China Tech ETFs in Positive Momentum: Here’s Why

China’s technology investment climate continues to evolve, especially in the areas of artificial intelligence (AI) and the electric vehicle (EV) sector. The past year has seen a significant shift in investor sentiment towards China’s tech giants, with a notable impact on the development of AI and an increasing association with the EV industry.

Chinese tech ETFs like KraneShares Hang Seng TECH Index ETF KTEC, Invesco China Technology ETF CQQQ, KraneShares CICC China 5G & Semiconductor Index ETF KFVG, KraneShares CSI China Internet ETF KWEB and iShares MSCI China Multisector Tech ETF TCHI has added 10.2%, 9.9%, 9.8%, 8.1% and 7.1% respectively over the past week (as of April 30, 2024). Of these, TCHI offers a hefty dividend yield of 4.28%.

While most of these ETFs don’t currently have a positive Zacks Rank, things could turn for the better in the near term. Some analysts expect a potential recovery, supported by a shift to new technologies. Let’s dig a little deeper.

Rapid Chinese technology partnership in electric vehicles

Foreign automakers are flocking to join Chinese counterparts in artificial intelligence and other smart car technology. Japanese Toyota engine TM announced it would collaborate with Chinese gaming and social media giant Tencent on AI and big data.

In addition, Japan’s Nissan also announced a partnership with the Chinese technology company Baidu BIDU will conduct research into AI and ‘smart cars’. German car giant Volkswagen also promoted its partnership with Chinese EV startup XPeng.

A Renault executive recently said he would hold “crucial discussions” with Chinese EV maker Li Auto and Xiaomi to delve into electric vehicle and smart vehicle technologies. Xiaomi, known for its smartphones, recently unveiled its first electric car, positioning it as a rival to Porsche Tesla TSLA.

Meanwhile, Tesla is making great strides in its driver assistance technology. It received approval to roll out its advanced driver assistance technology, Full Self Driving or FSD, in China. Tesla has also reached a deal with Baidu to form a partnership on mapping and navigation features, ahead of plans to deploy the FSD system, according to a Bloomberg report (read: Tesla Turnaround in the Cards ? Bet on These ETFs).

Impact and investments in AI

China’s commitment to AI has remained strong despite waning investor interest last year. In 2023, the country experienced a 38% drop in AI investments, with funding falling 70% from the previous year. This downturn was caused by geopolitical tensions and regulatory hurdles that led to a cautious approach from both local and foreign investors.

However, the Chinese government’s response has been proactive, with new AI regulations introduced in 2024 that aim to streamline the sector’s growth while addressing copyright and security concerns. These regulations are expected to make the future trajectory of AI development in China more controlled and stable.

Some Chinese tech stocks offer value

Chinese tech stocks are now value stocks: they boost dividends and buybacks, have huge cash balances and generate huge amounts of cash at cheap valuations.

Alibaba’s ( BABA ) price-to-earnings ratio (most recent quarter or MRQ) is 1.22x, versus the Internet commerce sector’s underlying price-to-earnings ratio of 2.28x. Price/cash flow (most recent fiscal year or MRFY) is 8.54x versus the industry measure of 14.67x.

Baidu’s price-to-earnings ratio is 1.04x, compared to the Internet services sector’s underlying price-to-earnings ratio of 1.63x. Price/cash flow (most recent fiscal year or MRFY) is 5.95x versus the industry measure of 10.19x. This year, both Alibaba and Baidu are experiencing slower growth compared to the industries in which they operate.

Meanwhile, Tencent (TCEHY) is different because it has a higher growth rate than the underlying Internet Services sector and the S&P 500. Investors are also rewarding the stock with higher price premiums because the stock has a higher P/E. B and P/CF than the industries.

Any weaknesses?

Despite the growth potential, there are inherent weaknesses in the space. The technology sector’s dependence on government policy and the ongoing geopolitical landscape pose risks to investment stability. Moreover, the growth rates of most Chinese technology companies are below their underlying business sectors.

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Toyota Motor Corporation (TM): Free Stock Analysis Report

Baidu, Inc. (BIDU): Free Stock Analysis Report

Tesla, Inc. (TSLA): Free Stock Analysis Report

KraneShares Hang Seng TECH Index ETF (KTEC): ETF Research Reports

Invesco China Technology ETF (CQQQ): ETF Research Reports

KraneShares CSI China Internet ETF (KWEB): ETF Research Reports

KraneShares CICC China 5G and Semiconductor Index ETF (KFVG): ETF Research Reports

iShares MSCI China Multisector Tech ETF (TCHI): ETF Research Reports

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