Chinese equities started underperforming the US in early 2018 on the back of trade tensions and a slowing economy amid “shadow banking” cleanup.  However, Chinese equities bottomed in October, almost 2 months before the SPX bottomed in December. Since the October bottom, Chinese internet stocks have rebounded 15%.

https://koyfin.com/s/95e2b74b-fa0d-4a53-b493-7f130f77edf5

China’s tech sector has outperformed US tech names since October. Peeling back the composition of this rally reveals several mid-cap companies which are leading the trend – though the large-cap tech names are not far behind.

https://koyfin.com/s/150cf218-5112-47cc-bfca-3b5487347bf5

3 mid-cap / small-cap picks from within the China internet sector are: MOMO (mid-cap), GDS (mid-cap), JKS (small-cap)

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https://koyfin.com/s/c7a879ba

https://koyfin.com/s/280eb52a

MOMO (MOMO, $5.9B)

After losing 46% of its value from October to December 2018, $MOMO stock gained 28% in January 2019 with the China internet rebound. With P/E (ltm) at 14.5x, it is relatively cheap compared to its peers. Its acquisition of Tantan in late February 2018 for $735mm confirmed its position as a leader in China online dating and social media, without making the stock more expensive. Previously a growth story, with top line growth at >60% in 1Q18, $MOMO is still an interesting pick as a value stock considering its substantial market share in a large market.

GDS Holdings (GDS, $3.4B)

$GDS is a developer and operator of data centers in China, had its IPO on the Nasdaq in October 2016. Hedge funds have taken interest in both $GDS and $MOMO (see chart below), with HF ownership of total O/S at 4.9% for the last reported quarter – 3Q18, slightly off the 6.5% high in 2Q18 for GDS. Sentiment from investors has been mixed – a short-seller report from late July 2018 alleged reckless borrowing, but the stock surged +20% by August 1 after GDS’ response and a Credit Suisse upgrade projecting +108% upside ($47 PT). $GDS currently trades at $27.50 and its chart shows a descending triangle pattern, which is likely to result in a gain or loss in the size of the distance between support and resistance levels – this range is $23 (see second chart below).

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JinkoSolar (JKS, $620m)

JinkoSolar Holding operates in the semiconductor space in China. JKS is not only a leader in the China solar semi market, but globally – in May 2018 JKS broke a world record (again) for efficiency with its P-type monocrystalline cell hitting 23.95%. JKS sells to a global consumer market, with 8 production centers and 15 subsidiaries globally. Relatively cheap compared to its semi peers, $JKS trades at 13.5x TTM earnings (see chart below). $JKS has fared better than its mid-cap peers briefed above, up +63% YTD In 2019, compared to +25% MOMO, +20% GDS (see second chart below).

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“BAT” Overview – Baidu ($BIDU), Alibaba ($BABA), Tencent ($TCEHY)

1 year relative performance chart:

https://koyfin.com/s/aae65fe7

Tencent (TCEHY, $411B)

Tencent’s 2018 bottom happened earlier than its peers, hitting a 52-week low on Oct. 29, 2018 at $32.15, a 44% drop from it’s all-time high. Chinese regulators began prohibiting new video game releases in 2018, citing concerns on the effects of excessive play on children’s’ health, hurting Tencent’s video game business as well as the industry as a whole. Tencent revealed a workaround called the “green channel” in summer of 2018, by which companies could release new games which had already received regulatory approval, which was thwarted shortly thereafter.

However, in terms of positive indicators, $TCEHY has recovered nicely through the start of 2019 and YTD, with several profitable and growing (double digits y/y) business lines ex video games. It’s largest segment, worth 88.9bn RMB (convert) is Value-added services (VAS) – this segment includes the video game segment, but also social media services, video streaming, live broadcasts, and music streaming – all of which are growing by double digits.

Alibaba (BABA, $480B)

Alibaba’s YTD rally is in part due to its $9.5bn acquisition of startup Ele.me, completed in April 2018, a food delivery service. Since acquisition by Alibaba, Ele.me has made improvements to its last-mile delivery service, aiding its competitive positioning against rival Meituan Dianping (backed by Tencent). Meituan’s stock has suffered under the pressure, down 25% since its IPO at $75 in September 2018. In 2017, Ele.me and Meituan were estimated to roughly split market share, as of 2018, Ele.me had 600 bps on its rival, at 49.8% of total market. The acquisition of Ele.me was and is instrumental in Alibaba’s fight with Tencent for dominance of the China market – YTD performance by both companies (see chart above) shows better sentiment towards $BABA.

Alibaba. Alibaba’s YTD rally is in part due to its $9.5bn acquisition of startup Ele.me, completed in April 2018, a food delivery service. Since acquisition by Alibaba, Ele.me has made improvements to its last-mile delivery service, aiding its competitive positioning against rival Meituan Dianping (backed by Tencent). Meituan’s stock has suffered under the pressure, down 25% since its IPO at $75 in September 2018. In 2017, Ele.me and Meituan were estimated to roughly split market share, as of 2018, Ele.me had 600 bps on its rival, at 49.8% of total market. The acquisition of Ele.me was and is instrumental in Alibaba’s fight with Tencent for dominance of the China market – YTD performance by both companies (see chart above) shows better sentiment towards $BABA.