Why Traders Are Doubling Down on China’s Internet Stocks

The eight-year bull market may feel long in the tooth, and the tech sector in the U.S. has been unstoppable. But some traders are looking much further to find profit in tech, and the “BAT”stocks are fast becoming a favorite buy. Baidu, Alibaba and Tencent; these Chinese companies are at the center of a huge wave for China’s fast-growing internet market.

Baidu

Eighty percent of China’s online search traffic flows through Baidu, which is why it’s regarded as the “Google of China”. Since Google left the Chinese market seven years ago, Baidu had entrenched itself in the internet search space with over 3 billion searches per day. Baidu is not without its detractors though. There have been continuing issues around sales sustainability, rising overhead, and rising competition.

Even though it seems that Baidu is the only game in town, after Google’s departure over a clash with Chinese regulators regarding email-hacking allegations and censorship practices, Baidu has been losing market share.

Year-to-date the trend has been a friend for CWEB (Direxion’s Daily CSI Internet Index Bull 2X Leveraged ETF)

Source: Bloomberg. The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized.

Qihoo 360, a domestic challenger to Baidu has become growing threat in the search space, just as others, mainly Tencent, are threatening to disrupt the equation in the digital ad space. Baidu has been spending a lot of capital this year, trying to match Tencent’s WeChat app, which has become the go-to platform for services like deliveries, payments, and gaming. That capital investment has eaten into Baidu’s earnings. Still, many analysts and traders expect Baidu’s revenue and earnings to rise into the next quarter and beyond.

Alibaba

To continue the analogy angle, Alibaba is considered the “Amazon of China”. Founded by Jack Ma, is a web portal that provides consumer-to-consumer, business-to-consumer and business-to-business sales services. It also provides electronic payment services, a shopping search engine and cloud computing services. Alibaba also operates a live entertainment business unit focused on ticketing, content creation and live experiences. The company has rallied throughout the 2017 trading year, but the rally has stalled over the past few weeks.

The eCommerce behemouth’s recent investment in the Cainiao Smart Logistics Network has raised some concerns among traders. Traders seem to be worried about the impact of the money-losing delivery company on Alibaba’s earnings. Should investors be worried about their investment in Alibaba stock? Most are saying, No.

Tencent

Tencent is most compared to Facebook. It’s the dominant social networking firm in China. As noted previously, Tencent’s WeChat app is the go-to platform for services like deliveries, payments, and gaming. WeChat is closing in on 1 billion users, although its per-user monetization rate is still low compared to Facebook’s. Third-party apps within WeChat is also another revenue channel. It all may add up to huge potential for the future. Tencent’s success may be its only detractor. Interest in the stock has been tempered by concern that valuations are turning expensive. At this writing, Tencent is the most valuable company listed in Hong Kong, trading close to an all-time high. The internet services giant’s earnings have soared, as its mobile gaming revenues caught fire. Although there are not many choices for internet-related stocks in Hong Kong, some are concerned that it may just be too hot.

Overall, traders should also be wary of the risks that “BAT” stocks face. Tighter regulations on Chinese internet content could squelch growth, a slowdown in China’s economy could reduce ad spending, and hasty attempts to expand their ecosystems could hurt their bottom lines.

But if you believe that their potential outweigh these risks, you might consider trading the BAT stocks.

Tailwinds for the BATs

In late September, it was announced that Baidu, Alibaba, Tencent all plan to set up branches in China’s new Xiongan economic zone. President Xi Jinping in April announced the launch of the Xiongan New Area, aiming to match the success of zones in Shenzhen and Shanghai that helped make China an economic juggernaut. The first group approved by the Xiongan management committee is made up of 48 companies, Xinhua said. Of those, 14 are leading Chinese information technology firms.

If you’re really bullish on the BATs and other Chinese internet stocks, Direxion offers traders daily 2X leveraged exposure to your trade. CWEB: Daily CSI China Internet Index Bull 2X Shares Leveraged ETF seeks daily investment results, before fees and expenses, of 200% of the performance of the CSI Overseas China Internet Index.

* The Net Expense Ratio includes management fees, other operating expenses and Acquired Fund Fees and Expenses. If Acquired Fund Fees and Expenses were excluded, the Net Expense Ratio would be 0.95%. The Fund’s Adviser, Rafferty Asset Management, LLC (“Rafferty”) has entered into an Operating Expense Limitation Agreement with the Fund, under which Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September 1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.95% of the Fund’s daily net assets other than the following: taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions and extraordinary expenses. If these expenses were included, the expense ratio would be higher.

The performance data quoted represents past performance. Past performance does not guarantee future results. The investment return and principal value of an investment will fluctuate. An investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted. Returns for performance under one year are cumulative, not annualized. For the most recent month-end performance please visit the funds website at direxioninvestments.com.

Short-term performance, in particular, is not a good indication of the fund’s future performance, and an investment should not be made based solely on returns. Because of ongoing market volatility, fund performance may be subject to substantial short-term changes. For additional information, see the fund’s prospectus.

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CSI Overseas China Internet Index (H11137) – Provided by China Securities Index Co., LTD (“Index Provider”). The Index is designed to measure the performance of the investable universe of publicly traded China-based companies whose primary business or businesses are in the Internet and Internet-related sectors, as defined by the index sponsor, China Securities Index Co., Ltd. (‘‘CSI’’). A China-based company is a company that meets at least one of the following criteria: 1) the company is incorporated in mainland China; 2) its headquarters are in mainland China; or 3) at least 50% of the revenue from goods produced or sold, or services performed in mainland China. The Index Provider then removes securities that during the past year had a daily average trading value of less than $500,000 or a daily average market capitalization of less than $500 million. One cannot invest directly in an Index.

†The CSI Overseas China Internet Index (“Index”) is calculated by China Securities Index Company (“CSI”). CSI does not make any warranties, express or implied, to any of the either customers or anyone else regarding the accuracy or completeness of any data related to the Index. All information is provided for information purposes only. CSI accepts no liability for any errors or any loss arising from the use of information.