KWEB's Q1 Setup: The Bull Case Wall Street Refuses to Run

 Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.

Transcript

Live Setup And Guest Intro

SPEAKER_02 0:07

And a busy, busy day, folks.

SPEAKER_00 0:08

Give me a second, I want to make sure we are streaming on all the various platforms here as we talk about uh China uh and uh some of the interesting things going on there and earnings, since uh of course earnings are always on everybody's minds. Uh for those that are watching this across X, Instagram, LinkedIn, YouTube, uh, thank you, by the way, for for watching this. Uh, this is streamed live. If any of you want to ask questions during this roughly 30, 45 minute conversation, I can see your comments. I'll have to bring it up. Let's make this as interactive as possible. Yes, this is Lead Lag Live, and yes, it is indeed live. Uh again, folks, just give me a second to make sure that we're off and running here, and we'll get started. Perfect. Okay, good. Uh again, thanks everybody for watching. My name is Michael Guy. I am the publisher of the Lead Lag Report, founder of Lead Lag Media, and host of Lead Lag Live. There's a whole bunch of Lead Lag in there. Good thing that I trademarked uh that term. Uh we've got here Mr. Henry Green of CraneShares going to be talking about one of uh one of their big funds, uh, which is K Web, and gonna be talking about earnings and uh what comes next to uh international investing, particularly when it comes to China, uh, which is particularly relevant since I'm doing several events this week about investing in China uh separately from Crane Shares. So, Henry, uh welcome. Uh maybe just a quick intro as far as uh your background, what do you do with Crane Shares? And let's get right into earnings uh season here.

SPEAKER_01 1:24

Yeah, sure, Michael. Uh thank you for having me. So uh yeah, at Crane Shares, uh we are uh China, well, traditionally we're a China-focused uh asset management firm specializing in ETFs. Um we've now expanded to include uh various other asset categories, improving alternatives uh and also um emerging technology ETFs such as robotics um and various various other techniques, AI. Um our founder uh started a successful uh business in China in the early 2000s, ended up selling that business, came back to the US, and wanted to give uh US and global investors a way to access China that was reflective of what he thought was the new China, which was uh the consumer all about the consumer and all about technology, right? As opposed to the old China, which was more about industrials, more about that manufacturing base, right? And so uh we we took John's vision, uh we've taken John's vision uh into uh various funds. Um our flagship fund, of course, is K Web. That's China Internet stocks. We become uh very much the benchmark for uh the China Internet sector uh here in the United States. Um that's KWeb KWEB, Crane Share, CSI, China Internet, ETF. Um, and we uh have recently been uh talking a lot about the AI story uh within the China Internet stocks, right, which which applies a little bit under investors' radars uh today. I myself am a senior investment strategist. I've been on the team for almost seven years, so I've been through multiple market cycles, uh experienced multiple market cycles uh in this space, which has been really fascinating for me in my career. Um, and uh I'm I'm here kind of analyzing these markets every day for our clients um and keeping them up to date, um, as well as educating on our products and and and building new products as well around similar themes. So um yeah.

Why China Tech Underperformed

SPEAKER_00 3:17

Whenever I see these posts on X and these videos of what's happening already in China, uh it seems to be like miles ahead of the US. And a lot of that obviously has to do with there's not as much sort of legal friction, you know, and a lot of advancements uh are coming from China. Um yet the the China internet and AI plays for the large long part, uh large part have not really been uh strong performers like US equivalent internet and AI plays. I'm curious what you um what do you attribute that to?

