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Home / Business / How to invest in Chinese stocks – The Motley Fool

How to invest in Chinese stocks – The Motley Fool



In world history, no economy has made a huge leap in as short a time as China's has done in the last generation. A nation of over 1 billion people who, not long ago, relied on the bike as their primary mode of transport, is now the world's largest car market. It is also the world's largest smartphone market and will pass the United States as the largest retail market in 2019. China is the world's second largest economy today behind the United States

According to HSBC, China is poised to overtake the United States by 2030 to become the largest economy after gross domestic product. The global bank also expects it to be the world's largest contributor to economic growth through 2030 as it has been since the financial crisis of 2008-09.

Given China's size and GDP growth rate, which hit 6.6% in 201

8, it is not surprising that so many investors are interested in China stocks. In this deep-dive look at China equities, we will explore the benefits and risks of getting exposure to China, how to analyze Chinese equities, the options investors have in China, and finally the top China equities to buy.

  American and Chinese bills scattered across a table with a glass sculpture of a globe

Image source: Getty Images.

Why You Should Invest in China Stocks

There is a reason above all others that makes China so appealing to investors: growth.

China's economy has boomed over the last generation, largely due to the government's planned urbanization of the country and massive investments in infrastructure, including commercial and residential skyscrapers, highways, airports, mass transit and high-speed rail, among other components. At the same time, globalization has made China the world's factory, a powerhouse for industries ranging from electronics to clothing to toys, and the gradual liberalization of China's communist government has allowed the economy to capitalize on the forces of capitalism, including outside investment and consumer choice.

The combination of these two forces, as well as technology such as the Internet and mobile computing, has created a thriving middle class in China. As the Chinese population move from rural areas to cities, they embrace the trappings of modern life, including American products such as Starbucks coffee, Nike shoes, GM cars, and Apple devices.

Beyond production, China is now transforming into a consumer-driven economy as retail sales increased 9% to $ 5.6 trillion last year, and Chinese companies reap the benefits of the rapidly growing economy. As the Chinese government continues to invest in infrastructure and stimulate the economy, and plenty of Chinese moving to newer, lower levels (what China calls their smaller cities) in the years ahead, China and Chinese equities should continue to scale up.

How to Invest in China Stocks

Investing in foreign companies is not always easy. There are risks (more on this below) that investments abroad entail currency risk, regulatory and transparency issues, volatility and local land risks such as corruption, war and natural disasters. But foreign business investors also face logistical challenges.

For example, buying shares listed on Chinese stock exchanges such as Shanghai, Shenzhen and Hong Kong may require you to open a brokerage account with a Chinese company, or you can check if your US brokerage will allow it.

Dozens of Chinese shares are listed on US stock exchanges through US deposit receipts (or ADRs), which are certificates issued by US banks representing shares of foreign shares. ADRs basically make it easy for foreign companies to list on US stock exchanges and make their shares available to US investors.

The other practical alternative American investors have to get exposure to China is to buy shares in an ETF, a publicly traded fund. These are funds that hold a group of shares and act like a stock would do, making it easy to move in and out of. Below are some examples of China ETFs investors might want to consider.

China ETF Description Assets Under Management Expense Ratio 5 Year Average Annual Return
iShares MSCI China ETF (NASDAQ: MCHI) Traces MSCI China Index $ 4.32 Billion 0.59% 6.95%
S&P SPDR China ETF (NEWSEMKT: GXC) Tracks with S&P China BMI Index [19659024] $ 1.25 Billion 0.59% 7.09%
iShares China Large-Cap ETF (NEWSKMT: FXI) Tracks with FTSE China 50 Chinese Stock Index which was traded on the Hong Kong Stock Exchange $ 5.53 billion [19659025] 0.74% 5.52%

Data Source: Yahoo! Finance.

Finally, another option is to buy shares that trade over the counter or on "pink sheets." These stocks have tickers that include "OTH" or "OTC" and are available to US investors who are directly listed companies. However, they do not face the same reporting requirements from the Securities and Exchange Commission that direct listed companies do, so it may be more difficult to obtain information about them.

