the international community. From the Hong Kong protests that took place before the pandemic to the trade wars of 2018 to the ban of Huawei and other Chinese companies from doing business in various nations, China is being seen as a threat from home and abroad.

China has its belt-and-road initiative (also known as the next Silk Road) where it’s been giving infrastructure projects to many nations in exchange for terms that lean heavily on China’s side. While that has helped boost business for its own infrastructure businesses, it’s still not enough to maintain the nation’s rapid growth.

Since the free markets approach has helped China turn from an impoverished country to a wealthy country, China believes that the crackdown of the monopolistic and anti-competitive behaviors in its homeland can create more room for growth and innovation. First, they targeted Alibaba where they suspended the Ant Group IPO. Then they placed heavy fines on the tech giants. The pace at which regulators were targeting the tech giants accelerated when they targeted Didi after it shortly went public on US exchanges. The latest industry that the regulators attacked was its educational training institutes. Additionally, the regulators are now telling Tencent to give up its exclusive music licensing rights.

In an article by CNBC, these waves of regulatory pressures were made to enhance the quality of the Chinese companies that are listed on public markets. Here’s an important quote from that article:

Beijing stated in the national five-year development plan adopted in March that authorities aim to “fully implement” a registration for stock issuance and improve the “quality” of listed companies, while strengthening efforts to ensure national security and crack down on monopolistic behavior.

To sum it up, these moves will ensure that in the future, Chinese companies have a lower risk of being delisted while at the same time, improving investor confidence in Chinese equities. At the same time, the crackdown on anti-monopolistic behaviors provides a reminder to China's Big Tech that at the end of the day, it’s the government that’s in charge, not them. The crackdown on Big Tech’s anti-competitive behaviors and the potential for a forced break-up of them will lead to more competition. And with more competition comes more innovation, which leads to more growth.

Many stakeholders outside of China have been hurt by the crackdown on Chinese companies. Investors in these Chinese equities have seen their portfolios plunge. The crackdown on Didi has led Uber, which owns 12% of Didi, to see its investment lose $2 billion. The decline in market cap for Tencent Music Group has led to Spotify and Warner Music Group seeing their stakes in the business decline. Those invested in Chinese electric vehicle stocks have seen their shares decline significantly as investors fear that those stocks, being traded on US exchanges, would be targeted next by regulators.

With all the pessimism happening in the Chinese tech scene, I figured that maybe I should step in and be like Warren Buffett and start displaying bullishness on Chinese tech stocks while the crowd becomes pessimistic about them. Here are a couple of Chinese tech stocks that I like:

Alibaba: They’re the Amazon of China. They’re both an e-commerce titan and a cloud computing giant. If ever that business splits into many segments, I’d be happy to own shares of all segments.

Baidu: Aka, the Google of China. While it focuses on self-driving and artificial intelligence, it is looking forward to spinning off its AI chip business to create more shareholder value.

Baozun: This company provides end-to-end e-commerce services in China for big multinational corporations that want to expand their footprints in China without hiring local sales and tech teams. They set up their clients' online marketplaces in China, manage their marketing campaigns, and fulfill their orders. It’s a business that I don’t see is subject to scrutiny from regulators.

JD.com: Another e-commerce giant that has multiple other businesses within itself and is growing fast overall. The spin-off of its logistics business will create a lot of shareholder value.

Pinduoduo: it’s an online Chinese marketplace that has brought a social aspect to the mix to keep users engaged in its platform. It has been experiencing high double digit growth. It’s the largest agriculture-focused technology platform in China. It has created a platform that connects farmers and distributors with consumers directly through its interactive shopping experience.

Didi: Known as the Uber of China, has impressive stats despite the ban of its app in the app store. For the past few years, Didi has been accumulating stakes in companies like Lyft, Grab; acquired Brazil's 99 Taxis; and expanding its namesake service across Japan, Australia, New Zealand, Canada, Latin America, South Africa, Russia, and Eurasia. Also, DiDi extended its reach with bike-sharing services, vehicle leasing services, freight services, and an overseas food delivery platform. However, DiDi still generated 94% of its revenue from China.

Here's a tweet that compares Lyft and Uber to Didi.

Qutoutiao is one of the top news-aggregator apps in China. The stickiness is undeniable, as their 37.5 million daily active users spend an average of more than an hour a day on the platform.

Huya is the Twitch of China. While it originally had a merger agreement with Douyu, until regulators said no to it, the company has been growing fast and continues to benefit from the growth in live-streaming.

Tencent Music Entertainment Group: Besides the fact that Spotify and Tencent both have stakes in this music streaming business, this music streaming provider still commands roughly 75% of the music streaming market.

The Chinese electric EV makers: For Nio, one thing I like most about it is that it’s starting to expand internationally. Also, if you watch this clip by 60 Minutes, you’ll learn more about what makes Nio a fantastic business.

For Xpeng, they too are starting to export vehicles into Europe. I do like how they’re going to be equipping their vehicles with LiDAR so that they can soon have self-driving capabilities (maybe be used as a robotaxi and generate revenue for its owner when it’s not in use).

For Li Auto, while it’s still only operating in China, it has seen sales surge higher in volume than its competitor Xpeng in the month of June.

BeiGene is a Chinese biotech giant that is notable for its robust oncology pipeline. With new products coming along the way, the company has seen its revenues surge. It’s important to note that BeiGene has quietly become the gatekeeper for top biotechs looking to gain access to the massive Chinese healthcare market.

*BeiGene hasn’t been hurt by the regulatory fears, yet...

iQiyi, known as the Netflix of China, was spun off from Baidu in 2018. While the pandemic has been a big boon for Netflix, it hasn’t for iQiyi because of a drought of new content. It’s important to note that Baidu still holds a significant stake in Iqiyi. Management believes it can boost subscriber growth by producing and licensing more content. However, those efforts will squeeze its margins. Plus, it needs to ramp up its marketing efforts if it wants to regain the market share that it lost during the pandemic.

Bilibili is a great way of capitalizing on the growing importance of Gen Z on China’s economy. It provides mobile games, streaming video, and other ACG (anime, comics, and gaming) content for China's Gen Z users. It ended the fourth quarter with 202 million monthly active users, up 55% from a year ago. Its daily active users increased 42% to 54 million, and its number of monthly paying users more than doubled to 17.9 million. This sticky ecosystem makes Bilibili one of the few Chinese tech companies that can keep pace with ByteDance.

Conclusion

There are many things to like about the many players in the Chinese tech scene. While regulators are making investors worried about their investments in China’s tech scene, the market looks to be providing investors with discounts on Chinese assets. Some Chinese tech stocks will still look expensive despite the massive sell-off, while other Chinese tech stocks will look like fair value or even undervalued because of the sell-off.

Do your own research before making any investment decisions. Investing in Chinese assets has been volatile and has been met with many things like fraud allegations or regulatory setbacks. Please talk to a financial advisor since they probably have a better understanding of the situation than the rest of us.

Invest wisely!

investing

About the author

Dissecting the Markets

My views on markets, investment strategies, perspectives on events, etc. usually differ from the mainstream consensus.

*All views expressed in my articles are my own and should be considered opinionated

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