In this article, we discussed Chinese billionaire Zhang Lei’s investment philosophy and his 10 best Hong Kong stocks to buy for 2021.
Hillhouse Capital Group founder and Chinese billionaire Zhang Lei has generated strong returns over the years amid his early bets on top-performing tech stocks. One of the world’s richest financiers is an early investor of companies like JD.com (NASDAQ: JD) and Tencent (TCEHY), which are now among the fastest-growing companies in the world. These two investments also represent Zhang Lei’s strategy of backing emerging plays both in private and public markets. The pandemic darling Zoom Video Communications (NASDAQ: ZM) is also among the best Hong Kong stocks that gained Chinese billionaire’s confidence well before going public.
Zhang Lei’s Hillhouse Capital usually prefers to buy and hold stocks. But the Chinese billionaire has made some interesting changes in his long-running investments for 2021. He slashed his Zoom Video stake by 40% during the fourth quarter to capitalize on the stunning share price rally. Shares of the video calling company rallied to almost $580 in 2020 from an IPO price of $62 in 2019. Zhang Lei first invested in Zoom Video in 2015 and added to his existing position when the video communication company went public in 2019. He also campaigned for Zoom before the pandemic. Some of the world’s elite investors gathered at an invite-only event to hear from Zhang Lei and Zoom Video founder and Chinese-American billionaire Eric Yuan early in 2020.
Zhang Lei has also reduced his stake in the long-running investment JD.com by 15% to capitalize on share price gains. The shares of the Chinese e-commerce platform are up 113% in the last twelve months. Moreover, the firm sold its entire stake in the Chinese largest e-commerce platform Alibaba Holdings (NYSE: BABA) after holding the stock for four years. BABA stake accounted for about 9% of the hedge find’s 13F portfolio in Q3 2020. The Chinese billionaire sold and reduced positions in 15 stocks, according to the latest filings.
Lei Zhang of Hillhouse Capital Management
Zhang Lei, who started Hillhouse with $20 million from Yale University’s endowment, has created several new positions in healthcare stocks during the latest quarter, lifting the healthcare stocks weighting to 32% of the overall portfolio in Q4 from 27% in the previous quarter. However, none of those positions were large enough to stand among the 10 best Hong Kong stocks to buy for 2021. His 10 out of 19 new positions belong to the healthcare sector. Besides healthcare, Hillhouse has diversified its portfolio towards information technology, consumer discretionary, communications, and financial sectors.
The 48-year-old Hillhouse founder Zhang was born in Henan province, central China. After studying finance at Renmin University in Beijing, he went to America’s prestigious Yale University where he met with Yale’s chief investment officer David Swensen. Zhang learned about investing from Swensen in his early investing journey. Zhang moved back to China in 2005 and founded Hillhouse Capital with a seed investment of $20 million from David Swensen. On the back of strong performances in the past fifteen years, big institutions are lining up to invest in his firm.
“I can see why big institutions would be lining up,” said Christopher Schelling, former director of private equity at the Texas Municipal Retirement System who recently joined Windmuehle Funds. “They’re super-connected — there’s literally nothing that happens in China that they don’t see. And their returns are incredible.”
While Zhang Lei’s reputation remains intact, the same can’t be said of the hedge fund industry as a whole. Its reputation has been tarnished in the last decade, during which its hedged returns couldn’t keep up with the unhedged returns of the market indices. On the other hand, Insider Monkey’s research was able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by more than 124 percentage points since March 2017. Between March 2017 and February 26th 2021 our monthly newsletter’s stock picks returned 197.2%, vs. 72.4% for the SPY. Our stock picks outperformed the market by more than 124 percentage points (see the details here). We were also able to identify in advance a select group of hedge fund holdings that significantly underperformed the market. We have been tracking and sharing the list of these stocks since February 2017 and they lost 13% through November 16th. That’s why we believe hedge fund sentiment is an extremely useful indicator that investors should pay attention to. You can subscribe to our free newsletter on our homepage to receive our stories in your inbox.
Let’s start examining the Chinese billionaire Zhang Lei’s portfolio to see how he plans to beat the market trends in 2021. For that, we decided to review the 10 best Hong Kong stocks to buy for 2021, according to Zhang Lei.
10. BridgeBio Pharma, Inc. (NASDAQ: BBIO)
Hillhouse founder Zhang Lei has been holding a position in the biotechnology company BridgeBio Pharma, Inc. (NASDAQ: BBIO) since the second quarter of 2019. Zhang Lei’s BBIO stock pick moved in favor of his hedge fund because shares of BBIO rose 144% in the last twelve months.
