China Internet Stocks Down 10% — Buying Opportunity or Warning Sign? | Henry Greene

Transcript

SPEAKER_01 0:06

I'm your host, Melody Schaefer.

SPEAKER_02 0:08

Welcome to Lead Leg Live. A year ago, a Chinese AI lab most people had never heard of wipes nearly a trillion dollars of US tech stocks in a single day. Since then, China's internet giants have been on a tear. Alibaba, Tencent, and the rest rallied hard through 2025. But now the picture is getting complicated. The Middle East crisis is shaking energy markets. AI monetization is still a bit of a question mark. And just last week, Alibaba and Tencent shed$66 billion in 24 hours after investors didn't like what they heard on AI strategy. So the question for anyone watching China Internet right now is are you looking at a buy-in opportunity or is this a warning sign? And to talk about this. My guest today is Henry Green, investment strategist at Green Shares, where he authors the China Internet Report and the firm's Daily China Last Night commentary. Henry, it's great to have you here.

Pullback Drivers Macro And Margins

SPEAKER_00 1:03

Hi, Melanie. Thanks for having me.

SPEAKER_02 1:05

So let me just ask you straight off uh to guess sorry, what's your read on China Internet stocks right now? Are we at a pullback or is this something bigger?

Price Wars Hurt E Commerce Profits

SPEAKER_00 1:14

Uh sure, yeah, I think we're definitely in a pullback. Uh we see K Web is down um about 10%, um, maybe a little more uh today, uh year to date, right? And um so what's driving that? I think mainly uh I think two things. I think global macro is a factor here. Um K Web is mostly in Hong Kong and US listings for China stocks. So that's very affected uh by just this general market beta and foreign investor sentiment, which is obviously being impacted by uh the conflict in the Middle East currently. Um fundamentally speaking, um, we have had uh a few hiccups, so to speak, in in the in the top companies in K-Web, um specifically around profitability, right? Uh specifically speaking of e-commerce giants, Alibaba, uh JD.com, and Matewans. So these three companies have been engaged in a uh subsidy war where they are really competing uh in that instant commerce category that's deliveries 30 minutes or less. They're uh giving huge promotions to their customers, um, and they've been doing this for uh three quarters to a year now, and that's really, really weighed on their profitability. And at the same time, uh, at least for Alibaba, they're investing heavily uh in their AI strategy, okay, in their AI initiative. So that's a double whammy for Alibaba's profitability. So that's that's been a challenge. Looking forward, though, I think that these stocks are very much undervalued. Um, I think that we're seeing progress on the uh subsidy war, so to speak. Um, there was an article yesterday in uh the Economic Times, which is a mainland uh China financial media article, saying that, oh, the instant delivery price war is over. So we're seeing an improvement in profitability, um, or at least we should in the next few quarters. Um and then I think that these companies, some of them, especially the ones with strong AI initiatives like Alibaba, are fundamentally being undervalued. And why do I say that? Um Alibaba gave a projection of nearly doubling their uh cloud revenue uh over the next every year for the next five years. Um whether or not that's achievable will remain to be seen. But what they did also say is that they have a chip that their chipmaking unit, um, so that's another fab, that's a fabless chipmaking unit, kind of like Nvidia, where they're designing chips to be sent to Fabs, um, made um uh is projected to make annually uh 10 billion RB, right? And that's much more revenue than the market expected, right? So these are real um tangible uh businesses in the Alibaba ecosystem. Um, and that chipmaking unit, it's called T-Head, um, makes as much as Cambrican, which is a chipmaker enlisted in mainland China, which has a much higher valuation than Alibaba. So if you do a sum-of-the-parts analysis on Alibaba, uh it becomes very clear very quickly that this company should be worth a lot more. And I think the same could be said for, for example, Baidu and a lot of these kind of full stack AI plays um within the China internet ecosystem. So yes, we're seeing a pullback. Some of that's macro, um, some of that's concerns about profitability. Um, but long term, um, I think that the fundamental uh the fundamentals of these companies are very strong. And so I do see uh uh for me, I do see a buying opportunity uh in those needs and in KWIP.