SPEAKER_01 3:46

Yeah, sure, Michael. So a few things, right? I think um I think we have to look back, I think just to start answering this question, right, because there's a lot of different factors here, I think we have to go back to um pandemic, right? Uh during pandemic, there was a lot of US-China friction. Um it's funny because China internet stocks are K Web actually hit an all-time high back in 2021. Um so that was kind of coming out of the pandemic, where you had China very strong, uh, very strong developments there. Um and then uh we s proceeded to have the market take a turn um because of regulations within China and also because of uh geopolitical friction between the US and China, right? Um and that lent itself to lower investor uh sentiment on a lot of these stocks, right, uh in China from the US. Um, and that while it didn't really affect the fundamentals of these companies, um it did have quite a large impact on uh the sentiment for US investors investing in these companies, which caused stock price declines. But we believe that was really driven by fundamentals, okay? And then in 2025, we had a real comeback year for China Internet stocks because people realized that these are big players in AI. Uh we had Deep Seat come out with its uh model, uh came out all over the world uh as being uh kind of a this this um big realization that wow, China's innovating in AI as well. Excuse me. And um so that was really fascinating for global investors and kind of brought people back into looking at this space in 2025, had a really stellar year in 2025, and now in 2026, we're seeing some volatility there um on these internet places as people have shifted to the the um very much the hard tech part of the AI story. So that semiconductors chips, the sort of quote unquote picks and shovels trade, uh, if you will. Um and so that's been really important uh to investors. Investors have kind of left and said, okay, not looking so much at internet names anymore. They're more looking at the hardware names that are powering the actual compute for AI, right? Um and we think that that's somewhat misguided, though. We think that this is look, this is an entire ecosystem. When you see TSMC, other chipmakers with these, you know, bigger and bigger revenue expectations coming out. Where is that coming from? It's coming from US hyperscalers, but it's also coming from Chinese China-based hyperscalers like Alibaba and Tencent, right? And so it's kind of doesn't make sense that those stocks are falling while US stocks keep right making record highs, and the chipmakers themselves keep making record highs because the outlook for the the the China platforms must be pretty strong if these chipmakers are are having these high revenue expectations because they're a part of that buyer base. So that's where

The Valuation Gap Versus Mag 7

SPEAKER_01 6:35

we think the disconnect is in the market.

SPEAKER_00 6:37

When I look at the um top 10 holdings on K Web, is there anything that any of these companies don't do the Mag 7 in the US does?

SPEAKER_01 6:47

Yeah, these companies, a lot of them are are this this do the same things as a Mag 7 in the US, okay? Uh you have Baidu, which is basically Google. They've even got their own uh Robo Taxi division. And um so and you have Alibaba, which is like Amazon, um, but they also do a lot in cloud services. So these are basically Mag 7 companies within China that are not priced as such. I'll give an example. You could buy every single company in K Web uh for the market capitalization of Google today, and you'd still have two trillion dollars uh left over. Okay? So just think about that for a second, and that's 30 companies, right? I mean, the the discounts here are massive. And one could argue that because it's China, there's always gonna be somewhat of a discount, right? That that you're not gonna reach a kind of US multiple, they have different legal jurisdictions, different political systems, uh different markets, right? But even if you applied a 50% uh discount to the China names, you would still want to see if it probably think that the valuation would be a lot higher than it is today, right? Again, the entire one company you could buy all every single company in K Web uh and still have $2 trillion left over, right? So that's just a huge disconnect, right, between the US names and the China names, right? And we think that's really critical for investors to understand, especially when you're looking at buying China, when you're looking at buying emerging markets, you're looking where is that value? Um, a lot of people are looking at Taiwan and Korea. They've had huge rallies, right, uh this year, mostly on the back of chipmakers, right? Where's the value? We think the value is in the software names, in the names that are actually driving the revenues for those chipmakers, and most of that is captured uh within the K Web portfolio.

Earnings Growth Through Cloud And AI

SPEAKER_00 8:32

When you look at um earning expectations and earnings growth, you know, quarter over quarter, quarter year over year, um, I know the numbers are gonna be different, but in terms of the the percentage jumps, um do the names in K-Web have similar percentage jumps in growth that the Mag 7 have had? Um or or is there a fundamental difference in the growth uh uh expansion?

SPEAKER_01 8:56

Um I think they do when you when you isolate uh cloud services. So Alibaba saw cloud growth of about 26% in their latest report for Kube4 year over year. And um so that's really strong, right? Overall, though, because just just consumption remains tepid within China overall. And so that has an impact on their overall earnings, right? Uh m the growth rate might not be quite as as as strong right now, just because that uh consumption demand um is a bit of a is on a bit of a flat line uh within China. But when you look at the cloud growth, right, and AI adoption growth, that's where they're really strong and can be compared or equivalent, uh made it looked at as equivalents to the Max 70 US, I think.

SPEAKER_00 9:47

So one of the big things that's often in the media here when it comes to the US is uh hyperscalers and the AI infrastructure build-out. It's my understanding that uh a lot of these companies in China are not anywhere near reaching those types of you know spend levels like we're seeing in the US. Um I wonder if you think that's a positive or a negative. And I say that because you can argue that that's a way of enforcing discipline, right? In terms of not just spending and you know, these expectations on spend keep on going up in the US. Um is it is it uh is it a function that China's uh broadly and these companies are broadly approaching the growth more conservatively than what we're seeing in the US? And and how do you kind of perceive that as an investor?

