Dating back to last year, Chinese internet stocks are among the world’s most repudiated asset classes. It’s just one name, but Alibaba (NYSE:BABA) shed 55.28% of its value over the past year.
Other Chinese internet names have fared better, though not by much. Some incurred worse punishment. As advisors know, the stark reality has been Chinese internet stocks have been treacherous for over a year now and discussing this asset class with clients seemed borderline foolhardy.
Perhaps the most obvious culprit behind the declines Chinese consumer internet stocks is increasingly frayed relationship between the U.S. and China, including the Holding Foreign Companies Accountable Act (HFCAA).
A simple explanation of HFCAA is that it attempts to put domestic companies on level playing fields with their international counterparts that list shares on major domestic equity exchanges. While HFCAA stipulations can apply to any international, the kerfuffle regarding potential delistments is mostly directed at Chinese firms, in large part explaining why once high-flying Chinese internet firms -- including plenty with credible business models – are sagging.
ESG Could Be Catalyst for China Internet Stocks
Given its status as the world’s largest polluter and a well-documented, highly dubious record on human rights, China’s environmental, social and governance (ESG) credentials are understandably scrutinized.
However, at the very least, Beijing is active in terms of attempting to reduce pollution and, more recently, appears open to bolstering governance standards. There are potential tie-ins to internet equities as a result of those efforts.
“ESG investors believe that factors such as a company’s contribution to society’s well-being may be better predictors of its long-term performance than technical valuations alone,” according to KraneShares research. “Recent policy guidance from China’s leadership acknowledges investors are also key stakeholders whose interests must be considered as reforms are rolled out. This tone shift could be a tailwind for China’s internet platforms, whose stock performance suffered from the implementation of new regulations last year.”
To be clear, this is not a puff or praise peace for the Chinese Communist Party (CCP) and as clients are learning, policy in the world’s second-largest economy can rapidly shift, often to the dismay of market participants. However, the CCP’s common prosperity objectives have ties to ESG goals and there are avenues through which clients can benefit.
“China’s commitment to equitable growth and environmental protection go hand in hand. China set the ambitious goal of achieving peak emissions by 2030 and carbon neutrality by 2060. China’s internet platforms realize they play an essential role in achieving these goals. Internet platforms currently rank among the most significant corporate consumers of coal-fired electricity in China,” adds KraneShares.
Plenty of Discounts Available
Using the KraneShares CSI China Internet ETF (NYSEARCA:KWEB) as the bogey, it’s clear clients can access Chinese internet names with growing ESG credentials at notable discounts.
“Despite the recent recovery in China internet stocks, KWEB’s holdings are still trading at, on average, less than one-half of the multiples of their US equivalents,” according to the issuer. “Furthermore, 13 companies in KWEB now have a price to book (P/B) ratio lower than 1, meaning that they are valued at less than the sum of their assets and cash on hand.”
The point: It’s going to take awhile for Chinese internet stocks to get their grooves back, indicating the asset class isn’t meriting of major slices of client portfolios, but as the ESG and valuation theses converge, there are opportunities here.