Investors and traders often focus on the big US technology companies. But Chris Smith, of CMC Markets, says they should turn their attention to the incredible growth and scale of the Chinese tech counterparts.
In the US, four big firms have driven more than 70 per cent of S&P 500 gains in recent years. They’re commonly referred to as the FANG stocks – tech giants Facebook, Amazon, Netflix, and Google.
In China, there’s a similar group of technology stars, known as the BAT stocks. These three leading stocks are mega-companies Baidu, Alibaba, and Tencent. The trio has a combined annual revenue of 550 billion Yuan (over US$80 billion).
In the past 20 years, these companies have grown from small start-ups, to become internet powerhouses, largely because of the rapid rise of the internet and e-commerce in China.
Alibaba was founded by 53-year-old Jack Ma and Tencent by 46-year-old Pony Ma. The Mas aren’t related, but they’re two of China’s richest men, and have been fierce rivals since the 1990s. The pair have changed the face of e-commerce in China, enabling it to leapfrog other developed countries in the volumes of online payments and transactions.
Now, more than 600 million people in China regularly use social media apps to make payments, mainly by mobile phone. Cash is almost non-existent and QR codes, WeChat payments, and facial-recognition payments are all on the rise.
Millions of small businesses rely on the BAT internet platforms. But what do these firms do?
Baidu – the Google of China
Baidu is China’s largest search engine, with more than 80 per cent of the market for domestic online searches and marketing solutions. Baidu offers maps, social media, and music streaming. Its investments span artificial intelligence, self-driving cars, payments, and movie-streaming technology (similar to Netflix).
The company was valued at more than US$94 billion at June 2018. It turned over more than US$13 billion in revenue in the past year and has achieved double-digit growth rates every year.
Google exited the China market in 2010, allowing Baidu to grow with relatively little competition.
Alibaba – the Amazon and ApplePay of China
E-commerce giant Alibaba launched in 1999. Its two main online portals are Taobao, for consumer-to-consumer commerce, and its business-to-consumer counterpart, Tmall.
In 2004, Alibaba launched the Alipay payments service. That’s since been spun off as subsidiary company, Ant Financial – which also has a large and rapidly growing cloud-computing division.
Among Alibaba’s other ventures are the DingTalk messaging service that was launched to compete with WeChat, the South China Morning Post media business, and a significant investment in artificial-intelligence technology.
Alibaba has turned Chinese holiday Singles’ Day into the world’s largest online shopping day, similar to Amazon’s Prime Day. Sales for Singles’ Day 2017 totalled US$25.3 billion – US$6 billion more than the five-day Thanksgiving shopping spree in the US.
Alibaba has 552 million active customers shipping goods globally.
It was valued at more than US$500 billion at June 2018, and turned over US$38 billion in revenue in the last year, making it the sixth-largest internet company (based on revenue).
Tencent – the Facebook of China
Tencent was founded in 1999 and grew rapidly. It invests in thousands of technology ventures, so in fact it’s more like a large holding company than a social-media channel.
Tencent owns the popular messaging and payments service WeChat, which recently hit one billion users. WeChat accounts for 34 per cent of China’s total internet traffic.
Tencent is valued at more than US$500 billion and turned over more than US$35 billion in the last year, with annualised returns of 45 per cent.
How does a Kiwi invest in Chinese companies?
Kiwis can get a piece of the action in the Chinese technology space in the following ways:
The BAT stocks are all listed on the New York Stock Exchange, along with other Chinese technology firms like JD.com. You can trade directly or you can buy an American Depositary Receipt (ADR) listing through a US bank. New Zealand share brokers can also offer access to shares in the US.
You can buy Exchange Traded Funds (ETFs) that are focused on China, such as the Guggenheim China Technology ETF (CQQQ).
If you’re an experienced trader, you can use a contract for difference(CFD) to give you access to international shares. CFDs offer leverage and also enable investors to go ‘long’ (buying the stock in the expectation that its price will rise in the long term) or ‘short’ (selling the stock on the basis that prices will fall, and the stock can be purchased again more cheaply at a later date).
What’s the outlook for China tech?
Chinese firms make up eight of the top 20 global internet leaders by valuation – with Alibaba, Tencent, and private company Ant Financial in the top 10. Only three Chinese companies were in the top 20 five years ago.
Currently, only 55 per cent of people in China have internet access. But with 770 million users, that’s twice the population of the US.
Artificial intelligence and robotics have been major investments for Alibaba and China’s other tech giants. Tencent has invested heavily in the online gaming sector, and is up against Amazon’s e-sports streaming competitor Twitch.
I predict we will probably see more Chinese companies listing on stock exchanges. Mobile phone maker Xiamo was this year’s largest new listing, valued on the Stock Exchange of Hong Kong at more than US$50 billion.
The battle for mobile payments in China, between WeChat and Alipay, is also heating up. The sector generated US$9 trillion in transactions last year, challenging the likes of Visa and Mastercard and UnionPay.
As the Chinese middle class continues to expand its wealth, countries like New Zealand will benefit from growing demand. I would see China passing Australia as our number one country for exports.
However, businesses operating in China do present some risks. A big one is government interference, possibly imposing controls on businesses, changes to taxes, and fair-trading decisions as companies get too large. Let’s watch and see if China’s tech giants can sustain their incredible momentum.
American Depositary Receipt (ADR): This is a method used to list Chinese shares on the US Exchange. An ADR is issued by a US bank. It represents one or more stocks traded on a US exchange, and is typically purchased by a non-US investor.
Contract for difference (CFD): A CFD is an agreement to exchange the difference in value of an asset, from the time the contract is opened, until the time it’s closed.
Exchange Traded Fund (ETF): An ETF, or exchange traded fund, tracks an index, a commodity, bonds, or a basket of assets, just like an index fund. Unlike mutual funds, an ETF is traded on a stock exchange, like a share.
Leverage: The use of borrowed capital as a funding source to increase the potential return on an investment.
Standard & Poor’s 500 Index (S&P 500): A market capitalisation weighted index of the 500 largest US publicly traded companies, across all industries, by market value.
First published 20 August, 2018
JUNO does not contain financial advice as defined by the Financial Advisers Act 2008. Consult a suitably qualified financial adviser before making investment decisions. This story reflects the views of the contributor only. Content comes from sources that JUNO considers accurate, but we do not guarantee that the content is accurate.