Trade War Couldn’t Stop Hedge Funds From Buying These Chinese Stocks

The prolonged and escalating trade war between the United States and China didn’t stop the collection of leading hedge funds in our database from buying into numerous Chinese stocks with greater gusto in the second quarter. That’s not entirely surprising given how much cheaper Chinese stocks now look after a difficult year for the Shanghai Composite Index, which hit four-year lows as recently as the middle of September. The index’s P/E ratio has likewise fallen to its lowest levels since 2014 at 10.8.

According to Bloomberg data, foreigners have invested an additional $29 billion in Chinese stocks in 2018 through Stock Connect, a platform which facilitates the trading of Chinese stocks for international investors. In this article we’ll use Insider Monkey’s own hedge fund ownership data to look at five Chinese stocks which had a net influx of hedge fund ownership in the second quarter.

Insider Monkey’s flagship “Best Performing Hedge Funds Strategy” has returned over 50% in the last year, destroying the market by 29 percentage points. Since its May 2014 inception, the easy-to-follow strategy has returned 121%, beating the bull market by more than 54 percentage points. Our hedge fund strategy’s small number of quarterly picks often span a range of industries and regions, and have included Chinese stock picks like SINA Corp (NASDAQ:SINA), New Oriental Education & Tech Grp (NYSE:EDU), and Momo Inc (NASDAQ:MOMO) over the past year. Check out a detailed analysis of Insider Monkey’s past performance and quarterly stock picks for all the details.

Alibaba Group Holding Ltd (NYSE:BABA)

Number of Hedge Fund Shareholders of Alibaba Group Holding Ltd (NYSE:BABA) (as of June 30): 117

Value of Hedge Funds’ Holdings in Alibaba Group Holding Ltd (NYSE:BABA) (as of June 30): $15.37 billion

Alibaba Group Holding Ltd (NYSE:BABA) was one of the most popular stocks among the hedge funds tracked by Insider Monkey, with 117 of them owning shares of China’s e-commerce and tech powerhouse on June 30. That was an increase from 111 funds owning Alibaba on March 31. Ray Dalio‘s Bridgewater Associates (84,629 shares) and Barry Rosenstein‘s JANA Partners (439,479 shares) were among the funds to open new Alibaba positions in Q2.

Both Alibaba Group Holding Ltd (NYSE:BABA) and JD.Com Inc (NASDAQ:JD) (which did not make this list) are operating in a legal grey area in China’s pharmaceutical market, where online sales of drugs are prohibited. The two firms have skirted around those rules by requiring payment upon delivery as opposed to being made online, though the orders are still placed online and the Chinese e-commerce firms still get their cut from the sales. The Chinese pharmaceutical market was worth over $122 billion last year, a 9% increase from 2016.

Baidu Inc (NASDAQ:BIDU)

Number of Hedge Fund Shareholders of Baidu Inc (NASDAQ:BIDU) (as of June 30): 67

Value of Hedge Funds’ Holdings in Baidu Inc (NASDAQ:BIDU) (as of June 30): $5.19 billion

Hedge funds were more bullish on internet giant Baidu Inc (NASDAQ:BIDU) than any other Chinese stock in Q2. By the end of the quarter, 67 funds in our database were Baidu owners, up from just 49 at the start of the quarter. Those 67 funds poured more than $1 billion in capital into the stock during the quarter. James Dinan‘s York Capital Management (44,551 shares) and Adam Wolfberg and Steven Landry‘s EastBay Asset Management (165,000 shares) were among the new Baidu owners.

While Baidu Inc (NASDAQ:BIDU) is most well known for its internet services and generates the bulk of its revenue from advertising, its aggressive R&D budget, which amounts to 15% of that revenue, is making the company a leading player in artificial intelligence. In addition to lending its AI might to the Gehua Little Fruit set-top box, which launched at the end of September, Baidu is also working with WABCO Holdings Inc. (NYSE:WBC) on autonomous driving applications that could achieve commercialization within three years.

