The Best Way To Profit From China's Amazing Internet Boom

By StreetAuthority | December 12, 2013 AAA

The most successful investors on Earth all share a common trait: the ability to see and act on long-term trends.

While the majority of investors are focused on short-term results, the top investors are primarily concerned with being on the correct side of global economic growth patterns. Finding and investing in companies that are riding these global growth trends is a recipe for long-term investing success.

Right now, China is attracting substantial investor interest due to its demographic shift toward a consumer-driven economy. Following the emerging Chinese bull hasn't always been easy, thanks to the government's tight control over the economy. However, this situation is well on its way to changing as China's leaders are turning their formidable powers toward spurring the economy rather than being strictly focused on rigid controls.

Most importantly for investors, the government's focus on economic growth is combining with the power of the Internet to create one of the most exciting investment opportunities I've ever seen.

The goal of China's current five-year economic plan is to increase domestic demand and reduce the population's high rate of savings. They are accomplishing these goals by increasing incomes, improving social safety nets, altering the tax structure, and actively promoting a demographic shift from rural areas to cities. To support the creation of 45 million new urban jobs, the government is building 36 million low-cost housing units to help with moving workers into the cities and increasing the minimum wage.

Consulting firm McKinsey & Co. estimates that consumption will account for 43% of total Chinese GDP growth by 2020. In addition, household income is forecast to increase to just under RMB 56 trillion (more than $9 trillion) in 2015, an increase of more than 130% from 2010. The increase in disposable income means that more and more consumers will be turning to the Internet for commerce, socializing and other everyday activities. Add in the fact that over the past 10 years, the average yearly income of China's poor has grown from $1,430 to $6,100, and you can see the massive growth on the horizon.

As of June, 44% of China's 1.3 billion people had used the Internet. As you can see from this chart, Internet use in China is in a clear uptrend.

The key takeaway from these initiatives is that disposable income will increase dramatically. This means that China's residents will have more money to spend thereby, and their Internet use is likely to increase further as a result.

It's a powerful trend that has already made numerous investors very wealthy. The #1 company on the forefront of this long-term growth pattern is Tencent Holdings (OTC: TCEHY), currently the third-largest Internet company in the world.

Founded in 1998 and based in Shenzen, China, Tencent is traded on the Hong Kong exchange and trades in the United States on the over-the-counter market. The conglomerate's market capitalization of over $110 billion makes it larger than Yahoo (Nasdaq: YHOO), Linkedin (Nasdaq: LNKD) and Twitter (Nasdaq: TWTR) -- combined.

That should dispel any concerns of it being a fly-by-night, undercapitalized firm.

Tencent is structured as an investment holding company with subsidiaries offering Internet, entertainment, advertising, and value-added cellular services to China's huge population. Its business lines include instant messaging, interactive TV, a multi-player online gaming portal, an auction site known as PaiPai, a payment service similar to PayPal, and even a social networking service. (Forbes recently reported that Tencent is about to overtake Facebook (Nasdaq: FB) as the world's largest social network.)

In addition, Tencent's mobile chat service WeChat has doubled its active user base from last year, to 272 million users, and the company launched five new games through its WeChat platform in the past three months. It's unclear what Tencent has earned from these games, but it has had a total of 570 million registrations since the games' debuts.

As you can see, Tencent has the Chinese Internet space covered. The company exhibited solid growth in its most recent quarter, with 20% profit growth and a 34% increase in revenue, but missed optimistic estimates.

Technically speaking, the stock has been in a firm uptrend since January 2012. The stock has tripled in price from $20 to just over $60 in less than two years. The 50-week moving average has served nicely as support, with every brief sell-off being bought.

Risks to Consider: Of course, there remains significant political risk in China. In addition, Tencent rival Sina Corp. (Nasdaq: SINA) is growing at a rapid pace. Be sure to always use stop-loss orders and diversify when investing, no matter how good an opportunity appears.

Action to Take --> I expect Tencent will reach $100 within the next 15 months. Buying now with initial stops at $49 makes solid investment sense.

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