This Article was first published on 29th Nov 2017 on our Asia-In-Focus Newsletter. To get the latest newsletters, click here.
Nov 2017 Edition
How Can We Invest In The Chinese Tech Space?
A few weeks ago, I had a small gathering with a group of our readers in Kuala Lumpur when I dropped by the city for a day. We spent the night talking about how to start investing, how to build your portfolio and also some interesting companies that are worth keeping a tab on.
However, one particular question stayed with me during that gathering. Asked by Wing Hun (thank you for the question); on how can we invest in the Chinese technology space?
I thought I would spend this email to highlight some of the key players within the Chinese tech space and introduce some companies worth researching on.
The Is No Place Like China
China’s internet space evolved apart from the rest of the world. For starter, there is no Google or Facebook or Youtube, three of the most visited sites worldwide. All of these three sites are banned in China, that is why the internet space in China is so much different compared to what the rest of the world has experienced.
China has developed their own version of the internet and its development has been rapid. This was probably because it was not held down by legacy infrastructures and can develop straight into what the 21st century can offers. And with close to a billion active internet users soon, their domestic tech companies have more than enough customers to create a sustainable business.
Today, Chinese Technology companies are not only some of the largest in the world, many are starting their overseas expansion. There could be a day where some of our most commonly used online platforms and services are from China.
The Kings; BAT
The giants within the Chinese technology space are the BAT; (B) Baidu Inc, (A) Alibaba Group and (T) Tencent Holdings. Instead of viewing them as the Google of China or the Amazon of China, we should see these companies as a leader in their own rights. In fact, all of them are such huge technology conglomerates that it is impossible to compare them with any of their western counterparts. Here are the breakdowns of the BAT of China.
The Super App King: Tencent Holdings
Tencent Holdings (HKG:0700) is listed on the Hong Kong Stock Exchange. It is the largest company on the exchange and the Hang Seng Index, with a market capitalization of about USD 500.0 billion in size. That is about the same market capitalization as companies like Facebook Inc and Amazon Inc.
Tencent got its start as a gaming company. Today, it is still making most of its revenue from its gaming and other related services. Through its QQ and WeChat social Platforms, Tencent Holdings has close to about 1 billion users on each service, making them the most popular social media platforms in China.
However, apart from these two platforms, Tencent Holdings owns many other services. Some of them are also the top few services within their own niches.
E-Payment: Through its e-wallets on Tenpay, WeChat Pay and QQ Wallet, Tencent allows their users to make payment and even invest their money directly from their platform.
Games: Tencent Games and Qzone are one of the largest gaming ecosystems in China, publishing some of the most popular games in the country and allowing users to manage their games from their platform.
Online Reading: Tencent recently just spinoff its online publishing arm, China Literature Ltd (HKG:0772). Together with Tencent Comic, Tencent has one of the largest online literature community in China.
Tencent Pictures: Tencent has a picture sharing platform that allows users to share and sell their pictures to one another.
QQ Music: QQ Music is one of the largest music platform in the country, commonly known as the Spotify of China.
Entertainment: Tencent is now an entertainment powerhouse in China. It has a platform for e-sports “Penguin e-Sports”, live streaming “NOW Live”, News “Tencent News”, Videos (Netflix & Youtube combined) “Tencent Video”.
Email: QQ Mail
Browser: QQ Browser
Anti-Virus: Tencent Mobile Manager / PC Manager
Cloud Services: Tencent Cloud
Learning: Tencent Class Room
Map: Tencent Map
Artificial Intelligence: Tencent AI Lab
App Store: China mobile app stores are not dominated by Apple App Store or Google Play. In fact, it is filled with many domestic app stores, Tencent’s YingYongBao is one of the most popular appstores in China.
Tencent Holdings is a complete conglomerate in the technology space. It has multiple services and platforms, all of which has the potential of huge growth in the future as well.
However, competition is intense as all the other tech giants in China are also pursuing a similar strategy.
The E-Commerce King: Alibaba Group Holding
Alibaba Group Holding (BABA) is listed on the US New York Stock Exchange. In term of size, it is almost as huge as Tencent Holdings with a market capitalization of USD480 billion. The two companies are considered as the twin pillars of the Chinese Tech industry.
