China’s Version Of FANG: What Happens If The Government Takes A Stake In Them?

I run a proprietary scan every night and have since 2009. The scan looks at several technical factors for bullish setups and there is also one that looks for bearish setups. It was interesting to see several Chinese internet companies on the bullish list after Friday’s trading action, especially given the recent Communist party meetings in China where President Xi Jinping was awarded five more years in power. Mr. Xi has expressed interest and plans for keeping the party involved in people’s lives. Specifically back in the spring there was a proposal for the state to take a one-percent stake in almost all China based internet companies.

Given these recent political developments, I found it surprising to see the Chinese internet firms on my bullish list, but after looking at their charts and their fundamentals, they certainly look like they belong on a bullish list. The four stocks that appeared on that list could be considered China’s version of FANG. The group includes Alibaba (NYSE: BABA), Altaba (Nasdaq: AABA), Bauzun (Nasdaq: BZUN) and Tencent Holdings (Nasdaq: TCEHY).

When I started researching the stocks, I found four companies with really good earnings growth, strong sales growth and high relative strength ratings. I used the tables from Investor’s Business Daily and their EPS ranking and relative strength rating. You can see in the table below that the EPS growth of BABA, BZUN and TCEHY are all in the top two percent of publicly traded companies. All four rank in the top eight percent in terms of relative strength. When it comes to sales growth, we see similar sales growth for AABA and BZUN (22% and 24%) and BABA and TCEHY (53% and 55%).

As impressive as those numbers are, you can’t help but wonder what is going to happen with these companies should the Chinese government take a stake in them. These companies fall under the watch of the Cyberspace Administration of China and State Administration of Press, Publication, Radio, Film and Television. The goal would seem to be gaining greater control of each company’s content and ensuring a degree of censorship.

Seeing these four stocks grouped together, I couldn’t help but think of the FANG stocks here in the U.S. Four internet based companies that have been moving higher in recent years. Naturally I decided to build the same table for the FANG stocks to see how they stacked up.

What we see is that the overall numbers aren’t quite as good. The EPS rankings for FB, NFLX and GOOGL are comparable to the Chinese firms, but AMZN’s lags. None of the relative strength ratings for the FANG stocks are in the 90s whereas all four of the Chinese firms were above 90. The sales growth for the four FANG companies are all very impressive, but if you average the four it comes out to 33.25 percent compared to the 38.5 percent for the Chinese firms.

Based on the numbers alone, it would seem that the Chinese companies look like better investments than the FANG stocks, but it has to be taken with a grain of salt due to the Chinese government’s involvement. The companies are already scrutinized closely and if they government takes a stake, the scrutiny and control could be a detriment. Despite the government’s ambitions, I don’t think they would make vast changes and I doubt they would be rapid changes. Based on that, the Chinese internet companies could be great investments for the foreseeable future, but if you invest in them, you should also keep an eye on the developments with the government.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

2 comments

  1. you may want to check out Wuling motors

  2. I find Mr. Pendergraft’s Chinese market equity choices interesting. Has he been published? When? Where?

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