Risk of investing in Chinese stocks

Although the available growth in China is clearly appealing, there are a number of risks investors should be aware of, including currency fluctuations, different reporting standards, influence of China's communist government, and the potential for fraud. For example, Chinese stocks tend to be attacked by short sellers more often than US companies.

The two biggest risks to Chinese equities in 2019 are trade tensions and slowing economic growth.

The Shanghai Composite index, which tracks all the shares traded on the Shanghai Stock Exchange, lost 25% in 2018 amid concerns about both the painful trade war with the United States and a sustained slowdown in China's economic growth. Although Chinese stocks have recovered much of the losses in 2019, since the index is up 18% through mid-July, the same risks remain.

In the second quarter of 2019, China's GDP grew by 6.2%, its slowest pace since 1992 as the trade war, internal challenges and a declining global economy appear to have an impact. Meanwhile, US-China trade tensions continue to move markets in both countries in a dispute over trade practices that gradually escalated in 2018 as the Trump administration began to cut tariffs on all imports of a variety of products, including washing machines, solar panels, steel and aluminum. Although customs duties were imposed on imports from all over the world, China was undoubtedly hit hardest by them when it exported large quantities of these products to the US China responding to slap 10-25% tariffs on hundreds of US products. The United States then introduced a new customs round specifically for Chinese products, with the two sides continuing in a tat-for-tat manner through May 2019.

By the end of June 2019, President Trump and Chinese President Xi had agreed ceasefire, maintain current tariff rates, but plan to renew trade talks and avoid escalation for the time being.

It appears that these trade tensions may already have lasting effects. Several US companies are moving production out of China to places like Vietnam, India and Mexico. If the trade war expands to a potential blacklist of Huawei, the Chinese smartphone maker, China's economy and technology industry may face further pressure. Such a move could provoke a counter-reaction to US brands being sold in China and lead to a vicious cycle.

Elsewhere, there are a number of other more general risks of investing in China. For example, the communist government exerts tremendous power, and can easily merge on companies whenever they want if they go according to China's strict content rules. Such an event happened to software company Momo earlier in 2019 when the Tantan dating app was removed from app stores and the company was forced to take down a social news feed. If the Chinese market ever opens to allow companies like Alphabet Facebook, and Netflix to operate there, Chinese companies could now do well to suffer from the competition.

Finally, the risk of fraud in Chinese stocks is much lower than it was, but investors should be aware that Chinese companies are subject to different reporting requirements regarding the financial statements. This allows unscrupulous companies to manipulate stock prices through their financial reporting, making it a popular target for short sellers. Uxin an online seller of used cars, was struck by a card seller in December 2018 and in April 2019 who accused it of fraud.

What are the biggest China stocks?

While the largest does not mean best to invest, looking at the largest China stocks that trade on US exchanges will give investors a good sense of the taste and variety of investments they can make in China. Below is a list of seven of the largest China shares by market value, showing both state-owned and privately owned companies. Market cap is the total market value of a company's outstanding shares.

Company Market Cap Description 5 Year Return
Alibaba (NYSE: BABA) $ 452.3 Billion Operates multiple marketplaces for e-commerce, and owns complementary businesses, including cloud computing devices, and logistics and delivery 85.6%
Tencent (NASDAQOTH: TCEHY) $ 439.8 billion [19659060] Owner of WeChat, China's most popular social media and messaging app. Also holds a strong position in online gaming and payments 192.6%
Baidu (NASDAQ: BIDU) $ 39.8 billion China's largest search engine (46.4%) [19659061] JD.com (NASDAQ: JD) $ 51.1 billion China's largest direct online seller 10.6%
China Mobile (NYSE: CHL) $ 185.1 billion

The largest telecom company in the world and one of China's three state-controlled telecoms

(28.8%)
Industrial and Commercial Bank of China (NASDAQOTH: IDCBY) $ 281 billion One of China's four largest state-owned banks 6, 2% [19659061] PetroChina (NYSE: PTR) $ 167 billion The listed arm of China's national petroleum (59.8%)

Data source: Yahoo ! Finance and Ycharts.

