Chinese tech stocks have rallied in the past six weeks. They could push even higher despite the resurgence of political tensions between the United States and China.
Shares in a social media provider
(ticker: 700.Hong Kong), online merchant
(JD) and food delivery
(3690. Hong Kong) have jumped by more than 20% since their nadir in mid-March, in positive territory since the start of the year.
(BABA) fell behind due to logistical snafus when China was locked up by Covid-19. This could be a buying opportunity. “There are not many large companies in the world where the downwinds are so strong,” said Danton Goei, a global portfolio manager at Davis Advisors, referring to the Chinese Internet sector in general. “They represent an excellent long-term investment.”
Market data center: EMEA and Asia
Chinese technology is taking advantage of the same online accelerated rush that has increased the shares of its American counterparts as
(NFLX). They are also amortized by diversity. Advertising could collapse on Tencent
network, but his video game franchise jumped during the quarantines. Alibaba can compensate for the drop in consumer spending with growing demand for its cloud services.
Chinese business valuations also seem relatively attractive. Price / earnings ratios are an imperfect criterion for fast growing disruptors. But on the simplest measure, market capitalization, Tencent is 20% smaller than its American counterpart
(FB), and Alibaba is worth less than half of Amazon, says Goei.
The Chinese economy comes back to life after the foreclosure, while the United States and Europe struggle with compromises between security and business recovery. “Tables have really changed for Chinese and American technology stocks,” says Gil Luria, director of research at D.A. Davidson. “China is the only major country that has really passed the peak of the pandemic.”
Not that buying Chinese internet is a one-way bet. Category leaders face stronger domestic competition than the United States, says Luria. Alibaba lost market share during the quarantine because its third-party delivery network flouted. JD, which controls its own distribution, has proven to be more reliable. Result: JD shares are up 24% in 2020, Alibaba down 8%. The dominance of Tencent on social networks faces a challenge from ByteDance, still private, whose TikTok application has won over young people around the world, while its rivals like
(NTES) threatens his gaming hegemony.
Chinese technology also faces a powerful, albeit indirect, threat to the blurring of relations between Washington and Beijing, which blame each other for the devastation of Covid and prepare for increased rivalry. “There is an incredible macroeconomic risk between China and the United States on 5G, the South China Sea, responsible for the coronavirus,” said Colin Gillis, director of research at Chatham Road Partners, advisor in hedge funds. “It could put bumps in the inventory route.”
The recent revelation by U.S.-listed Chinese Starbucks lookalike, Luckin Coffee, didn’t help matters: its 2019 financial statements included $ 310 million in fictitious revenue. This has sparked a warning from the Securities and Exchange Commission about its “inability to inspect audit working papers in China,” and some worry about the 150 or so Chinese companies traded on US exchanges. “Restrictions on ownership of these assets could be difficult,” said Conrad Saldanha, portfolio manager for emerging market equities at Neuberger Berman.
But that does not hold him back for the moment. “We have favored Tencent for a long time and are looking to buy Alibaba because of its weakness,” he said. “Both are phenomenal companies that are resisting in this environment.”
Corrections and amplifications
Danton Goei is a global portfolio manager at Davis Advisors. An earlier version of this article misspelled her first name.
E-mail: [email protected]