BAT Stocks: The Rise Of The Chinese Tech Giants

Investing

BAT Stocks: The Rise Of The Chinese Tech Giants

A growing number of global investors are jumping on the bandwagon and investing in Chinese internet companies Baidu, Alibaba, and Tencent – or, as they are commonly known, the “BAT” stocks.

Published on 19 September 2017

Commonly referred to by the acronym of “BAT”, the three Chinese tech giants Baidu, Alibaba, and Tencent are widely considered to be the chief rivals of the United States’ FAANG (Facebook, Amazon, Apple, Netflix, and Google) group of tech behemoths.

While the FAANG stocks have outperformed the S&P 500 so far this year and have been grabbing a lion’s share of the headlines in the financial news, the BAT stocks – fuelled by strong earnings and growth potential as well – have actually been rising at a much faster clip than their US counterparts. From the beginning of this year to mid-August, BAT shares have soared by over 60% on average, while FAANG stocks have only gained around half as much.

In the latest quarter, BAT stocks have continued their climb upward, with average gains of 41.7% – while FAANG stocks saw a 30.7% increase. And BAT stocks are cheaper than their FAANG rivals – making them all the more appealing to investors.

Here we take a closer look at the BAT companies, exploring their core businesses and stock market performance.

Baidu

Robin Li, CEO of Baidu

China’s dominant search engine, Baidu is basically the Chinese version of Google. Since Google exited China in 2010, Baidu has grown significantly, expanding into a wide range of portals and cloud-based apps. Currently, the company controls around 80% of the China search engine market share.

One of Baidu’s main revenue streams, selling internet advertisements, was hit hard in 2016 after the government imposed stricter regulations. As a result, many advertisers decided to switch platforms, causing the company a huge drop in its advertising earnings.

The search giant also conducts research into artificial intelligence and self-driving cars, and is counting on its AI projects to offset the downturn in its advertising business. Baidu’s chief operating officer Qi Lu remarked at a press conference that the company is confident in beating Alphabet Inc at driverless cars within the next three to five years.

Although in 2016 Baidu reported its first annual earnings decline since it went public in 2005, the company has recovered this year – posting 14.3% revenue growth for the second quarter of 2017, and generating net income of CN¥4.4 billion (US$671.8 million). And the future looks bright for Baidu: the company is expected to register a year-on-year revenue increase of 26.7% to 30.1% for the third quarter of 2017. Wall Street analysts are predicting that Baidu’s revenue and earnings will rise 21% and 47% respectively this year.

Alibaba

Jack Ma, Chairman of Alibaba Group

Founded by Jack Ma in 1999 as a small start-up, the online retail behemoth has a market capitalisation of US$460 billion today, and controls over 80% of China’s entire e-commerce market.

Alibaba operates two main online portals: Taobao, a consumer-to-consumer e-commerce platform, and Tmall, its business-to-consumer marketplace. The company has also expanded into cloud platforms and digital media, and has developed a successful online payment platform, Alipay, which is widely used in China. Asian countries like Singapore and Malaysia are starting to use Alipay as well.

Interestingly, Alibaba claimed the record for being the largest initial public offering ever at US$25 billion when it went public in 2014. This year, the company reported a fiscal first quarter revenue of US$7.51 billion – a 56% year-on-year increase, including a 58% rise in its principal business, online commerce, and a 96% increase in cloud services revenue. Many analysts expect the Alibaba stock to surpass Amazon in terms of market cap this year, as the Chinese e-commerce giant’s shares continue to rise at a faster rate than its American rival.

Tencent

Ma Huateng, CEO of Tencent

The Chinese internet conglomerate Tencent’s extremely popular mobile messaging app WeChat dominates China’s social network market with close to a billion active users. WeChat supports a number of value-added features, including the widely used payment service WeChat Pay. Last year alone, WeChat Pay processed US$1.2 trillion in mobile payments. Additionally, Tencent is also the biggest video game publisher in the world, owning successful massively multiplayer online games such as the mobile hits Clash of Clans and League of Legends.

Over the past one year, Tencent’s stock has surged close to 60% with its revenue and earnings climbing by 48% and 42% respectively due to its robust growth across its social networking and gaming businesses. Looking ahead, analysts forecast that Tencent’s revenue and earnings will soar another 52% and 51% respectively this year.

Beyond BAT

Besides BAT stocks, other Chinese tech stocks – including JD.com, Netease Inc, and Weibo – are attracting the attention (and dollars) of investors.

With a market cap of US$57 billion, JD.com, Alibaba’s biggest rival in the Chinese e-commerce market, has shown great earnings growth potential. With Tencent as a minority shareholder and Walmart steadily increasing its stake in JD.com, now could be a good time for investors to consider adding this tech stock to their portfolios.

Founded in 1997, Netease Inc is an online services provider that is a key pioneer in the development of internet services in China. The company reported strong second quarter revenue growth this year, and analysts expect its earnings to increase by 47.8% over the next few years.

Weibo, China’s equivalent to Twitter, has been posting steady profit growth in recent years, beating earnings and revenue expectations for seven straight quarters. Analysts expect its revenue to rise by 66% this year.

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