The Resilience of Chinese Technology Giants

Veteran emerging markets investor Mark Mobius has identified Alibaba and Tencent as crucial stocks for any portfolio investing in developing economies. Despite recent volatility, Mobius believes that these Chinese technology giants could form the foundation of a successful investment strategy. He highlights that both companies are still generating significant profits, despite experiencing a remarkable decline in their share prices over the past three years.

Alibaba’s Performance and Potential Spin-Offs

Alibaba, listed on both the NYSE and the Hong Kong stock exchange, reached its peak in October 2020 but has since witnessed a decline of over 70%. Nevertheless, Mobius finds Alibaba’s potential spin-offs particularly intriguing and believes they could greatly benefit the company. In March, Alibaba announced plans to reorganize into six independent business groups, each capable of raising external funding and going public. Last week, the company revealed its intention to list its logistics unit, Cainiao, on the Hong Kong stock exchange.

Tencent’s Performance and the Broader Tech Sector

Tencent, another major Chinese technology company, saw its stock reach its peak in early 2021 before plummeting by over 60%, mirroring the broader decline in the growth technology sector. Despite this setback, Mobius emphasizes the resilience of both Alibaba and Tencent, stating that they continue to generate profits even amidst substantial decreases in their stock prices.

Unlocking Value and Potential Growth

Investment banking analysts suggest that Alibaba’s decision to reorganize into multiple independently listed divisions will “unlock value” at a time when China’s economic growth is slowing. They point out that despite economic uncertainties, Alibaba’s customer management revenue has experienced double-digit growth, driven by receptive consumption demand and increased profitability. Mizuho Securities analysts have raised their price target on the stock to $145, indicating a potential 70% upside from current levels.

China’s Advancements in Chip Capabilities

Mobius predicts that China will make significant advancements in chip capabilities over time, surpassing the current industry leader, the United States. He attributes this progress to the Chinese government’s strong emphasis on chip development and its efforts to replicate the achievements of Taiwan Semiconductor Manufacturing Company (TSMC). While acknowledging that these advancements will not occur overnight, Mobius is confident that China’s commitment to the sector will yield remarkable results.

Preference for Lesser-Known Semiconductor Companies

Despite acknowledging the achievements of TSMC and China’s Semiconductor Manufacturing International Corporation (SMIC), Mobius reveals that his current preference lies with lesser-known companies operating in the semiconductor sector. His investment fund, the Mobius Emerging Markets Fund, holds investments in Elite Material, a Taiwan-based manufacturer of base materials for circuit boards, and Zilltek Technology, a company focused on circuit board design and development. The fund’s largest stock holding is LEENO Industrial, a South Korean semiconductor testing company.

Geopolitical Risks and the Semiconductor Sector

Mobius recognizes the geopolitical risks associated with investing in the semiconductor sector, particularly in Taiwan. However, he finds smaller tech companies in the region appealing due to their agility and profitability. These companies have the capability to quickly adapt and relocate operations if necessary, reducing potential disruptions caused by geopolitical events.