Chinese tech stocks are suddenly back in Wall Street’s favor, but that does not mean investors and analysts expect the sector to regain its former glory any time soon — if ever.
From Goldman Sachs Group Inc to Morgan Stanley, a growing number of strategists have made bullish calls following Chinese President Xi Jinping’s (習近平) “zero COVID-19” exit and vows to end a crackdown on the sector.
The shifts have spurred a 60 percent rally in the Hang Seng Tech Index since a trough in October last year, a world-beating feat even though the gauge’s market value is still half of its February 2021 peak.
Photo: REUTERS
A big question looms on the sector’s fair valuation under a regulatory regime in which free-wheeling growth is no longer tolerated, and as the industry matures.
“Chinese tech shares were once the easiest bet, and for most of the past decade you were able to win and see outperformance without doing much,” Fortune Hill Asset Management Ltd (富春山資產管理) managing director Chen Da (陳達) said. “It’s possible we’ll never see those times again.”
Outlook on the sector has gone through a sea change from early last year, when some of the biggest banks questioned whether the industry was even “investable.”
Having endured two straight years of losses, markets are brimming with hopes over the sector’s returns as signs grow that authorities are taking a more lenient stance.
People’s Bank of China party secretary Guo Shuqing (郭樹清) said this month that a regulatory overhaul is drawing to a close.
That, as well as the country’s reopening and thawing tensions with the US, has led to a flurry of price target upgrades across the sector, including for Alibaba Group Holding Ltd (阿里巴巴) and Tencent Holdings Ltd (騰訊), but targets fall far short of their highs.
“There is a growth story to tell, but it’s not a very high rate of growth, one that is higher than utilities and more stable than cyclicals,” Chen said, adding that “it makes sense to look at the cohort more like consumer discretionary shares.”
Alibaba’s forward price-to-earnings ratio has only recently topped that of electricity provider CLP Holdings Ltd (中電控股). E-book platform China Literature Ltd (閱文集團), a Tencent subsidiary, was valued as low as 11 times forward earnings at one point last year, below the one-year average for natural gas operator ENN Energy Holdings Ltd (新奧能源).
Meanwhile, the Hang Seng Tech Index’s valuation reached a peak of about 46 times forward earnings in 2021 and a low of 17 in October last year, and currently stands at about 27 — comparable to consumer firms such as Li Ning Co (李寧) and Budweiser Brewing Co APAC (百威亞太).
“There is going to be a greater discrepancy within the industry after best years of their growth are for the most part over,” Shenzhen JM Capital Co (深圳君茂投資) fund manager Zhuang Jiapeng (莊佳鵬) said. “The valuations we can expect to see under the new economic cycle will be very different depending on the company.”
For Goldman Sachs analysts, the Internet sector still has another 20 percent upside, driven by valuation expansion after two years of contractions, and sales growth recovery over this year.
Tech is a fast-evolving space that could see a second growth curve with fresh developments, and the size of China’s market makes it an attractive investment destination.
“When you look at how that sector’s been very batted down over the past few years, valuations also aren’t extremely stretched,” Abrdn PLC investment director for Asia equities Christina Woon said in a Bloomberg Television interview.
However, lingering regulatory risks could make assessing the sector’s fair value a complicated task. A sweeping clampdown across the sector has ended, but that is not to say authorities are letting go of intense scrutiny.
On Friday, a report said Chinese government entities are set to take so-called “golden shares” in units of Alibaba and Tencent — potentially indicating greater state influence. Last month, the government published a new set of restrictions on private tutoring services for school students, increasing pressure on the so-called edtech firms.
“It’s only been a few months since we’ve stopped questioning them about investability, about regulatory weakness,” said David Perrett, co-head of Asian equities at M&G Investment Management. “The regulatory concerns are in the price, and that’s very different from where they were two years ago.”
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