SPEAKER_01 10:25

Um yeah, I I think that that's part of it. Um but at the same time, we are seeing them ramp up growth significantly. Baidu, if you look at Baidu as a company, they have um a very large cash position. And so they're very conservative, right? Others not so much. Like Alibaba is spending, I mean, they just every quarter they come out with a higher number for their their AI investment fund, right? And they're projecting uh growth, uh actually cloud services growth doubling every year for the next five years. Right. And so um they are ramping up that spending, but yeah, it has been it has been relatively more conservative um recently. And so um that's uh had an impact on investor perception, but I think that that's changing a little bit. And and again, these companies have cash positions, very high cash position. Um all the companies in K Web, we estimate to have uh a net cash total of about $136 billion in terms of their that's their dry powder that they can use uh to spend and invest. And um, so yeah, we'd like to see them invest more of that cash, right? But they certainly have the have the cash available um to do that investing. They've been a little bit more conservative. Um, but we're seeing that changing uh a little bit. And I think it takes it helps when you have the consumer coming back, which is possible this year. Uh government support is very important. China just had its five-year plan released, um, which was very supportive for the quote unquote the platform economy and the development of AI and technology. And so we see that as being um as as you know, just more encouragement for these companies to spend more. Um but again, when you look at the revenues of NVIDIA uh and or TSMC, right, a lot of them uh again, a lot of that is coming from these Chinese hyperscalers. Um and so they are spending uh uh on chips as well, but they also have their own chipmakers too, uh in-house. So Alibaba has T-Head, um, and Baidu has Kunlun Xin. Um and so that accounts for some of their chipmaking spending. Um but i in any event, um, yes, we do think we do see that's that spending increasing. Um it helps that there's government support. And I think we're getting that more and more. And I think this quarter you could see even more um uh spending announcements, spending on AI. But the other thing is they have to be careful because in their core businesses, so like for Alibaba, their core business is still e-commerce, right? That's become super, super competitive in China. We've seen the rise in instant commerce where where the the it's just a race to get products cheaper, get them to people faster, right? And that's been continuing unabated um for the past year. We we think that this first quarter will be key to see that actually start to slow um and see their margins improve a little bit. So I think that's also where they've been hesitant to maybe spend quite as much as the US platforms, because take Amazon, for example, right? They still benefit from a relatively strong US consumer. Uh and maybe a bit of a better profit situation in the e-commerce business, right? Whereas whereas the in the e-commerce is very intense competition uh in China e-commerce at the moment. But this quarter, these coming quarters' earnings, we have Alibaba uh and Tencent uh reported reporting on Wednesday, especially for Alibaba. It's gonna be really important to see uh that the margins are improving uh for e-commerce. And we've JD tomorrow, actually, as well.

SPEAKER_00 14:00

All right, so let's get into the earnings side

What To Watch In China Earnings

SPEAKER_00 14:03

a bit here. Uh there's always a criticism that earnings from China are not of the same standard or quality as the US. That's probably changed over time. Um, but uh if an investor is looking at earnings coming out from various uh large China companies, what should they focus on more? Should they be focused on the CapEx side, on the uh margin side, as you mentioned, free cash flow? What does the market reward the most now when it comes to international China investing?

