The MSCI China Index is lower by 7% over the past month, confirming that global investors are pensive about the state of affairs in the world’s second-largest economy.
Near-term Chinese stock declines will likely chasten some market participants, particularly those long frustrated by lagging performance by the broader emerging markets universe. Still, patience may reward market participants with long-term perspectives. The WisdomTree China ex-State-Owned Enterprises Fund (CXSE) could be an example of China exchange traded fund that makes it easier to exercise that patience.
Owing to the fact that it eschews slow-growth state-owned enterprises (SOEs), CXSE has an overt growth profile, including significant exposure to consumer internet equities. Ignore neither those declines nor the fact that some CXSE holdings remain attractively valued.
CXSE Competitive Advantages
Several of CXSE’s well-known holdings are sporting attractive valuations. Many consider these wide moat companies, or firms with stout competitive advantages. Online retail giant JD.com (NASDAQ: JD) – CXSE’s sixth-largest holding – merits a place in this conversation.
“We think JD has a wide moat based on an intangible asset of high reliability and assurance (on-hand inventory, quality, fast proprietary logistics services) and a cost advantage resulting from its growing economies of scale in its first-party business,” observed Morningstar analyst Chelsey Tam.
While not a consumer internet stock, Yum China Holdings (NASDAQ: YUMC) is a consumer cyclical name. The CXSE holding is the parent company of several of China’s most popular fast food chains, including Kentucky Fried Chicken (KFC), indicating that has relevance as a reopening idea and that it may have some durability even if the economy there contracts.
“Over the next several years, we expect Yum China to speed up new unit openings. We share management’s view that there remain plenty of expansion opportunities in lower-tier cities in China—evidenced by the nearly 1,200 cities that still have no KFC presence,” noted Morningstar’s Ivan Su.
Alibaba (NYSE: BABA), CXSE’s largest holding at a weight of 11%, is not to be ignored when it comes to undervalued Chinese stocks with wide moats. The e-commerce behemoth faces increasing competition, but rivals are falling short.
“None of its new competitors—mainly third-party e-commerce platform Pinduoduo and short video platforms Douyin and Kuaishou—have proved they can monetize the physical goods e-commerce market with a durable profit margin. Meanwhile, Alibaba has been profitable for a decade, and we believe it will remain profitable for the next 20 years,” concluded Tam.
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