Beijing’s Tech Sector, the New Silicon Valley

Beijing’s Tech Sector, the New Silicon Valley

Over the past week, tech-giant Apple Inc [NASDAQ:AAPL] has invested US$1 billion into Didi Chuxing, China’s Uber. This news sent Western media into a frenzy. Suddenly, there is an overwhelming sensation surrounding China’s tech-boom. A wave of articles came out; I will simply list a few headlines here:

  • ‘Chinese will buy more tech than Americans within 2 years’
  • ‘Forget physical stores, China does ‘bytes and bits’’
  • ‘Alibaba, SoftBank strike cloud deal to expand into Japan’
  • ‘Watch out, Silicon Valley: China is coming to eat your lunch’

In truth, there was never a shortage of positive reviews on China’s tech sector from veteran Silicon Valley investors. However, a few big US tech players have been unable to gain access to China’s massive market. Namely Facebook [NASDAQ:FB] and Alphabet (formerly Google) [NASDAQ:GOOGL]. This has muted a lot of the potential interest in the Chinese tech scene. With more western tech companies establishing a large exposure to China’s market now, such as Apple, investors are taking a second look at the Middle Kingdom.

I write for the publication Emerging Trends Trader. This is a subscription service that searches for emerging market trends that can potentially turn into massive ‘tides’. When I see an emerging trend, such as China’s tech boom, I know it is going to be a huge opportunity for investors.

However, I am not surprised by the late discovery of this trend by Western mainstream media. Before expanding its focus and becoming Emerging Trends Trader, my publication looked more exclusively at emerging markets, and was called New Frontier Investor. I am myself an Australian-Chinese. I worked in China, I own assets in China, and I am a frequent traveller to China. The Chinese tech boom is not a surprise to me in any shape or form.

As I am writing, another ‘China expert’ Richard Li, the Executive Chairman of GoConnect [ASX:GCN], is fast moving into Virtual Reality (VR) content distribution in China. After discussing China’s tech trend with Richard, we agree the technology space is one that investors cannot afford to ignore. With US$338 billion raised in venture capital funds in China in 2015 (five times more than the rest of the world), I can tell you this is one of the biggest emerging trends in the next five years.

How do you get exposure?

There are several ways investors can get exposure to the Chinese tech boom. You can buy individual stocks by tapping into Chinese companies listed in the US. You can also tap into Chinese companies listed on the Hang Seng. Or, you can access them via a simple Exchanged Traded Fund (ETF) product.

What is ETF? Here is an explanation from Investopedia:

An ETF, or exchanged traded fund, is a marketable security that tracks an index, a commodity, bonds, or a basket of assets like an index fund. Unlike mutual funds, an ETF trades like a common stock on a stock exchange.’

There are three particular ETFs you can look at for the Chinese tech sector: Guggenheim China Technology ETF [NYSEArca:CQQQ], Global X Nasdaq China Technology ETF [NASDAQ:QQQC] and KraneShares CSI China Internet ETF [NASDAQ:KWEB].

CQQQ is the ETF with the most holdings, a total of 60 Chinese tech companies. Arguably, it is the most diversified. QQQC is a rival ETF to CQQQ, with roughly half of the number of holdings, but is less expensive than its rival. KWEB is a pure internet, software and service focused ETF that excludes hardware producers in China.

All three ETFS have fluctuated over the years. They typically have a higher volatility (degree of movement) than the Dow Jones Industrial Average and the Shanghai Composite Index. Due to the cyclical fluctuation of the three ETFs, investors need to be a little tactical in buying the ETFs. You want to buy low and sell high, obviously. At an annual frequency, the Relative Strength Index (RSI) can be used to detect whether the ETFs are at a low point. Right now is a low point for the three ETFs. It looks like a good time to build a position, for medium term investors.

Typically, the top 10 holdings of an ETF take up a large percentage of an ETF’s net asset. I will use QQQC as an example; its top 10 holdings are 60% of its total net asset. Below is a breakdown of the top 10 holdings for QQQC.

NET ASSETS % NAME MARKET PRICE ($) SHARES HELD MARKET VALUE ($)
9.5 NETEASE.COM INC ADR 153.4 7,111 1,090,827
9.12 TENCENT HOLDINGS LTD 19.98 52,435 1,047,511
7.68 BAIDU INC – SPON ADR 159.75 5,519 881,660
6.43 LENOVO GROUP LTD 0.64 1,146,683 738,481
5.99 SEMICONDUCTOR MANUFACTURI 0.08 8,353,044 688,574
5.31 ALIBABA HEALTH INFORMATIO 0.68 902,709 610,426
5.31 SINA CORP 45.5 13,411 610,201
3.78 VTECH HOLDINGS LTD 10.19 42,672 434,756
3.65 SOHU.COM INC 39.52 10,607 419,189
3.59 YY INC ADR 44.85 9,185 411,947

 

The top holdings tend to be large-cap stocks in the Chinese tech space. Large-caps tend to track the overall performance of the stock index in China, thus giving cyclical trading opportunities to investors.

However, is this the best way to gain access to China’s tech boom? I don’t believe so. A tech boom usually sees smaller players emerge to disrupt larger players. It means small-cap or microcap tech stocks listed in Shenzhen or Shanghai, or even Hong Kong, will become the ‘disruptors’. The large players will become the ‘disrupted’.

I am certainly not saying the companies in the above list are bad companies. But they are not going to be the ones that give you 1000% returns. If you want to learn more about which ones will do that, have a look at the Emerging Trends Trader.

Regards,

Ken Wangdong,
Analyst, Emerging Trends Trader

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