SPEAKER_02 4:47

What Andrew, what about deep deep seek? That's sort of like where kick this sort of AI re-rating off in China. Where are we within that story?

Alibaba Valuation And AI Upside

SPEAKER_00 4:56

Yeah, so Deep Seek uh was kind of this eye-opening moment, I think, for global investors who had kind of counted out um China uh for AI innovation. Everyone was focused on the US and what was happening with open AI um and others anthropic um and really didn't consider uh China to be an AI innovator. Um this follows uh a narrative that we've kind of seen over and over again, where uh people look at China and think, okay, they're they're copycats or they're uh just a manufacturing powerhouse, the world's factory, right? Making things designed by other people, people sitting in the US, Europe, and other places. And this was really a moment where we said, wait, hold on. Um they just developed a model, a Chinese company, small company based out in Hangzhou, founded by this hedge fund manager, um, just created uh a large language model that uh by some measures was more efficient than Chat GPT, right? So that was a huge watershed moment, uh, I think for people um globally, for investors globally. Um and so since then, um I think we've really seen um companies like Alibaba and Baidu, for example. So those are the the internet um large caps, uh going uh more becoming more valued for their AI and cloud initiatives and people realizing, I mean, they've always had these businesses, they've had these businesses for a while, but this was people realizing that, okay, um these are something that that could be different uh from what we have in the US, and these are real innovation players uh in the AI space, right? Because that wasn't that wasn't the consensus previously, right? And and the the interesting part about Deep Seek to me is um that their model was completely open source. So it's it's usable for uh other companies to kind of come in and take what they did and tweak it and and make it better, right? And that's what we saw like Alibaba and Baidu actually doing, right? And in some cases, their chatbots actually also use uh DeepSeek's model. Um so that's really interesting. And that's also different from in the US, where we have a lot of proprietary uh models that are there's script subscription uh um uh economics there. Um and the models themselves are not open source, right? So in China, the preferences for not not open source. I led Alibaba to make its QN large language model also open source. Um and so that's a big deal and a key differentiator, I think, uh, in the China AI ecosystem versus in the US. And so uh you might ask, it where's you know, where's the money if all these models are open source? And the answer is um when you look at a company like Alibaba, you have um huge demand for their cloud services, right? And that's only growing and they they use the model, the free model, right? The open source model to drive uh traffic to their cloud services unit. And so that's how they're seeking uh to monetize these models, which is different from in the US, where you know you pay a subscription for whether it's Perplexity or ChatGPT Premium, right? So it's just a different model. Um but yeah, OpenAI, uh excuse me, Deep Seek um certainly opened investors' eyes to the real innovation that's going on in China. Um, and that has led to a re-rating, a significant re-rating ever since, uh, for China's internet and technology sector uh very broadly.

SPEAKER_02 8:24

Yeah, and and so taking all of that into account, something that caught my eye recently is that Jeffries uh came out and said China's AI market still only about 6.5% of the US. Is that a gap that you think is going to close? Or is there is there a reason that's going to stay, stay so wide?

SPEAKER_00 8:43

I think that uh there will continue to be somewhat of a gap between US and China AI. I mean, look, um right now China doesn't have full access um to every level of chip uh that's available on the market, right? Um and so that's gonna create um some differences, and this is gonna that's gonna create a continuing gap. We're seeing that gap close, though, very quickly, um, especially when you had the Trump administration allowing uh another kind of level of chip to be exported, um, overriding some of the Biden administration's uh export restrictions, right? So that's gonna help to close that gap. Um and then you also have uh local uh chip makers, such as that which is owned by Alibaba called T-Head. You have CamberCon. Uh CamberCon's been talked about a lot recently within China that are working uh, I think every day to come up with a chip that might not be the same as Nvidia's highest level chip, but will um provide some of these um efficiencies and uh and potentially uh have have more features and different kinds of efficiencies and and a competitive advantage uh than those Nvidia chips. So it's a really interesting uh ecosystem. You kind of have two ecosystems, I think, that are uh somewhat linked, um, but they're also very separate. So we could see differences in how the AI ecosystem develops in China uh versus in the US. And um, I think as more innovation occurs, um, I think it'll be less of a gap and more of just uh purely um uh it'll be differentiated, right?

