Should you invest in the stocks of China’s biggest technology companies? The answer is a definite yes to me. But how you invest in China is the tricky part, especially the technology sector.

Many clients and readers asked me about Lion Global’s new ETF, Lion-OCBC Securities Hang Seng TECH ETF. Is this a good investment opportunity or it is just another hype?

You may know that I have been long advocating to invest in China. China’s financial market is often misunderstood due to the lack of understanding of her history and culture by the outside world. China’s stock market is built on a different system and the underlying economy operates differently comparing to the western world. This is not to say China’s stock market is better or worse, just different. So if you are interested in investing in China’s tech companies, read on…

The interesting thing about the Hang Seng TECH Index is that there are already several ETFs listed in Hong Kong tracking the same index but never attracted much interest from the local investors. They are

• iShares Hang Seng TECH ETF – Ticker 3067 (HKD) & 9067 (USD)
• ChinaAMC Hang Seng TECH Index ETF – Ticker 3088 (HKD) & 9088 (USD)
• Hang Seng TECH Index ETF (by Hang Seng Investment) – Ticker 3032
• CSOP Hang Seng TECH Index ETF – Ticker 3033

I won’t go through the technical details which you can easily find them online. What I am going to explain in this article are three common myths that I observed from retail investors.

Myth #1: Hang Seng Tech ETF is China’s Nasdaq

As you probably know, an ETF only tracks the performance of an underlying index. In this case, the Lion-OCBC Securities Hang Seng TECH ETF tracks Hang Seng TECH Index. The index was only launched recently on 27 July 2020 and it tracks the 30 largest TECH-themed companies listed in Hong Kong as listed below. Many are familiar names, you may not be familiar with Sunny Optical or SMIC, but you definitely heard about Alibaba, Tencent, and Xiaomi.

One unique “selling point” about the Hang Seng Tech index is that it has an IPO Fast Entry rule. It means Qualified IPOs can be included in the index shortly after listing. To a certain extent, this rule was tailor-made specifically for ANT IPO, whose recent mega IPO debut was unfortunately suspended by China’s regulators. I don’t think there will be any other company that meets the “qualification” in the near term.

Some blogs and stockbrokers refer to the Hang Seng Tech index as China’s Nasdaq index. This is not accurate. You need to understand Hang Seng Tech index is only tracking the companies listed in Hong Kong, and there are thousands of other tech companies listed in Shang Hai and Shenzhen exchanges.

The real Nasdaq-styled market in China is ChiNext in Shenzhen and the STAR market in Shanghai.

• ChiNext started in 2009 and it is geared more towards growth-oriented innovative and start-up enterprises. Now they have 880 stocks with 10 trillion RMB market capitalization.
• STAR Market is relatively new and touts the priority to “hard technology” companies. These include next-generation infotech such as internet-of-things, artificial intelligence, big data, and new energy. They now have 133 listings worth a total of Rmb2.8 trillion.

Although Hang Seng Tech Index does include some of the best China technology companies, it is not a good representative of China’s technology sector which is far broader.

Every index has its own methodology. That is why there is no true passive investing.

Related reading: why ETF investing is not passive investing.

If you are into the technical details, the Hang Seng TECH Index consists of Greater China-incorporated stocks that specifically have high business exposure to the internet, fintech, cloud computing, e-commerce, and digital technology themes.

The 30 largest stocks must meet these criteria and are ranked by market capitalization. Constituents are weighted by free-float market capitalization, subject to a cap of 8% on any individual stock. The major positions of the index include well-known Chinese names such as Alibaba, Tencent, Xiaomi, Meituan Dianping, Sunny Optical, JD.com. Other familiar holdings include Lenovo, NetEase, and Ping An Healthcare & Technology.

Myth #2: Subscribing the IPO to “lock-in” the price

There are countless times that I hear people saying that they want to subscribe to a new ETF or unit trust to “lock-in” the price. Inexperienced investors tend to regard IPO as a sure way of making money. Moreover, ETF’s IPO is nothing like a stock’s IPO. I have highlighted this when Nikko launched its Investment Grade Corporate Bond ETF.

As ETF’s price is “derived” from the underlying stocks. There is no “initial” price for an ETF per se, it is really just a reference starting point that is used to calculate the future fund price based on the weighted average movement of the underlying 30 stocks.

So if you think by subscribing to an ETF IPO, you can make quick bucks like the Hong Kong IPO fever, you can’t be more wrong.

Myth #3: Buying Hang Seng TECH for long term holding

I can’t say this won’t work out well, but throughout my conversation with my clients and readers, I find that one of the biggest mistakes of retail investors is that they are focusing too much on the product than the price.

Related Reading: Why long term investment is a bad strategy.

If you seek investment advice online, you will typically see something like these:

• “Buy Tesla’s shares because it has great potential.”
• “Buy Apple shares because it sells great products.”
• “Buy ABC company because the pandemic boosts its earnings.”

Well, these may be legitimate claims, but it does not factor in your unique personal circumstance and risk tolerance level. It also does not consider the opportunity costs should you buy at a higher price.

The truth is that you can buy the stock of a great company but still losing money. Of course, you can also buy a loss-making company yet make a fortune.

My point is when you assess an investment opportunity such as Hang Heng Tech ETF, not only do you need to study the merit of the product, but you should also pay attention to the market price.

From a valuation perspective, China’s tech companies are severely undervalued. For example, Amazon is trading at 93 times P/E ratio based on 12 months trailing PE and 66 times forward P/E (based on Dec 2020 estimate). On contrary, Alibaba is trading at 47 times trailing P/E and 26 times of estimated P/E. So why? Are all the institutional investors dumb or are you too smart?

“My philosophy is that all stocks are bad. There are no good stocks unless they go up in price.” – William O’Neil

Let me go back to the early statement I made, it is not to say that China’s tech companies are better or worse than their US counterparts, but they are “undervalued” for a reason because they are under different market conditions. I will discuss this more in the future, subscribe at the end of this article for future updates.

Related Reading: Should you invest in Chinese tech stocks after China’s tech crackdown? 

Parting words…

I have been running thematic based portfolios for my clients for many years. What I can tell you is that themes come and go. The capital market always has new stories to tell, from agriculture to oil price, from gold to bitcoin, from real estate to new energy.

If you catch the wave, good for you. If you miss the boat and play FOMO, you often end up badly.

I think Lion-OCBC Securities Hang Seng TECH ETF is a good product, even if they charge slightly higher fees. In the past, I have been advising my client to invest in China’s tech shares through the Hong Kong exchange, but it involves currency conversion loss and hassle to trade.

Many Singaporeans are reluctant to invest in overseas exchanges which is detrimental to their investment portfolio. Hang Seng TECH ETF opens up a new option and it allows Singapore investors to trade Hong Kong shares in SGD which is a fantastic feature.

Nevertheless, we need to recognize that technology sectors across the globe had a spectacular run this year so you need to be very mindful about the price that you are willing to pay for this ETF.

In my November GMC investment update, I talked about the “Great Value Rotation”. With the imminent wide distribution of vaccines and expected global recovery, the market may be shifting the focus from growth to value.

I am not talking about an immediate bubble burst, but just that technology stocks may underperform other sectors or your expectations in the next year.

You also need to keep track of the development of China’s new antitrust laws against their own tech giants. We all know that the governments will come to save the day when there is a financial crisis, but we often ignore the fact the government can also do the reverse when they feel things are out of control. I will discuss more about this in the future.

Update in August 1st 2021: Should you buy Chinese tech stocks after China’s regulatory crackdown? 

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