Is Chinese Tech Still Attractive To Investors? [TFC 102]

China has been making the rounds in the media circuit these days and there is one particular sector that many are looking at: Chinese tech. What is the outlook for the Chinese tech sector and the big names like Alibaba, Tencent, JD and more? In TFC 102, Reggie shares his positive views about this booming sector and why he thinks it will continue to grow in spite of the recent government regulations. 

With the massive sell down on Chinese tech, many investors are left wondering if this sector is worth investing in. However, Reggie thinks we shouldn’t be too worried. In fact, he implores us to have a deeper understanding of the kind of regulations the Chinese government is implementing. After listening to this episode, you may find that all these concerns are much ado about nothing.

So why is the outlook on Chinese tech so positive? Reggie lists 3 key pointers for listeners to think about: the phenomenal tech penetration in China (1 billion internet mobile users!), undervaluation of many Chinese tech companies compared to their Western counterparts and the increase in the number of affluent Chinese consumers who are willing to spend, and looks like nobody is going to stop them. 

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podcast Transcript

Reggie: So many people talking about China, so I had to chime in on this. Today, we’re going to focus on China tech and why am I pretty positive about it. I don’t want to make China sound like a monolith. Like I said in the last episode, China… there are many sectors. It’s just the US media paints everything about China… is like China, China, China, right? So it makes China sound like a monolithic country that has only one big brother that controls everything. 

But the reality is it’s multifaceted. There are a lot of different sectors and like I said in the last episode, the growth in different sectors will be pretty different over the next decade. But specifically for China tech, I’m pretty positive. So I’m going to share with you a little bit more as to why I think the mid term to long term future of tech in China is going to be very sexy.

Expand Full Transcript

Good morning everyone! I welcome you to another day with The Financial Coconut. In our podcast, we are debunking financial myths, discovering best financial practices and discussing financial strategies that fits our unique life. You get it, ultimately empowering us to create a life we love while managing our finances well, and today I’m going to spend some time to focus on why am I positive about China tech?

By now, you should have seen a lot of content going out there about China, whether is it our content, other people’s content. Specifically for ours, we did quite a few lives… different discussion with Freddie from Stashaway, with Thomas from Steady Compounding, Eugene from Vision Capital. I think we’re going to organize quite a few more. 

As of time recording now, I don’t know what else is coming, but we are definitely going to spend a little bit more effort trying to break down China as an investment, as a country and what is the future? And yes, if you have not checked out last week’s episode, those pointers are important because it forms my basis of how I look at China tech. 

Today, we’re going to just focus on Chinese tech, especially after the massive sell down over the past few months. Yes, I know recently there’s been a bigger sell down, but before that there was already a steady sell down. Whether is it the US-China trade war, whether it is China setting big regulations on its big tech companies and what have you. They’ve all caused to Chinese companies to come down over the last year. 

So for anybody that has invested in China or heavily invested in Chinese tech companies specifically, your portfolio may be underperforming like mine… okay, I won’t say I am underperforming, but not as sexy as what I would hope, especially for my bigger portfolio where there’s US companies, Chinese companies and because I’m a little bit more heavy on the Chinese companies. I have about 20% in Chinese companies. I am not doing so well broader to what I will be able to perform lah. A bit sad lah. 

But anyway, I’ve put out my positions. I do own Chinese companies, Alibaba, JD, Tencent. I am a little bit safer when I buy Chinese companies. I do not try to dig small names. I’m just very happy with the big tech because fundamentally they are very strong and they do have dominance in the Chinese game. Of course, I’ve lived in China for about a year, a few years back. So I had experience in that Chinese ecosystem where I literally go with a phone. I don’t need to bring my wallet, I won’t feel afraid and jittery and what have you. 

Recently I’m seeing that happen in Singapore, so that’s amazing. You can actually bring a forward and just QR code pay here, order this do that. So whatever you’re starting to experience here on this little island of Singapore, China has already done it maybe about five years ago where you can order a Grab or order a Didi specifically, like a taxi on your phone. You can get discounts with Meituan. You can have all sorts of stuff with JD, with Alibaba. They send to you the next day or the day after depending on where you are. If you’re at a bigger city, the delivery is a lot faster. If you’re in a rural town, within a week, they will be able to send you all the stuff that you need. You can book your train tickets, your air tickets on C Trip (携程), all sorts of stuff. 