SPEAKER_02 10:25

Yeah, so uh so I want to zone in now that for why we're talking about all of this is to uh to eventually get to talk about CLIP, which is a covered call strategy on top of KWeb, right? Paying at roughly 26%. For someone who's never used a covered call ETF, can you explain how that works?

SPEAKER_00 10:42

Sure. So a covered call ETF, um, generally speaking, uh will uh buy either another ETF uh or a basket of stocks um and then sell calls on uh those underlying assets. Uh sell at the money calls where um it's really just looking to benefit from that uh call-op premium um but without having uh the the risk of it uh of uh not having it be uncovered, right? So it's covered because you own the underlying asset, so you're taking less risk. Um and so really uh to me when I think of a covered call ETF, it's it's about um uh generating uh income uh uh in the portfolio. Um and you have uh some exposure to the underlying asset um but not full upside exposure, you're exchanging that for a monthly uh income street.

SPEAKER_02 11:44

Yeah, and and so you know, with with China and and the internet uh start being so volatile and and choppy right now, is is the cover call strategy sort of the sweet spot um for investors?

SPEAKER_00 11:58

Uh it it could be, Melanie. Um I think that what we've seen, and one of the reasons we developed CLIP was because K Web was uh much more volatile than uh we saw like US tech indexes, like the NASDAQ. And so that creates a greater income opportunity, right? The more volatility there is, the more uh a covered call strategy um, the more income it'll be able to generate um because there's a higher premium uh on those those those call options that that that are being sold uh by the portfolio. So that definitely has benefited Clip. Uh we've seen Clip, I mean, maybe maybe now that's changing uh just because the US market has been very volatile uh so far this year with everything that's going on in the world. Um but we have for uh since we launched Clip um a few years ago, we have for the past probably three years seen um pretty significant uh income increase when you look at Clip versus covered call strategies on uh US equities, right? So that's been really positive. A lot of our investors like Clip because it has uh it produces a very high level of income. You mentioned the I think we mentioned the 26% uh annual yield, right? Um and uh so that's been very positive for investors um looking for income. So some people use a different some people use it for um a higher level of income, some people use it for um uh diversification to protect against they they have maybe they have a position in K Web or other China Internet stocks, right? And they kind of use this as a little bit of a hedge. Um yeah.

SPEAKER_02 13:35

Yeah, and it's talking a little bit about volatility, but then there's also the the downside. You've got like the sector is downward at 60% off of its all-time highs. But uh as you spoke a about a little a few minutes ago, the the earnings growth estimates are still strong. How do you square that up?

SPEAKER_00 13:53

So I I think that um, well, uh I I think it depends on where you where you look, because earnings growth in uh the large cap, so what I mentioned before, Alibaba, Atoon, JD, have come down because their profitability has come down, right? So that is a factor, right? Um I think what's what's uh really strong uh continues to be strong is is is very much free cash flow um revenue for these companies. Um some of them have relatively the the margins are are are are disparate, it depends on where you look. Um, but definitely strong free cash flow. Um if you look uh to me that though that's when you look at that margin compression, the EPS growth um decline for those companies, that's really been in the past year or so. Um if you broaden that out and you look at um the past five years, you mentioned 60% down from all-time highs, um, you're seeing that decline in the price of K Web Um basically in some cases very much the inverse of the uh revenue growth and earnings growth, EPS growth uh for these companies, right? So that long-term uh uh shift, um dislocation, so to speak, I think still to this day, despite the strong rally in 2025, represents a good opportunity for long-term investors.

