Trade War With China May Not Affect All Emerging Market Companies Equally

|
Includes: BABA, BIDU, CCFFF, EMQQ, LX, MELI, QD, QIWI, SINA, TCEHY, YRD, ZZHGY
by: Kevin Carter

Summary

China and the United States are engaged in an ongoing trade war.

Analysts are downgrading their growth estimates for Chinese companies.

Companies with less exposure to the U.S. may not be as hard hit.

China and the United States are locked in an ongoing trade war as each country has introduced tariffs on goods traded with the other. Uncertainty regarding the impact and outcome has rattled investors. As of 10/7/18, the Shanghai Composite had declined over 17% year-to-date.

A Business Insider article reports that JPMorgan has downgraded their outlook for Chinese stocks to neutral from overweight. This opinion is predicated on their estimate of the impact of these tariffs on overall China GDP.

"China sectors such as energy, IT and industrials will be most impacted based on our analysis, while sectors such as real estate, insurance, diversified financials, telecom and utilities generate virtually no revenue from the U.S.," the team wrote. It is the second part of that statement on which we want to focus. Many large emerging markets ecommerce companies are very diversified and have divisions which are not expected to be impacted by trade sanctions? Many of these are held in the EMQQ portfolio. What are some of these?

Tencent

Tencent (OTCPK:TCEHY) is one of the largest internet companies in China. In addition to its social media and ecommerce operations, TCEHY has a financial group. The company offers online payment platforms such as Tenpay, Weixin/WeChat Pay, and QQ Wallet. In addition, the company’s wealth management platform, LiCaiTong, has amassed over RMB300 billion in assets under management as of January 2018, according to its 2017 annual report. TCEHY’s financial operations are included in its “Other” category which, in 2017 and the first half of 2018 was 18% and 24%, respectively, according to its financial filings.

Alibaba

Alibaba (NYSE:BABA) has a 33% stake in Ant Financial. Ant operates Alipay, one of China’s leading online payment platforms. The company also has a large consumer and small-business lending operation, oversees the world’s largest money-market mutual fund and runs a fast-growing technology-services business, according to the Wall Street Journal.

Baidu

Rounding out the big three internet companies in China, Baidu (BIDU) operates Baidu Wallet which provides online and mobile payment services.

Sina Corp.

Sina (NASDAQ:SINA) is a leading Chinese online media company and operates one of the largest microblogging platforms in China. According to its website most of its customers are from China.

Emerging market companies in countries other than China have also been affected by the recent trade wars. They also have operations, such as financials, that generate very little revenue from the U.S.

MercadoLibre

MercadoLibre (MELI) operates Mercado credito which provides cash advances and working capital loans to professional sellers and loans to Mercado buyers. The company also operates Mercado pago which offers an array of financial services including payment process, mobile payments and credit cards.

Kakao

Kakao (KS) is a South Korean internet company best known for its KakaoTalk mobile instant messaging application, which is the leading instant messaging platform in South Korea. The company also has growing businesses financial services. In 2017 the company received approval to become Korea’s first Internet-only bank. The company offers traditional banking services, such as deposits, checking, and wiring money, online.

These are just a sampling of EMQQ holdings which also have operations in areas that, according to the JPMorgan note, might not be affected by the trade wars.

Others include ZhongAn, a large Chinese online insure; Qudian, a fintech company providing online small consumer credit in China; LexinFintech, a Chinese online consumer finance platform; Yirendai, a Chinese fintech company matching borrowers and investors; Chong Sing, a Chinese consumer lending company; and Qiwi, a Russian payment service provider.

Summary

While not immune from the effects of the current trade war between the U.S. and China, many internet and ecommerce companies in emerging markets have operations in segments of the economy which have little potential exposure to the U.S. and, therefore, less likely to be hit by tariffs. All of the companies mentioned in this article are held in EMQQ – the Emerging Markets Internet and Ecommerce ETF – as of 10/8/18.

Disclosure: I am/we are long BABA, TCEHY, BIDU, MELI, SINA, ZZHGY, QD, LX, YRD, CCFFF, QIWI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.