Despite worrying signs that China’s economy is slowing, it’s not all doom and gloom. Here is a collection of stocks to watch for opportunities in the tech sector amid the generative AI boom and a rise in consumer spending.
- Alibaba abandons IPO plans for its cloud division and will instead focus on opportunities presented by AI.
- Meituan could enter the southeast Asian food delivery market with the acquisition of Delivery Hero’s local unit.
- Tencent’s gross margin in Q3 was its highest since 2017 thanks to strong gaming sales.
The Public Cloud Stock
Alibaba [BABA] shocked investors last month when it abruptly cancelled the much-anticipated IPO of its cloud division. On the third-quarter (Q3) earnings call on 16 November, CEO Eddie Wu said that the company would focus on public cloud, as opposed to “project-based revenue exposure”, and would look to capitalise on opportunities presented by artificial intelligence (AI). “The cloud intelligence group will resolutely implement a strategy of driving growth with AI and of prioritising public cloud. It will scale up its technology investments in AI-related software and hardware,” said Wu.
The AI Chip Stock
Baidu [BIDU] is expecting limited impact from US curbs on chip exports. “We have a substantial reserve of AI chips, which can help us keep improving ERNIE Bot for the next year or two,” Co-founder and CEO Robin Li said on the Q3 2023 earnings call on 21 November. However, he cautioned that the chip export ban “inevitably impacts the pace of AI development in China”. Baidu’s share price has shot up 15.3% in the past month.
The Short-form Video Stock
Kuaishou Technology [KSHTY] swung to a profit in Q3 2023. The short-form video company, which is the closest rival to Bytedance’s TikTok, saw its average daily users figure increase by 6.4% to 386.6 million in the three months to the end of September, while average monthly users were up 9.4% to 684.7 million. The company’s gross merchandise volume increased 30.4% year-over-year.
The Food Delivery Stock
Meituan [MPNGF] is said to be exploring a deal to acquire the southeast Asian division of German online food delivery service Delivery Hero [DLVHF]. As first reported by Bloomberg on 16 November, there are no guarantees that initial talks will result in an official bid, but Meituan’s move into southeast Asia would likely eat into Grab’s [GRAB] market share. Meituan’s net profit surged 272% year-over-year in Q2 2023, when “food delivery experienced strong growth as consumption continued to recover”.
The Growing Gross Margin Stock
Tencent’s [TCEHY] Q3 2023 earnings were boosted by its gaming division, with its gross margin hitting 49.5%, its highest level in several years. “We believe that the current level of margin is sustainable, and we believe that there is room for margins to improve further,” Chief Strategy Officer James Mitchell told analysts on the earnings call. International games revenues rose by 14% in the three months to the end of September, while domestic games revenues increased 5%.
Another Way to Invest in China Tech
The Invesco China Technology ETF
The Invesco China Technology ETF [CQQQ] holds the Hong Kong shares of all the companies except Alibaba as of 24 November. The fund is a pure-play on the tech theme within China. The fund is down 1.7% in the past year and down 6.4% in the past six months.
The iShares MSCI China Multisector Tech ETF [TCHI] holds the Hong Kong shares of all the companies except Meituan. The fund has allocated 40.6% of the portfolio to information technology as of 22 November, while consumer discretionary and communication have weightings of 25.8% and 24.4% respectively. Industrials and financials account for 7.1% and 2%. The fund is up 8.3% in the past year and up 1.7% in the past six months.
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