Large asset managers as well as retail investors in the US have jumped on the Chinese technology stock bandwagon. As per usual, Wall Street tends to simplify a phenomenon and turn it into something that is easily marketed. Over the last decade, this would be the invention of the portmanteau BAT – Baidu, Alibaba and Tencent.
The thesis was easy – Baidu is the Google of China, Alibaba is Amazon and Tencent is Facebook (Whatsapp). China is big and getting richer so investors will make money given the total addressable market.
Now to Wall Street’s credit, this was a trade that largely worked out. Alibaba has tripled since their NYSE IPO and Tencent went up forever until about two years ago, where it has fallen off a bit. Baidu has disappointed.
But Chinese tech is so much more than Alibaba and Tencent – although they are good ways to play the space because they essentially serve as venture capital firms and plow money into every new promising Chinese technology firm at the seed money stage, offering public investors very attractive returns.
Chinese tech is a continuously evolving space that can no longer be seen as a copycat of established behemoths Google or Microsoft – but rather as one of the most innovative and scalable investable areas with the force of a focused centralized government for 1.4 billion people behind them.
For investors who understand the Chinese market, they could have capitalized on these trends (and avoided Baidu).
Here are some observations about Chinese tech for going forward.
What Do Alibaba and Tencent Do?
Alibaba is known for being an e-commerce platform, but like Amazon are branching out into the cloud. Alibaba Cloud is the market leader in China and has a huge addressable market as digitalization continues. Alibaba also has Ant Financial’s Alipay, an integrated payments platform for everyday consumption, paying bills, transferring to friends and even for deposits and lending.
Tencent controls almost all of the instant messaging within China with its Weixin/WeChat platform. They are working hard to better monetize this, but WeChat is essentially a utility in China where personal and commercial life cannot exist without its use. Tencent is also one of the largest gaming companies in the world, also serving as a distributor for various major developers in China. Tencent also has its own cloud computing platform.
Tencent and Alibaba both have various projects across all major technology trends including the internet of things, big data, artificial intelligence and machine learning. They are both essentially venture capital firms for new technology companies inside and outside of China.
Chinese Stock Trends: Big Data and Artificial Intelligence
China has a lot of 5-year plans – the leadership has the benefit of not going through ballot box elections every four years and is accordingly able to realize very long-term visions.
What China has had tremendous success in doing is moving up the value chain like the various other East Asian Tigers before its rise. ROC Taiwan, Singapore, Japan, and South Korea all adopted export models to grow into first world prosperity – with the caveat that they have either stagnated or are too small to become a global economic leader across various disciplines like the United States. China has a large enough domestic population base to support its ambitions.
China has mastered secondary industry or manufacturing and wants to have sufficient tertiary and high tech industry to attain first world status for all citizens. It can only have this if it succeeds in becoming an all around technology leader (the service and retail jobs will come along with those).
Chinese Artificial Intelligence
Let’s work backwards starting with artificial intelligence. If computers were much faster than humans at finding solutions and focused enough on a specific goal so that it does not develop general intelligence and eradicate the human race, there could be various wonderful outcomes achieved.
For example, at the risk of being too futurist, if AI was applied through healthcare, there could feasibly be computing systems that could figure out how to tackle cancers or epidemics quickly, synthesize the appropriate compounds for drugs and run robots to perform flawless surgeries (from remote locations where there is doctor scarcity) what would be the benefit to society? This would also be tremendously lucrative for the corporations that control these technologies.
However, AI does not come down to a quant writing a good algorithm. Otherwise, the algorithm can really only be as good as the person who wrote it. The algorithm needs data to refine and improve outcomes.
Data is food for AI. Only through being able to learn what is right and wrong through various exposures can AI become “intelligent”. AI has taught itself to beat the world’s best chess and poker players, something that was not thought to be possible for at least decades. However, these are games with static sets of rules where AI can find game theory optimal outcomes just by playing itself enough times provided that there is sufficient computing or processing power.
Real life is much more dynamic. China has the largest population and therefore the largest data set. These people also move around a lot and enter into thousands of transactions every day because payment frictions are far lower than anywhere else around the world (more on that later). It should not be surprising that China wants to maintain data sovereignty and keep Chinese data within China and out of the hands of Facebook.