It’s pretty, pretty advanced by now from a consumer tech standpoint. Before we go deeper on this discussion, I want to put it out there that this is not recommendation. Yeah, it’s important. Only for education and entertainment purposes only, okay? Do not take this as advice or recommendation etc. 

So the idea here is China is really very advanced from a consumer tech standpoint. Okay. I’m very specific about this because tech is very broad and I don’t want to make it sound like “oh, every tech in China is very good”. But you are seeing some crazy things happening in China, like they built their own space station. Crazy, right? They have very, very, very extended networks of railway system, high speed rail and what have you. So from a hardware standpoint, I think there’s a lot of advancement there, but from a consumer tech standpoint, there’s also a lot of advancement. They are leaps and bounds ahead in terms of their consumer tech angle. 

Which is why when people tell me “oh, you know, government regulations, demographic is aging”… all those things, I agree. I actually agree that government regulation is a risk factor. I agree that aging demographic is a risk factor. But at the core, you’ve got to ask yourself a few things like what kind of government regulation? What are they regulating? They’re regulating data, they’re regulating payments, and recently they’re regulating education for a broader reason of a demographic purposes because the demographic is getting very old and they believe that the stress on the people is resulting in them not giving birth, which I think there is some sort of basis to it.

If you think about it, the Chinese government is not regulating consumption itself… or it’s not even regulating tech as a whole sector, but they’re just very focused on data and they’re very focused on payments. So we can go on and on on this discussion, I’m sure you’ve heard a lot of people talk about it. In general, you must understand that the Chinese economy is essentially planned economy with markets. It’s not a market economy. 

Anything that challenges the Chinese rule or the Chinese power or the CCP’s (Chinese Communist Party) power, then becomes a little bit more of a pain point for them and they will try to regulate it like data, like payments. Because they don’t want private companies to own all the data of the people and they don’t want private companies to be able to route out of the financial system because financial system, in today’s world, is a very important tool for government to regulate the economy and control the country.

So those are some basic pointers that I know people are talking about. But to me, those things do not form a very strong case against Chinese tech and I’m going to share with you the first point why I think China tech has a lot of runway and pretty, pretty sexy and powerful going forward. 

Point number one is the tech penetration in China is amazing, okay? Amazing, like 1 billion mobile internet users. Whatever statistic you take out, whether you take the China Internet Network Information Center or whatever reports out there… I know some reports have discrepancy, it’s a little bit different here and there, but across the board, they are all showing that China’s internet penetration is very high. 

Penetration fundamentally has two elements. One is the hardware, that means a lot of people are having mobile devices. The other is the network, which means internet cables are being laid across the country. A lot of people, even in the rural town, are having very good and stable internet and you can already see it from your Tik Tok videos, your Bytedance videos, YouTube videos and what have you, where a lot of rural influencers are becoming very big in China and all these is not possible without very strong and stable internet. 

If you’ve done any kind of content creation, you’ve done any kind of video exporting or you’ve tried to trade when you are traveling or something, somehow, somewhere, you know that internet connectivity is fundamental to all these things. In other words, China has established itself with a lot of mobile users and very high speed internet across the country. This is something pretty positive about a centrally planned economy where China can kind of lay out all these cables and they can fund the companies to lay all the cables, internet cables even into the rural parts of China and not be that concerned about whether we can make a profit now and what have you, because they have a much longer plan. 

You are seeing that happening in the US also. A lot of private companies are talking to the public administration to try to share the costs and lay cables in the rural town. But in China, it already happened and it’s happening at quite a crazy speed. About 50 over percent of rural province have internet. So with close to a billion internet users and mobile internet users specifically… 

Okay, why must say mobile internet users? If you think about it all the latest big tech from China are mobile first, whether it is Bytedance, whether it is Tencent, whether is it Alibaba, JD… they are all mobile. People don’t go to to shop. I mean… some people do, but you get the idea. Generally, all the biggest tech guys in China are mobile first and there’s a reason. Because everybody has a mobile phone or a lot of people have mobile phones and they have easy connectivity through high-speed internet.

