China's Tech Giants Aren't Done Growing

China’s technology stocks have been pressured by political hurdles as the governing party tries to reign in the power of its own tech giants. As a result, companies such as Alibaba, Baidu and Tencent are trading at historically low multiples and at lower levels than before the pandemic struck.

“Hong Kong stocks suffered the biggest sell-off in seven weeks as a surge in global commodity prices and factory-gate inflation in mainland China stoked concerns about tightening monetary policy. Meituan slumped for a 10th straight day to the lowest since October.” by Zhang Shidong for SMCP

While the political risk is present in China, investors should also consider the risk of inflationary pressures that comes with the rise of the middle class. Certainly as the output produced by China could not be efficiently replaced by any neighbouring country.

“Manufacturing goods in China is now only 4 percent cheaper than in the United States, in large part because yearly average manufacturing wages in China have increased by 80 percent since 2010.” by Matthias Lomas for The Diplomat


CHEAP, PROFITABLE, GROWING

China’s middle class is rising but the country is still heavily reliant on trade to support its growth. In short, China needs the world’s consumption in order to grow and the world needs China’s massive factory output to supply its consumers.

  • In this light, we believe that the technology-crackdown driven by the government in the last months is temporary and not meant to break China’s champions
  • Inflation concerns regarding factory output in China could largely be transitory as problems may be concentrated in global shipping and the initial hurdles linked to a post-pandemic restart of the global economy
  • China’s technology champions are, for the most part, showing healthy growth rates, stable margins and growing influence over China’s neighbour (Southeast Asia and Europe)

In this light, we believe Chinese technology stocks offer great value for money at current levels.


BENCHMARK’S TAKE

  • China’s technology stocks have been pressured by political hurdles as the governing party tries to reign in the power of its own tech giants
  • We believe that the technology-crackdown driven by the government in the last months is temporary and not meant to break China’s champions
  • Investors should also consider the risk of inflationary pressures that comes with the rise of its middle class
  • However, inflation concerns regarding factory output in China could largely be transitory as problems may be concentrated in global shipping and the initial hurdles linked to a post-pandemic restart of the global economy
  • China’s technology champions are, for the most part, showing healthy growth rates, stable margins and growing influence over China’s neighbour (Southeast Asia and Europe)

We have started a position (5% of portfolio) in the iShares MSCI China UCITS ETF.


Disclaimer

Please note that this article does not constitute investment advice in any form. This article is not a research report and is not intended to serve as the basis for any investment decision. All investments involve risk and the past performance of a security or financial product does not guarantee future returns. Investors have to conduct their own research before conducting any transaction. There is always the risk of losing parts or all of your money when you invest in securities or other financial products.

Disclosures

The author has a position in the iShares MSCI China UCITS ETF. The author has no business relationship with any company mentioned in this article and the author is not receiving any form of compensation for this article other than contributions from paying subscribers.

Credits

Photo by Li Yang on Unsplash.