In this article, we discuss 8 tech stocks that Chinese billionaire Lei Zhang is selling in 2022.
Lei Zhang, CFA, is one of the richest Chinese investors, serving as the Chairman and Chief Investment Officer (CIO) of Hillhouse Capital Management. The hedge fund has assets under management (AUM) of over $63.69 as of Q1 2022. Overall, $4.79 billion has been invested by the hedge fund in US equities, as revealed by the most recent 13F filings on March 31, 2022.
Hillhouse is the biggest private equity firm operating in Asia, with offices in Beijing, Shanghai, Hong Kong, and Singapore. Hillhouse also has international offices in New York and London. The private equity firm employs over 350 investment professionals from leading universities across the globe.
Zhang was born in 1972 in the city of Zhumadian, situated in the Henan province of China, at the peak of the Cultural Revolution. This was a time when China was removing all signs of capitalism from its economy. However, as he grew older, his country saw a gradual acceptance of capitalistic reforms. Zhang had a knack for business from a very young age. At the age of seven, he executed his first business idea. Zhang rented his comic books to passengers who were waiting at the train stations. Today, companies like Uber Technologies, Inc. (NYSE:UBER) and Airbnb, Inc. (NASDAQ:ABNB) are also working on similar lines under the shared economy model.
Zhang completed his Bachelor’s in Economics from Renmin University in 1994. In 1999, he received a scholarship to study at Yale University, from where he completed his MBA and also Master’s in International Relations. During this time, Zhang applied for numerous Wall Street jobs but never received a response from them. He received a big break when he was hired as an intern by Yale’s endowment fund. Although it was unusual to hire MBA students as interns, David F. Swenson, the CIO of the endowment fund, was impressed by Zhang’s financial acumen. He had very strong networking skills, which he brought into use by making meaningful connections with Chinese entrepreneurs through the Hillhouse Club, created on the campus of Yale. Zhang named it after Hillhouse Avenue, where some of his classes took place. During his stint at the Yale endowment fund, he would be sent to research industries, and weeks later, he would return with in-depth reports.
After completing his first year at Yale, Zhang took a year off to discover the Chinese business environment. During this time, he met and created meaningful connections with leading entrepreneurs like Alibaba’s Jack Ma, Baidu’s Robin Li, and Tencent’s Pony Ma. He came back to the US in 2001 after the debacle of the dot-com bubble.
Early Investments
Four years after completing his MBA, Zhang requested the Yale endowment fund for $20 million to invest in Chinese companies. At that time, the Yale endowment fund had an asset under management (AUM) of $15 billion. Although the amount was not significant to the overall holdings of the Yale endowment fund, there were concerns about Zhang’s lack of experience in the field of investment management. However, the fund decided to bet on this young man and allocated him the funds to invest in Chinese stocks.
One of the earliest bets of Mr. Zhang was on Tencent back in 2005. At that time, the company was known for its QQ messaging application and had a market capitalization of $2 billion, which has now increased to over $426 billion. He also invested $255 million in JD.com in 2010. The value of the stake soared to $3.9 billion at the time of its initial public offering (IPO) in 2014. It is believed that Zhang was pulling the strings when Tencent acquired a 15% stake in JD.com for $215 million. Some market experts term Hillhouse Capital Management as more of a private equity firm as opposed to a hedge fund. This is because of the fund’s buy-and-hold investment philosophy.
Hillhouse looks for visionary entrepreneurs leading high-quality businesses and invests in them for the long term. Hillhouse does not only invest financial capital but also provides resources and industry expertise to generate long-term healthy returns on investment. When investing in growth opportunities, the firm looks for corporations that are solving challenging problems through unique and sustainable solutions. Some of the popular companies Zhang has liquidated his stake in as of Q1 2022 include Amazon.com, Inc. (NASDAQ:AMZN), Pinduoduo Inc. (NASDAQ:PDD), and Airbnb, Inc. (NASDAQ:ABNB).
Lei Zhang of Hillhouse Capital Management
Our Methodology
In this article, we will be covering 8 tech stocks that Zhang’s Hillhouse Capital Management has offloaded or reduced their positions in during Q1 2022. We have analyzed the business fundamentals and economic developments to provide readers with a context behind these investment decisions. Moreover, we’ll also be looking at how the 924 hedge funds tracked by Insider Monkey during Q4 2021 are positioned in these stocks to gauge the overall hedge fund sentiment.
Chinese Billionaire Lei Zhang is Selling These 8 Tech Stocks in 2022
8. Li Auto Inc. (NASDAQ:LI)
Number of Hedge Fund Holders as of December 31: 24
Li Auto Inc. (NASDAQ:LI) is a Chinese electric vehicle company with its headquarters in Beijing and operations in Changzhou. The company is named after its founder and CEO, Xiang Li. During Q1 2022, Hillhouse Capital slashed its stake in Li Auto Inc. by 51% to 2.5 million shares as compared to 5.01 million shares a quarter earlier. The investment firm initiated its first position in the company in Q3 2021 with 1.67 million shares.