Baron Health Care Fund, which returned 17.1% (institutional shares) for the fourth quarter, highlighted a few stocks including BridgeBio Pharma in an investor letter. Here is what Baron Health Care Fund stated:
“BridgeBio Pharma, Inc. is a diversified biotechnology company running a novel decentralized model of drug development focused on genetic medicine. During the period held, shares increased on news that GlaxoSmithKline had floated a $4.6 billion takeover offer for Eidos Therapeutics, of which BridgeBio owns 60%. We retain conviction in BridgeBio based on four upcoming critical data readouts that we think will help drive share performance.”
9. Bilibili Inc. (NASDAQ: BILI)
Chinese Billionaire Zhang Lei’s position in Bilibili Inc. (NASDAQ: BILI) has also generated robust gains for his hedge fund. This is because shares of Chinese online entertainment services provider grew almost 300% in the last twelve months alone. Hillhouse created a position in the online platform in 2018. It ranks 9th in the list of 10 best Hong Kong Stocks to buy for 2021, according to Zhang Lei.
Tao Value, which posted a return of 26.43% for the fourth quarter, presented a bullish outlook for Bilibili in a Q4 investor letter. Here is what Toa Value stated:
“Bilibili (ticker: BILI) similarly reported a blast Q3 2020. Bilibili reached average MAU of 197m with high 7.6% pay ratio, showing strong user growth and high engagement. Additionally, the high margin advertisement segment showed exceptionally strong trend, growing 126% yoy. Though surprising to many, I think it is a natural outcome of building an ever-more valuable user generated contents platform. If it is not by ads, I believe these values created by Bilibili will accrue to it in other ways. One interesting data point is that management mentioned the average age of new cohorts are still around 20, indicating it is still in its early stage of a long growth runway. I am happy to see this position played out like how I envisioned in original thesis and will be excited to continue to follow its progress.”
8. China Biologic Products Holdings, Inc. (NASDAQ: CBPO)
The biotechnology company China Biologic Products Holdings, Inc. (NASDAQ: CBPO) is among the 10 best Hong Kong Stocks to buy for 2021, according to Zhang Lei. The billionaire investor looks bullish over the future performance of CBPO despite stock price underperformance in the last couple of years. The firm left its CBPO position unchanged in Q4.
7. Enstar Group Limited (NASDAQ: ESGR)
Enstar Group Limited (NASDAQ: ESGR), which offers property and casualty insurance and other non-life lines of businesses, has been the permanent member of Hillhouse stock portfolio since 2016. Shares of Enstar Group soared 53% in the last twelve months, extending the five-year gains to 63%. It was the seventh-largest stock holding of Hillhouse’s portfolio at the end of the latest quarter.
Enstar Group was in 11 hedge funds’ portfolios at the end of December.
6. Uber Technologies, Inc. (NYSE: UBER)
Zhang Lei slashed his position by 39% in Uber Technologies, Inc. (NYSE: UBER) during the fourth quarter, according to the latest 13F filings. Despite that, it is ranked at the 6th spot in the list of 10 best Hong Kong stocks to buy for 2021. After pandemic-related pressure on Uber’s stock price in 2020, the stock has started performing well in 2021 amid prospects for easing social distancing policies.
In their Q4 2020 investor letter, Miller Value Partners said Uber Technologies was a top contributor to their portfolio in the fourth quarter of 2020. Here is what Miller Value Partners said:
“It was a busy quarter for Uber Technologies (UBER) who took off in the quarter following the passing of Proposition 22, their ballot initiative that allows them to classify their drivers as independent contractors and not employees. The company also reported 3Q results that was largely in-line with expectations. Adjusted net revenues of $2.81B was slightly below expectations of $2.82B with EBITDA of -$625M coming in slightly worse than expectations for -$623M. The company reiterated their expectation that they will reach EBITDA profitability at some point in 2021, as their Eats business continues to see strong growth as the pandemic continues. The company announced the sale of ATG, their self-driving car unit, to Aurora for $4B, while investing $400M in the business and holding a 26% share of the combined entity. This was followed by the announcement of the company selling Uber Elevate, their air taxi business, to Joby Aviation with Uber investing an additional $75M in Joby. The company’s acquisition of Postmates closed in the quarter and Mexico’s antitrust regulators approved Uber’s acquisition of Cornershop, the Latin American grocery delivery company. The company also announced a joint venture with SK Telecom, to create a South Korean taxi-share company investing $150M in the start-up.”
5. iQIYI, Inc. (NASDAQ: IQ)
iQIYI, Inc. (NASDAQ: IQ), which provides online entertainment services in the People’s Republic of China, is a member of Hillhouse Capital’s stock portfolio since the beginning of 2018. Shares of IQ increased strongly in the last twelve months after experiencing a selloff in early 2020. The firm held 38.6 million shares of iQIYI at the end of the latest quarter, accounting for 5.37% of the overall portfolio. iQIYI offers internet video, online games, live broadcasting, online literature, animations, e-commerce, and social media platform.
