It’s often said that China internet stocks trade at lower multiples than comparable U.S. firms. It’s also said that the former offer similar or higher rates of growth at more attractive valuations.
Following years of harsh regulatory regimes employed by Beijing, the valuation situation with China internet equities, including members of the KraneShares CSI China Internet ETF (KWEB ), is arguably unprecedented. Years of tight capital controls by Beijing have weighed on shares of some of the fund’s marquee holdings. That has prompted skittish attitudes toward the stocks among global investors.
The $5.55 billion KWEB is higher by 6.60% over the past month. That potentially signals that some investors are warming to the opportunities available with the ETF’s holdings. Likewise, some market participants may feel this is a rare opportunity to own fast-growing, large-cap internet names at depressed multiples. That’s difficult to accomplish with U.S. equities.
Liberalization Could Help KWEB Holdings
Charles Schwab’s Jeffrey Kleintop noted that the country has strict policies regarding shareholder rewards programs for companies that do most of their business on mainland China but list shares in Hong Kong or New York. Those traits are applicable to some KWEB member firms.
“The stock market values of some giant Chinese [companies … are] approaching the amounts of cash and equivalents on their balance sheets despite these being profitable and growing companies,” he wrote. “That may be due to the perception that the Chinese government could announce a policy change at any time. [It could impose] costly new fines, taxes, or regulations.”
Alibaba (BABA) is KWEB’s second-largest holding at a weight of almost 9% while JD.com (JD) and Baidu (BIDU) combine for almost 8% of the ETF’s roster. Despite the aforementioned capital controls, some KWEB holdings are repurchasing their shares. For example, Alibaba recently told investors it bought back $4.8 billion worth of its stock in the first quarter.
Kleintop noted that at the end of 2023, Baidu and JD.com had about $59.1 billion in combined cash on hand. But their current market values are $38.06 billion and $43.63 billion, respectively. Alibaba sports a market cap $182.7 billion, with cash on hand of nearly $107 billion. Those are tidy sums, which arguably aren’t fully appreciated by the investment community.
“Loosening capital controls could boost confidence by shareholders in the cash stockpiles held by many Chinese companies being distributed to them rather than risk being plundered by policy changes,” concluded Kleintop.
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