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China Consumer Technology Investment Opportunity

Harvest Exchange
May 16, 2017

China Consumer Technology Investment Opportunity




7 Combes Drive Manhasset, NY, 11030 213.309.3335     


China: Consumer Technology Sector Investment Opportunities  

May 15, 2017   

JWS Capital Management:  Investment idea of the month

JWS  carefully monitors markets and companies, searching for catalysts that  will drive investments in these assets higher. One of the best  opportunities  we have identified is investing in China’s relatively  unknown and undiscovered consumer internet and  technology giant,  Tencent, andother companies in China’s Internet, gaming, and mobile  payments sector. 

JWS’s Investment Thesis:

China’s  leading consumer technology companies represent an attractive  investment opportunity today, based on their valuation, rising domestic  consumption by China’s growing middle class, and the increasing  purchasing power of tech-savvy millennials. This investment theme is  supported by several catalysts, described below.

China Consumer Technology Investment Theme Catalysts

An easing of US and China geopolitical issues:


The  US and China working closely together should promote mutually  beneficial fair trade. President Trump’s recent meeting with President  Xi Jinping went very well and avoided confrontational trade issues.  Global trade tensions have eased, and fear of trade wars has diminished.

It  certainly appears that China is working hard to help defuse the North  Korea situation. After all, North Korea counts on China for virtually  everything that it consumes, including its energy. The world’s two  leaders working in a cooperative manner is beneficial to both countries  and will also promote global growth and world peace.

Economic growth:

The  economic surprise so far this year is China’s accelerated growth of  6.9% in the first quarter, its best performance since the fall of 2015,  whereas the US decelerated from a strong fourth quarter. The IMF forecasts global growth of 3.5% in 2017.


Here  is a breakdown by region: US growing 2.3% in 2017, up from 1.6% in  2016; the Eurozone growing by 1.6% in 2017, down from 1.7% in 2016;  China growing by 6.6% in 2017, versus 6.7% in 2016; and developing  nations accelerating to a 4.5% gain in 2017, compared to 4.1% in 2016.

Global  trade volume, an indicator of health in the global economy, is  projected to rise by 3.8% in 2017 and by 3.9% in 2018, versus 1.8% in  2016. What I find important is that the IMF has not factored much, if  any, of President Trump's pro-growth agenda into its forecasts.

Consumer technology:

China  is moving from what historically has been an export-driven economy to  one that is much more consumer driven.  In fact, the domestic side of  the economy actually surpassed the export segment about three or four  years ago. Online shopping in China, for example, is growing at 35% to  40% per annum.

These are all domestically driven operations and  businesses. So, increasingly, China is becoming more focused on domestic  consumption. This sector should benefit from the increased wealth and  income from its growing middle class and from the millennial  generation’s substantial use of social, mobile, gaming, and payment  applications.

Timing of MSCI’s expected increased weighting of China’s markets to MSCI’s Emerging Markets Index:

$1.6  trillion of assets are benchmarked to this MSCI index. In  early to mid  June, I expect MSCI will increase its allocation for China’s equity  markets weight from 26% to over 40%, due to adding and including Chinese  A-share companies on the Shanghai and Shenzhen Stock Exchanges, which  together comprise the world’s fourth- and seventh-largest stock  exchanges, and are worth around $7 Trillion.

Over 90% of US  pension funds that are invested in global stocks are benchmarked to  MSCI’s indexes. In May 2016, MSCI announced that its review to add the  Chinese A-shares to its Emerging Markets Index would be extended for one  year, due to three outstanding issues that I believe are now resolved.

Chinese  regulators implemented rules addressing these concerns a year ago, and  we now can evaluate their impact. Once this expected MSCI announcement  occurs in June, the initial implementation period is usually 12 months  later. The large allocation percentage increase means the full  implementation period likely will be gradually phased in, and take up to  five and perhaps even ten years, with the Chinese markets increasing  their initial allocations in this Index by 1%-2% in the first year and  2%-3% thereafter. Including Chinese companies on the Shanghai and  Shenzhen exchanges in this Index should provide both a substantial  tailwind and a boost for these company stocks and markets, as a  significant number of the world’s investors rebalance their allocations  to these markets.