Actually, China has kind of route away from the desktop revolution. That means desktop is not very common in China unless you work and you need desktops, people don’t really have it as a thing. Maybe in Singapore and other parts of the west, desktop is a thing, which is why there’s a lot of desktop gaming. There’s a lot of things that are focused on the desktop first, right? There’s web services, desktop services and what have you. There are a lot of big companies with Windows, Activision and all that jazz that was born out of an era where a lot of people had computers at home… desktop computers at home or laptops… whatever, as long as something that opens and works like a computer. 

But in many other parts of Asia, China specifically also, a lot of these countries have actually route away from this revolution. They have went straight into mobile, which is why the mobile ecosystem is a lot stronger. The desktop ecosystem is not as strong in China. There are not a lot of big apps that are desktop centric or computer centric or laptop centric. Most of the big apps are actually very mobile centric, so that is interesting to know. 

Why is this important? Why is this a very big plus point for China’s big tech or China’s tech future. Simply put, there are a lot of people lor. There are a lot of people then there’ll be a lot of businesses. There will be a lot people that want to touch and tag on this and you are already seeing it even with companies like Activision or EA, some of the bigger game guys. In the past, they don’t have dominance in mobile gaming. They are not big on mobile games. They do a lot of desktop games and that is an extension of what is happening in the US or in the other developed parts of the world.

Because at that point in time, more and more people are using desktop and people use it to play games. So it’s a thing. But now China is this big market with a lot of mobile users and you see all these big mobile games coming up and all these US companies trying to create mobile games targeted at the Chinese consumers. 

All that by extension is already showing that as long as you have a big market, there’ll be a lot of people that want to come in. It’s not unique to China… is anywhere. As long as there are a lot of people are trying to do this thing, there’s value in spending money in this space. There will be a lot of businesses that want to come in and that becomes a flywheel. More business, more services, more people want to join the ecosystem and it just keeps churning and it keeps churning and it keeps churning. 

When you look at China specifically, with a billion mobile internet users, with platforms like Tik Tok, with Tencent, with WeChat, Alibaba, Taobao, Meituan, Didi… all these different companies are already intertwined in the Chinese daily user. Everyday, they use these platforms. It’s not like a special thing. I think maybe for a lot of outsiders when we don’t live there, we think like “wah, very cool. A lot of people are using all these apps”. But actually, it’s no different from Instagram, Facebook and what have you. We use a certain app ecosystem here daily. They also use ecosystem over there daily and with a lot of mobile users, there’s just a lot of business to be done. 

So whatever Chinese regulations throw down, there is a Chinese saying in China: 上有政策, 下有对策. That means every policy that comes up from the top, people on the ground will find a way to work with it. So yes, 上有政策, 下有对策. Essentially, people on the ground will find a way and a lot of these companies will work with whatever regulation that happens. They are not going to try to stand up against the government and lose business and what have you. 

Whatever the Western media is trying to paint… that China is anti-business and all that, that it’s a certain view and a certain angle. But if you really look at the ground, if you’re not concerned about political affinity and what have you, with a lot of users and a lot of people enabled in China to use with their mobile phones to join the internet ecosystem, to use all these apps… hey, it’s just a big bunch of people here waiting to be serviced. All these companies will continue to be consumer centric and focus and service them. So there will still be very good businesses. Just wait for the reports that are coming out… within this few weeks. It’s going to do very well. 

So with that fundamental where there are a lot of users to serve and a lot of these Chinese companies are doing very well fundamentally, it makes me to point number two and that is the valuations of a lot of these Chinese tech companies today are too low relative to their US counterparts or even…. I mean, you just compare across the board. It’s really, really low and we will talk a little bit more about this after a word from our sponsors.