Geopolitics Tariffs And Portfolio Rotation

SPEAKER_02 15:20

Yeah, and so for investors of advisors looking on that okay, but clip um now. Can you talk a little bit about what how the Iran crisis could play into things and the tariff overhangs uh and regulatory things? We know Trump is going, as just announced yesterday, he's going to be meeting uh with President Shi. Where should uh US ambassadors feel comfortable or why should they feel comfortable and and what's what's the risk?

Where To Follow Henry And Closing

SPEAKER_00 15:47

Sure, Melanie. Um I think uh well everything uh is uh very much macro driven right now, so um uh would caveat that. Um but I think uh China, as opposed to other Asian economies, uh is is relatively um insulated from uh trade through the Strait of Hormuz. They get less than half of their oil, still a significant amount, but less than half of their oil imports uh through that channel uh compared to Japan and Korea, where you're looking at more than uh at about two-thirds, right? So that's significant, right? Um and I think that makes China's economy a little bit better insulated um uh from this uh than other East Asian economies. And why do I bring up Japan and Korea? Well, they've done very well uh up until this point, up until the conflict happened, um, right? Uh mostly and they're heavily geared towards um uh chipmakers and kind of hardware technology, uh, that's also done so well um over the past few years. Um and so you're seeing a pullback there. Um and yeah, we we think that if you're looking for um international tech exposure and you're concerned about those markets, um, that China's a good place to look. Um and then specifically China Internet, um, because you're getting access to uh similar growth themes that you would be getting access to if you were buying, you know, Japanese tech, Korean tech, right? i.e. um hardware technology, um kind of AI picks and shovels, so to speak. So I think that's where um if you're looking at a global portfolio right now, um, you might want to uh look at a bit of a rotation uh into China internet um just because it's a little bit better insulated uh uh from from the current conflict.

SPEAKER_02 17:39

And to to just to wrap up, Henry, for investors and advirers watching who want to dig in deeper, where where should they go? Uh to learn more or to connect uh with you and your key.

SPEAKER_00 17:47

Sure, yeah. So uh investors can go to our website, craneshares.com, uh, where they'll be able to view our uh latest research and commentary um as well as sign up for our mailing list. And they can also go to chinalastnight.com. Uh that is our daily um note uh recap of uh China's capital markets. We deliver that every morning uh on the weekdays. Um and that's a really great resource um for people to use to know kind of what happened the night before. Um and I say yeah, that that those are the those are the main places uh for people to check out, I think, if they want to keep up with us.

SPEAKER_02 18:22

Fantastic. Well, thank you so much for joining me, Henry.

SPEAKER_00 18:25

Thank you, Melanie.

SPEAKER_02 18:26

For those of you watching, we've been speaking with Henry Green, investment strategist at Crane Shares. Thank you to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lead Light Live.

SPEAKER_01 18:39

All right, is there anything you think we missed? Um I think that was pretty good. Yeah. It was good. Are you? You feel good about it?

SPEAKER_00 18:50

Or I feel good about it. Yeah, there is I do so given uh when we talked about the the earnings growth versus uh price, I do have a sh a great chart for that. Amazing that I'd like to share. And I I think if we just do that, we should be good. Um talks about clip distributions, it'd be nice to visualize that, but like um yeah, I just think the K Web earnings chart would be more interesting.

SPEAKER_02 19:19

Okay. Okay, so you're you'll send that over now and I'll add it right to the card so that it's being edited in like from the beginning.

SPEAKER_00 19:25

Yeah. Okay, great. And then that'll be where uh you know, you know where to put like right when I'm talking when I uh probably when I remember when I said, Oh, but if you look at the long term correct, I need to see the the dislocation. Yeah.