This unloved industry is mispriced for its growth

By Brian Tycangco

There’s been a lot of collateral damage in the U.S.-China trade war. The share price of China’s internet stocks, in particular, have taken a lot of trade war shrapnel.

The CSI Overseas China Internet Index is down nearly 29 percent this year. That’s even worse than the Shanghai Composite Index, which lost 22 percent.

By comparison, U.S. internet stocks have gained 15 percent year-to-date, as reflected by the Dow Jones Internet Composite Index.

The CSI Overseas China Internet Index, which tracks foreign-listed Chinese internet stocks, includes 44 of the biggest Chinese internet stocks, like e-commerce giant Alibaba. It also includes social media giant, Tencent, search engine Baidu (China’s version of Google), online travel booking service CTrip.com, Weibo (China’s version of Twitter), and dozens of other internet stocks.

Meanwhile, the Dow Jones Internet Composite Index tracks the share price movements of 41 U.S.-listed internet economy stocks like Amazon, Facebook, Netflix, Alphabet, and Twitter. The chart above shows comparisons of the U.S. and Chinese internet stock universes.

As shown in the chart above, China’s internet stocks have sharply underperformed their U.S. counterparts since March 2018. That was right about when the U.S.-China trade war began, and since then they’ve fallen victim to the bearishness that has gripped Chinese stock markets.

Additionally, some shares – like Tencent in particular – have weakened because of an ongoing crackdown by Beijing on mobile internet games.

But the story is only starting for China’s internet.

Mobile access is driving internet company growth

Most Chinese internet companies are growing fast, as China shifts from a manufacturing-led economy to a service- and consumption-driven economy. And that shift is being led by technology.

Indeed, by the end of this year, China’s total e-commerce sales will amount to a quarter of the country’s total retail sales, after posting growth of almost 30 percent year-on-year. That’s 2.5 times higher than the share of e-commerce in annual retail sales in the U.S.

Meanwhile, the number of Chinese using mobile phones to access the internet is also rising. That in turn fuels the internet sector.

According to the China Internet Network Information Center (CNNIC), the number of mobile internet users in China has reached 800 million. That’s 167 percent more than the number of mobile internet users in the U.S.

It’s also almost 30 million more users than there were in early 2018. And though 800 million is an enormous number, it’s still less than 60 percent of China’s population. So there’s lots of room for growth.

Moreover, China’s mobile internet users are becoming increasingly dependent on internet-based services that make life more convenient. The CNNIC states that 31 percent of users are using bike sharing apps, while 43 percent are using taxi-booking apps (similar to Uber) and 37 percent use the internet to book seats on buses and trains.

Just beginning to tap the market’s full potential

Chinese internet companies are just starting to tap into their target markets. And they’re posting enormous growth.

China’s largest video-streaming services company, for instance, has gone from 5 million paying subscribers in May 2015 – to 66.2 million by June of 2018. That’s a 13-fold increase in just three years.

WeChat, the country’s most popular social messaging app has one million mini-programs downloadable within its app. WeChat also has its own mobile payment service. Most Chinese use WeChat Pay for just about anything nowadays, even to give money to beggars.

Another popular and growing internet service is Weibo, the country’s equivalent of Twitter. According to eMarketer, 340 million people are expected to be using Weibo in China by the end of 2018, for growth of 17 percent. That’s roughly equivalent to Twitter’s number of active users.

So the foundations of China’s domestic internet industry are strengthening. Users across all major platforms – be it social media, online messaging, or ride sharing services – are growing.

A government that’s behind the industry all the way

A big factor to the success of China’s internet companies can be attributed to strong government support. For instance, Beijing prevents foreign rivals from accessing the huge domestic internet services market. Until today, popular Western online services like Twitter, Facebook or YouTube are inaccessible in China.

The internet companies in China also benefit from unfettered sharing of personal user data if they also share information with government. This is something that wouldn’t be possible in countries like the U.S.

This setup isn’t going to change any time soon. It means Chinese internet stocks should continue to flourish even if the old economy continues to slow down.

It’s also resulting in the birth of entirely new internet industries. We’re just starting to see smart warehouses, artificial intelligence-enabled delivery systems, facial recognition in day-to-day activities (including paying for your grocery) spread throughout China to support the growing online economy.

Things are happening faster, easier and in exponentially larger numbers in China. The one billion in transactions taking place during Singles’ Day is but a sneak peek into the future of the world’s second-largest economy.

In our Strategic Wealth Confidential newsletter, we search out the best opportunities in China’s changing economic landscape. Robotics is one of those best opportunities, and this could result in explosive gains for investors in the next two to three years. Read here for more.

 

Brian Tycangco
Brian Tycangco is an Editor and Investment Analyst with Stansberry Churchouse Research, an independent investment research company based in Singapore and Hong Kong that delivers investment insight on Asia and around the world. He's been working in the financial world since 1995 and has carved out a reputation as "Master Stock Picker". He's seen just about everything there is to see in these markets, met with the leading CEOs of every industry in Asia, and knows the ins and outs of doing business and making money there. Brian has been a stock broker at a large Asian trading house, an equities analyst for a major European investment bank, as well as editor and chief investment strategist for one of the longest-running Asian investment newsletters in the world. Click here to sign up to receive the Asia Wealth Investment Daily in your inbox every day, for free.

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