For the past few years, investing in Chinese tech stocks has been simple, and lucrative.
Alibaba Group (ticker: BABA), Tencent Holdings (700.Hong Kong), and Baidu (BIDU) dominated e-commerce, social media, and search, respectively, combining management moxie with state protection from global rivals to deliver soaring profits and share prices. They changed the nature of emerging markets in the process, as global indexes shifted from banks and oil stocks to the digital future.
Forget simplicity if half-a-dozen prospective multibillion-dollar initial public offerings from China’s tech sector come to pass this year. Smartphone maker Xiaomi ushered in the next generation on May 3, filing for an IPO in Hong Kong that could raise $10 billion, the world’s biggest since Alibaba four years ago. A number of pure-play internet powerhouses await, including Chinese versions of Uber (Didi Chuxing), Groupon-plus-Yelp (Meituan-Dianping), and Spotify Technology (Tencent Music). Most intriguing may be Ant Financial, a mushrooming online payments network cum lender and asset manager. Together, they should be valued in the hundreds of billions, says Tracy Chen, a Chinese-born portfolio manager with Brandywine Global.
That spells opportunity to broaden exposure to one of the growth stories of the age. “I’m excited about new possibilities,” says Paul Meeks, a celebrity fund manager during the 1990s tech boom and now chief investment officer at Sloy Dahl Holst. “You have companies with global heft going public.”
But the rewards won’t come without risk. First off, all the new entrants except Xiaomi are wholly or partly owned by the existing Chinese Big Three. Ant Financial is a division of Alibaba, Tencent Music (obviously) of Tencent. The Groupon and Uber clones are controlled by those two plus Baidu. That bolsters investor confidence in their managements, but sets up a welter of arbitrage possibilities if and when the spinoffs are completed.
The IPOs could also encounter unpredictable crosswinds from the (so far) slow-motion U.S.-China trade conflict. Chinese telecom equipment maker ZTE (ZTCOY) fell into disarray this past week after Washington banned its purchase of components made by U.S. companies—one reason, perhaps, why Xaomi slashed its target valuation by $25 billion to a mere $70 billion to $80 billion. Domestically focused internet services might seem better insulated. But, to varying degrees, they all have global expansion plans, and no one is safe from collateral damage.
The nurturing relationship between Chinese internet titans and their government, which owns a small equity stake in each, also shows signs of fraying. Ant Financial faces a growing appetite for regulating its myriad nonbank financial services, while all social media are constrained by the state’s rein on user data. “With the state controlling all the data, Chinese apps could face a Facebook-type situation five or 10 years in the future,” Chen comments.
Against these threats, the replicating tech giants can present one heck of a track record. Alibaba shares have doubled since January 2016, and Tencent’s surged by 150%. “These businesses have demonstrated they can win customers and convert that quickly into cash flows,” says Rohit Chopra, an emerging markets portfolio manager for Lazard Asset Management. “My perception is the market is quite keen on these platforms.”
Chen takes more of a yin-and-yang approach. “We are favorable in the long term, but in the short term this will be a very volatile trade,” she says.
Craig Mellow writes about markets from Savannah, Ga.China