SPEAKER_01 14:27

Um I think that what happened in the past quarter, so if you look at last quarter, was that markets read the uh oh, EPS is down. Again, that's because of the e-commerce competition and the AI investment. We're just gonna write off uh we're not gonna look at the growth projections for the cloud businesses, right, which is what they were investing in. The market just said, oh, you know, profitability down, you know, and Chinese consumer not doing well, you know, that's a sell. And it's not that simple, right? So I think that there's been a laser focus on profitability, and that could continue. Um, but I think that's a little bit misguided because, again, these companies are investing heavily uh in the future, uh in in the growth of the cloud, especially in cloud services, right, in future growth initiatives. And I think that's being discounted by the market, and the market's focusing solely on lower profitability and lower EPS. And it's difficult because um, you know, when we talk to clients a few years ago, like when I first started doing this, right, it was all about the China consumer story. These were the, and they still are, the transmission engines of China's consumer. That's where to today. Now they are also the innovation engines uh for China, for China's AI ecosystem, right? Which is, of course, separate to the US as a firewall. And so you kind of got to tell you both stories at once. And um I think the latter story, the AI story, is is doing phenomenally well. Um, this phenomenal growth. Whereas the consumer um has been flat for the past couple years, right? And so that can be a difficult needle to thread for the international investor community. But I think that there's real value to be had for these names, specifically because they're software. I think that like, I mean, you've seen this run up in memory chips recently, for example. Um uh obviously TSMC does very well, as I mentioned, just the chipmakers doing reaching new highs every day. And and that's great. And but it's like, where are those revenues coming from? They're coming from the users who are the cloud services providers, who are, you know, the the the Googles, the Amazons, and the Alibabas and Baivus of the world, right? Uh Google and Amazon have done okay, right? And I think that there's just a heavy discount on the the the Chinese equivalents, right? It's still billion, over a billion people using these in China, right? And that's driving these revenues for the chipmakers. It's an entire ecosystem, right? And I just think that that's it's being heavily discounted because people are expecting to see when they look at China, it's like, oh, if it's not 10% GDP growth or 8% consumer sales, then it's like who wants it, right? But that's like the old, just as John Crane went to China and said, oh, we need to look at the new China, not the old China. That's like the old view of China, right? Is is uh you've got to look at the headline growth, it has to be super, super strong double digits, right? Um now they're a more mature economy, more of an economy based on services, based on technology innovation, right? You don't need those headline, crazy headline figures, uh, right, to still achieve that kind of growth. I mean, we don't have those crazy headline figures in the United States, right? It's just another stage of development. Um and so I think that's where people need to focus. Um and again, if you look at just the the the market cap, um again, you can buy every single company in K Web and sell two trillion dollars left over for the price of Google, right? Of a single company versus 30. Right. Um I just think that's where the real value is uh today.

SPEAKER_00 18:18

Um yeah. Obviously a big valuation gap between you know K Web and the Qs as an example. What do you think investors are getting most wrong about internet plays or AI plays in China?

SPEAKER_01 18:30

Um I think that there's I think that um there's an assumption that you know there's there's this whole SASPOCalypse idea, right, that uh um software firms are gonna have trouble competing, um can have trouble with their existing business models with the advent of things like AI agents and such. And I think that I think that China's firms like are not are actually not susceptible to that in the same way. Um and I think that's really important. Um today a lot of businesses actually are using the same firms that like US companies do. So they might use Salesforce, Microsoft Office, all these kind of US software providers, right, that they're using. And but they're using these software providers and and they're gonna be the one the who they're switching to are the local ones, our companies like Alibaba Cloud. They're gonna be switching to Tencent Cloud. And why are they gonna be doing that? Because Alibaba and Tencent are AI forward, right? They're the ones they've already grown up in this new business model, right? Where it's tokens versus seats, where you're selling uh the compute power, not licenses, right? They've they they've gotten started in this new environment. So I think that is an inherent advantage. And um I think a lot of people don't realize that that the that I think a lot of investors do not realize this key difference uh between US and China in terms of the software companies.

SPEAKER_00 20:04

When

The Misread Software And AI Shift

SPEAKER_00 20:05

you look at the um top 10 holdings of K Web, right? I'm looking at Tencent, you know, Alibaba, it's the top two, PDD, Netties, JD, Baidu. Is there any one in particular that excites you the most that you think has the most potential? I mean, arguably it's a fairly concentrated fund, right? You have 32 holdings, so a couple of names can obviously have a big impact, right? But as you look through the top 10 in particular, which one really stands out the most to you?

SPEAKER_01 20:30

Um, I think that right now, uh JD uh again, this is not an AI story. Um it's purely a profitability story. Their margins have been so uh compressed over the past four quarters or so. Um, and I think that you're gonna see a really mar uh big improvement in the first quarter uh in terms of their margins. So they competed heavily to get into the um this instant commerce business within China, and that cost them a lot. Um and I think I think that's maybe the I think this coming quarter, that's gonna be the biggest turnaround story, kind of comeback story uh in China Internet. So that I think right now, that's what I'm excited to see um this quarter, um, if they can achieve that. Um and then obviously Alibaba continues to be uh very much a leader in in in AI and cloud services um in China. They continue to do well there. But um yeah, I think JD's gonna be the comeback kid uh in in Q1. So we'll see. I don't know.