Li Auto Inc. stock has been on a downward trend as it has lost nearly 28% of its value since the start of the year. On May 11, Jeff Chung at Citi reduced the price target on Li Auto Inc. from $51.50 to $26.80. The analyst stated that Li Auto Inc.’s rising costs and R&D investments are likely to have an adverse impact on margins. Chung has reduced Li Auto Inc.’s earnings estimates by 83% for 2022 and 36% for 2023.
7. Membership Collective Group Inc. (NYSE:MCG)
Number of Hedge Fund Holders as of December 31: 12
Membership Collective Group Inc. (NYSE:MCG) is a New York-based operator of physical and digital spaces that connects like-minded members across the world through a private membership platform. The hedge fund opened a position in Membership Collective Group Inc. in Q3 2021 at an average quarterly price of $12.5 per share. The entire holding was sold off in Q1 2022.
Membership Collective Group Inc. reported weak Q1 2022 results on May 18 as it missed revenue and earnings estimates for the quarter. Revenue increased by 165.2% YoY to $192 million but still missed consensus estimates of $204.72 million. Meanwhile, the GAAP loss per share of 30 cents was 12 cents higher than the analysts’ forecast of 18 cents. However, the silver lining in the quarterly results was the better-than-expected full-year revenue guidance. Membership Collective Group Inc. issued a total revenue outlook of $950 million to $1.02 billion. The midpoint of $985 million was slightly higher than the consensus forecast of $984 million.
Membership Collective Group Inc. was mentioned in the Q3 2021 investor letter of Baron Funds:
“During the quarter, we purchased Membership Collective Group Inc. (“MCG”), a global membership platform centered around club houses in metropolitan areas. Its trademark Soho House brand has 30 Houses with more than 111,000 members globally, 94% average annual retention, and a wait list of over 59,000 people. In addition to the core Soho House brand, the company has additional membership brands including Soho Works, Scorpios Beach Club, The Ned Club as well as adjacent/digital memberships, including Soho Friends and Soho House Digital. We believe MCG has a valuable, unique business model as a scaled global membership platform. Its strong brand, evidenced by its long wait list, leads to very low marketing expenses and high retention, while also driving strong recurring revenue. There are currently 30 Soho Houses open, and 5 to 7 new openings are planned per year, providing a clear line of sight for attractive long-term growth. Over the long term, management believes they can have close to 100 houses globally.
6. Kanzhun Limited (NASDAQ:BZ)
Number of Hedge Fund Holders as of December 31: 16
Kanzhun Limited (NASDAQ:BZ) has been an operator of an online recruitment platform, BOSS ZhiPin, in China since 2013. The platform is the biggest online recruitment platform in terms of monthly active users (MAU).
Hillhouse Capital initiated a position in Kanzhun Limited through 1.05 million shares in Q2 2021 but slashed it to 525,000 shares in Q4 2021 before exiting in Q1 2022. Since the start of 2022, nearly 49% of the market value of Kanzhun Limited has been wiped out. In a note issued to investors on April 10, Timothy Zhao at Goldman Sachs assumed coverage on Kanzhun Limited stock with a Neutral rating and a price target of $37.50.
The number of hedge funds holding a stake in Kanzhun Limited reduced from 18 in Q3 2021 to 16 in Q4 2021.
5. Coinbase Global, Inc. (NASDAQ:COIN)
Number of Hedge Fund Holders as of December 31: 57
Coinbase Global, Inc. (NASDAQ:COIN) is an operator of the biggest cryptocurrency exchange in the US without any physical headquarters.
The stock price of Coinbase Global, Inc. has been under immense pressure as it has lost over 73% of its value since January 3. Hillhouse initiated a position in the company in Q3 2021 with over 70,000 shares. The following quarter the private equity firm slashed its holding by 60,000 shares before liquidating the remaining 10,000 shares in Q1 2022.
According to an internal email sent to employees last week, Coinbase Global, Inc. has put a hold on all new business projects, stopped new recruitment for the next fortnight, and is looking to lower its cloud spending on Amazon Web Services (AWS). To make up for the loss in stock value, Coinbase Global, Inc. intends to give its 5,000 employees more stock grants.
Longleaf Partners Fund shared its insights on Coinbase Global, Inc. in its Q4 2021 investor letter. Here’s what the fund said:
“We also have seen plenty of IPO/SPAC craziness showing both that private players need public markets more than they admit and that there is more volatility embedded in these newer companies than a private quarterly mark might admit. As for how efficient both the private and public markets are, we would encourage you to really delve into some of those multi-hundred-page S1s for many of the newest public companies to see the huge gap between the last valuation at which the company was funded and/or granted shares to its executives and the often much higher price at which the company went public – Coinbase is a prime example.”
Apart from Coinbase Global, Inc., stocks such as Amazon.com, Inc., Pinduoduo Inc., and Airbnb, Inc. are also being sold by the Chinese billionaire in 2022.
4. Airbnb, Inc. (NASDAQ:ABNB)
Number of Hedge Fund Holders as of December 31: 63
Airbnb, Inc. is a San Francisco, California-based online marketplace for lodging, vacation homes, and tourism activities.
