Beijing, China – As investors consider the prospect of investing in China, key factors come into play when deciding whether to enter this market. While the Chinese market is indeed investable, caution is warranted due to certain risks and challenges that need to be assessed. With the importance of adequate disclosure and audited financials, potential investors should also consider valuations that take into account the various risks associated with investing in China.
One major consideration for investors looking at Chinese stocks is the lack of a robust rule of law in the country. The Chinese Communist Party (CCP) holds significant power in shaping regulations, policies, and directing capital, which can impact businesses and investors without much recourse. Furthermore, the ongoing geopolitical tensions between China and the West have led to protectionist measures and trade barriers that can complicate doing business in the region.
In a recent analysis, the KraneShares CSI China Internet ETF (KWEB) has shown positive signs that may make it a buy for investors. With a lower relative valuation compared to historical levels, a consensus EPS growth upgrade of 5%, and a 7% price target increase since the last analysis, KWEB presents a potential upside of 30%. Additionally, the Chinese economy has shown signs of bottoming out, with export-led growth and improving sentiment.
However, one of the main risks to consider with this upgrade is the potential for further escalation in geopolitical tensions, particularly through additional trade tariffs or barriers that could impact China’s export growth and domestic consumption. The performance of Chinese tech stocks has been mixed, with the sector experiencing volatility in recent years due to increased scrutiny and regulation imposed by the CCP, as well as challenges in the residential sector.
Looking ahead, analysts are optimistic about the portfolio’s potential, with estimates pointing to a 25% EPS growth rate in the coming years. While there are concerns about potential corrections in earnings forecasts and the visibility of China’s tech sector, some companies in the portfolio are expected to outperform. Valuation wise, the KWEB portfolio appears cheap compared to historical levels, with a PEG of 0.6x for the YE24-25 period, indicating potential long-term consistency in growth.
In conclusion, while risks remain in investing in Chinese stocks, KWEB presents an attractive opportunity for investors given the current market conditions. With positive earnings revisions and a relatively low valuation, the outlook for the Chinese tech sector appears promising, though investors should remain cautious of major geopolitical events that could impact the market.
