Options Market Likes China’s Mobile-First Revolution
(Bloomberg View) -- China is no stranger to revolution, be it cultural, political or economic. But the ready adoption of a mobile-first approach to technology, which has propelled the most populous country to the global forefront -- and storefront -- of the digital age, may be the most far-reaching reformation yet.
China’s online search, e-commerce and content landscape is dominated by Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd., collectively known as the BATs. In May, Alibaba and Tencent joined a group of 11 titans with a market value of more than $300 billion, ranking seventh and 10th on that measure. The first five names on the list are, in order, Apple Inc., Google parent Alphabet Inc., Microsoft Corp., Amazon.com Inc. and Facebook Inc.
The options market indicates the BATs can close the gap on the FAANGs, an acronym standing for Facebook, Apple, Amazon, Netflix Inc. and Google. Options provide efficient estimates of the market’s assessment of whether asset prices are more likely to rise or fall. Using options prices to garner information about the distribution of future outcomes is similar to using crowdsourcing to gather data. Market prices convey important information about changing risks.
According to China Internet Network Information Center, 723.6 million people out of a population of about 1.36 billion access the internet via a mobile phone. That’s double the population of the U.S. and about a third more than the number of people in the European Union.
Online sales reached $750 billion in 2016, according to China’s National Bureau of Statistics, more than the U.S. and U.K. combined, and are set to grow by 20 percent annually through 2022, twice the pace of the U.K. and U.S., with mobile accounting for 74 percent of the total by 2020, compared with 46 percent in the U.S.
Baidu is the country’s dominant search engine, Alibaba’s Taobao and TMall marketplaces control online shopping with 529 million mobile monthly active users, while a third of WeChat’s 963 million monthly active users access the Tencent app for four hours or more a day.
With WeChat, users can find a doctor by location, discipline and price; book an appointment; pay for treatment; and order prescriptions for delivery. In a restaurant, users bring up the menu on their phone, from where they order and pay. After eating, the app can book movie tickets and a ride to the theater. To settle with friends, users transfer money between accounts. In return, Tencent gets all that data.
Because everyone uses Alipay or WePay -- which accounted for 54 percent and 40 percent of online payments respectively in the first quarter, according to China’s central bank -- it’s becoming difficult to pay in cash for something as simple as a bowl of noodles from a street vendor, an example of consumers leapfrogging technologies by skipping credit cards and going directly to mobile payments from cash.
The ubiquity of their apps gives Alibaba and Tencent the ability to leverage data for new ventures such as financial services.
In four years, Alibaba’s Yu’e Bao has become the world’s largest money market fund with $210 billion in assets, 28 percent of China’s market, according to Fitch Ratings. Yu’e Bao’s parent, Tianhong Asset Management Co., is the first Chinese money manager with more than one trillion yuan ($145 billion) in assets.
The success of Yu’e Bao, majority owned by Alibaba affiliate Ant Financial, led Tencent to introduce a similar offering, while Tianhong is seeking to add fixed income and equity-based options to the exchange-traded funds it introduced last year.
Such innovation is working. On Aug. 17, Alibaba said fiscal first-quarter revenue grew 56 percent over the three months through June 2016. A day earlier, Tencent reported a 59 percent surge in second-quarter revenue from a year earlier.
Alibaba’s stock has doubled since Dec. 22, a day longer than it has taken Tencent’s shares to advance 80 percent. Baidu has climbed 30 percent since June 16.
While options prices indicate plenty of upside for Amazon, Facebook, Apple and Alphabet, the FAANGs have to overcome entrenchment in financial services, traditional retailing and in consumer attitudes. The BATs face lower hurdles, making the options market appear extremely optimistic about their potential.
The box plots show the ratio of expected upside to downside of FAANG and BAT equities inferred from option prices. A yellow dot higher in the box signals more attractiveness to the upside.
Antitrust threats may also present headwinds for the FAANGs, especially in the European Union, where Google was fined 2.4 billion euros ($2.83 billion) in June and faces further probes. In the U.S., President Donald Trump has pondered visa and tax rule changes that could impact Silicon Valley companies that some conservatives view as too powerful and too liberal. By comparison, China has cleared a regulatory path for internet companies to innovate.
The options market has confidence in the Chinese companies’ abilities to develop cloud computing and to ramp up advertising revenue while remaining dominant in e-commerce, content and gaming, such as through Tencent’s hugely popular “Honour of Kings” mobile game.
And with most mobile users concentrated in the biggest cities, the BATs have an opportunity to expand into smaller cities and China’s rural communities, where it’s often uneconomical for retailers and financial, healthcare and educational organizations to have a presence.
When it comes to growth in mobile commerce, options prices suggest that the BATs have the FAANGs licked.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Ash Alankar is global head of asset allocation and risk management at Janus Henderson Investors, and manages the firm's adaptive allocation strategies.
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