Alibaba (NYSE: BABA) recently commenced the largest and one of the most widely anticipated initial public offerings in U.S. history, but investors familiar with Chinese Internet stocks and the exchange traded funds that focus on those names know there is much to the group than Alibaba.
Alibaba does, however, make for the “A” in a nifty acronym pertaining to three of China’s Internet behemoths. That acronym is BAT and its constituents are Baidu (NasdaqGS: BIDU), Alibaba and Tencent (OTC: TCEHY).
BAT comes courtesy of a recent presentation by KraneShares, the issuer behind the KraneShares CSI New China ETF (NYSEArca: KFYP) and the popular KraneShares CSI China Internet Fund (NasdaqGM: KWEB). KFYP, formerly known as the KraneShares CSI China Five Year Plan ETF, allocates nearly 35% of its weight to Baidu and Tencent while those two stocks combine for about 21.5% of KWEB’s weight. [Proper Application of China ETFs]
Underscoring the opportunity with the BATmen and the aforementioned ETFs, KraneShares points out that the trio generated $20 billion in revenue last year and $7 billion in the first quarter of 2014.
The three companies have a combined market value north of $430 billion. Although Alibaba is still in its infancy as public company, its market value was $219 billion at Tuesday’s close. That’s nearly the combined market value of Visa (NYSE: V) and Goldman Sachs (NYSE: GS), two of the largest members of the Dow Jones Industrial Average.
Importantly, Baidu, Alibaba and Tencent each have specific niches in which they are dominant, as KraneShares notes. Alibaba is an e-commerce juggernaut while Baidu is the Google (NasdaqGS: GOOGL) of China. In fact, Baidu controls 81.7% of the China Internet search market compared to a meager 12% for Google China, according to KraneShares. Tencent is a leader in gaming and instant messaging.
Revenue growth for the BAT firms has been extraordinary. Both Baidu and Tencent more than doubled revenue in local currency terms from 2011 to 2013, according to KraneShares. [ETFs for a VIP of Internet Stocks]
For its part, KWEB has surged nearly 32% since coming to market 14 months ago, indicating that the ETF would be a compelling addition to the emerging markets corner of investors’ portfolios. In fact, KraneShares points out that a portfolio of 80% to the iShares MSCI Emerging Markets ETF (NYSEArca: EEM) and 20% to KWEB offers a 6.1% one-year return advantage over owning EEM alone.
Importantly, just two stocks representing a mere 2% of EEM’s weight are also found in KWEB. On that note, it should be acknowledged that while it is possible MSCI will make room for Alibaba in its global benchmarks, a final decision on that matter has not been reached and if it is affirmative, Alibaba will not be seen in MSCI indices until March 2015 at the earliest. [MSCI Indices Could Make Room for Alibaba]
However, KFYP and KWEB will make room for Alibaba after the stock’s eleventh trading day, which is rapidly approaching, and are likely to make the stock one of the largest holdings in both ETFs.
That is a good thing when considering that it is estimated 790 million Chinese residents, more than double the U.S. population, will be online in 2016. That is up from an estimated 669 million this year, according to KraneShares data.
KraneShares CSI China Internet Fund
Tom Lydon’s clients own shares of EEM.