Okay, so how I’m comparing valuation in this current situation is just basic PE (price to earnings) ratio. PE ratios are not an end all be all for valuations. It is just a much easier, simpler way to compare across similar companies. Of course, I’m a big proponent of using DCF (Discounted Cash Flow) to evaluate. There’s all the modeling and all that jazz, I will not be very specific on today’s podcast. Just using PE ratio, I think is good enough when you’re trying to compare similar stuff and it’s very common. Everybody use it out there. If you want to learn a little bit more, Google it. If you have some questions, come to our Telegram group, ask us about ratios and what have you. I will share with you a little bit more. Yeah, maybe I should do a podcast about valuations or so… 

But anyway, coming back to the point that Chinese companies have relatively low valuations compared to its Western counterparts. Let me just give you the idea. Today is what day? Today is 3rd of August, Tuesday. So I’m recording one week ahead. Alibaba is trading today at 24.9X. Alibaba… 24.9X, price to earnings ratio. Price to earnings ratio, 24.9X, Alibaba. I think you can compare it to Amazon. 

Compared to Amazon, Amazon is at 63.36X. So it is quite… of course it is not an apples to apples comparison, but across the board, whether is it Tencent trading at 22.4X or Google trading at 29.47… you get the idea that generally, the big Chinese tech which is Alibaba and Tencent specifically, they are all trading at a very, very low valuations and I think there is a reason why. 

Because the market is pricing in government regulation risks. The market is pricing in currency risk. The market is pricing in all the dispute between china and the broader Western world. I think US is leading that Western world. Europe is a little bit wonky, they don’t know where they’re standing. So generally, I think the market is pricing in all these risks, which I think is fair because all these are real risks, right? Like we have talked about last week and earlier in the starting of the podcast and with all our friends that came onto our shows. 

But the reality is as long as the long term growth trajectory of the Chinese tech companies stays intact, which means there’s still a lot of users and all the platforms they are creating, the apps they’re creating are still being used by all these consumers, then fundamentally it is still going to be generating a lot of cash. It’s still going to be doing very well and over time, much like any other fundamentalist will tell you, time will reevaluate… I’m quoting the big Warren Buffett. I don’t like to quote these guys but quoting the big Warren Buffett: in the short term, the stock market is a voting machine. In the long term, it is a weighing machine. As long as the company’s fundamentals are strong, it will come back. 

A lot of people have done valuations on Alibaba and Tencent. You just go and Google, it’s everywhere, YouTube is everywhere. I think a lot of their valuation models are pretty okay, it’s not crazy and wild. Even our friends from Dr Wealth, Alvin, they have done a valuation of Alibaba, which at a target price of $275… don’t quote me, you can go and check that platform. You don’t quote them also, they are an education company. 

Generally, I think the consensus is the fundamentals of these big tech is amazing and whatever that you can say about Amazon, Google, Facebook, you can also say the same thing about Alibaba, Tencent, JD, Weibo and Meituan… so all the positive things with network effect, brand, pricing power, blah, blah, blah. It’s all the same. You can say about all this big Chinese tech. It’s just that they are covered and currently under the shade of all these geopolitics and regulation risk and what have you. 

But at the core, I think they are beautiful, strong and good brand, reliable, blah, blah, blah…  If you live there, everybody uses these platforms. It’s not everyday that you have a new messaging app. it’s been a long time since we had a new search platform. It’s the same big tech problems in the US where there’s a lot of big monopoly in tech, same in China. 

So hey, as a business owner or as an investor… hey, good businesses, fair valuation, or I would say a pretty low valuation for its fundamentals. So yeah, that is definitely something that I think Chinese tech companies are trading at and have a positive point at this moment in time. 

Definitely something to consider, which brings me to the third point and that is Chinese consumers are very rich. This is a bit broad base, but if you understand how Chinese consumers are consuming, which is tech first, which is mobile first. Whether or not they buy from JD, they buy from Alibaba, they buy from WeChat or they buy from other live streaming platform and what have you, a lot of the consumption are tech first

While I do not have the exact numbers and the latest reports of how much is being consumed relative to online and offline spending and what have you, I think there’s a pretty good report by McKinsey in 2019. It says that China’s online retail market is larger than 10 markets combined. It’s estimated to be about $1.5 trillion with an expected growth rate of about 20 over percent year on year. So yeah, it’s quite wild essentially. 

If you look at it, whether or not the Chinese consumers are consuming online or offline, they are fundamentally quite well to do in a sense of they have very high saving rates, saving rates at about 58%… household saving rates of 58%, Japan is at 53%, the US is at 12%. Just to give you some context, the Chinese are very well to do and probably a sign that the Chinese government is not really trying to regulate consumer spending at this point. They’re trying to promote consumer spending because the consumers have a lot of money sitting around and it’s not healthy for the country if they’re not spending. That’s something to be aware of. 

