Author: David Flynn, Chief Investment Strategist and Director
We originally began to add Chinese Tech exposure to our Multi-Asset Portfolios in February of last year via the purchase of the Kraneshares CSI China Internet ETF. For comparison we use the Nasdaq 100 ETF as it is the main proxy for investment in US investment in Technology companies. Since that time (a period of roughly 15 months) the Kraneshares CSI China Internet ETF has returned 32.27% while the Nasdaq 100 ETF returned 19.11%. An outperformance of 13.16%.
Market Size
We see Chinese Technology as a very attractive long term investment. We believe investing in Chinese Technology now is very much like investing in US Technology following the Global Financial Crisis in 2008. We find it particularly attractive because it is not impacted by US tariffs.
Below are a few important points. The “Dragon 7” (Chinese equivalent to the “Mag 7”) refers to a phrase coined by Erik@YWR in a piece entitled “Unleash the Cash Dragons”, from April of last year, which I highly recommend. The “Dragon 7” make up roughly 50% of the Kraneshares CSI China Internet ETF. You can read the full piece here; https://www.ywr.world/p/ywr-unleash-the-cash-dragons?utm_source=publication-search
Retail Web Sales (2023): China’s $2.1 trillion in online retail sales dwarfs the U.S.’s $1.1 trillion, reflecting a massive and growing e-commerce market. Online shopping accounts for 32% of China’s total retail sales ($6.5 trillion), highlighting the sector’s significance.
Internet Population: China’s 1.09 billion internet users (77% penetration) compared to the U.S.’s 311.3 million (93% penetration) underscores the sheer scale of its digital market, even with lower per capita penetration.
https://engage.kraneshares.com/s/8ab04502/kweb-presentation/?ks_product=kweb&page=1
Financial Strengths:
Cash Reserves: The Dragon 7 holds $204 billion in cash, nearly a third of their $955 billion market cap. JD.com stands out with net cash at 67% of its market value, providing a strong buffer against market volatility.
Free Cash Flow (FCF): An average FCF yield of 8.0%, indicates robust cash generation, supporting reinvestment, buybacks, or dividends.
Share Buybacks: Significant buyback programs (e.g., Alibaba’s $35 billion, Tencent’s $12 billion, JD’s $4.5 billion, Baidu’s $4.3 billion remaining) signal management confidence and aim to enhance shareholder value.
Valuation: Trading at an average P/E of 12.9x with 17% projected EPS growth, the Dragon 7 offers a PEG (P/E relative to growth) ratio of 0.7x, suggesting undervaluation relative to growth. Alibaba’s 8.6x P/E and Meituan’s 42% EPS growth are particularly attractive.
Investment Case:
Low Downside Risk: High cash reserves and strong FCF yields provide a safety net, insulating these companies from broader economic issues like real estate and banking sector challenges.
Government Support: The Chinese government prioritizes Tech as a driver of economic growth and employment, given high unemployment rates, reducing regulatory risks for these firms compared to other sectors.
Generational Opportunity: There is a gigantic valuation gap between China Tech and US Tech. This disparity, combined with strengthening fundamentals in China, suggests significant long term upside potential.
Implications for Investors:
Attractive Entry Point: The Dragon 7’s low valuations, high cash reserves, and strong growth prospects make them a bargain compared to global peers, particularly US Tech stocks.
Sector Insulation: Unlike China’s troubled real estate and banking sectors, Tech is relatively insulated and strategically important, offering stability and growth potential.
Portfolio Diversification: Adding Chinese Tech exposure can balance portfolios, especially for investors overweight in U.S. or other global tech stocks, capitalizing on the valuation gap.
Conclusion
Chinese technology companies offer a compelling investment opportunity due to their low valuations, strong cash positions, and robust growth prospects. Insulated from real estate and banking sector woes, supported by government priorities, and trading at a significant discount to global peers, they present a low-risk, high-reward option for portfolios. The valuation gap with the Magnificent 7 further enhances their appeal as a generational investment opportunity.
Tax implications
There are no tax issues for those investing inside of their pension structure, cash investors are subject to CGT tax treatment.
Alternative ways to get exposure to the China Tech Investment Theme
Further, for more risk averse investors who like this investment theme but would prefer a capital protection feature, there is a 100% capital protected ETF, as well as a 90% capital protected ETF. Lastly, for income focused investors who like the China Tech theme, there is an ETF which uses a covered call strategy to provide monthly dividend distributions. This can be a favourable option inside of a pension wrapper because there is no income tax on dividends inside of a pension wrapper.
For more information and how to avail of this investing opportunity, email pbrown@baggot.ie
Kind Regards,
David Flynn
Chief Investment Strategist and Director
Disclaimer
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