China has been dominating the headlines in recent days.
And not in a good way.
Since late last week, worries about slowing growth, financial-system shenanigans and the potential for an “Asian-Contagion” type spillover have whacked global stocks – and have left folks wondering if the “China Miracle” is over.
But China’s kind of like a still-young tech venture: There are going to be reversals, it’s going to be volatile, and it’s normal to expect this kind of whipsaw market action.
And let me tell you something else: While it’s true that Beijing has some big problems to solve, investors who just write China off are going to miss out on one of the biggest profit opportunities in global technology. Even as the broader economy there slows (meaning it’s still growing – just at a slower rate than before), there’s a tech-focused slice of that country’s market that continues to advance at a scorching pace.
In fact, if you look at the numbers, I bet you’ll agree with my assessment that we’re looking at the hottest investable market on earth.
Today I’m going to tell you all about this market … and I’m going to show you exactly how to play this for maximum gain.
Old Sam Would Be Proud
Few of you would argue that Wal-Mart Stores Inc. (NYSE: WMT), the retailing giant founded by the late Sam Walton, is the savviest big-box merchandiser on the planet. It has more than 4,500 stores in the U.S. market alone – as well as ventures abroad.
But I’ll bet that a lot of folks would be surprised to discover that Wal-Mart is also one of the world’s shrewdest high-tech opportunists. Back in 2012, as part of its never-ending global search for new growth, the Bentonville, Ark.-based company took a 51% stake in China retailer Yihaodian.
And Yihaodian just reported that the $1.9 billion in revenue it reaped in 2013 was up 70% from the year before.
As a Web-only retailer, you see, Yihaodian sells into the super-hot sector that we’re so interested in … the China e-commerce market.
Blue-chip consultant McKinsey & Co. says that China is already the world’s second-largest e-commerce market – trailing only the United States.
Mainland China’s online marketplace earned that No. 2 slotting by virtue of a decade’s worth of 120%-a-year growth – a pace that dwarfs the still-hefty U.S. pace of 17% a year during the same stretch.
And McKinsey says China’s e-commerce market will continue to surge – tripling between 2011 and 2015 to reach $395 billion.
And that’s merely the start.
Only about 40% of China’s populace is online today. With a 2013 population of 1.34 billion people, China still has 807 million additional consumers who could gain Web access.
If only half those folks start shopping online over the next few years, you’re talking about a market gain that’s bigger than the entire U.S. population.
In our weekly chats with you here at the Strategic Tech Investor, we consistently counsel you to watch for “unstoppable trends” – since those are usually high-percentage pathways to wealth.
Growth numbers of the magnitude we’ve been telling you about can translate into market-crushing gains – provided you pick the right stocks. And that’s just what we’re going to do for you here.
And we’ve chosen three that should fatten your wallet nicely in the years to come.
So let’s take a look …
China E-Commerce Play No. 1: Baidu Inc. (NasdaqGS: BIDU)
If you have any doubts about the growing importance e-commerce plays in China’s economy, just consider this – Robin Li, founder of online search leader Baidu, recently became China’s richest man.
Li climbed to the top of the Bloomberg Billionaire Index in mid-December after shares of the “Google of China” went on a tear, zooming more than 70% last year.
On a global basis, Baidu still plays second fiddle to Google. But it’s still a force on the Web: It accounts for 63% of the search traffic in China and 19% worldwide.
And Baidu is looking for more growth. It now has 20 million daily active users for a new mobile video app. Moreover, Baidu recently established a joint venture with Viki Inc. for a Website that allows users to share and subtitle videos in more than 160 languages.
To help fuel growth, Baidu is also moving forcefully into mobile search and apps, social media, and music products. And it launched Box Computing, a service that improves search across multiple devices like PCs, tablets and smartphones.
Baidu has a market cap of $57 billion, and its stock trades at about $163 a share. Before you dismiss that as being “expensive,” however, consider this: The company has an operating margin of 39%, a return on equity (ROE) of 34.5% and holds $4 billion in net cash – meaning it’s healthy and well-run financially.
But the stock trades at just four times forward earnings.
Now that’s what I call a cheap stock – no matter how high its share price might be.
Chinese E-Commerce Play No. 2: Qihoo 360 Technology Co. Ltd. (NYSE: QIHU)
If you want to learn how to ramp up e-commerce sales, talk to John Liu. For six years, Liu ran the China operation of global search leader Google Inc. (NasdaqGS: GOOG).
In short, Liu is the kind of tech-sector executive that I keep on my personal radar screen: When he makes a move, I watch where he goes and then ask what kind of opportunity this might create for my readers.
