China Tech ETFs in Upbeat Momentum: Here's Why

Sanghamitra Saha

2 May 2024 at 1:00 pm·4-min read

China’s tech investing backdrop continues to evolve, particularly in the realms of artificial intelligence (AI) and the electric vehicle (EV) sector. The past year has seen a significant shift in investor sentiment toward China's tech giants, with a notable impact on AI development and an increasing association with the EV industry.

China tech ETFs like KraneShares Hang Seng TECH Index ETF KTEC, Invesco China Technology ETF CQQQ, KraneShares CICC China 5G & Semiconductor Index ETF KFVG, KraneShares CSI China Internet ETF KWEB and iShares MSCI China Multisector Tech ETF TCHI have added 10.2%, 9.9%, 9.8%, 8.1% and 7.1%, respectively, past week (as of Apr 30, 2024). Among these, TCHI offers a hefty dividend yield of 4.28%.

Although most of these ETFs do not have an upbeat Zacks Rank currently, things could turn around for the better in the near term. Some analysts expect a potential rebound, supported by a shift toward new technologies. Let’s delve a little deeper.

Rapid Chinese Tech Partnership on EVs

Foreign carmakers are flocking to join Chinese counterparts in artificial intelligence and other smart car technology. Japan’s Toyota Motor TM announced that it would team up with Chinese gaming and social media giant Tencent on AI and big data.

Separately, Japan’s Nissan also announced a tie-up with Chinese tech firm Baidu BIDU to carry out research on AI and “smart cars.” German auto giant Volkswagen was also seen promoting its partnership with Chinese EV startup XPeng.

An executive from Renault lately mentioned engaging in "pivotal conversations" with Chinese EV manufacturer Li Auto and Xiaomi to delve into electric vehicle and smart-vehicle technologies. Xiaomi, renowned for its smartphones, recently unveiled its inaugural electric car, positioning it as a competitor to Porsche and Tesla TSLA.

Meanwhile, Tesla is making great progress toward its driver-assistance technology. It received approval to roll out its advanced driver-assistance technology, Full Self Driving or FSD, in China. Tesla has also reached a deal with Baidu to form a partnership on mapping and navigation functions ahead of plans to deploy the FSD system, according to a Bloomberg report (read: Tesla Turnaround in the Cards? Bet on These ETFs).

Impact and Investment in AI

China's commitment to AI has been firm, despite facing a decline in investor interest last year. In 2023, the country experienced a 38% drop in AI investments, with funding plummeting by 70% from the previous year. This downturn was triggered by geopolitical tensions and regulatory hurdles that have led to a cautious approach from both local and foreign investors.

However, the Chinese government's response has been proactive, with new AI rules introduced in 2024 aiming at streamlining the sector's growth while addressing copyright and safety concerns. These regulations are expected to make the future trajectory of AI development in China more controlled and stable.

Some Chinese Tech Stocks Offer Value

Chinese technology stocks are now value stocks: They are boosting dividends and buybacks, have massive cash balances and are generating huge amounts of cash at cheap valuations.

Alibaba’s (BABA) P/B (Most Recent Quarter or MRQ) is 1.22X versus the underlying Internet - Commerce industry’s P/B of 2.28X. Price/Cash Flow (Most Recent Fiscal Year or MRFY) is 8.54X versus the industry measure of 14.67X.

Baidu’s P/B is 1.04X versus the underlying Internet – Services industry’s P/B of 1.63X. Price/Cash Flow (Most Recent Fiscal Year or MRFY) is 5.95X versus the industry measure of 10.19X. This year, both Alibaba and Baidu are experiencing a slower growth rate compared to the industries they operate in.

Meanwhile, Tencent (TCEHY) is different as it has a higher growth rate than the underlying Internet – Services industry as well as the S&P 500. Investors are also rewarding the stock with higher price premiums as the stock has higher P/E, P/B and P/CF than the industries.

Any Weaknesses?

Despite the potential for growth, there are inherent weaknesses in the space. The tech sector's reliance on government policies and the ongoing geopolitical landscape pose risks to the stability of investments. Plus, most Chinese tech companies’ growth rates are below their underlying operating industries.

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Toyota Motor Corporation (TM) : Free Stock Analysis Report

Baidu, Inc. (BIDU) : Free Stock Analysis Report

Tesla, Inc. (TSLA) : Free Stock Analysis Report

KraneShares Hang Seng TECH Index ETF (KTEC): ETF Research Reports

Invesco China Technology ETF (CQQQ): ETF Research Reports

KraneShares CSI China Internet ETF (KWEB): ETF Research Reports

KraneShares CICC China 5G and Semiconductor Index ETF (KFVG): ETF Research Reports

iShares MSCI China Multisector Tech ETF (TCHI): ETF Research Reports

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Rapid Chinese Tech Partnership on EVs

Impact and Investment in AI

Some Chinese Tech Stocks Offer Value

Any Weaknesses?

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