The economic moat is a term believed to be coined by Warren Buffett as he tries to impart a punchline that not all businesses in the same business are the same.
It has since inspired individual and retail investors to use the term over and over again. Sometimes I think I am guilty of using it too much.
Finding moat is not easy. Hence, Morningstar created a framework and assigned a Moat rating to all stocks, ranging from wide, narrow, or none. According to Morningstar, there are 5 sources of moat – switching cost, intangible assets, network effect, cost advantage, and efficient scale.
With the Hang Seng Index down in the red for the last 5 years, I went to dig out the wide-moat companies from the HSI components.
Surprisingly, there are only 5 of them, and they are all in the tech industry!
1) Tencent Holdings Ltd
Tencent Holdings Ltd (HKEX: 0700) needs no further introduction. The company that owns WeChat or 微信 connects people in Mainland China just like how WhatsApp and Messenger do it for the rest of the world.
It is also the world’s largest video game vendor and owns stakes in gaming companies like Riot Games, Epic Games, Supercell, and many more.
It also has stakes in live-streaming platform operators, such as DouYu (NASDAQ: DOYU), Kuaishou Technology (HKEX: 1024), and Bilibili Inc (HKG: 9626).
Tencent has grown from a pure tech company into a technology conglomerate with a venture capital mindset. Its products and services have been ingrained into the daily lives of each and every Chinese citizen.
A wide moat that is well justified, with little room for arguments.
2) Alibaba Group Holding Ltd
Yet another China tech giant makes it to the list.
Alibaba Group Holding Ltd (HKEX: 9988) might have its fair share of doubters, but it is a company that has been identified with a wide moat.
To be fair, Alibaba has evolved and improved a lot ever since its founding.
Today, it has e-commerce, brick-and-mortar, fintech, last-mile delivery, logistics, and even digital media and entertainment in its portfolio.
Sure, the share price performance might show otherwise. Some businesses, like China e-commerce, might be facing huge competition from other players.
It could be the turnaround story of the decade. But the company really needs to find back its mojo.
3) Hong Kong Exchanges and Clearing Limited
Hong Kong Exchanges and Clearing Limited (HKEX: 0388) is the Singapore Exchange equivalent for the Hong Kong market.
While it is well known for operating the stock exchange of Hong Kong (SEHK), HKEX also operates the Hong Kong Futures Exchange (HKFE) which offers derivatives such as futures, options, and swaps in Hong Kong, and also the London Metal Exchange (LME), which is the world’s leading market for base metals trading.
Compared to the US where there are multiple exchanges and companies, HKEX seems to be the de-facto company operating and governing the financial markets in Hong Kong.
The tendency of Chinese companies to offer secondary listings on the stock exchange of Hong Kong does provide HKEX prospects and a catalyst to grow.
Thus, even with the dethroning of Hong Kong as Asia’s financial center might not dry up HKEX’s wide moat as of now!
4) JD.com Inc
JD.com Inc (HKG: 9618) is a Chinese e-commerce company that operates a business-to-consumer (B2C) online retail marketplace and an online marketplace for third-party merchants. The company also operates a logistics network and provides financial services.
Similar to Alibaba, JD.com has 3 main pillars in its business model. Direct sales where JD.com sells products directly to customers, and also an online marketplace that allows merchants to sell to customers.
To complement this, JD.com has its own logistic network. This helps to work out the logistics of getting consignments from the seller up till the receiver.
5) Baidu Inc
Baidu Inc (HKG: 9888) rounds up the list of wide-moat Hang Seng Index components.
Baidu is a Chinese technology company that provides a variety of online services, including search, maps, and online advertising. The company’s business model is based on two main pillars.
Firstly, it’s the online advertising vertical, where Baidu generates most of its revenue.
The next and upcoming vertical would be its AI initiatives with its Baidu AI Cloud
It is essentially the Google equivalent in China.
Too much concentration on tech stocks?
There are plenty of quality stocks within the Hang Seng Index components. I would consider stocks like China Mobile Ltd (HKG: 0941) and Ping An Insurance (Group) (HKG: 2318) as quality companies.
At least to be fair, these 2 companies have a sizable market share of the business that they are operating in, and not facing too many headwinds like the e-commerce companies.
Then again, if we relook back at the source of moats, tech companies do have the tendency to fulfill the criteria more than a normal business.
Are all wide-moats stocks a sure win?
Are all wide-moat stocks quality businesses? Yes, they are.
But are wide-moat stocks a sure win? Food for thought.
Most of the wide-moat HK stocks mentioned are trading at a discount from their all-time high. While some still justify their wide moat statuses, some are facing their toughest challenge yet.
I always believe that both quantitative and qualitative measures play an equal part in helping an investor searching for stocks to invest for the long term.
Knowing a wide-moat stock is just half the script. You still need due diligence and analysis to complete the investment thesis!
