A closer look: KraneShares CSI China Internet ETF

Wednesday, Jan 11th 2023


Holding Name: KraneShares CSI China Internet ETF (NYSE: KWEB)

Strategy: Offshore

Percent weighting of strategy: ~6.8%

TLDR: Reopening is fueling outperformance in China and important data points signal that growth may continue.

Position overview: KWEB tracks the CSI Overseas China Internet Index, which consists of China based companies whose primary business or businesses are focused on internet and internet-related technology. The Index is free float market capitalization weighted (in other words, weighted based on the market cap of the companies in relation to the available shares outstanding) and includes publicly traded securities on either the Hong Kong Stock Exchange, NASDAQ Stock Market, or New York Stock Exchange.

KWEB's largest holdings include companies that you are likely familiar with: Alibaba, JD.com, Baidu, Bilibili, and more.

Why we own it: KWEB is an ideal investment vehicle to invest in a diversified basket of Chinese technology companies. The position provides Titan investors exposure to companies benefitting from increasing domestic consumption by China's growing middle class - a trend we believe to persist over the next 10-15 years. As of the end of 2021, only 73% of China’s population had access to the internet. Contrasted with the United States' 97% penetration, we believe further adoption is on the horizon. 

As local policies continue to loosen, we believe that the Chinese government is attempting to reduce the economic and social cost of its zero-Covid policy. KWEB has the potential to outperform while offering a diversified way to reap the potential benefits of reopening. 

The largest holdings in KWEB are still trading near historically low valuations given the derating over the past ~2 years with many valued at historically low EV/EBITDA multiples. Although we believe much of the derating has been warranted, we believe that the pendulum has swung too far and that value can be found for long term holders. 

Important to note, with 68% of the KWEB holdings already listed in Hong Kong, KWEB plans to fully convert the remaining American Depository Receipts (ADRs) by the end of the year. Although to a lesser degree today, the risk that Chinese ADRs become delisted in the United States still exists, owning Hong Kong local shares helps us sleep much better at night.

What’s the latest: Chinese authorities’ abrupt pivot away from zero-Covid policies has been matched by the quick shift in investor sentiment about Chinese stocks from the bearishness of the past year. The backdrop for Chinese stocks has changed markedly: for the first time in four years, economic, regulatory and Covid policies are aligned—and are a benefit rather than a hindrance to the market. 

Covid cases have begun to plateau, reopening has remained steady and travel restrictions  have been lifted - we believe that the reopening trends remain positive for continued outperformance. Not only this, but Chinese consumers are leaving pandemic restrictions with meaningful amounts of built up savings - JPMorgan estimates the three-year total excess savings since 2020 may have reached 5.6 trillion yuan, or about 4.7% of China’s 2022 GDP. This should provide a tailwind for Chinese technology companies in the coming quarters.

Sign posts moving forward: Knowing that data reported by the Chinese government can be rather subjective, we plan to closely monitor air quality degradation in China’s largest cities, which we believe to be an objective, high-signal data point, given economic activity directly affects air pollution (see chart below from Beijing - we expect to see more red here in the coming months).

We also plan to monitor covid spread and the continued downtrend of reported cases. While case load tolerance is likely to be more relaxed, reported cases may provide insight into pivots or continuation of policy. We acknowledge the potential unreliability of this data but will use this as a barometer for underwriting the risk of closures moving forward.

The content contained in this material is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, solicitation of an offer, or investment advice.


As of this writing, KWEB was a portfolio holding of Titan. This security may cease to be a portfolio holding at some point in the future.

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