SPEAKER_00 21:38

But uh Well, you know that you said that if you c you come back next month, I'm gonna use that clip if it's up twenty percent. Uh it's it's you cold in that in that case. Um okay,

JD’s Margin Comeback Bet

SPEAKER_00 21:48

so now I'm looking at some of the other uh China plays that you've got. Uh it's interesting to me that that Cure, the China healthcare fund that you guys have. Uh yeah, it that's actually performed pretty well relative to to K Web. Right. Uh is there is there some story about maybe investors favoring healthcare over tech when it comes to looking at China?

SPEAKER_01 22:07

No, I don't think so. I think that um the best tech has been in favor in China, just not internet, right? We have another fund, KSTR. That's done very well, garnered some interests here. Um, and that's mostly focused on hardware technology. Again, it's the AI quote unquote picks and shovels trade. Uh has been very popular in Asia and and in China. Uh, right. Healthcare's been a little bit more under the radar, but it has performed well. Um, and there's a lot of exciting uh developments within healthcare, especially. Um there was a record number of deals to license drugs, treatments that were produced in China, actually outside of China, reached a new record um last year. Um and so that's really exciting. That's another place where similar to technology, you're seeing real, now you're seeing real innovation coming out of China. Whereas before, you know, people talk about the copycat China, uh, and then before that it was just oh, low-end manufacturing, right? So this is just the latest evolution of China's economy. And when you take that in the in the healthcare sense, in the healthcare context, I think 2025 and 2026 as well will be really breakout years uh for that kind of innovation. So yeah, you mentioned Cure K-U-R-E. Um Cure is pretty balanced between the biotech firms who are doing this this uh exporting of actual intellectual property and the more localized um you know treatment distributors and care providers, right? Uh as well as contract research. That's also important in China healthcare. So, yeah, I think China healthcare is definitely an overlooked story um that people should look more into. And another place, uh out of the, you know, um out of most people's radar where you're seeing a lot of innovation happening now, um, where you wouldn't expect it to see it, where a lot of people wouldn't expect to have seen it, right? And that's uh really fantastic and and really interesting. A really interesting story there in in healthcare. Um but no, I think tech tech still favored um

China Healthcare And Hardware Winners

SPEAKER_01 24:22

even in China.

SPEAKER_00 24:24

For the uh last few minutes here, um, for those who want to learn more about K Web, uh, where we point them to, but then also kind of make the case for why K K Web now.

SPEAKER_01 24:32

Sure. If you want to learn more about K Web, you can go to Craneshares.com uh slash K Web KWEB. Um you can also just navigate to it from our product lists. Um I'd also recommend you follow our daily capital markets note on China called China Last Night. That's every morning. Uh our chief investment officer Brendan Ahern produces a uh uh note summarizing what happened in China's markets overnight for investors to read in the morning. Um so why K Web now? Um I think there are two main reasons. Number one is I think it's heavily discounted from uh the versus the hardware companies. I think that you've seen this huge disparity between the multiples and returns of the quote AI quote picks and shovels trade uh versus the platforms that are actually enable consumers, real humans, to use AI, right? And nowhere is that more pronounced than in China. So you're cat capturing that discount right now, uh if you believe uh that is, if you believe in the future growth of AI and and and cloud services. Number two, uh, and this is a little a little bit more long-term, but these companies are still the transmission engines for China's consumer economy. So um I think that there's really only upside uh for China's consumer right now. So far, consumer stimulus has been pretty uh muted, but um any improvement, almost any improvement uh in China's consumer directly goes into the bottom lines of the companies within K-Web. So you have two, I think, very strong um and potentially very contrarian um catalysts uh for K Web right now. Um and they're again they're two they're very different from one another, right? So they don't both have to go perfectly, right? Um and I I think that that those two catalysts are are the reason to look at K Web today. It's a good place to wrap up this episode of Lee Light Live.

SPEAKER_00 26:41

Thank you everybody for uh tuning in. This will be available on the uh YouTube channel as well as podcasts, uh anywhere podcasts are. Uh always good uh uh context from Harry Green here. I'm a big fan of China, uh, and uh I'm saying that as an American. I remember when I um when Trump got elected, I tweeted out um uh unpopular opinion China will outperform the next four years' uh US markets. And I said that purely

Why KWEB Now And Closing

SPEAKER_00 27:04

because of starting valuation, had nothing to do with Trump. Uh and I still maintain that. So uh take a look at K Web, learn more about what Crane Chairs has to offer, and I'll see you all on the next episode. Thank you, Henry.

SPEAKER_02 27:14

Thanks, Michael. Alright, cheers everybody. Okay, give it a seconds.