A Dragon-Sized Play In Chinese Tech

By Aaron Levitt | October 21, 2013 AAA

While emerging giant China’s position as a low cost manufacturer is well known, the nation is quickly moving up the value chain and is becoming a technology hot spot. The developing nation has used its manufacturing prowess to improve its product mix, while its growing middle class is craving all new forms of technology. From device manufacturing to mobile commerce, the opportunities in Asia’s largest economy are certainly immense.

For investors with longer timelines, China’s burgeoning tech sector could lead to outsized gains in the years ahead. And there’s plenty of ways to profit.

Huge Growth

Despite slowing economic growth projections, China is riding high on high technology.

As the nation’s newfound wealth has begun trickling down, China’s expanding middle class is spending their rising disposable incomes on all forms of internet entertainment. According to the research arm of private equity group Bain Capital, China will surpass the U.S. as the world’s largest digital retail market. The nation currently has 564 million active internet users, while 242 million of those users shop online. The number of internet users continues to jump, while the number of mobile subscribers is also moving upwards at a blistering pace. Aside from shopping, China is becoming a hot bed of online gaming and social media. Consuming online content like streaming movies, music and games is becoming more commonplace.

All of this current activity is certainly impressive. Yet, the biggest gains could down the road. Boston Consulting Group’s (BCG) research paints a very rosy picture of Chinese internet activity.

BCG predicts that by 2015, China will add nearly 200 million users, reaching an Internet population of more than 700 million. That’s almost double the number of internet users in Japan and the U.S.-combined. The nation’s overall internet penetration rate will exceed 50% in that time frame. This will help push China’s online shopping market to become the biggest in the world, with 10% of all online retail activity occurring in the nation.

Meanwhile, smartphone adoption in the nation is set to grow by leaps and bounds. Driven by subsidies from network operators like China Unicom (NYSE: CHU), lower device costs and the strong consumer demand, analysts estimate that shipments of smartphones to China will reach a staggering 360 million by the end of the year.

Betting On Chinese Tech

Given the sheer growth in internet and mobile phone adoption, Chinese tech stocks continue to outperform their North American rivals. For investors, adding a swath of the sector to their portfolios could be a big win over the longer term.

The Guggenheim China Technology (NASDAQ:CQQQ) could be a great broad-way to start. The ETF tracks 39 different Chinese tech firms- including stalwarts like internet content firm NetEase.com (NASDAQ:NTES) and Baidu (NASDAQ:BIDU). The fund has done pretty well in the returns department since its inception in 2009. The Chinese Cubes has managed to put up an 8.61% annual return and is up more than 46% this year. Expenses run just 0.70% for the fund. Another option could be the internet-focused KraneShares CSI China Internet ETF (NASDAQ:KWEB). Although new, KWEB could be a powerful tool over the longer haul.

Just like American’s love social media outlets like Facebook (NASDAQ:FB), Chinese consumers are flocking to websites in the sector. One of the most popular could be YY Inc. (NASDAQ:YY). The popular Chinese social platform uses software that allows users to interact- in real time- without any downloads or installations. That’s proving to be a big draw as YY has logged more than 14 quarters of triple-digit revenue growth. The key for the firm is mobile phone adoption, which is key for YY’s software and social platform. Likewise, social media stock Renren (NASDAQ: RENN) has also seen its star rise over the last year or so.

Perhaps one of the best Chinese internet and tech plays could be found in SINA (NASDAQ:SINA). The $6 billion dollar behemoth operates one of China’s most popular web portfolios- think Yahoo! (NASDAQ:YHOO) –and has been expanding into a variety of new areas. One of the hottest has been its microblogging site, Weibo. Meanwhile, the 20 year old company continues to be portfolio as its mix of content and services remains a top draw in the nation.

The Bottom Line

For tech investors, China’s growth story is just getting started. The nation is quickly becoming a hot bed of internet and mobile activity. That could mean some big gains down the road for those investors. The previous picks make ideal selections to play the theme.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

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