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BARRON'S INTERVIEW
Tencent to Beat Alibaba, Baidu Says Asia Fund Pro
Bets on Tencent and Chinese insurers are paying off for BNP Paribas Investment Partner’s Arthur Kwong.
By DANIEL SHANE
April 21, 2017 12:06 a.m. ET
Betting on Chinese internet giant Tencent has paid off handsomely for Arthur Kwong.
The head of Asia ex-Japan equities at BNP Paribas Investment Partners has delivered an 8% return this year, thanks to overweight positions in technology and financials, while underweighting real estate and materials stocks. Tencent is up 25% this year. About one-third of Kwong’s $450 million fund is invested in Chinese stocks listed in the U.S. and Hong Kong.
Barron’s Asia caught up with Kwong in Hong Kong for his latest views on China’s top internet and finance stocks.
Barron’s Asia: Asian stock markets have delivered an impressive return year-to-date. Where do they go from here?
Arthur Kwong - head of Asia ex-Japan equities at BNP Paribas Investment Partners.
Arthur Kwong: We thought 2017 would be a good year and that’s been true already. Asian stocks are up about 12%-13%, which is about the best performance out of the last 15 years. We’re taking more of a prudent outlook now and we believe single mid-digits are the kind of returns you’re going to get for the rest of the year. You’re not going to get a very significant return if you only buy now.
But we’re still bullish on Asia-Pacific long-term because the stocks are trading at a 30% discount compared to the U.S. The last time it was trading at such a massive discount was during the Asian Financial Crisis in the 1990s. That discount is not justifiable because even if the U.S. economy continues to recover, Asia will benefit because it’s always exporting to the U.S.
Q: The fund is overweight Tencent and underweight Alibaba and Baidu. Why?
A: Given that Chinese internet penetration overall is still relatively low, these three companies haven’t really had to compete with each other’s businesses yet. But if they do one day - even if it’s five to 10 years down the road – Tencent (700.HK) will win. It has the integration of mobile from instant messaging all the way down to ecommerce and games. Tencent has a good ecommerce partner in JD.com (JD), even if it’s a far second to Alibaba (BABA). What Tencent can do in the future is integrate JD.com’s system into its payments platform Tenpay and social network Wechat. Consumers will find that very convenient, because Wechat is the first thing they look at in the morning and the last thing before they go to sleep. So Tencent interacts a lot more with its customers. When Tencent needs to monetize more from ecommerce they can say “OK, JD.com, bring me your goods and we’ll put you through Wechat.”
In terms of risk profile, Tenpay is lower than Alipay. Alibaba’s finance strategy is to be more aggressive in lending, whereas Tencent is working with a bank to do risk assessment on granting loans. Everywhere Tencent overall seems to be more conservative in the way they do things, and they’re more diversified compared to the other two.
The key assets for Baidu (BIDU) are maps and search. Unfortunately search is becoming less popular because everyone downloads an app for anything they regularly search for. If you want a food service you download an app for that. You don’t go to Baidu and search for, say, “food in Shanghai” anymore.
Q: The fund prefers Chinese insurers over banks, although both benefit from rising rates. Why is that?
A: Penetration-wise insurance is better than banks: There are fewer people in China who have insurance than using banking services. In terms of competition, China is over-banked. If you look at the largest banks in China, their market share is only 5% or 6% for deposits. If there’s more liberalization in financial services they will have to compete severely too. For insurance there’s more or less an oligopoly. Ping An (2318.HK) – which we like - is good with health insurance for example. It has a 20% market share.
Also, most of the banks are state-owned enterprises. That’s true for insurance as well, but Ping An isn’t state-owned. It can make decisions purely based on customers and shareholders. Plus, it means they can just focus on the most profitable, tier one cities. They don’t have to go to rural areas and try to cover everyone. It’s also got the top, premium-generating agency teams. They’re very focused on achieving good results.
Interest rates moving up will benefit both banks and insurance, true. But there’s just too much leverage in the banks. It’s hard to value these stocks because it really depends on how much leverage they have on their balance sheet.
Thanks, Arthur.
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