Alibaba Group started out as an e-commerce platform; Alibaba.com. Today, it is still mainly generating most of its revenue from its e-commerce platforms like Taobao.com and Tmall. However, it is also expanding rapidly into other services and can also be deemed as a huge technology conglomerate. Here are just some of its services.
E-Commerce: Alibaba Group serves a wide range of e-commerce transactions from B2B, B2C, C2C, for import and export through its multiple platforms including Taobao.com, Tmall, AliExpress, Alibaba.com.
Ad-Exchange: Alibaba has an ad exchange for advertisers to buy and sell ads spaces through its big-data driven platform, Alimama.
Video: Alibaba Group owns one of the most popular video sharing and premium video site Youku Tudou.
Browser: UC Browser
News: UC Headlines
Search: Shenma (Search)
Cloud Services: AliYun
Mobile Operating System: YunOS
Enterprise Communication: DingTalk
Logistics Database: Cai Niao
Many of its services are directly in competition with its arch-rival, Tencent Holdings. We are seeing more and more direct competition between the two giants, in particular in the field of e-commerce and e-payment.
The King of Search: Baidu Inc
Baidu Inc (BIDU), listed on NASDAQ, is commonly considered as the Google of China. However, it is not generally known that the two companies started out during the same time period. Google managed to dominate the search ecosystem globally while Baidu ended up very dominating in China.
Today, Baidu Inc is a USD 86 billion company and generates most of its revenue from its search advertising.
Nonetheless, Baidu is also considered as a technology conglomerate with many other services that are very popular in China.
Search: Baidu Search is the most dominant search engine in China.
Encyclopedia and File Sharing: Baidu WenKu
Appstore: Baidu Mobile Assistant is the most popular appstore in China.
Anti-Virus: Baidu Mobile Guardian
Personal AI-Assistant: Baidu Duer is a virtual assistant similar to Amazon Alexa or Apple’s Siri
Social Media and Publishing: Baijiahao
Cloud Services: Baidu Cloud
E-Finance: Baidu Wallet, Baidu Wealth Management, Baidu Consumer Credit
Map: Baidu Maps
Video: iQiyi and PPS are two of the most popular premium video and video sharing platforms in China.
Other Notable Companies
There are other technology companies that compete with the three giants above but due to their smaller size, they are less talked about. Here are some of them.
The Twitter of China? Or The Weibo Of The States?
Weibo Corp (WB) is a social media company listed on NASDAQ. Sized at USD 25billion, it is even larger than its comparable in the west; Twitter Inc. Many commentators like to see Weibo as the “Twitter of China”. However, after from their broadcasting feature, Weibo is nothing like Twitter. In fact, Twitter felt like a cheap knockoff of Weibo if you have ever tried both services.
Weibo has very powerful features for broadcasters to further enhance their brand and channel through interactive videos, payment gateway, Weibo Groups and other features. Due to the lack of Facebook-like services in China, Weibo has in many cases became the de-facto social media platform, especially for brands and celebrities.
The Gaming Competitor
Although Tencent Holdings is the dominant player in the Chinese gaming space, another notable contender is NetEase Inc (NTES). Listed on the NASDAQ exchange with a market capitalization of USD44 billion. NetEase is like a smaller version of Tencent Holdings. The company also operates a huge online gaming community and publishes many popular games.
However, it also has services such as news, e-commerce, emails, search and other online services that the BAT provides.
|Summary of The Market Cap of All the Companies Mentioned
|The Up and Coming
YY Inc (YY) is one of the interesting social media company that focused on live streaming. Listed on the NASDAQ with a market capitalization of USD 7.15 billion. The company is mainly a live streaming platform where users can reward the entertainer in term of virtual gifts which can be converted back to cash.
The social media company is also one of the few in this industry that is profitable. In fact, the company is expected to grow its earnings by more than 20% in 2018. YY Inc is currently trading at about 19 times its earnings, one of the lowest as a social media company globally.
Alibaba Group is still the king of e-commerce in China and in fact the world. It recorded a gross merchandise volume (GMV) of more than RMB 3.09 trillion (USD 450 billion) this year. However, there is a new contender in the space and it is growing extremely fast.
