3 China Tech Stocks to Watch

Recent economic data suggests that China’s recovery is stalling. While the gloomy macro outlook is weighing on consumer demand, here are three big tech stocks that could benefit from the eventual rebound.

China Tech Companies to Invest In:

• Alibaba’s remote work collaboration tool DingTalk looks set to split from the company’s cloud unit.
• JD.com has embarked on a discount campaign to fend off competition from the likes of Bytedance.
• Tencent expects developments in advertising technology to help it achieve its growth targets.

Alibaba

The Cloud Stock

Behemoth Alibaba [BABA] became the subject of intense scrutiny from Beijing’s regulators during the pandemic.

Revenue grew modestly in the first quarter (Q1) of 2024, but its earnings for its cloud segment surged 106%.

Chairman and CEO Daniel Zhang explained on the earnings call that the revenue growth rate “was negatively impacted by the normalisation of content delivery network demand as usage of video streaming, remote working and remote learning came down when offline activities resumed after [pandemic] measures were lifted”. But less traffic resulted in lower costs, lifting earnings in the process.

The big news last week was that Alibaba’s remote work collaboration tool DingTalk is to split from the company’s cloud unit, which might pursue its own listing at a later date, sources told Reuters. In May CNBC revealed that Alibaba is likely to cut 7% of its workforce as it prepares to IPO its cloud unit following the major restructuring back in March.

JD.com

The E-commerce Stock

JD.com [JD] is the second-largest online retailer in China, and is Alibaba’s main competitor within the country’s e-commerce and retail sector.

The company has been able to establish its position by investing heavily in its supply chain and leveraging technologies to improve sorting at its warehouses. In June, JD.com unveiled that its logistics division, JD Logistics, had launched the second phase of Intelligent Logistics Park, the largest of its kind.

Sales numbers for Q2 2023, the first under new CEO Sandy Xu, who took over during the quarter, were positive. Total revenue climbed 8% year-over-year, while retail revenues rose 5%. While this marked an improvement on the previous two quarters, it pales in comparison to the double-digit growth enjoyed during the height of the pandemic, before Beijing started to clamp down on big tech’s dominance.

Earlier this year, JD.com launched a RMB10bn discount campaign to try to stave off the threat of growing competition from PDD Holdings [PDD], which is known for its more affordable products, and TikTok’s owner ByteDance.

Tencent

The Conglomerate Stock

Tencent [0700.HK] is the owner of the ubiquitous messaging platform WeChat and the world’s largest video game publisher. It boasts the second-largest cloud service behind Alibaba’s and is also the majority shareholder in music streaming service Tencent Music Entertainment [TME].

The conglomerate reported an 11% increase in its quarterly revenue for the three months to the end of June. However, sales in the WeChat operator’s cloud and gaming divisions weren’t as big as expected. Weakness in domestic gaming demand was chalked up to their decision “to temporarily release less commercially impactful content”, Chief Strategy Officer James Mitchell said on the company’s Q2 2023 earnings call.

Despite concerns about domestic consumption, it’s hoped that improvements in advertising technology should help Tencent to realise its growth plan. “We believe we'll keep growing going forward as we enhance the return on investment to advertisers and therefore, enhance what advertisers are willing to spend with us,” said Mitchell.

The ProShares Online Retail ETF

Another Way to Invest in China Tech

ETFs, or exchange-traded funds, offer an economical and diversified way to invest in a variety of stocks within a particular theme.

The Invesco Golden Dragon China ETF [PGJ] holds Alibaba and JD.com. Although it doesn’t hold Tencent, it does hold Tencent Music. As of 22 August, consumer discretionary stocks account for 57.3% of the portfolio, while communication services has a 22.4% allocation. Industrials has a 5.9% weighting, while information technology and real estate have weightings of 5.4% and 3.6% respectively. The fund is down 0.8% year-to-date.

The ProShares Online Retail ETF [ONLN] holds Alibaba, JD.com and PDD. Consumer discretionary makes up 81.5% of the portfolio, while healthcare equipment and services has been allocated 3.5% and media and entertainment 3%. The fund is up 12.9% year-to-date.