Unmatched Market Size, Opportunity In Chinese Internet ETFs

It has been a good year for U.S. internet stocks, but an even better one for Chinese internet names. The KraneShares CSI China Internet ETF KWEB is up about 67 percent year-to-date, putting it ahead of the largest U.S.-focused internet exchange traded fund by nearly 3,000 basis points.

Now a $1.2-billion ETF, KWEB has been bolstered by large stakes in the likes of Tencent Holdings Ltd. TCEHY, Alibaba Group Holding Ltd. BABA and Baidu.com Inc. BIDU, among others.

For KWEB and the Chinese internet space at large, much of the investment thesis has been viewed through a long-term lens, but it's clear that thesis delivered for investors in 2017. A slew of data points suggest KWEB's run may still be in the early or middle innings.

What The Experts Say

“In my experience, most notable stock growths that have taken place followed a similar pattern: the stocks appear expensive at first, experience a 30-40 percent upward move and subsequently leave investors feeling like they’ve missed their prime opportunity to buy, when in reality some of the best gains are yet to be realized,” KraneShares head of capital markets Mark Schlarbaum said in a recent note. “I believe that strength and positive growth are actually indicators of a potential buying opportunity, not an excuse to stay on the sidelines.”

One way of looking at the Chinese internet opportunity is this way: Amazon.com Inc. AMZN's market value is about $130 billion above Alibaba's, but Alibaba's Singles Day sales dwarf those of Amazon's Prime Day. Additionally, the Chinese internet market, in terms of sheer size, makes the U.S. internet market look tiny. Better still is the fact that internet penetration in China is small, on a percentage basis, compared to the U.S.

“China's internet population reached 721 million people, a penetration of only 52.2 percent. The U.S. internet population reached 287 million people, a penetration rate of 88.5 percent,” according to KraneShares.

A Leveraged Idea

Risk-tolerant traders looking to profit from near-term upside in Alibaba, Tencent and friends can consider the Direxion Daily CSI China Internet Index Bull 2X Shares CWEB. CWEB, the only leveraged ETF dedicated to Chinese internet stocks, looks to deliver double the daily returns of the index KWEB tracks.

There is obvious enthusiasm for CWEB, as traders have been pouring an average of more than $414,000 per day into the ETF over the past month, according to Direxion data

“If you compare FANG stocks to the BATJ (BIDU, Alibaba, Tencent and JD) stocks for the past 12 months ended 11/30/2017, the BATJ companies’ average revenue growth was 42.6, which is greater than the FANG companies’ average revenue growth of 32.6,” said Schlarbaum. “The PEG ratio is 1.29 for BATJ and 4.50 for FANG. The FANG stocks have outperformed on price but underperformed on fundamentals. Given the PEG ratios, a rational investor might expect, with all else being equal, BATJ may outperform FANG over the next few years.”

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