So earlier this month, when Liu joined Qihoo 360 as chief business officer, I added the company to my “target list” of stocks to study. What I found was that, in his new role, Liu will be responsible for adding new products and services at the fast-growing firm.
His breadth of experience showed us just how seriously Qihoo 360 wants to expand its sales of Web-security services with a new special emphasis on mobile platforms.
That’s because we know that this is a market Liu knows well. He previously served as a CEO of China Operations for SK Telecom Co. Ltd. (NYSE: SKM), a provider of wireless services based in Korea.
Now Liu has joined Qihoo 360 – and at a most-opportune time.
You see, the company launched its own search engine less than two years ago. But it already handles 23% of China’s search traffic, according to the brokerage firm Stifel Nicolaus.
And it’s not stopping there.
In December, Qihoo took a small stake in Japan’s KLab, a respected developer of mobile social games. Qihoo acquired 2.56% of KLab for roughly $6 million.
Don’t be fooled by what seems to be a small dollar amount: It’s the upside that’s important here. Under the agreement, KLab will set up a team that specifically designs games for the China market, giving Qihoo another e-commerce sales hook.
In the meantime, Qihoo has delivered stellar financial results. In last year’s third quarter, sales jumped 124% to roughly $188 million. Earnings per share soared to 35 cents, a 218% jump from the 11 cents reported a year ago.
Like Baidu, Qihoo is impressively sound. It has an operating margin of 19.5%, a return on equity of 17.5% and $400 million in net cash on hand.
The company has a market cap of $11.2 billion, and trades at around $93 a share.
Chinese E-Commerce Play No. 3: NetEase Inc. (NasdaqGS: NTES)
Founded in 1997, Beijing-based NetEase is one of China’s oldest e-commerce firms.
It’s also one of the best-developed – a full-service operation with entries in all of the industry’s major segments. These include e-mail, advertising, mobile apps, and Web portals.
None, however, can compete with the Big Story here.
When you get right down to it, NetEase is really all about online gaming.
And you can see that by drilling into the company’s financials.
In the third quarter, overall sales hit $402 million, a very nice gain of 23% from the year-ago period.
But online games accounted for 83% of total sales, or roughly $336 million.
NetEase is focused on gaming because this is such a large and potentially lucrative sector. And we’re still in the very early going, meaning there’s still a lot of growth to be had.
Technology research firm Strategy Analytics estimates that global online gaming sales increased 25% last year for a value of about $15 billion. China alone was projected to account for more than half that total, or roughly $8 billion.
What makes this so alluring is that online gaming in China isn’t facing the roadblocks it does in other countries. In fact, it has Beijing’s de facto endorsement.
Turns out the People‘s Daily, the mouthpiece of China‘s Communist Party, is joining the craze.
Earlier this month, the newspaper’s Website released “Beat Corruption,” an online game that allows players to fight graft by zapping greedy officials. Players win points by using their mouse to blast corrupt officials with a Taser.
For its part, NetEase is targeting a trend in China that’s known as “massively parallel games,” where hundreds and sometimes thousands of players battle it out over the Web.
NetEase released several new titles in this genre last year alone. It expects to unveil at least three more this year and also has moved into the sophisticated world of 3D games that feature hyper-realistic graphics.
Once again, we’re talking about a company with impressively strong finances. NetEase has a profit margin of nearly 47%, an ROE of 24.3 % and has more than $2.6 billion in net cash on hand.
The company has a market value of $10 billion, and the stock trades at roughly $78. Despite its decidedly bullish growth prospects, the shares are trading at a forward Price/Earnings (P/E) ratio of 12.8.
There’s an old investing adage – attributed to Baron Rothschild, of the Rothschild banking family – which holds that “the time to buy is when there is blood in the streets” … meaning, when markets have fallen off dramatically, and when investor sentiment has reached near-eulogy levels.
When that happens – and the market hands you high-quality companies in a high-growth market like we have here – it pays to be opportunistic.
As we often tell you: The road to wealth is paved by tech.
But that road is most often traveled by folks with the courage to act on their strongest convictions.
And the potential of China’s e-commerce market is just too alluring to ignore.
See you all later this week.
[Editor’s Note: Michael’s call on Ericsson (NasdaqGS ADR: ERIC) in Friday’s Strategic Tech Investor couldn’t have been any better timed. If you saw the news, on Monday Ericsson won a $650 million patent settlement from Korea’s Samsung that will also give the Swedish telecom giant years’ worth of royalty payments. If you liked that call, you should see the profit play he just recommended in the new issue of his Nova-X Report. One subscriber Brian B. invested $750 and turned it into $210,000. You can check it out here.