Urban household income has went up a lot. From 2010 to 2020, it went up from $20 000 per household to $43 800 per household. It sounds like $43 800 a year per household not a lot, right? US dollars… but actually I think about it, ten years, your income doubled. The whole family’s income doubled in that sense. You have a lot more to spend. Even in the rural areas, you’re seeing the numbers double also. 

So Chinese consumers being very well to do and… relatively well to do with a lot of money sitting around, waiting to spend, those are all good signs for Chinese tech, especially when everybody has a computer in their pocket these days. Whatever that is going on, whatever the people are fearing of, whether is it regulation, whether is it geopolitical trade and what have you, the fundamentals are very strong in the Chinese tech ecosystem. 

I’m going to sum up today: why am I pretty positive about Chinese tech? Number one is the tech penetration is very high, about a billion mobile users. So with a billion people, miracles can happen. You can do all sorts of stuff. If you just look at it, a lot of the big Chinese tech companies today are mobile first and there’s a reason for it. 

Number two is valuations today are very, very affordable relative to its fundamentals and relative to its US counterparts. Alibaba and Tencent, they’re all trading low 20X PE ratio. If you just go ahead and do some basic DCF, you can be able to come to even more sophisticated valuation of your price. 

Number three is the Chinese consumers are very rich and they are very okay to spend online, Their consumer spending online is about 1.5 trillion in 2019 and I’m sure it’s much higher today. So all that put together, regardless of what people are doing or regardless of what the US media is saying, the core tells you that the Chinese internet tech business is very, very sexy and there’ll be a lot of stuff coming along. So yeah, that’s why I am pretty positive about Chinese tech although I know it’s very painful now, it’s being sold down and what have you. So yeah, I hope you learnt something useful today. See ya. 

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Okay, okay. Enough of China, right? There’s a lot of discussion on China and if this keeps playing out, we will continue to get more interesting people on to talk and share with you their perspectives. I think it is a worthy discussion because if you look at China, whether is it from a macro economic standpoint, they do have trade surpluses. They run trade surpluses with four major economies of the world. That means they are selling more to people than they are buying. 

So they have done some pretty amazing job and whatever you say, during a pandemic, it taught me one thing: it’s not about how much money you have specifically, it’s about what can you produce? What kind of technology you have? What kind of production capacity you have? What can you do as a country that makes it more resilient and also as an individual, it makes you stronger, right? So it’s not just about how much money you have and if you look at China, China is… I think at this point in time, unstoppable.

Whether or not it will overtake the US, that is a question mark. Whether or not… what’s going to happen, I don’t know. But I am pretty certain that for a country that have nuclear power plant, that can do some of the biggest infrastructure projects, that have a supply chain… even the big US companies that are trying to be patriotic or maybe they’re really patriotic and what have you… cannot avoid, and big consumer market. They can send their own space stations. They have high speed rail crossing from the deserts to the falls and what have you… they are already unstoppable. They have a very big fundamental to their advantage. They have technology or what have you.

Of course, it’s not perfect. They have a lot other things that they should solve and they will solve. I also want to put it out there, that does not mean I support China as a country, as an investor, means I definitely support their politics. That’s something that you need to recognize as an investor. Sometimes we gotta recognize that politics affinity is one thing, businesses is another thing. Whether or not to you it’s important that’s up to you, but you don’t try to use your basis to judge how I invest, okay? 

For me as an investor, I’m only interested in the fundamentals. I’m interested in the business practices and how are they gonna progress into the future? From many layers, economics, consumers, businesses, technology, I think China’s going to do pretty well and Chinese tech is underappreciated at this point, but this is my thoughts, my basis. Please do your homework and all that jazz. So yeah, I hope you learnt something useful next week. 

I’m going to focus on SPACs (Special Purpose Acquisition Companies). I think I’m going to focus on SPACs. It’s either SPACs or CPF. I’m going to record it now, I’ll let you know. So yeah, I think recently a lot of good things coming out, so stay tuned. Take care, see ya. Bye.

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