JD.com Inc (JD) is an online retailer that is using a completely different approach to the business as Alibaba. Instead of being the asset-light business model of Alibaba, being just the platform to connect buyers and sellers, JD.com is pursuing the asset-heavy business model of buying stock, investing in warehousing and delivering products themselves.
All these in the spirit of having more control over the whole shopping experience for its customers and providing a better service. It seems to be paying off as well. In the B2C e-commerce space, JD.com now has a market share of about 32.9% in China. Alibaba’s Tmall has about 51.3% market share during the same period.
The company is starting to be such a big threat to Tmall that Alibaba has announced that it will start investing more in infrastructure in warehousing and delivery as well.
However, due to its huge capital investment and fast growth, the company is still suffering a net loss at the moment. JD.com Inc is listed on NASDAQ and has a market capitalization of about USD 55 billion.
The Travel Agent
Travel is on the rise, especially in China. As the Chinese become wealthier, there would be a huge demand for travel. The largest online travel portal in China is Ctrip.com International Ltd (CTRP).
Listed on NASDAQ, the USD24.4 billion company is the main online travel agency in China. Bookings for flights, trains, hotels, tour package and other travel related services are all available through the site. It is almost the Expedia of China. Except for one small detail; it is even larger than Expedia itself.
The Legacy Technology Company
When the Chinese Tech space is building up, there are many technology startups during that era. Many of them continue to exist today but have failed to grow significantly as compared to the BAT of China. You can think of them as the Yahoos of China. Here are some worth mentioning.
Listed on NASDAQ, Sina Corp is an online media company. It has a news and search portal, Sina.com. It is quite similar to Yahoo as it provides news, sports, finance and other entertainment content for the Chinese public.
Interestingly, Sina Corp is also the main investor in Weibo Corp. However, as Weibo Corp continue to perform well, the holding company is not as prominent as before. Today Sina Corp only has a market capitalization of USD7.5 billion, about a third of the size of Weibo Corp.
Qihoo 360 Technology Co Ltd
Qihoo 360 Technology Co Ltd (QIHU) is most famous for its anti-virus products with the “360” branding. However, instead of selling the anti-virus as a product, Qihoo 360 embarked on a freemium model, providing most of its products for free, engaging users and making its money from advertising. The company is a USD10 billion company listed on the NASDAQ.
Sohu.com Inc (SOHU) is also the online portal company, that provides online games, news and search portal to its users. Sohu.com is listed on the NASDAQ since 2000 and today it is a USD2.0 billion company.
58.com Inc (WUBA) is an online classified business. It has portals fitted for jobs, real estate, used goods, automotive, and other products and services. It can be seen as the Craiglist of China. The company has a market capitalization of USD 11 billion.
One very interesting technology company that I have come across is Meitu Inc (HKG:1357). Meitu is perhaps best well-known for some of the most popular mobile applications it has developed such as Meitu and Meipai. These are photo and video applications that allow us to create a more “perfect” version of ourselves before posting our images on social media.
Meitu Inc can be considered as a mobile application developer and also an internet-of-things (IoT) manufacturer. It has a line of smartphones, smart mirrors and smart remotes. The company is listed on the Hong Kong Stock Exchange and has a market capitalization of USD5.8 billion.
|Price To Earnings Summary of All the Companies Mentioned
|The Market Is Your Oyster, Choose Your Pearl
All these companies are just some of the more prominent Chinese technology companies that are listed. If you are interested in this space and are looking for ways to invest in Chinese technology companies, these are possible companies for you to research on.
However, please note that many of these companies operate in the extremely competitive market and many of them are still unproven outside of China. Therefore, for those that are embarking on an international expansion, it is still too early to know if they are able to duplicate the success they have in China to the rest of the world.
On top of that, there are many multi-billion technology businesses in China that remain in private investors’ hands. Companies like XiaoMi, Mobike, Didi Chuxing, DJI Innovations, Meituan Dianping, Lu.com and Toutiao are all huge enterprises in their own rights but are not accessible for investors like ourselves.
Interestingly, many of these companies count the BAT of China as their cornerstone investors. This means that apart from having great operating businesses, the BAT of China is becoming more and more like the venture capitalists of China.
The world is changing so rapidly and China seems to be leading the change. Stay with us as we bring you more development from time to time.
Till Next Time, Choose Your Investment Wisely.
Editor of ValueInvestAsia.com
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