Chinese tech stocks are often associated with revenue growth and aggressive investment instead of stability and dividends. However, there are still plenty of Chinese tech stocks that offer both dividends and relative stability in a volatile market. Let's take a closer look at three stocks that fit that description -- China Mobile (CHL), NetEase (NTES -0.78%), and Tencent Holdings (TCEHY -0.06%).
China's top telco
China Mobile is the largest wireless carrier in China. Its total number of wireless customers grew 3% annually to 943.6 million in October, and 4G customers accounted for 79% of that total -- up from 76% a year ago. Its wireline customer base grew 24% to 187 million.
The government, which owns a controlling stake in China Mobile, dictates many of its business decisions -- including the sale of its towers to China Tower in 2015 to cut costs, its ongoing rotation of its management with its two state-backed peers (China Unicom and China Telecom), and the reduction of its monthly fees and elimination of its data roaming charges.
China Mobile is expected to post nearly flat revenue growth next year with just 2% earnings growth. It only pays semi-annual dividends instead of quarterly ones, and it's only raised its payout annually over the past three years (excluding a special dividend in 2017). However, China Mobile's yield -- which is set annually by a payout ratio of 40%-50% -- has hovered between 4%-5% over the past year.
The stock also trades at just nine times earnings, due to the trade war, unrest in Hong Kong, and concerns about its earnings growth -- but it remains a conservative long-term play on China's growth.
China's second largest game publisher
NetEase is the second largest video game publisher in China after Tencent. It publishes three of the top ten highest-growing iOS games in China, according to App Annie -- two entries in its flagship franchise Fantasy Westward Journey, and Immortal Conquest. Other popular titles include Onmyoji and Knives Out.
NetEase went public nearly 20 years ago, and it's no longer a high-growth company. Instead, it generates steady growth with consistent profits. It still generates most of its revenue from video games, but it streamlined its business over the past year by divesting non-core assets like its online comics unit and e-commerce platform Kaola, as well as spinning off its online education unit Youdao in an IPO.
Analysts expect NetEase's revenue and earnings to rise 3% and 6%, respectively, next year, and it trades at a reasonable 18 times forward earnings. It spent just 16% of its free cash flow (FCF) on its dividend over the past 12 months, and it currently pays a forward yield of 1.3%, which was temporarily boosted to 2.4% with a special dividend.
A tech giant with a low payout ratio
Tencent is significantly larger than NetEase, but it pays a much lower forward yield of 0.3%. It spent just 10% of its FCF on that dividend over the past 12 months, though, which indicates that it has plenty of room for future hikes.
Raising that dividend could be a good way for Tencent, which underperformed NetEase and other Chinese tech stocks like Alibaba (BABA 0.44%) by a wide margin this year, to appease its investors. It would also arguably be a smarter move than the buybacks it started implementing last September.
Tencent still has lots of irons in the fire -- it owns China's top messaging platform, gaming business, and mobile payments system, as well as one of its largest video streaming, cloud, and advertising platforms. It also owns a sprawling portfolio of investments, which now generates over a quarter of its net profits.
Tencent's core growth engines still face daunting challenges -- its advertising business faces nimbler rivals like ByteDance, its gaming business faces tougher regulations in China, and its cloud and fintech businesses face fierce competition from Alibaba. However, analysts still expect its revenue and earnings to both improve about 22% next year, which are decent growth rates for a stock which trades at 27 times forward earnings.