Considering the China-U.S. trade war, you would think that Chinese tech stocks are a major no-no for your portfolio. However, there is a contrarian view that is emerging. With the Democratic Party taking the White House, all eyes are on the Big Tech giants that will benefit in a Biden presidency.
Most experts agree that a Democrat-controlled Congress and White House will not bode well for the largest and most dominant companies in the information technology industry of the United States, including Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL), Alphabet (NASDAQ:GOOG,NASDAQ:GOOGL), Facebook (NASDAQ:FB) and Microsoft (NASDAQ:MSFT).
In the U.S., an adversarial attitude towards these tech firms is prompting increased interest in Chinese tech stocks. The Global X MSCI China Information Technology ETF (NYSEARCA:CHIK) is up 50%, pretty specular considering the Nasdaq composite is up 33.6%.
But why are the stocks going up when the U.S. and the Chinese are at loggerheads? Well, that has to do with the differing attitudes both administrations have to their respective tech sectors. The Chinese are looking to draft their economic and social policies to nurture their local tech companies for the next five years. Meanwhile, the Democrat-controlled House Judiciary Committee has recommended restricting the powers of U.S. technology giants.
That’s why it’s the right time to invest in Chinese tech stocks. Here are four that offer excellent yields, margins, and growth prospects:
Chinese Tech Stocks to Buy: China Mobile (CHL)
Listed on both the New York and Hong Kong exchanges, China Mobile provides mobile voice and multimedia services through its nationwide mobile telecommunications network across mainland China and Hong Kong.
Both in terms of market cap and the total number of subscribers, CHL is the world’s largest mobile network operator. It was also among the first in the world to launch a 5G infrastructure.
The novel coronavirus pandemic has impacted revenues, subscriptions, and profitability. But that’s a short-term headwind that will evaporate within a few quarters. With 950 million mobile customers and a relatively clean balance sheet, the company is very secure. Plus, the Chinese government is a major shareholder with more than 72% of ownership. So, it’s not like the company will have issues managing its affairs if cash flows are put under the hammer.
Surprisingly, CHL stock trades at 8.3x forward price-earnings with so much going for it when the sector itself trades 20.2x. With shares trading at such a steep discount, they are practically a bargain.
Alibaba (BABA)
Chances are that if there is one Chinese company you’ve heard of, it’s this one. Alibaba is often referred to as the “Amazon of China” because its growth trajectory is nearly identical to that of Amazon. But in many ways, as astounding as it may sound, the company has outpaced Amazon.
Look no further than China’s Singles’ Day event with gross merchandise value (GMV) hitting roughly $75.1 billion. That’s almost double what Alibaba did last year, at $38 billion. Its two sites, Alibaba.com and T-Mall, are the biggest ones in the country. With disposable incomes soaring domestically, the sky is the limit for Alibaba.
The only thing that’s gone wrong for the company recently was the much-vaunted Ant Financial IPO. Alibaba has a 33% equity stake in Ant Group. The Chinese government delayed the IPO recently, leading to a one-day 10.5% drop for Alibaba stock. Regardless, it’s a minor blip for the Chinese behemoth. If anything, it has made the stock even more attractive in the eyes of investors.
JD.com (JD)
JD.com, also known as Jingdong and formerly called 360buy, is a member of the Fortune Global 500. Along with Alibaba-run Tmall, it’s one of two massive B2C online retailers in China by transaction volume and revenue.
Much like Alibaba, JD.com is benefiting immensely due to the pandemic. With people shuttered at home, online sales are skyrocketing. In the second quarter, revenue increased at over 33%, the company’s strongest showing in the last 10 reporting periods. The geographic footprint of the company is also expanding at an excellent rate. In the recently reported quarter, 80% of JD’s new user gains in China came from lower-tier cities.
Another important recent development is the company’s decision to spin off JD Health and JD Digits. Management expects to fetch $1 billion to $3 billion in the IPO, considering JD Health is now considered the largest pharmaceutical retailer in China’s health care industry. No wonder JD.com is forecasted to grow earnings at an average annual rate of 49.7% per year over the next five years.
NetEase (NTES)
NetEase is the second-largest mobile gaming company globally is often overshadowed and Tencent (OTCPK:TCEHY). Apart from developing its own titles, it also has a partnership with Warner Bros to develop “Harry Potter: Magic Awakened” and “The Lord of the Rings: Rise to War.”
But self-developed games account for 90% of the gaming revenue, so the company isn’t dependent on licensed products.
However, the company has contracts with Activision Blizzard (NASDAQ:ATVI) and Microsoft for licensed games. It is also involved with music streaming and online education — both lucrative business segments in their own right. Geographically as well, the company is on the move. It has already expanded to Japan with some success. The company has earmarked 45% of the proceeds from its secondary listing in Hong Kong for globalization strategies and opportunities.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
