6 Reasons You Should Own at Least One China Internet Stock

Markets Motley Fool

Many investors avoid owning stocks in China due to the greater than average risk. They cite many reasons, including the difficulty verifying information, the potential for fraud, and Chinese government interference as reasons to stay away.

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On the other hand, Chinese internet companies have become some of the largest and most profitable in the world and their shares are trading on U.S. markets, subjecting them to oversight by the U.S. Securities and Exchange Commission (SEC). An investment of the appropriate size can yield significant gains.

Below are six reasons you should be invested in at least one.

1. The largest population of internet users worldwide

China has a population of 1.379 billion people, roughly four times that of the U.S., at 323 million. With only 54% of its citizens online, China has more than twice the number of internet users as its western counterpart. If China reaches a penetration level similar to the U.S. at 88%, it could add another 463 million potential users -- a number greater than the current U.S. population.

2. The "everything" app

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In the U.S., consumers have different apps for different things: Facebook, Inc. for social media, WhatsApp for messaging, Tinder for dating, PayPal for payments, and Slack as a messaging app for work. Many of these are banned in China, leaving consumers to rely on local choices.

Tencent's (NASDAQOTH: TCEHY) WeChat combines elements of many different platforms and is the most frequently used app in China, with 980 million monthly active users. It has been described as "a portal, a platform, and even a mobile operating system depending on how you look at it."

The platform is a messaging app, but also acts entirely like a social network. It contains functionality not found in any of its Western counterparts. It can also be used to hail rides, order food delivery, check in for flights, buy movie tickets, meet people, and pay utility bills, all without ever leaving the app.

Did I mention that it's also one of China's most popular payment methods?

3. Mobile payments are booming

While U.S. consumers have been slow to adopt mobile payments, people using them in China are expected to reach 630 million -- nearly half the population -- by 2020. Mobile will soon account for the majority of all payments in China, and the sector is dominated by two platforms, Alibaba's (NYSE: BABA) Alipay with a 54% market share, and Tencent's WeChat Pay with 40% of the market.

It should be noted that in its 2017 third quarter conference call, Apple Inc.'s (NASDAQ: AAPL) CFO Luca Maestri stated, "Apple Pay is by far the number one NFC payment service on mobile devices, with nearly 90% of all transactions globally." However, while NFC payments are widely accepted in China, consumers there prefer paying with the QR codes generated by Alipay and WeChat Pay.

4. World's largest e-commerce market

E-commerce is a worldwide phenomenon and Chinese consumers love to shop. The average online customer there will spend an estimated $1,836 in 2017, and the e-commerce market is expected to top $1.7 trillion by 2020. While Amazon.com, Inc. is the go-to for online shoppers in the U.S., Alibaba's Tmall reigns supreme in China. According to PWC, the platform dominates business to consumer shopping, with a 53% market share. An astonishing 97% of Chinese online shoppers use Tmall, and 61% of consumers begin their product search on the site.

5. Gaming popularity

While gaming is popular in the U.S., it has a much broader following in China. Nearly 50% of the population participates and 600 million Chinese gamers will spend an estimated $27.5 billion on games in 2017. That number is expected to grow to $33.7 billion by 2020.

Tencent is the world's largest video game publisher, with more than $10 million in gaming revenue in 2016. Honour of Kings is the top grossing game worldwide, generating over $1 billion in revenue last year. The game boasts 200 million players, with 70 million of them participating daily.

6. Artificial intelligence

Artificial intelligence (AI) is a worldwide phenomenon, but the technology is limited to those companies with sufficient stores of data to make it work. In China, only three companies possess the requisite data: search leader Baidu, Inc. (NASDAQ: BIDU) Alibaba, and Tencent. Of the three, Baidu is widely believed to have the most advanced AI in the country, having begun its research more than six years ago. Baidu hired noted AI expert and Stanford University professor Andrew Ng to develop its AI efforts, which resulted in the Baidu Brain, the company's contribution to deep learning.

Baidu also boasts the most advanced self-driving car platform in China and recently open-sourced the technology, garnering more than 70 partners for its Apollo programming.

The company has integrated its AI across a broad swath of its business and stands to reap the rewards for future adoption of the technology.

Final thoughts

Investments in Chinese companies may involve a higher level of risk than their U.S. counterparts. That said, as a small part of a diverse portfolio, they can provide access to the largest single population on the planet and produce significant gains in the process.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Danny Vena owns shares of Amazon, Apple, Baidu, Facebook, and PayPal Holdings. The Motley Fool owns shares of and recommends Amazon, Apple, Baidu, Facebook, PayPal Holdings, and Tencent Holdings. The Motley Fool has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool has a disclosure policy.