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Market Trends

Chinese Tech Stocks Soar: Booming Profits and Loosened Regulations Drive Investor Confidence

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Benjamin Hughes

May 21, 2024 - 02:04 am

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Emerging Optimism: Chinese Tech Stocks Gain Appeal on Rising Profits and Regulatory Relief

Amid an earnings season that has seen improved profitability, increased buybacks, and boosted dividends, the allure of Chinese technology stocks is on the rise, captivating the attention of more investors. The Hang Seng Tech Index, which encompasses leading tech firms in China, has observed a notable uptick in its forward-earnings estimates, now at a triumphant three-year zenith. This financial uplift is attributed to companies like Tencent Holdings Ltd., whose earnings have surpassed expectations. The positive momentum arrives following a period of relaxation in the stringent regulatory measures previously put in place by Beijing, suggesting a potential resurgence from the sector's lows.

Investor faith appears to be gradually restoring in this once beleaguered sector, underscored by a 38% surge in the Hang Seng Tech Index since the year's dawn. Despite this impressive leap, China’s benchmark tech index presents a value proposition, trading at a multiple of less than 17 times forward earnings—a figure that seems modest when juxtaposed with its five-year historical mean of 26 times, and on par with the valuation of the Nasdaq 100 Index.

"Chinese tech stocks still look attractively valued in my opinion, and I think we are far from reaching the top," expressed Jian Shi Cortesi, a seasoned fund manager at GAM Investment Management. The sentiment is fostered by many Chinese tech companies' earnings growth in recent quarters, which is finally receiving due recognition from investors.

Revival Not Without its Challenges

While optimism prevails, it's important to recall the past hurdles that have tempered enthusiasm. The index remains over 60% lower than its zenith in 2021—when valuations plummeted to their lowest in years, and concerns about Beijing's stringent policies and the nation's economic deceleration deterred investment. However, the landscape appears to be shifting, with policymakers extending their support to the economy and placing their bets on tech companies to champion innovation.

Tencent, a titan in the Chinese tech ecosystem, is on its way to record its longest duration of monthly share price gains since the banner year of 2018. The company recently unveiled a staggering 62% ascendancy in quarterly profit, thanks largely to a doubling of ad sales via its TikTok-like video platform. Post-result, the financial nous of analysts has led to an approximately 9% elevation in Tencent's average price target, with expectations of a gaming business renaissance propelling the company’s shares even further in the imminent quarter.

Other heavyweights within the industry, such as JD.com Inc. and Baidu Inc., likewise reported earnings that did not merely meet but exceeded forecasts. Cortesi of GAM Investment attributes this robust performance to improved cost management, tempered competitive forces, and disciplined investment approaches. Rising shareholder returns were also cited as a significant factor that bodes well for the health of these stocks.

Rewards to the Shareholders

The performance enhancement has not gone unnoticed by shareholders, who stand to gain from this uptick in earnings. Projections from Bloomberg Intelligence highlight that buybacks by Tencent, Alibaba Group Holding Ltd., JD.com, Meituan, and Baidu could escalate to an all-time apex of $28 billion in 2024, ascending from the $20 billion benchmarks of the previous year. Dividend disbursements are likewise anticipated to increase to a collective $10 billion, up from $8.3 billion.

Still, the path forward is not devoid of potential obstacles. Challenges such as cautious consumer sentiment persist, and the influx of emerging competitors is an ongoing concern, as evidenced by the less-than-stellar numbers from Alibaba. Yet, there are indications that the market's previous gloom is diminishing, as seen in the drop in Alibaba’s three-month volatility skew to levels close to their lowest since 2021, a sign that points to a reduced craving for downside protection among investors.

Looking for Clues in Consumption Recovery

Upcoming reports from notable e-commerce entity PDD Holdings Inc. and premier gaming company NetEase Inc. are eagerly anticipated for further insights into the recovery of consumer spending. While the Chinese government is expected to continue offering support measures, investors remain vigilant, bearing the memory of previous regulatory crackdowns and the looming trade tensions with the United States and the European Union.

Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management, espoused a sanguine outlook regarding the trajectory of tech stocks. In the face of "geopolitical noises" that tend to cast a shadow over China equities, Bao believes the rally has stamina due to the attractive valuations vis-à-vis their American counterparts, light positioning from international investors, and an environment of improving fundamentals.

Significance of the Hang Seng Tech Index Movement

The emphatic rise in the Hang Seng Tech Index since January reflects a remarkable turnaround for an index that tracks 30 of the most significant technology enterprises listed on the Hong Kong Stock Exchange. The index's increase may serve as a harbinger of a renewed investor confidence in China's technology sector, following a period marked by uncertainty due to strict regulatory interventions by the Chinese government, which reached its height with the reform of the Antitrust Law in 2020 and the subsequent antitrust fines levied on several tech giants.

Furthermore, the Hang Seng Tech Index operates as a thermometer for the tech sector at large, and its movement carries reverberations beyond borders, influencing investor sentiment globally. While these companies are predominantly based in China, their influence and operations are global in scope, thus making the index a pivotal gauge for international technology markets.

In Conclusion

There seem to be burgeoning signs of a potential rebound in the valuation of Chinese technology stocks. This reassessment emerges on the back of several quarters of solid earnings growth, revealing that companies within this sector are regaining their footing after a turbulent phase marked by enhanced regulatory scrutiny.

However, it is pivotal to recognize that the sector is not devoid of risks. Factors such as regulatory environments, both domestic and international trade relations, and consumer sentiment within China will continue to be instrumental in shaping the prospects of these technology powerhouses. The market’s nascent optimism suggests that, provided there are no further regulatory surprises or deterioration in international diplomatic contexts, these tech giants are well-positioned to maintain their recovery trajectory and continue to offer attractive investment opportunities.

For further details on the performance of the Hang Seng Tech Index, visit Bloomberg to gain access to market insights, updated stock valuations, and expert financial analyses.

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