Hedge Funds Love Chinese Tech Stocks

The Chinese economy is the second-largest economy in the world. The Chinese market for smartphones and internet applications is the largest in the world. There are 1.4 billion people in China and many of them have growing disposable incomes. Given the large size of the market, it’s not surprising that many elite hedge funds own shares of Chinese tech companies. In this article, we use the latest 13F filings to analyze how the elite hedge funds tracked by Insider Monkey are positioned in Alibaba Group Holding Ltd (NYSE:BABA), Baidu Inc (ADR) (NASDAQ:BIDU), Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP), JD.Com Inc(ADR) (NASDAQ:JD), and Vipshop Holdings Ltd – ADR (NYSE:VIPS).

Our backtests that covered the period between 1999 and 2012, showed that following the 15 most popular small-caps among hedge funds can help a retail investor beat the market by an average of 95 basis points per month (see the details here).

#5 Vipshop Holdings Ltd – ADR (NYSE:VIPS)

 – Number of Hedge Fund Holders (as of March 31): 42
– Total Value of Hedge Fund Holdings (as of March 31): $879.01 million
– Hedge Fund Holdings as Percent of Float (as of March 31): 11.70%

Vipshop Holdings Ltd – ADR (NYSE:VIPS) reported earnings of $0.16 per share on revenue of $1.89 billion in Yuan terms for the first quarter. Revenue grew by 41% year-over-year as China’s e-commerce market remains unsaturated. Management expects more of the same for the second quarter, with revenue growth guidance of 37%-to-42% year-over-year. Although Vipshop shares are down by 21% year-to-date, they now trade for just 14-times forward earnings estimates. Like the analysts who estimate higher earnings going forward, the smart money crowd is becoming more bullish. Of the 766 elite funds that we track, 42 owned shares of Vipshop at the end of the first quarter, up by eight from the end of 2015.

#4 Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP)

 – Number of Hedge Fund Holders (as of March 31): 67
– Total Value of Hedge Fund Holdings (as of March 31): $2.64 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 17.30%

As the dominant travel site in China, Ctrip.com International, Ltd. (ADR) (NASDAQ:CTRP) is in prime position to benefit as the Chinese middle class continues to grow. Seeing as many analysts expect the disposable income of China’s middle class to rise considerably by 2020, Ctrip.com has substantially more revenue growth ahead of it. In addition, Ctrip has margin growth opportunities as the company gains more market share in the hotel booking sector and as management successfully integrates its Qunar acquisition. Billionaire Lei Zhang‘s Hillhouse Capital Management owned 8.16 million ADRs of Ctrip on March 31.

We’ll reveal the top three Chinese tech stocks among hedge funds as of March 31 on the next page.

#3 Alibaba Group Holding Ltd (NYSE:BABA)

 – Number of Hedge Fund Holders (as of March 31): 67
– Total Value of Hedge Fund Holdings (as of March 31): $5.14 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 2.60%

Although early investor SoftBank may have sold $10 billion worth of Alibaba Group Holding Ltd (NYSE:BABA) shares at around $74 per share, Alibaba still has long-term potential. As the dominant e-commerce company in China, Alibaba offers substantial upside if the Chinese economy turns around and its middle class continues to grow. Alibaba also has a fast growing cloud division that could one day drive earnings growth like Amazon Web Services has been doing for Amazon.com, Inc. (NASDAQ:AMZN). 67 funds in our database owned shares of Alibaba as of the most recent 13F filing period, down by ten from the end of the previous quarter.

#2 Baidu Inc (ADR) (NASDAQ:BIDU)

 – Number of Hedge Fund Holders (as of March 31): 72
– Total Value of Hedge Fund Holdings (as of March 31): $4.82 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 9.30%

Baidu Inc (ADR) (NASDAQ:BIDU) holds the lion’s share of the lucrative Chinese search market and is some ways ahead of the curve in terms of the ride sharing trend. Although it doesn’t own a major part of Didi Chuxing like Alibaba and Tencent, Baidu does own a stake in the fast growing app, Uber. Baidu’s Uber stake could pay off big time if and when the fast growing start-up launches its IPO. 72 funds in our system owned shares of Baidu at the end of March, up by 17 from the end of 2015.

#1 JD.Com Inc(ADR) (NASDAQ:JD)

 – Number of Hedge Fund Holders (as of March 31): 73
– Total Value of Hedge Fund Holdings (as of March 31): $9.11 billion
– Hedge Fund Holdings as Percent of Float (as of March 31): 39.40%

Although JD.Com Inc (ADR) (NASDAQ:JD) might be smaller than its e-commerce competitor Alibaba, the stock counts more top funds as shareholders of it. According to our database, 73 funds owned almost 40% of JD.com’s shares, while 67 funds owned just 2.6% of Alibaba’s shares. The smart money’s fascination with JD.com is no surprise; JD.com is eyeing the long-term horizon much like Amazon.com, Inc. (NASDAQ:AMZN) did, and putting market share and growth above profits. If the company’s management executes well and Alibaba slips up, the stock could mimic Amazon’s torrid multi-year run that has seen its shares gain 13-fold over the past seven-and-a-half years.

Disclosure: None