On the next page we’ll look at three more Chinese stocks that hedge funds were buying in the second quarter.

 TAL Education Group (NYSE:TAL)

Number of Hedge Fund Shareholders of TAL Education Group (NYSE:TAL) (as of June 30): 30

Value of Hedge Funds’ Holdings in TAL Education Group (NYSE:TAL) (as of June 30): $897.56 million

Hedge fund ownership of TAL Education Group (NYSE:TAL) among the funds tracked in our database rose by 20% during the second quarter to 30 hedge funds. Those funds owned just under $900 million worth of TAL shares on June 30. Arrowstreet Capital, managed by Peter Rathjens, Bruce Clarke and John Campbell, opened the largest new position in TAL Education Group (NYSE:TAL) during the June quarter, consisting of 585,429 shares.

The value of TAL Education Group (NYSE:TAL) shares have been cut in half since early-June as investors have become concerned over new regulations that will hit after-school educational institutions like TAL with more stringent guidelines and operating standards. Institutions will need to be authorized and provide a detailed accounting of their curriculums and schedules. The extracurricular schooling market in China is worth more than $117 billion, playing host to more than 137 million students in 2016.

Momo Inc (NASDAQ:MOMO)

Number of Hedge Fund Shareholders of Momo Inc (NASDAQ:MOMO) (as of June 30): 31

Value of Hedge Funds’ Holdings in Momo Inc (NASDAQ:MOMO) (as of June 30): $913.26 million

A net total of ten hedge funds added Momo Inc (NASDAQ:MOMO) to their 13F portfolios in the second quarter, while the collective value of their positions more than doubled in value to over $913 million. New shareholders of Momo included Cliff Asness‘ AQR Capital Management (352,289 shares) and Daniel Lascano‘s Lomas Capital Management (171,948 shares).

Noted short seller Spruce Point Capital hit Momo Inc (NASDAQ:MOMO) shares with a strong sell recommendation at the end of June, which helped cool them off after a torrid first-half of 2018. Momo Inc (NASDAQ:MOMO) shares are up by nearly 50% year-to-date nonetheless, thanks to the online dating and social video platform’s 58% surge in Q2 revenue ($494.3 million) alongside a 90% surge in earnings ($0.66).

 Ctrip.Com International Ltd (NASDAQ:CTRP)

Number of Hedge Fund Shareholders of Ctrip.Com International Ltd (NASDAQ:CTRP) (as of June 30): 32

Value of Hedge Funds’ Holdings in Ctrip.Com International Ltd (NASDAQ:CTRP) (as of June 30): $2.42 billion

Lastly is Ctrip.Com International Ltd (NASDAQ:CTRP), which fell heavily out of favor among the hedge funds that we track between the end of the first quarters of 2016 and 2018, as hedge fund ownership plummeted to 21 from 67 during that two-year period. That figure rebounded somewhat in the second quarter of 2018, jumping to 32 by the end of June from 21. Crispin Odey‘s Odey Asset Management Group (35,000 shares) and Paul Tudor Jones‘ Tudor Investment Corp (46,622 shares) were among the funds adding Ctrip to their 13F portfolios.

As with Alibaba and numerous other Chinese stocks, Ctrip.Com International Ltd (NASDAQ:CTRP) shares have been beaten down since early-June, sliding by nearly 33%. And like TAL, Ctrip is also facing the looming specter of broad Chinese regulations, which are poised to strike the online tourism industry with heightened safety and insurance requirements following the deadly July sinking of two tourist boats in Thailand, which killed more than 40 Chinese tourists. Otherwise, the Chinese travel industry is headed in the right direction for Ctrip.Com International Ltd (NASDAQ:CTRP), with 130 million overseas trips being taken by Chinese citizens in 2017, who spent a total of $115 billion. Both figures represent greater than 1,000% increases since 2000.

Disclosure: None