Chinese internet stocks (KWEB US)- Worth a look

Chinese internet stocks is an opportunity.

Have a look at Pic 1. KWEB is an ETF of Chinese internet stocks. Its top 5 stocks are Tencent, Alibaba, Meituan, PDD, and Netease. Collectively, they account for 1/3 of the ETF. Yet, over 10 years, KWEB has gone absolutely nowhere. In fact, since 2021, KWEB has tanked 70%.

Why ? Back in the days, China and its internet stocks were exciting themes. Remember KWEB is traded in USA. With geopolitical pressure, slowing Chinese economy, and the ever cut throat competitive intensity, the sector has been de-rated significantly. I often say the world (for investors in China) can be a better place without PDD and Douyin.

In the past 1-2 years, the rise of AI is further re-directing liquidity from the Chinese internet stocks. Case in point is the EM index where the weighting of Taiwan and Korea have jumped to as much as 40%. No surprise if we consider the blistering run of TSMC, Hynix and Samsung. In comparison, the weighting of China has declined from 30% to 25%.

Plus recent crack down by the govt on domestic investors investing/punting overseas (via Futu and co) led to sell down of internet stocks in HK... Note these internet stocks are NOT listed on the mainland but in HK/US.

The backdrop is clearly dull and uninspiring, if not painful. BUT have a look at Pic 2... The valuations for many Chinese internet giants are attractive, if not especially so....

Tencent is on 13X PE in 26, PDD 8X, JD.com 8X, Netease 12X, Kuaishou 11X.

Contrast with the hyperscalers in USA (look at Pic 3), they are valued at a much higher multiples (at least 2X higher).

Given the lower starting valuations as a group, Chinese internet stocks could offer significant upside if picking the right ones. Why do I say that ? For a long long time, the big Chinese internet stocks have been riding a few very big secular trends i.e. internet advertising, e-commerce. BUT the rise of Douyin and PDD ensure lower profitability across the board. Besides law of large number is catching up i.e. e-commerce penetration rate is amongst the highest in the world and internet advertising has grown and grown but now slowing as well (Tencent video is now in the mix).

Ok.. So here are the characteristics I would be looking for in the "new" world.

1. Co needs to be able to grow.

2. Needs to be able to succeed overseas. The Chinese domestic market is so competitive. These "shaolin monks" will be very hard to beat when they venture out. And invariably, international markets can be more profitable than domestic.

3. There is something new in the business model. Or able to intersect a new trend in the coming years.

4. How it is placed given AI...

With that said, what are the big names to consider.

1. Tencent.. 12-13X... Seen as a laggard in AI... BUT surely it can figure out a path forward... My personal hypothesis is at some point the different models will be +/- 5 to 10% for most tasks. If this hypothesis is true, AI will be a plus for Tencent given it has extensive data on just about everyone in China.. AI will clearly benefit its advertising + game divisions as well.

2. Netease.... 11-12X... Again, my core idea is AI is good for game companies.... Netease has a potential blockbuster coming up (Ananta) which will accelerate growth in 2027.

Now for the more controversial picks.. the smaller end of town which can be best termed Greed and Fear.. Ha....

1. Tencent Music... 9X PE in 2026. Douyin/Soda stealing traffic is nothing new.... Heck monthly online music subscription costs less than the price of a bubble tea in China. The "new" in business model is Tencent Music going for online to offline convergence where it is specifically targeting the fan economy, combining with its online music subscription model. Music fans are nuts when it comes to their spending power....Stock has been chopped down by 2/3 in the past year.

2. Kanzhun/Boss... 9-10X... LinkedIn of China.... AI is going to kill Boss right ? No one will ever hold down any job going forward.... Yet, I am intrigued by what AI can do to the LinkedIn/recruitment business model..... Potentially, changing from advertising to HR/Hiring agencies model.

3. VIPS.... 5-6X... Discount retailer/Online outlet .... Think popular perception is it is road kill... BUT the misconception is VIPS doesn't compete with Taobao and PDD... These are market places... VIPS is larger than any individual sellers/distributors/brands on Taobao/PDD. So weak retail spending will lead to better inventories for VIPS. 5-6X... Co buys back stocks every year (say 10-15% buyback a year is possible)... So in 2-3 years' time, the stock can be on 3X PE is earnings hold together. The secular thesis is down trading in China... Outlet model online/offline should be the retail winner going forward... If 2-3X PE and growth pick up a bit to say high single digits, stocks should re-rate. Say it re-rate to 8-10X....

The long term story is at some point the AI story will fade... And then we are looking at post 2000 tech slump that could last for 2-3 years...which will give rise to The Tiger's Julian Robertson Trade of anything but tech... Plus money will move away from Taiwan and Korea.... One day, fervor in US equities will fade as well.... Where would the money go ? China is one big bucket to catch the re-balancing trades then.

One more point... Consensus is building that the Chinese economy is slowing.. Latest retail spending was down yoy..... OK exports were more than fine.... Maybe govt needs to do something... .... We can only dream and pray.... Ha...

In summary, when the market is scared and dis-interested, there is money to be made. Need some patience and hopefully picking the right ones for the next wave.

Note: Do your own research. Not financial advice. I may own or sell the stocks named.