Chinese Tech Stocks to Watch
As a financial writer, I am often asked for predictions on the next bull market, and my answer is always the same: Chinese tech stocks. Investors looking for double- and triple-digit gains should take a fresh look at the top tech stocks in China.
It’s equally important that investors abandon their simplistic notion of China as the “world’s factory.” There’s obviously still a ton of manufacturing in the “Middle Kingdom,” but the country has entered a new stage in its evolution.
China has modernized more quickly than anyone had imagined was possible. Chinese technology stocks are now popping up on exchanges in North America, and the country is even issuing yuan-denominated debt in overseas markets.
We can no longer talk about China as an emerging global power. It’s already here.
Last year, the International Monetary Fund (IMF) approved China’s bid to be included in the reserve currency basket. It was a relatively small piece of news that slipped under the radars of most investors. But I think it marked a turning point for Chinese investments.
It was a signal to Chinese tech stocks: go forth and conquer.
Dear reader, if I have read the signal correctly, and I think I have, Chinese tech stocks are about to skyrocket. We could be standing on the edge of the biggest bull market in history, yet most investors are completely blind to this opportunity.
They are blinded by politics. Bringing one’s personal views into the mix is one of the worst mistakes an investor can make. Moreover, it can cost you a lot of money in this business, so I prefer to look at things from a purely rational perspective.
If there’s money to be made, go make it. It’s that simple.
With that in mind, Chinese tech stocks are clearly on the rise. They used to confine themselves to the domestic Chinese market, but now they are spreading like wildfire into the rest of the world. Either by listing on U.S. stock exchanges or through buying up U.S. firms, Chinese tech stocks are becoming a force to be reckoned with.
For instance, there was a record-high $15.0 billion worth of direct investment from China in 2015. (Source: “Chinese firms go on a buying spree for American companies,” CNBC, May 9, 2016.)
It’s already looking like 2016 will shatter that record. The ink is already dry on $7.5 billion worth of deals, and there are $33.0 billion worth of announced deals yet to be closed. They are buying everything from ride-sharing companies to Hollywood studios.
But let’s get down to brass tacks. Some of these Chinese tech stocks are available only to wealthy individuals and private investment funds in China, so let’s skip right over those. What we’re looking for are cutting-edge technology stocks with massive upside potential.
I have found three names that fit the description.
No. 1 Top Tech Stock in China Market: Alibaba Group Holding Ltd
U.S. tech stocks have previously tried and failed to break into the Chinese market. Most famously, Alphabet Inc (Google) (NASDAQ:GOOG) left the country after its disagreements with the Chinese government.
As a result, there are Chinese tech stocks that mirror some of the best-known tech brands in the U.S. For instance, Alibaba Group Holding Ltd (NYSE:BABA) is often referred to as the Chinese version of Amazon.com, Inc. (NASDAQ:AMZN).
The two companies are extremely alike, except for the fact that BABA stock only trades at 33.8 times earnings (for the last 12 months), compared with Amazon’s trailing price-earnings (P/E) ratio of 189.6. It’s a shockingly low multiple, considering that Alibaba’s entrance into the New York Stock Exchange was the biggest initial public offering (IPO) of all time!
If you look at all of Alibaba’s web sites combined, you’ll see a stunning user base of 434 million active buyers. The company has 80% of China’s e-commerce market, growing sales per person, and a solid mobile retail platform. One of my favorite things about Alibaba is that 75% of gross market value came from sales on a mobile platform.
Consumers want to shop whenever they want, wherever they are. That’s the new expectation, and clearly Chinese tech stocks are prepared to meet those demands.
Alibaba also offers payment services and cloud storage. It has become commonplace for Chinese citizens to pay for gas or groceries using their smartphones, so “Alipay” is much further along in development than its North American equivalents.
As for cloud storage, Alibaba already has 500,000 paying members, something that has caught the attention of big-time investors at Morgan Stanley. They issued a report saying that “AliCloud” could warrant an independent valuation of $39.0 billion. (Source: “Alibaba Cloud Hires Microsoft Veteran,” The Wall Street Journal, July 6, 2016.)
In the last year, BABA stock has surged almost 40%, but I think those gains are just the tip of the iceberg.
No. 2 Top Tech Stock in China Market: Baidu Inc
Speaking of Chinese tech stocks that mirror U.S. giants, investors should take a closer look at Baidu Inc (ADR) (NYSE:BIDU). It is the China’s version of Google, except with a P/E ratio of 12. By contrast, Google trades at a multiple of 30. As with Alibaba and Amazon, the market places a premium on U.S. tech stocks.
It’s not a coincidence. Chinese tech stocks are notoriously underpriced by U.S. investors, which is what makes them so attractive right now. They’re trading cheap.
For instance, Baidu’s monopoly over the Chinese Internet search market is similar to Google’s stranglehold over the North American search market. Baidu also has a driverless technology program that is arguably more advanced than Google, yet its multiple is lower.
Baidu already has driverless buses and vans roaming around towns in China. Just think about that for a second. The company is aiming to bring autonomous mass transportation to major Chinese cities before Google gets a single driverless car into commercial production.
In other words, Baidu will be halfway through a marathon before Google has laced up its shoes. Chinese regulations can be changed much more quickly than North American ones, so Baidu could get approval in short order.
Considering that the driverless car market will be worth $42 billion by 2025, Baidu is setting up its share price for an explosive amount of growth. I expect there to be a tipping point once the first commercial contracts are signed, sealed, and delivered.
No. 3 Top Tech Stock in China Market: Trina Solar Limited
Trina Solar Limited (ADR) (NYSE:TSL) is slightly different from our other Chinese tech stocks. Trina Solar isn’t an Internet company, nor is it a gadget manufacturer. This company is engaged in one of the fastest-growing industries in the world: solar power.
I know that last year wasn’t the best year for solar energy companies. Rooftop providers like SolarCity Corp (NASDAQ:SCTY) (before the Tesla Motors Inc (NASDAQ:TSLA) merger) and Vivint Solar Inc (NYSE:VSLR) got hammered by the market as the regulatory landscape shifted under their feet.
But Trina Solar isn’t a rooftop solar provider. It’s in the business of building solar power equipment and selling it to other solar energy companies. That’s why their share price grew 23.59% over the last 12 months while others stagnated.
The company is a supplier, not a seller. Although its headquarters are in the Jiangsu province of China, Trina has branches in the U.S., Europe, and parts of Asia.
I’m generally bullish on solar energy plays, but Trina Solar is particularly exciting for its global reach and insulation from regulatory headwinds. That being said, there are a few other solar energy stocks that are also attractively priced.
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