Potential Amidst Prevailing Pessimism
For the past several years, Chinese technology stocks have haunted investors like a stubborn ghost, inflicting painful losses. Yet, beneath the smokescreen of dismal performances, compelling valuations and other bullish catalysts have emerged, rendering them more attractive than ever. The prevailing narrative now paints a picture of an overcrowded short trade, where masses of investors have deserted the territory, leaving it ripe for contrarians.
Despite valid concerns about China’s weak economy and geopolitical risks, the waning interest in these stocks creates an alluring opportunity. Much like a hidden gem in uncharted waters, the potential for growth lies in the unlikeliest of places.
Recent actions by banking authorities to inject liquidity into the economy are expected to provide a tailwind, countering fears of a stagnant growth story.
Attractive Valuations and Technical Signals
The enticing valuations of these stocks reveal a seemingly capped downside, trading below intrinsic value, while accompanied by rising earnings estimates. Meanwhile, the China Internet ETF KWEB, amidst a steep declines, shows signs of a potential turnaround. Technical indicators suggest a bullish wedge pattern, signaling the probability of a bullish upturn if certain price levels are breached.
Tencent Holdings: A Beacon of Undervaluation
Tencent Holdings Limited TCEHY, a heavyweight among Chinese conglomerates, boasts a diverse portfolio across social media, gaming, and entertainment domains. Notably, the company’s aggressive buyback of shares underscores its conviction about being undervalued, contributing to a flurry of buyback activity throughout the year.
Augmented by analysts’ bullish outlook, Tencent Holdings exhibits a Zacks Rank #1 (Strong Buy) rating, with forecasted earnings showing robust growth trajectory, all at the backdrop of a decade-low earnings multiple.
PDD Holdings Group: E-Commerce Challenger
PDD Holdings Group PDD, challenging the e-commerce behemoth Alibaba, is on a remarkable growth trajectory, backed by rising earnings estimates and a Zacks Rank #1 (Strong Buy) rating. While not as great a bargain, its forward earnings multiple stands at a reasonable level, considering the high growth rates.
NetEase: A Diverse Tech Player
NetEase NTES, known for its presence in online gaming, e-commerce, and related internet services, cites a Zacks Rank #2 (Buy). The company anticipates sales growth and has seen upward earnings revisions, indicating an optimistic outlook in the online gaming space, among other sectors.
Chinese Tech Stocks: A Hidden Gem
The Good News on NTES
NetEase, Inc. (NTES) rose as much as 16.4% to $161.24 on strong quarterly results. The company beat Wall Street earnings forecasts by 13% on higher gaming revenue. The 11% increase in online game services, particularly in China, contributed to a quarterly revenue increase of 30% to $3.1 billion. Furthermore, the cloud services division grew by 40% in revenue. NTES presented earnings reports of $2.93 per share, a significant jump from $1.82 per share last year. The cost of revenue also decreased by 14% year-over-year. Over the next 3-5 years, EPS are forecast to grow 16% annually and with a forward earnings multiple of 12.5x, NTES has a PEG Ratio of 0.71x, indicating that it is undervalued based on growth. It is also below its 10-year median valuation of 21x, and below the industry average of 19.3x.
Alibaba’s Compelling Case
Alibaba (BABA) has doubled its annual sales over nearly three years, reflecting a clear disconnect from its downtrending stock value. Although BABA currently has a Zacks Rank #3 (Hold) rating, its valuation is the most appealing of the stocks mentioned. Like Tencent, Alibaba management has shown an extreme commitment to returning cash to shareholders, having bought back an incredible $9.5 billion of shares in 2023. Additionally, FY24 earnings are forecast to grow 15% YoY while sales are expected to climb 5.2% over the same period. Alibaba is trading at a one-year forward earnings multiple of 8.8x, just a fraction of its 10-year median multiple of 36.1x, and well below the industry average of 27.1x. The company also pays a dividend yield of 1.4%.
The Bottom Line
Athough investing in Chinese equities carries additional risk, the compelling proposition some of these stocks offer cannot be ignored. For investors looking to add exposure to Chinese technology stocks, NTES and BABA make a great starting point.
