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  • Industry Spotlight
  • china tech
  • disruptive innovation

Why the China tech theme has been gaining traction

On 20 January, Jack Ma, CEO of Alibaba Group [BABA], re-emerged after four months of public invisibility and sent the company’s Hong Kong stock up 8.8%. The billionaire had criticised the “pawnshop mentality” of China’s state-owned public banks in late October, prompting the government to suspend Ant Group’s planned $37bn initial public offering (IPO).

His subsequent disappearance had fuelled concerns that the CEO was in legal trouble following his face-off with the Chinese Communist Party (of which he is, ironically, a member). However, those close to him insisted that he was simply lying low and not travelling due to the coronavirus pandemic.

Despite dominating the narrative over recent months, Ma’s disappearance and subsequent reappearance conceals a bigger story in the Chinese tech theme. The coronavirus pandemic and a resultant massive stimulus package could see China unseat the US in the global tech race.

China has gained ground on the US in areas such as electric vehicles (EVs), 5G and artificial intelligence (AI). Former US president Donald Trump’s erratic and often overly aggressive sanctions against China have been counterproductive as far as many US firms are concerned, leading to billions of dollars in lost revenue.

Furthermore, China’s lockdown was enforced earlier and more comprehensively than many of those in the west. According to Abishur Prakash, a geopolitical futurist at the Center for Innovating the Future, this set events in motion “that will rewire China — and put technology at the heart of everything”, reported CNBC.

Tech firms have weathered the coronavirus storm better than many other sectors, no matter where in the world they are based. Opto’s Thematic ETF Screener offers an oversight of the China tech theme, with the Invesco China Technology ETF [CQQQ], the KraneShares CSI China Internet ETF [KWEB] and the Global X MSCI China Information Technology ETF [CHIK] tracked against each other.

Each of these ETFs has outperformed the Nasdaq Composite’s 40.9% climb in the past 12 months by a healthy margin (as of 29 January’s close).

 

Invesco China Technology ETF 75.48%
KraneShares CSI China Internet ET 74.84%
Global X MSCI China Information Technology ETF  73.30%

 

Alibaba’s ETF effect

Alibaba’s share price is 11.11% lower than it was before Ant’s IPO cancellation on 3 November, Ma’s reappearance notwithstanding (through 29 January’s close). The launch of an antitrust investigation by Chinese regulators in late December sent Alibaba’s share price, and those of other major Chinese tech firms, plummeting.

11.11%

Alibaba's share price drop since Ant's IPO cancellation

  

Given its reputation, and the waves its regulatory woes have made throughout the sector, not all major China tech ETFs carry Alibaba. In fact, of the three ETFs tracked by Opto’s Thematic ETF Screener, only the KraneShares CSI China Internet ETF includes the stock. Even here, Alibaba is only its third-largest holding at 7.16% of the fund.

The other ETFs in the screener have underperformed KWEB over the previous three months, perhaps surprisingly given Alibaba’s struggles. In 2021 alone, KWEB is ahead after gaining 13.29% against CQQQ’s 11.35% increase, with CHIK lagging significantly after climbing 0.49% (as of 29 January’s close).

 

High-performing holdings

CQQQ and KWEB’s acceleration is driven by China’s other tech giant, Tencent Holdings [0700.HK]. The company’s diverse business includes video games, venture capital, payments and the popular messaging platform WeChat. It was the biggest holding in KWEB with 10.85% of the fund as of 25 January. It makes up 10.01% of CQQQ, making it the fund’s second-largest holding.

Tencent also owns 62.9% of Tencent Music Entertainment [TME], a joint venture with Spotify [SPOT], which contributes another 4.92% to the fund. Combined, this would make the tech giant CQQQ’s largest holding overall.

Tencent’s share price has rocketed lately, gaining 19% in the first month of 2021 alone, and 26.4% over the last six months. TME’s share price has grown almost twice as fast as its parent company’s in 2021, gaining 37.33% on the New York Stock Exchange (as of 28 January’s close).

19%

Tencent's share price gains in January 2021

  

CHIK stands out for holding neither of China’s two tech giants. Its biggest holdings are Xiaomi Corp [1810.HK] and Sunny Optical Tech [2382.HK], which comprise over 20% of the fund between them.

Smart electronics manufacturer Xiaomi’s stock has fallen 17.16% since the start of 2021. This drop, combined with CHIK’s non-exposure to fast-growing Tencent, explains its lag relative to CQQQ and KWEB.

Sunny Optical, however, has gained 15.37% in the year to date. The firm, which supplies lenses to the likes of Huawei, Oppo and Vivo, is also held by CQQQ — at 8.9% of the fund, it is the fourth-largest holding in the ETF.

KWEB’s second-largest holding, Meituan [3690.HK], an online shopping and takeaway food platform, has grown 21.6% in the same period, delivering the best performance of the three funds in 2021 so far.

 

Clouds forecast

According to The Wall Street Journal’s markets data, now is a good time to buy Alibaba stock, as well as shares in any ETFs carrying it. An average target of CNY2,137.38 ($330.13) implies a 30% gain from Alibaba’s share price at 29 January’s close.

Stocks to keep an eye on over the coming months include Kingdee [268.HK] and Kingsoft Cloud [KC], both of which are well placed to benefit from China’s unwillingness to adopt cloud providers headquartered abroad.

Kingsoft provides cloud services to ByteDance, the owner of TikTok, and analysts at Jefferies expect its revenue to grow by a compound annual rate of 40% or more over the next two years. By 2022, analysts at Citi estimate that Kingdee’s cloud revenue could reach CNY5bn ($774m).

$774million

Kingdee's estimated cloud revenue by 2022

  

However, despite optimistic forecasts for many stocks, some investors remain wary of investing in Chinese tech firms given the clouds that the government’s exchanges with Jack Ma have cast over the sector.

Whichever way the stocks go, 2021 may well prove to be a definitive year for Chinese tech.

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

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