(Bloomberg) — Cheap valuations in Chinese tech stocks are becoming more attractive to more investors after an earnings season with stronger earnings, share buybacks and higher dividends.
Analysts raised their future earnings forecasts for the Hang Seng Tech Index to the highest level in three years after companies such as Tencent Holdings achieved better-than-expected profits. The results, released after the Chinese government eased a years-long regulatory crackdown, suggest that stocks for Chinese tech companies may have hit rock bottom.
Some investors have already returned to hard-hit sectors, with the Hang Seng Tech Index up 38% since the end of January. Even after that rally, the index tracking China's biggest tech companies still trades at less than 17 times expected earnings, compared with a historical average of 26 times over the past five years. The NASDAQ 100 is also up 26 times.
“In my opinion, the value of Chinese tech stocks remains attractive and is far from the all-time high,” said Jiang Xi Cortesi, fund manager at GAM Investment Management. “Many Chinese tech companies have grown their earnings in the past few quarters, and investors are finally starting to take notice.”
The index remains more than 60% off its 2021 peak. The company's plunge has pushed its valuation to multi-year lows, but concerns about Chinese government policy and slowing economic growth have long kept investors away. In recent months, policymakers have increasingly stepped up support for the economy, saying technology companies would help boost innovation.
Tencent has enjoyed the longest monthly share price increase since 2018. Last week, the company reported a 62% jump in quarterly profit as ad sales through its TikTok-style video service doubled. Analysts have raised their average price target by about 9% since the company's earnings announcement, predicting that an improvement in the gaming business this quarter will lead to a rise in the stock price.
Rival e-commerce operator JD.com Inc. and internet search giant Baidu Inc. also posted better-than-expected profits. GAM Investment's Cortesi cited improved cost control, “more rational competition” and investment discipline as reasons for the strong performance, adding that higher shareholder returns were also positive for the stock.
Shareholders are benefiting from improved profits. Share buybacks by Tencent, Alibaba Group Holding, Jingtocom, Meituan and Baidu could reach a record $28 billion in 2024, up from less than $20 billion in 2023, according to Bloomberg Intelligence. There is sex. Dividends are expected to rise from $8.3 billion to a total of $10 billion, according to BI estimates.
Competition from wary Chinese consumers and new entrants remains a challenge for tech companies, as evidenced by Alibaba's disappointing numbers. However, there are signs that excessive pessimism is waning, with Alibaba's three-month volatility skew falling to near its lowest level since 2021, indicating that investor demand for downside protection is diminishing. .
Results later this week from e-commerce operator PDD Holdings and gaming giant NetEase will provide further insight into the recovery in consumption. Beijing may provide further stimulus with support measures, but investors remain cautious given the tightening of regulations and recent trade tensions with the United States and the European Union.
Despite the “geopolitical noise” weighing on Chinese stocks, tech stocks have further upside, said Shadong Bao, a fund manager at Edmond de Rothschild Asset Management. “Given the attractive valuations of tech stocks relative to U.S. tech stocks, light positioning by global investors, and improving fundamentals, we think the rally could still continue.”
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