China appears to be recovering well from the coronavirus-induced economic slump. Shaking off the 6.8% contraction in the first quarter, resulting from the pandemic lockdown, the Asian economic giant’s economy is picking up faster than that of Europe and the U.S. The Shanghai Composite Index rose 5.7% to a two-year high, on July 6, while the combined daily turnover on Shanghai and Shenzhen bourses clocked a whopping US$213.2 billion, a five-year high.
Investors may find attractive opportunities in the country’s tech sector. These Chinese tech heavyweights with global ambitions are turning up the heat in the fight for global dominance as they take on their American rivals. They enjoy favourable government policies and lax regulation and are beneficiaries of the growing affluence amongst China’s middle class, arguably the world’s best consumption story.
However, investors should note that it may be prudent to do due diligence and scrutinize each stock as these companies operate in an environment of relaxed oversight relative to their U.S. and Canadian peers.
| Alibaba Group Holding Ltd ADR | ||
| Ticker | BABA | |
| Current yield: | - | |
| Forward P/E: | 26.39 | |
| Price | US$223.60 | |
| Fair value: | US$258 | |
| Value | 15% discount | |
| Moat | - | |
| Moat Trend | Stable | |
| Star rating | *** | |
| Data as of July 06, 2020 | ||
Chinese e-commerce juggernaut, Alibaba (BABA) is the world’s largest online and mobile commerce company that operates online marketplaces, including Taobao and Tmall. China accounted for 68% of revenue in 2019, while additional revenue came from international retail/wholesale marketplaces (7%), cloud computing (7%), digital media and entertainment platforms (6%), among others.
Taobao and Tmall rang up gross merchandise volume of CNY 5.7 trillion (US$807 billion) in the year ended March 2019, more than Amazon and eBay combined in the year of 2018, representing a significant portion of China's CNY 8.0 trillion online shopping industry, based on data from iResearch.
“Alibaba is a big data-centric conglomerate, with transaction data from its marketplaces, financial services, and logistics businesses allowing it to move into cloud computing, media/entertainment, and online-to-offline services,” says Morningstar equity analyst, Chelsey Tam, who puts the stock’s fair value at US$258, adding that despite recent macroeconomic uncertainty due to COVID-19, the company is well placed on an extended runway of growth for China and Southeast Asia's digital commerce industry, adds Tam.
| Tencent Holdings Ltd ADR | ||
| Ticker | TCEHY | |
| Current yield: | 0.23% | |
| Forward P/E: | 38.31 | |
| Price | US$66.69 | |
| Fair value: | US$77 | |
| Value | 16% discount | |
| Moat | - | |
| Moat Trend | Stable | |
| Star rating | **** | |
| Data as of July 06, 2020 | ||
Tencent (TCEHY) is a Chinese internet giant whose businesses include communication and social networking (Weixin/WeChat and QQ), online PC and mobile games, content (news, videos, music, and comics), utilities (email, app store, and mobile browser), the cloud, and financial technology. The firm has over 600 million monthly active users for QQ and 1.2 billion for Weixin/WeChat. The firm’s payment solution, Tenpay, enables closed-loop transactions in Tencent’s ecosystems.
The wide moat company’s dominant position in social networking and entertainment (gaming, online video, and online music) helps create strong network effect around its massive user base, says Tam, who recently raised the stock’s fair value by 30% to HKD 597 (US$77), prompted by strong gaming sales.
Tencent’s adjusted return on invested capital significantly exceeds its cost of capital. “Tencent will generate excess returns on capital over the next 20 years via various monetization sources, such as online gaming, subscriptions, advertising, and payment,” says Tam.
