Pent-Up Demand From Chinese Investors Is a Tailwind for This Tech Giant

A new wave of money is about to flow into Chinese investments...

Last year, Chinese online-retail giant Alibaba (BABA) filed for a secondary listing in Hong Kong. This opened the door for Chinese investors to put their money to work in Alibaba for the first time.

You see, Alibaba's initial listing was here in the U.S. But current law prohibits Chinese investors from buying U.S.-listed shares. So Chinese investors couldn't invest in Alibaba... until it listed in Hong Kong.

The keys to the listing were the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs. These programs allow qualified mainland Chinese investors to purchase Hong Kong-listed shares through their local brokers.

Since Alibaba is such a well-known company in China, there was incredible pent-up demand for its shares. On its first day trading on Hong Kong's exchange, Alibaba shares surged more than 6%. And other companies are taking note...

Other U.S.-listed Chinese companies have begun exploring listings in Hong Kong to reach their home market. This trend has only accelerated in recent weeks as the U.S. government has increased criticism of Chinese companies listed on U.S. exchanges. And today's company is the latest to take advantage of the pent-up demand...

Chinese gaming company NetEase (Nasdaq: NTES) is one of the largest companies in China. It boasts a market cap of about $56 billion.

Roughly two-thirds of NetEase's revenue comes from gaming. It also operates a few e-commerce platforms and other online portals. These businesses are growing, but they aren't nearly as important to NetEase as gaming.

The company's massive online multiplayer game, Westward Journey Online II, attracts hundreds of thousands of players.

But NetEase's mobile-game division makes that look small...

Today, mobile games make up about 70% of NetEase's online gaming revenue, or $1.34 billion in the first quarter of 2020. The company has more than 100 mobile games on the market, mostly in China.

And it has a long-standing partnership with U.S. gaming giant Activision Blizzard (ATVI) to bring Blizzard's games to Chinese players. For non-Chinese businesses to come to market in China, it's essential to have a Chinese partner. By partnering with NetEase, Blizzard has brought versions of hits like StarCraft II, World of Warcraft, and Overwatch to the Chinese market.

This is part of NetEase's plan to expand beyond China.

In 2018, NetEase and Blizzard announced plans to co-develop a new game called Diablo Immortal, a mobile multiplayer game based on one of Blizzard's most popular franchises.

This plan is still in its early stages. But it shows that NetEase is thinking long-term and outside of China.

And NetEase also recently announced a partnership with Warner Brothers to develop a mobile game based off of popular book and movie series The Lord of the Rings. NetEase CEO William Ding said the company was "thrilled" to develop a game for "one of the most influential and celebrated literary works in the world."

Its gaming portfolio makes NetEase one of the most well-known companies in China. But since it was only listed in the U.S., Chinese investors couldn't put their money to work in NetEase shares. That has since changed...

Earlier this month, the company began taking orders for a secondary offering in Hong Kong. Through the share offering, NetEase expected to raise about $2.7 billion. NetEase added that it will use the proceeds from the listing to expand game offerings in Japan, the U.S., and southeast Asia.

The Hong Kong share offering began trading on June 11. And it was met with heavy demand...

The section of the listing for individual ("retail") investors was more than 300 times oversubscribed. This means that for every share being offered to retail investors, there were 300 orders to buy. That's a clear indication for intense, pent-up demand for NetEase's shares.

In their first trading day, NetEase's shares rose more than 5%. But even more demand is set to be released...

Now, NetEase can apply for the Shanghai-Hong Kong and Shenzhen-Hong Kong Stock Connect programs. This will finally allow people in mainland China to invest in NetEase shares.

NetEase is one of China's best-known companies. And now that it's listed in Hong Kong, people in China will finally be able to invest in the company's shares. That should be a continued tailwind for the stock, both in the U.S. and Hong Kong.

Sometimes investing is simple.