The stock is up about 50% over the last 12 months.
4. Zoom Video Communications, Inc. (NASDAQ: ZM)
The pandemic darling Zoom Video Communications, Inc. generated robust returns for the Chinese billionaire who first invested in the video calling company in 2015. His firm sold almost 40% of the position during the fourth quarter to capitalize on the share price gains. Despite underperformance so far in 2021, Zoom’s stock price is up 209% in the last twelve months.
In a Q4 investor letter, Alger Mid Cap Focus Fund highlighted a few stocks including Zoom Video Communications. Here is what Alger Mid Cap Focus Fund stated:
“Zoom Video Communications offers a cloud-native, video-first communications platform that transforms how people communicate. interact and work together. It offers a better, more efficient experience. easy onboarding and use and capabilities for addressing enterprise needs around scalability. cost and minimal IT involvement. The company seeks to make video collaboration that “just works,” delivering high-quality and frictionless video. voice. chat and content sharing across multiple devices and mediums. Users of Zoom benefit from a platform that is easy to deploy, use and manage that is also scalable and can easily integrate with any workspace, facilitating greater work effectiveness.”
3. JD.com (NASDAQ: JD)
Zhang Lei is the early investor of the Chinese e-commerce platform JD.com (NASDAQ: JD). He first initiated a position in JD in 2014. His firm, however, sold 15% of the stake in Q4 of 2020. Despite that, JD is among the 10 best Hong Kong stocks to buy, according to Chinese billionaire. Hillhouse held 13.5 million shares of JD at the end of the latest quarter.
Argosy Investors, which generated 29.8% in select accounts for 2020, commented on a few stocks including JD.com in an investor letter. Here is what Argosy Investors stated:
“JD.com has been making conscious decisions to break its business up into its component parts, which in our opinion helps surface the value of each business. JD’s enterprise value is about USD $120 billion today. JD spun off its JD Health business worth USD $28 billion (like Teladoc in the US), may spin off its JD Cloud business (similar to AWS in the US), has sold shares in its JD Logistics business and is shooting for a valuation of USD$40 billion in 2021 via an IPO, and JD Digits which provides supply chain and consumer loans was expected to be valued at nearly USD $30 billion before Ant Financial was prevented by the Chinese government from completing its IPO. The combined values of these business segments within JD is about $98 billion, leaving $22 billion for JD’s core retail business (and its cloud business) which is on track for over USD $100 billion in sales this year and growing over 20% per year. Assuming a 5% long-term margin for JD Retail, that segment is generating USD $5 billion of operating profit (EBIT). Given their strong market position, investors could value JD’s retail business alone at 20x EBIT, valuing JD retail at $100 billion. By comparison, Amazon was valued at over $175 billion during the year in which it earned USD $100 billion in revenue, so we continue to believe JD is being undervalued, despite a more competitive environment with Alibaba in China than Amazon faces in the US.”
2. BeiGene, Ltd. (NASDAQ: BGNE)
The biotechnology company BeiGene, Ltd. (NASDAQ: BGNE) is the second-largest stock holding of the Hillhouse stock portfolio, according to the latest 13F filings. Shares of BGNE rallied more than 95% in the last twelve months, extending the five-year gains to 990%. BeiGene is a commercial-stage biotechnology company, engages in discovering, developing, manufacturing, and commercializing medicines for cancer therapeutics in China and the U.S.
1. Pinduoduo Inc. (NASDAQ: PDD)
Pinduoduo (NASDAQ: PDD) is Zhang Lei’s largest stock holding, according to the latest filings. His hedge fund raised its stake in the Chinese e-commerce platform during the fourth quarter of 2020 by 8.72% to 14.45% of the overall portfolio. Shares of Pinduoduo fell 8.5% since the beginning of this year despite a 360% increase in the last twelve months.
Tao Value, which generated a return of 26.43% for the fourth quarter, highlighted a few stocks including Pinduoduo in the Q4 investor letter. Here is what Toa Value stated:
“Pinduoduo (ticker: PDD) reported a very strong Q3 2020, beating key KPIs all-around (GMV, active buyers & Revenue). It even surprisingly recorded the first non-GAAP profit (RMB466 million). Yet, the more important development is Duoduo Maicai, a new fresh grocery initiative. It is a natural extension of Pinduoduo’s deep root in agriculture e-commerce, and I think the logistic expertise it accumulated over years should help them compete. It is also a very nascent market, which attracts other tech giants (including Meituan & Alibaba). I will watch very closely on the developments.”
You can also take a peek at Billionaire Jim Simons’ Top 10 Stock Picks and Billionaire Steve Cohen’s Top 10 Stock Picks.
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