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How to Profit from Chinese Tech Stocks

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Chinese President Xi Jinping kicked off his U.S. visit yesterday with a stop in Seattle where he met with top American tech executives.

The list of execs Xi met with includes big names like Microsoft Inc. (Nasdaq: MSFT) CEO Satya Nadella and Apple Inc. (Nasdaq: AAPL) CEO Tim Cook.

The fact that Xi attended a tech forum before meeting with the president on Thursday perfectly illustrates the importance of the technology sector for the world’s two largest economies.

According to common wisdom among tech analysts and other news commentators, Xi stopped in Seattle to drum up the tech industry’s support in his efforts rebuild good relations between the two nations. After all, China is – deservedly – receiving a lot of criticism regarding its Internet censorship, cyber-spying, currency manipulations, and military adventures in the South China Sea.

But I believe this “noise” misses a much larger point for tech investors…

china tech
Despite the bad headlines coming out of the world’s most populous nation, China still boasts one of the globe’s fastest-growing economies. And the country’s move to become a more consumer- and tech-focused economy puts e-commerce front and center.

That means, in the long term, if you want to make money on tech stocks, you must aim a portion of your portfolio at Chinese e-commerce.

And today I’m going to tell you about what I think is the best way to play China’s renewed emphasis on e-commerce.

It’s an investment that will pay out big for decades to come…

Yes, China

Now, after news of China’s slowing economy and the nation’s stock market crash earlier this year, you might think I’m a bit nuts for recommending buying into China.

However, two things tell me now is the perfect time to invest there.

First off, while the White House may retaliate against Chinese cyber-spying by imposing import restrictions, I think that response will be weak, at best. That’s because China remains one of our largest and more valuable trading partners. We can’t afford to lose out on too much there.

Second, Chinese tech stocks traded in the United States are off so far this year – and I think they’re substantially oversold due to overreaction to all the news coming out of China.

This situation, however, provides tech investors who take the long view with new buying opportunities. And a new report by the International Monetary Fund (IMF) puts China’s growth in its proper context.

The IMF projects China’s economy will grow by 6.8% this year and 6.3% next year. While that’s well below 2011’s 9.5% increase, China’s economy is still growing twice as fast as the U.S. economy.

And it’s managing to do this at a time of massive change. The IMF report concludes that:

“China is moving to a ‘new normal,’ characterized by slower yet safer and more sustainable growth. The transition is challenging, but the authorities are committed to it. They have made progress in reining in vulnerabilities built-up since the global financial crisis and embarked on a comprehensive reform program. With China now the globe’s largest economy, success is critical for both China and the world.”

That’s why I think tech investors like you ought to consider having this exchange-traded fund in their portfolio…

The Way to Play It

I’m talking about the Emerging Markets Internet & Ecommerce ETF (NYSE Arca: EMQQ).

EMQQ is chock-full of fast-growing Chinese e-commerce and Internet players – and so there’s plenty of upside. The average annual revenue growth for the 40-plus firms in the fund is more than 35%.

Take a look at Tencent Holdings Ltd. (OTCMKTS ADR: TCEHY), China’s biggest Internet company and the fund’s largest holding, with a weight of just under 8.5%. This is a well-regarded company that’s a broad play on China’s burgeoning Internet sector.

Tencent provides online payments, social networks, online gaming, advertising, and streaming music and video.

Two weeks ago, the firm signed a landmark deal with Walt Disney Co. (NYSE: DIS) that makes Tencent the exclusive online distributor of the first six “Star Wars” movies.

This marks the first time China’s Internet users will have legal online access to the legendary film franchise. The news comes as Disney is ramping up a worldwide marketing campaign around the December release of “Star Wars: The Force Awakens.”

Over the past three years, Tencent has averaged a 36% annual sales growth. In its most recent quarter, the firm grew earnings per share by 40% and had a 37% profit margin.

Alibaba Group Holding Ltd. (NYSE: BABA) is the fund’s third-largest holding, with a weight of 7.5%. A year ago, Alibaba had the largest initial public offering in U.S. history, valued at roughly $25 billion, and the Chinese e-commerce giant now boasts a $158 billion market cap.

Investors and analysts have dinged Alibaba for its most recent quarterly sales gains of 28%, because that’s half its sales-growth average over the past three years. I think that’s a gross overreaction to what is after all just one three-month snapshot.

And even if this slowdown holds, Alibaba would still double sales every 2.5 years. More to the point, earnings per share in the quarter rose some 148%, more than five times faster than sales growth.

And I’m not the only analyst who considers Alibaba a great long-term play. Credit Suisse recently added Alibaba to its list of global stocks worth holding.

EMQQ also holds Baidu Inc. (Nasdaq: BIDU), which boasts a more than 60% share of China’s search traffic. Even better, forecasters at IResearch say Baidu commands more than 90% of China’s online search advertising market.

Baidu recently missed second-quarter earnings forecasts by 3%, but sales grew 38% to $2.67 billion. I’m not surprised that earnings are a bit soft at present because Baidu is acting like Amazon.com Inc. (Nasdaq: AMZN) – it’s investing $3.2 billion in its own operations, much of it on mobile-commerce infrastructure for local Chinese companies with limited web resources.

Consider that it already 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.

This is clearly a shareholder-driven firm. Baidu recently announced that it will invest $1 billion in a share buyback. Its EMQQ’s fifth-largest holding at roughly 6%.

But Not Just China

Meantime, there’s more to EMQQ than China. The ETF also offers exposure to Eastern Europe and Latin America.

For instance, EMQQ owns MercadoLibre Inc. (Nasdaq: MELI), Latin America’s dominant online auction house. It also holds Yandex NV (Nasdaq: YNDX), widely known as the “Google of Russia.”

In other words, EMQQ gives us both a specialized tech investment and geographic diversity.

Trading at just $19.11, EMQQ is a cost-effective way to invest in global e-commerce firms with a special emphasis on China. I suggest buying some now and then adding steadily to your holdings over time.

This is the kind of investment that will reward patient long-term investors who see the obvious – that China’s economy and its e-commerce sector will only grow in importance in the years ahead.

Follow us on Twitter @moneymorning.

China Isn’t the Only Tech Sector Poised to Grow: Many young Silicon Valley tech companies are postponing going public, believing IPOs to be more trouble than they’re usually worth. That means wealthy private investors are the ones making big profits on these startups, leaving mainstream investors like you on the sidelines. But now, that’s all changed. Michael has put together an “investment package” that will allow you to finally share in the billions being generated by these pre-IPO startups. Plenty of wealthy investors are making huge money in this private market. This is your chance to grab a share…

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