The past year has been rough for Chinese tech stocks. In May, the U.S. Senate passed a bill that threatened to delist U.S.-listed Chinese tech companies if they didn’t comply with new auditing standards.
Several Chinese companies then filed secondary listings in Hong Kong, sparking fears of a mass exodus from U.S. exchanges. Chinese regulators also recently drafted new antitrust rules to rein in top tech companies like Tencent, Alibaba, and Baidu.
Those challenges have cast a dark cloud over China’s tech sector, but I believe three growing companies are still worth holding onto over the next decade…
1. The underappreciated gaming giant: NetEase
NetEase is China’s second-largest video game publisher after Tencent. Its top games include Fantasy Westward Journey, Invincible, Life-After, and Knives Out. It also owns the discount e-commerce marketplace Yanxuan, a streaming music service, and an online advertising business.
NetEase streamlined its business over the past two years by selling its online comics to Bilibili, selling its cross-border e-commerce marketplace Kaola to Alibaba, and spinning off its online education unit Youdao (NYSE:DAO) in an IPO while retaining a majority stake.
NetEase’s revenue rose 22% year-over-year to 35.2 billion yuan ($5 billion) in the first half of 2020, as its online gaming, Youdao, and “innovative businesses and others” segments (including e-commerce and advertising) all grew throughout the pandemic. The gross margins for all three businesses also expanded year-over-year, and its adjusted net income per ADS grew 28%.
Unlike Tencent — which diversifies its business across the gaming, social networking, advertising, cloud, and fintech sectors — NetEase generates over three quarters of its revenue from video games. It’s also less exposed to antitrust regulations, since it doesn’t own a culturally dominant platform like Tencent’s WeChat or lead any of its main markets.
NetEase will likely continue growing over the next ten years as it launches new installments of its flagship Fantasy Westward Journey video game franchise, invests in overseas markets like Japan, and expands NetEase Cloud Music — which ranks second in China’s streaming music market after Tencent Music.
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