The applications are almost endless. With thousands of payments every day, an e-commerce platform such as TMall can figure out what a customer from a certain demographic is looking to buy and make intelligent recommendations.
With thousands of passengers on public transport and on the roads every day, cities can optimize urban planning to facilitate traffic and save time and money – everyone knows (especially in Los Angeles or Mexico City) how much productivity is lost in gridlock every day. For a huge lending platform, default rates can be more accurately predicted.
The most prominent application today that is not yet developed is autonomous driving. How many lives would be saved (and how many nights out without a designated driver) and how much time can be allocated for other tasks if cars drove themselves much safer than humans? Google’s Waymo (which is now raising money outside of Google), Tesla (Autopilot – not officially “allowed” but people use it anyway, giving Tesla and Elon Musk a goldmine for data) and any ridesharing app with high volume/data are ahead of the curve here. Any stock that gets the first mover advantage here will make multiples on capital through licensing and see a huge return on equity.
As for an example where we can already see it, the most obvious example is Tiktok – owned by China’s Bytedance (not yet public but with a recent valuation over US$75 billion). Short videos are shown to the viewer and within 3 minutes you will feel like the app can read your mind.
Big Data in China
Now that we know that AI is helpful and AI needs data, how is the data collected? The answer is through smart cities and the internet of things. Smart cities have smart devices – which basically means that sensors are everywhere and data is collected and machines are reactive.
Sensors can track how many cars move through a road and at what velocity. Sensors can detect foot traffic in stores. Hangzhou HIKVISION surveillance and facial recognition technologies such as Megvii can help identify who comes in.
When everything is connected, big data becomes possible.
With enough data, maybe you can accurately predict the weather or how much oil is in the source rock.
And this ties back to 5G and eventually 6G (and Huawei). 4G LTE+ is fast, but as with any other utility, telecom rollout is difficult because of the infrastructure costs involved. The greater the population density, the greater the economies of scale. If everyone lives in one square kilometre, laying down fiber and antennae becomes much less demanding.
The speed of 5G completes the connectivity puzzle.
Now all of these things are achievable only in Asia because every society faces a trade-off between privacy and certain liberties and development and security.
Chinese society is hierarchical and demands safety and stability. Stability and the ability to pursue life, liberty and the pursuit of happiness (sound familiar) is key to the people not revolting against their government – so goes the prevailing philosophy of the leadership.
The Great Firewall and Chinese Stocks
Alibaba, Tencent and Baidu are beneficiaries of the Great Firewall – or China’s censorship mechanism.
If I go on google when I am in Mainland China, it either loads very slow or it does not load. I am not able to access various non-Chinese sites without a VPN.
So, why does the Great Firewall exist?
First, it has helped foster the growth of national technology champions. The Chinese government has correctly predicted that the internet was going to be a big thing and that it would be ideal for Chinese companies to have a share of the pie. Time was needed for national champions to catch up with foreign offerings to scale and be competitive.
So – this is protectionism – although the national champion defense is accepted by most trade bodies. For all intents and purposes this has worked – Alibaba’s e-commerce platforms Taobao and TMall have excellent market penetration while Amazon’s foray into China has failed (Walmart China is doing better).
This has, in turn, allowed for these large Chinese companies to leverage their platforms and advances on the learning curve to make the right acquisitions or start the appropriate expansion projects outside of China. If the Great Firewall was knocked down tomorrow, Alibaba and Tencent would do just fine (although Baidu search would probably be killed by Google search).
Second, the Great Firewall is there because of security and data sovereignty. Whatsapp is well known for having excellent encryption – no one can read your messages. China, accordingly, blocks all Facebook properties in the Mainland. The government needs to have access to all messages.
All internet companies who serve the Chinese market must store their data domestically on Chinese servers.
Data is going to be the most important resource for the next century, and China will want to keep Chinese data patterns and trends in China.
Ironically, widely cited censorship is not that important of a reason for the Great Firewall. Most Chinese would not read Western media if the firewall was down (because it’s not in Chinese) and most Chinese who can read Western media (they have VPNs and are foreign educated) would still rather read Chinese news.