Chinese tech stocks have rallied over the past six weeks. They may push even higher despite resurgent U.S.-China political tension.
Shares in social-networking provider Tencent Holdings (ticker: 700.Hong Kong), online merchant JD.com (JD), and food deliverer Meituan Dianping (3690.Hong Kong) have surged more than 20% from their mid-March nadir, into positive territory year to date.
E-commerce giant Alibaba Group Holding (BABA) has lagged behind due to logistical snafus while China was locked down by Covid-19. That could be a buying opportunity. “There are not that many great companies globally where tailwinds are so strong,” says Danton Goei, a global portfolio manager at Davis Advisors, referring to the Chinese internet sector broadly. “They’re a great long-term investment.”
China tech is benefiting from the same accelerated rush online that has vaulted shares in U.S. counterparts like Amazon.com (AMZN) and Netflix (NFLX). They are also cushioned by diversity. Advertising might be slumping on Tencent’s WeChat network, but its videogaming franchise surged during quarantines. Alibaba can offset slumping consumer spending with rising demand for its cloud services.
The Chinese firms’ valuations also look relatively attractive. Price/earnings ratios are an imperfect yardstick for fast-growing disrupters. But on the simplest measure, market capitalization, Tencent is 20% smaller than U.S. counterpart Facebook (FB), and Alibaba is worth less than half of Amazon, Goei says.
China’s economy is springing back to life after lockdown, while the U.S. and Europe struggle with trade-offs between safety and getting back to business. “The tables have really turned for Chinese versus American tech stocks,” says Gil Luria, director of research at D.A. Davidson. “China is the only big country that is really past the peak of the pandemic.”
Not that buying Chinese internet is a one-way bet. Category leaders face stiffer domestic competition than in the U.S., Luria argues. Alibaba lost market share during the quarantine because its third-party delivery network sputtered. JD, which controls its own distribution, proved more reliable. Result: JD shares are up 24% in 2020, Alibaba is down 8%. Tencent’s social-media dominance faces a challenge from still-private ByteDance, whose TikTok app has swept global youth by storm, while rivals like NetEase (NTES) threaten its gaming hegemony.
Chinese tech also faces a potent, if indirect, external threat in darkening relations between Washington and Beijing, which are blaming each other for the Covid devastation and preparing for a sharpened rivalry. “There’s incredible macro risk between China and the U.S. on 5G, the South China Sea, blame for coronavirus,” says Colin Gillis, director of research at hedge fund advisor Chatham Road Partners. “That could put bumps in the road for stocks.”
Not helping matters is the recent revelation by U.S.-listed Chinese Starbucks lookalike Luckin Coffee that its 2019 financials included $310 million in fictitious revenue. That prompted a Securities and Exchange Commission warning on its “inability to inspect audit work papers in China,” and some unease about the 150-some Chinese companies traded on U.S. exchanges. “Restrictions on owning these assets could be challenging,” says Conrad Saldanha, portfolio manager for emerging market equities at Neuberger Berman.
But that’s not keeping him away for now. “We have favored Tencent for a long time and are looking to buy Alibaba on weakness,” he says. “Both are phenomenal businesses proving resilient in this environment.”
Corrections & Amplifications
Danton Goei is a global portfolio manager at Davis Advisors. An earlier version of this article incorrectly spelled his first name.