Chinese tech stocks have soared past earnings expectations, with investors hoping to see companies perform better amid an economic recovery before buying more shares, according to analysts who previously questioned the sector's investibility.
“We still see about 20% to 25% upside for shares” given improving cost structures and increased competition, said Alex Yao, co-head of TMT research in Asia at JPMorgan Chase & Co. In an April report, Yao said he thought the sector had bottomed out.
Mr. Yao's shift in tone on China's tech sector highlights the return of skeptics to the world's second-largest stock market after years of slumping. Bellwether stocks such as Tencent Holdings Ltd. have led a recovery as the Chinese government shifts its focus from broad regulatory tightening to policies to strengthen the economy.
“From a top-down perspective, once the macro economy recovers, e-commerce companies will benefit from a cyclical recovery in consumption,” Yao said in an interview last week. “The theme this time is China's macroeconomic stabilization.”
Investors are closely monitoring data from China, including consumption growth, inflation and property market trends, for clues about the strength of the country's economic recovery.
He said “macro indicators showing signs of stabilizing” have been the main driver of the sector's gains so far this year and will be a key factor in how shares move going forward.
China's growth remains very uneven. The country's housing market slump deepened in May, and industrial production fell short of expectations. Still, improving consumption and strong exports provide some encouragement for investors. Yao surprised markets two years ago by downgrading 28 companies, including Tencent and Alibaba Group Holding, saying the sector was unsuitable for investment due to geopolitical and regulatory risks. Just two months later, he upgraded some stocks, but “unsuitable for investment” has become a catchphrase that has become closely associated with the term ever since. To be sure, the rally in tech stocks could be choppy, given that sentiment for China stocks remains weak. Investors are also concerned about the potential impact of geopolitical risks and a sharp price war in China's emerging artificial intelligence market. A gauge of China's tech stocks recently entered a technical correction.
“If this industry can grow revenue at 10 percent or 20 percent over the long term, I think people should reward companies for the sustainability of that revenue,” Yao said.
