Get ready to invest in Chinese unicorns

China has recently galloped ahead of the US in terms of the number of unicorns. According to the Hurun Global Unicorn List 2019, there are currently 206 unicorns in China versus 203 in the US. 

The 3 largest unicorns in the world are all Chinese and there are now more than twice as many unicorns headquartered in Beijing and Shanghai as there are in Silicon Valley.

Investors can benefit from the rise of China as an entrepreneurial power in two main ways. Firstly, investors can participate directly in unicorn IPOs. Secondly, investors can hold mega-cap “unicorn incubator” stocks like Tencent and Alibaba as part of their core portfolio.

In terms of IPOs, the most exciting listing slated for 2020 is ByteDance, which owns the short video app TikTok and news aggregator Jinri Toutiao and is valued at approximately $75 billion as per its last funding round. 

In terms of investing in unicorn incubators, the table below shows that Tencent is ranked second in the world for investing in and incubating unicorns with 46 in its stable. Alibaba is ranked 7th with 22. Other Chinese stocks like JD, Ping An and NetEase have also invested in and spun off (or will spin-off) successful unicorns.

In the wake of the WeWork debacle and severely disappointing IPOs by Uber and Lyft, investors may question the hype around some these unicorns. But Chinese unicorn listings, on the whole, have fared much better than their US counterparts. 

Biotech stock Wuxi Apptech is up over 300% since listing in late 2018 and Chinese electric car battery stock CATL is up 211% since its June 2018 IPO. Better known Chinese stocks like Pinduoduo and Meituan are up 129% and 40% since IPO, respectively.

Finally, some food for thought about what the size and number of Chinese unicorns imply for global asset allocation. 

The pie charts below show China’s share of world GDP (19%), China’s share of global unicorns (42%) and China’s share of MSCI AC World Index (3%). 

This mismatch doesn’t make sense. It is only a matter of time before China’s share of the benchmark pie is meaningfully bigger.

So, get ready to invest in Chinese unicorns in 2020. It will be a blessing. 

Stay informed in 2020

Stay up to date with Ellerston Capital latest views. Hit the FOLLOW button below to be notified by email as soon as I publish my next wire.

This wire is part of the ‘One thing investors can’t ignore in 2020’ series. To download the full ebook please click here.