How to Analyze China Stocks

When looking for individual China stocks, investors will want to use many of the same tools and metrics they would do with any other company to evaluate potential stock purchases. These include the following:

  • Revenue growth is always a key indicator of a stock potential, but it is especially important to consider with Chinese equities, as investors will want to look for high turnover growth of 20% or more, which shows that the company Take advantage of China's huge economic growth and take advantage of the hugely addressable market in China's fast-growing middle class, which now totals around 400 million.
  • Competitive Advantage also deserves the attention of investors, as a competitive advantage is especially important in rapidly growing markets as assets such as a known brand or network effects can lead to high returns in the way of expensive and sometimes unprofitable growth stocks.
  • Relationships with other companies are also a unique aspect of Chinese equities, and one area investors should consider. For example, tech giants Alibaba and Tencent hold shares or have relationships with many smaller companies, including Baozun Uxin and JD.com. Considering the interconnection of many Chinese companies, such conditions have a source of competitive advantage, and investors should look for companies that have such ties.
  • State owned versus privately owned companies and the differences between the two. The most unique thing about China's economy is the embrace of "state capitalism" that the government owns many of the businesses, especially those in strategic industries such as banking, telecom, aviation and energy, but the economy still operates according to market principles. Many of China's largest companies are state-owned, and these stocks tend to be slower growth in dividends in more traditional industries. Investors looking for high growth stocks in China will largely focus their attention on technology companies, which are more dynamic and innovative, and tend to be privately owned. Because of this distinction, Chinese tech stocks tend to get the most investor attention in China.

Top China Stocks to Buy

The best China stocks will show revenue growth, long-term opportunities, competitive advantage and strong relationships with other Chinese companies. Let's look at a few Chinese stocks that deserve investor attention.

Alibaba

Of all the Chinese stocks out there, Alibaba is perhaps the best known to American investors, and for good reason. The company was built by the famous entrepreneur Jack Ma, is a technical and e-commerce power plant. The online Tmall market provides a home for a number of advanced global brands such as Nike, Estee Lauder and H&M to sell their goods. The company has forged partnership with US companies such as Starbucks where it helps the coffee giant with delivery, payment and online store.

Alibaba has also built an impressive network of complementary businesses and competitive advantages. The market model itself creates competitive advantage through network effects and has generated high profit margins for the company. In fiscal year 2019, which ended on March 31, Alibaba's China retail outlets, Tmall and Taobao, gross trading volume (GMV), or total value of goods sold on the platforms, rose 19% to $ 853 billion. Organic revenue growth, which excludes the impact of acquisitions, drove 39% to $ 56.2 billion. Including acquisitions, sales increased 51% in fiscal year 2019.

Meanwhile, Alibaba also operates China's leading cloud services, Alibaba Cloud, which had 84.5% revenue growth in fiscal year 2019 to $ 3.7 billion. Alibaba's cloud business is still unprofitable, but it will eventually become a significant profit center as infrastructure-as-a-service tends to be very profitable in scope as the success of Amazon Web Services shows.

Finally, Alibaba owns one-third of Ant Financial, the superior of Alipay, the payment processing service, which is part of 70% of the company's e-commerce transactions and had more than 700 million users in China as of September 2018 and 900 million globally. .

The combination of this business provides Alibaba with significant exposure to the rapidly growing segments of China's economy and areas that will benefit from advances in technology and the continued embrace of it as more Chinese move into the middle class. In addition, strong partnerships with brands that sell in the marketplace should protect their value position and ensure strong profit margins.

Last year, the company posted adjusted net income of $ 13.9 billion for $ 56.2 billion in revenue.