Hillhouse Capital Management closed its entire position in Airbnb, Inc. during Q1 2022. One of the reasons for offloading the complete stake could have been Airbnb, Inc.’s decision to shut down its domestic operations in China. Although the firm launched its operations in 2016, it did not have any significant impact on Airbnb, Inc.’s overall profitability as it contributed nearly 1% to the total revenue. Operating in China was already complicated due to competition from local players. All the company’s listings in mainland China will be removed in the coming months.
Here’s what Tollymore Investment Partners said about Airbnb, Inc. in its Q3 2021 investor letter.
“Today disruptors are not typically seeking to replace incumbents entirely. Rather, they break the links in the customer journey, in doing so better aligning monetisation with value creation and minimising externalities. For example, Airbnb broke the link between staying in residential property and owning it. Airbnb is a specific example of a business model innovation which separated asset use from ownership. This is hardly a novel idea; it’s called renting. Rental models lend themselves to assets which are expensive and durable, and where usage is infrequent.”
Of the 924 elite funds in Insider Monkey’s database, 63 funds held a stake in Airbnb, Inc. as of Q4 2021.
3. NIO Inc. (NYSE:NIO)
Number of Hedge Fund Holders as of December 31: 30
NIO Inc. (NYSE:NIO) is a Chinese EV company. Hillhouse Capital Management initiated a position in NIO Inc. in Q3 2020, with over 2 million shares bought at an average quarterly share price of $15.40. Over the next few quarters, the stake was decreased until the entire holding was sold off in Q1 2022.
The stock price of NIO Inc. has declined by over 50% YTD. NIO Inc. posted an EPS GAAP Actual of -$0.21 for Q1 2022, missing the analysts’ estimates by $0.05. However, the company is expected to perform better following ease in Covid-19 related restrictions in China.
On May 23, Vijay Rakesh at Mizuho reiterated a Buy rating on NIO Inc. stock with a price target of $60. Rakesh added that NIO Inc. plans on launching Nio Pilot+ self-driving in the following months and has priced it at a 40% to 50% discount from Tesla.
2. Pinduoduo Inc. (NASDAQ:PDD)
Number of Hedge Fund Holders as of December 31: 34
Pinduoduo Inc. is a Chinese e-commerce platform that provides a wide variety of discretionary products. Hillhouse completely liquidated its position in Pinduoduo Inc. during Q1 2022. This is only the second quarter since Q2 2018, when the shares of Pinduoduo have not been part of Hillhouse Capital’s portfolio.
The analysts’ view on Pinduoduo Inc. stock contrasts with Zhang’s stance. In a note issued to investors on May 16, Andre Chang at JPMorgan double upgraded Pinduoduo Inc. stock from an Underweight to an Overweight rating with a target price of $55. The target price reflects a healthy upside potential of over 34.4% from the last closing price. The analyst highlighted that following the recent regulatory announcement by the Chinese government, the “significant uncertainties” related to the Chinese internet sector are out of the way.
In its Q4 2021 investor letter, Tao Value discussed its stance on Pinduoduo Inc.. Here’s what it said:
“On the detracting side, one of our largest detractors includes Pinduoduo (ticker: PDD). Pinduoduo (PDD) reported the second consecutive GAAP profit quarter yet missed on the revenue due to nation-wide consumption weakness & scaled back Sales & Marketing efforts. Market disliked it and the stock price plunged on the earnings. In my opinion, the accounting profits proved the original thesis of using S&M to acquire users and using great shopping experience to keep them. After realizing the first growth curve, Pinduoduo now shifted its focus & investment to agriculture. It is still very early, but the reduced size due to price drop warrants a position to watch and continue grow with such a team with strong culture.”
1. Amazon.com, Inc. (NASDAQ:AMZN)
Number of Hedge Fund Holders as of December 31: 279
Amazon.com, Inc. is a Seattle, Washington-based e-commerce giant. Hillhouse Capital liquidated a stake of 15,000 shares in the trillion-dollar company in the first quarter. The hedge fund opened a position in Amazon.com, Inc. in Q1 2017, with 11,562 shares purchased at an average quarterly share price of $833.5. Amazon.com, Inc. stock has come under pressure after major retailers in the US provided a very bleak outlook regarding consumer spending for the rest of the year due to the increase in inflation.
Miller Value Partners shared its insights on Amazon.com, Inc. in its Q1 2022 investor letter.
“For frame of reference, Amazon (NASDAQ:AMZN) bottomed at the same valuation in the financial crisis (side note: Amazon bottomed at 4x EV/GP after the tech bubble burst)! So there’s historical precedent for the lows being in. We will see whether that holds true this time. Regardless, we think there’s significant upside over a 5-year time horizon. The one other topic I want to briefly address is our volatility. We hope to write something about the topic in more depth in the future, but we want our clients and prospective investors to understand our views on it. We think that volatility is significantly misunderstood. We believe it creates opportunities from which we can profit.”
Amazon.com, Inc. is the most owned stock amongst the 924 hedge funds tracked by Insider Monkey at the end of Q4 2021.
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This article is originally published at Insider Monkey.
