The Future of Chinese Technology – Social Manufacturing?

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Prior to joining Global X Funds, Alex Ashby lived and traveled extensively throughout Asia.  He currently manages group of six ETFs covering the consumerenergyfinancial, industrial, material, and technology sectors of the Chinese economy.  The Global X NASDAQ China Technology ETF (NASDAQ QQQC) provides investors with exposure to technology companies in China and is designed to be a transparent, cost-efficient way to get access to the country's growing tech and social media sectors.

[continued from Spies Like Us – Chinese Technology Sector Expanding]

Nick Slepko:  At 8.6%, China’s Facebook Tencent (NASDAQOTH: TCEHY) is the single largest holding of the fund.  Lenovo is second [~8%], and online media service Sina (NASDAQ: SINA) third [~7.3%].  How much of QQQC is related to and/or dependent upon trends in social media? 

Slepko Ashby:  Tencent, Sina, and Netease are also important parts of our [global] Social Media Index ETF as well, however the China Tech ETF is a broader technology play - social media doesn’t dominate the fund and is currently less than 25% of the composition (although this could change if social media continues to grow rapidly).  At the moment, there is actually more hardware and software exposure.  Taiwanese Foxconn [Hon Hai Precision Industry] (NASDAQOTH: FXCNY) has extensive operations in China and an exposure to industrials in a way as well, but its demand comes mostly from the technology sector.  So, while social media is the early stages of its growth and monetization, the hardware producers are also expected to benefit from the continued expansion of social media.

Slepko:  Semiconductor Manufacturing International (NYSE: SMI) is a little less famous (or infamous) than Foxconn, but is also one of those Chinese companies that seems to make everything.  Where do you see it going over the next decade?

Alex Ashby:  SMI has been successful in executing its strategy thus far and may become more familiar to investors in the future.  Their current customers are all names that US investors probably recognize – including Qualcomm and Texas Instruments – and they have also recently announced some new technology in chip manufacturing for high growth areas like mobile phones.  Their business model has also been successful in leveraging local government involvement in capital intensive projects, which has helped reduce expenditures for capital intensive manufacturing plants.  The recent issues with Foxconn that you alluded to have demonstrated the increasing focus on labor rights and working conditions, so that will definitely be a challenge that these companies will be prioritizing moving forward.

Slepko:  Which companies do you think are the stronger aspects of the ETF?  What names are going to be as well-known by Americans as Lenovo?

Ashby:  Domestically, Tencent is well-known in China (like most of the Chinese social media companies), but currently there is very little chance that Americans will be exposed to their brand or products.  This is one reason why the fund is so interesting for investors because it is a chance for investors to get exposure to names that are domestically focused at the moment.  We view the social media companies like Tencent and Renren (NYSE: RENN) as having significant potential, simply because of the strong demand for social media in the country and the still relatively low levels of Internet penetration.  Existing users are fairly active in terms of usage, but the main wild card here is the extent of government involvement and censorship of content.  Again, this is a potential area where we could see some changes and reforms with the new leadership, and where we expect to get some more clarity over the next several months – particularly if anything controversial starts making the rounds in local social media and prompting some sort of government action (or inaction). 

[continued in Apple is Not Always Emperor in China]




Nick Slepko (hukgon) has no position in any company mentioned here at the time of publication.  The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend SINA . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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