China’s growth thesis confirmed by large Wall Street investment banks

Many  investors look for the problems and ignore the opportunity in China.  They worry about China’s debt, politics, and a potential economic crash.  But I worry about those same problems in the US. The difference is that  the opportunity in China is unlike anywhere else in the world.

In  February 2017, Morgan Stanley's research department published a report  titled, "Why We Are Bullish on China." The report is 118 pages long, and  it details the economic, political, and market forces that will help  propel China over the next decade.

Last  month, Goldman Sachs also upgraded Chinese stocks to "overweight." And  UBS issued a report maintaining an overweight position on Chinese stocks  and said Internet stocks are one of their favorite sectors.

China versus US Internet penetration rates:

China’s  Internet users reached 668 million people in 2015, a penetration rate  of only 50%. Contrast that with 280 million people in the US using the  Internet in 2015, a penetration rate of 87%. China’s e-commerce sales  reached $590 billion in 2015, compared to $392 billion in the US.

Recommendation and Investment Opportunity:

I  believe the best investment opportunity is to invest directly in  China’s leading dominant consumer Internet company, Tencent Holdings  Ltd., (Tencent). Tencent’s ADR trades in the US OTC market under the  symbol TGEHY. Tencent is an investment holding company, principally  involved in providing social networks, mobile gaming, and online  advertising services.


Tencent  owns two social networks, QQ and WeChat. WeChat is a must-have for  anyone doing business in China. WeChat is like having Facebook, Paypal, a  smartphone, mobile gaming, and text messaging combined in one app.  One-half of WeChat users are on this app 90 minutes every day.

Both  WeChat and QQ allow users to link bank accounts and make secure  payments directly from their smartphones. Both networks have over 650  million users apiece, and are linked to over 300 million bank accounts.  WeChat’s importance and dominance is evidenced by Didi Chuxing, China’s  largest ride sharing service, backed and partially owned by both Tencent  and Alibaba. Didi Chuxing’s scale and dominant market position drove  Uber out of China largely by removing Uber’s presence from WeChat in  2015, and eventually allowed Didi Chuxing to purchase a majority  position in Uber’s China business activities. China’s population is over  1.3 billion, which means substantial growth as these networks’  penetration and growth increase.


Tencent  also dominates the world in mobile gaming. Tencent owns Riot Games, the  creator of League of Legends, the world’s most popular game. At League  of Legends’ last world championship, viewership peaked at 14 million,  with 30 million people tuning in over the course of the games.

With  a strong management team that has grown both revenue and EPS over 40%  in recent quarters, Tencent should benefit especially from China’s  consumer-focused economy and the extensive growth of China’s millenials’  use of social networks, mobile gaming, online shopping, and payments  applications. Analysts estimate revenue will increase from 151 billion  yuan in 2016 to 329 billion yuan in 2019.

Although  relatively obscure in the US, Tencent is now the tenth largest company  in the world today, based on market capitalization, and is using its  vast knowledge and expertise to expand into several other emerging  markets. Many US investors first heard of Tencent when the company  bought 5% of Tesla. Tencent opened its first data center in the US last  month in Silicon Valley, expanding its cloud-computing services to the  US market, and recently announced it is opening an artificial  intelligence laboratory in Seattle. Tencent is regarded as China’s  premier employer and attracts employees from the world’s leading  investment banking and consulting firms. Its US ADR symbol is TCEHY, and  I believe its stock price will benefit greatly from this theme and  these catalysts coming to fruition.

For  investors who want a more diversified exposure to China’s consumer  Internet theme, I recommend KWEB, an ETF sponsored by Krane Fund  Advisors LLC, based in New York City. I particularly like the  diversified consumer technology and Internet companies in this ETF, with  Tencent being its largest holding. I believe that other broad market  Chinese ETFs and equity mutual funds may perform well, but not as well  as Tencent in particular, and the Chinese consumer Internet technology  sector in general, driven by China’s rising middle class and the  increasing purchasing power of their tech- savvy mllennial cohort.

Originally Published at: China Consumer Technology Investment Opportunity

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