Investors all over the world have been discovering Chinese stocks this year, and why not? The leading Chinese tech companies, Alibaba, Tencent, Baidu, and JD.com have all been on incredible runs. The Chinese e-commerce industry is booming as much of the country's 1.3 billion citizens are now just entering the middle class and companies from outside China have had a hard time competing thanks to Chinese regluations.
BABA Year to Date Total Returns (Daily) data by YCharts
However, there is a whole other part of the Chinese tech industry that is still underdeveloped: enterprise software, which is software used by businesses. But that may be about to change.
No big players
While the aforementioned Chinese tech giants are the equivalent of the American FANG stocks, China does not have an equivalent to Oracle or Salesforce as of yet. In fact, according to Forrester, as reported by The Wall Street Journal, Chinese companies spent less than 10% of what U.S. companies spent on enterprise software in 2016, despite having four times the population. Pundits see a rising opportunity as could computing makes for a more attractive option than piracy.
Moreover, subscription-based enterprise software companies can make for wonderful businesses, so whichever Chinese start-up eventually breaks through could well become the Chinese version of, say, Microsoft. A recent article by The Wall Street Journal [subscription required] highlighted one name that could potentially make waves in the future: ZhuiYi Technology Co.
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The company
ZhuiYi was founded just a year and a half ago by a group of former Tencent computer programmers and it's already making waves in the field of chatbots. Software-based chatbots use artificial intelligence and natural language processing to answer basic (or even not-so-basic) questions from customers, essentially allowing businesses to replace or reduce the number of customer service representatives needed. Chatbots could even move into a conversational advertising role in the future, based on whom they are speaking with, and what is being discussed.
According to The Wall Street Journal, ZhuiYi's chatbot product, YiBot, won against IBM's Watson for China Merchants Bank Co. recently. ZhuiYi also counts Ctrip.com International, China's largest online travel site, and Didi Chuxing, China's largest ride-hailing service, as clients. So, for investors looking to familiarize themselves with the next big wave of Chinese tech companies before they go public, ZhuiYi is one to watch. Zhuiyi received $21 million in series B funding in November, according to The Wall Street Journal. That would be the company's second round of raising money from venture capitalists.
Chatbots are hot
Of course, ZhuiYi is very young, and the aforementioned tech giants could start offering their own competing chatbots. These companies are already developing their cloud infrastructure services, with Alibaba's cloud revenues doubling year over year, so developing enterprise software, as both Amazon, and Microsoft do, could be a logical next step for these Chinese infrastructure giants.
However, after Microsoft's chatbot Tay went on a racist rampage in 2016, CEO Satya Nadella admitted, "The complexity is too much. We need to tame it [bots]." Microsoft's Chinese chatbot, XiaoBing, also went off the rails this summer, and was reportedly pulled by Tencent after it said, "My China dream is to go to America." So, it appears that chatbots are tricky, even for the largest enterprise software companies, to get right. If ZhuiYi has figured out a way to build a high-performing bot for the Chinese market, the opportunity could be large indeed. Keep your eyes peeled on this space.