JD.com

Alibaba's main rival in China, JD.com (NASDAQ: JD) also looks ready to capture the long-term growth opportunity of electronic commerce in China. Although JD has its own marketplace, most of the company's business comes from direct online sales. Like Amazon, it has invested in an extensive network of warehouses and now has more than 550 stores across China. JD also operates its own logistics and delivery service, which it believes is the largest of any e-commerce provider in China. The company delivers most of the customer orders itself and offers same-day and next-day delivery to 2,146 counties and districts in China.

JD has also invested in technology such as drone delivery and robotics to automate its warehouses, and help to strengthen delivery management. Last year, JD opened a highly automated warehouse in Shanghai that can process 200,000 orders a day. In the meantime, the company is experimenting with delivery of drones in rural China and Indonesia, as delivery of drones can unlock parts of China that are difficult to access due to poor infrastructure.

JD has forged a number of partnerships with other Chinese companies and global retailers. It formed a strategic partnership with Tencent, which makes JD Tencent's preferred e-commerce partner for physical goods and allows JD to use Tencent's apps to help its users' shopping experience. The company also has a strategic partnership with Vipshop another Chinese online retailer, where it is also an investor.

Outside of China, JD has also teamed up with Alphabet, which invested $ 550 million in JD and partnered with the e-commerce company to combine JD's supply chain and logistics expertise with Google's technology understanding. JD has also entered into an alliance with Walmart who owns 9.9% of the company, and the two have collaborated on one hour delivery from Walmart stores in China and to launch online stores from Walmart, Sam & # 39; s Club, and Asda at JD.com.

JD's strengths in delivery and logistics combined with its expansive partnerships should allow the company to continue to leverage the long-term growth opportunity of Chinese e-commerce.

Tencent

Together with Alibaba, Tencent is China's second dominant tech giant, and together the two companies have a role in almost every corner of China's technology industry.

Instead of e-commerce, Tencent rose to become one of China's largest companies by dominating social media and gaming. The leading social network Weixin, or WeChat as it is known internationally, ended 2018 with nearly 1.1 billion active users each month. QQ, the second social network, had an additional 807 million users. The size of these apps has provided the company with a very tacky and valuable platform for adding a wide variety of money-earning components, including advertising, mobile gaming, video streaming and mobile payments.

Last year, these businesses drove revenues up 32% to $ 45.6 billion and delivered net revenues of $ 11.7 billion, allowing Tencent to pursue a range of growth opportunities in high-margin businesses such as advertising, mobile payments and cloud computing. Web ad revenue jumped 44% last year to $ 8.47 billion, driven by 55% growth in social advertising from new products like Weixin Moments, Mini Programs, which are mainly in-app applications, and its mobile advertising network. [19659002] In its other business, which primarily consists of mobile payments and cloud computing, revenue jumped 80% to $ 11.4 billion, driven by a growing rate of commercial transactions and an increase in other fees as the number of active users increased significantly from the previous year. In its new cloud business, turnover has more than doubled to $ 1.3 billion, as cloud is still a valuable long-term opportunity.

Growth in the largest segment, online gaming, has been slower lately due to a temporary halt in the approval of new games. However, gambling is still expected to be a rich source of growth in China as UBS predicts that annual spending on gambling in China will more than triple by 2030 to $ 200 billion.

In addition, Tencent has a massive portfolio of investments in more than 700 companies, many of which are expected to be announced soon.

Tencent may seem like a sprawling enterprise, but no Chinese stock provides exposure to a broader range of growing and interconnected segments of the Chinese economy in areas such as social media, gaming and entertainment, mobile payments, advertising and cloud. 19659011] Ride the dragon

As the Shanghai Composite's sharp fall in 2018 shows, Chinese equities may be unstable and the market will favor growth investors over value seekers. However, no market can offer the kind of expansive long-term growth opportunities that China can. This is the world's most populous country, and hundreds of millions of citizens are still expected to move up the middle class as the government is still focused on urbanization and making the country a high-tech power plant.

Despite some challenges, China's growth should continue to outperform the developed world and give investors many opportunities as it expands. Whether you are considering individual China stocks, a China ETF, or just US companies with Chinese exposure, the potential for investing in China is too great to ignore.


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