Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 73% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money

73% of retail investor accounts lose money when spread betting and/or trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.

  • Updates
  • china tech

Brokerages say buy the dip in China tech shares

Investors walked away from China’s big tech stocks in 2021, but some analysts and market experts believe the industry is now undervalued.

One of the least popular Hong Kong-listed stocks among mainland China investors in 2021 was Tencent [HK:0700], according to data compiled by Bloomberg. In the second half of the year, investors sold a net RMB19.1bn, which contributed to Hong Kong-listed shares falling 27.6% in the past 52 weeks to the close on 17 January.

The Alibaba [BABA] share price has taken a pummelling too, down 45% in the last year, as the Chinese government continues its regulatory crackdown. Investors converting their ADR shares to ordinary Hong Kong shares has contributed to the sell-off. 

Many China-focused funds that hold Hong Kong-listed stocks saw their net asset value fall significantly last year.

However, there are signs of optimism. A 4 January SEC filing shows Charlie Munger’s Daily Journal [DJCO] snapped up 602,060 Alibaba ADR shares in the quarter ended 31 December. This is up from 302,060 ADRs reported at the end of Q3, during which the firm bought 136,740 shares. It didn’t add to any of its other positions in Q4. This gives some indication that Munger views Alibaba as an attractive investment.

In the early part of the trading week commencing 10 January, Alibaba, Tencent, and JD.com [JD] enjoyed a bounce. Bo Pei, an analyst at Tiger Securities, told Barron’s this is partly because Chinese companies look undervalued compared to US counterparts like Amazon [AMZN].

 

Time to buy the dip?

The major concern hanging over China’s big tech in the past year has been the threat of companies being delisted from US exchanges.

“Towards the end of the year, investors also had to grapple with the external shock of China ADRs potentially needing to delist from the US,” Eric Lin, head of research at UBS, told Institutional Investor. Potential sell-off pressures and the impact on liquidity and valuation were still unclear to investors, Lin added.

Fears may have been alleviated somewhat by recent news that the Chinese government won’t be banning the variable interest entity structure, which has allowed the likes of Alibaba and Tencent to float in the US. The regulatory picture could be looking slightly rosier as a result.

Goldman Sachs strategists led by Kinger Lau told Barron’s that the worst of regulation tightening in terms of its intensity is behind us. “The risks seem well priced per our indicators.” 

On the assumption that market jitters have been soothed — at least in the near-term — now could be an opportunity to start adding shares to portfolios.

Speaking to the Financial Times, Dickie Wong, head of research at Hong Kong-based Kingston Securities, argued that institutional investors and traders in mainland China should consider buying into Alibaba and Tencent. “This is the time for [Chinese] tech to rebound — at least for those positioned at the top of the market,” said Wong.

“This is the time for [Chinese] tech to rebound — at least for those positioned at the top of the market” - Kingston Securities Head of Research Dickie Wong, per Fincancial Times

 

 

Attractive opportunity

MarketBeat data shows that Wall Street is generally bullish on Alibaba. Still, with caveats, Citigroup analyst Alicia Yap recently cut her price target for the stock from $234 to $216, albeit still an upside of 64% from the 14 January closing price. Yap cited “softening consumption demand” and slowing retail sales in a note to clients seen by Barron’s.

Yap added that “we are optimistic on the potential enhancement” the company’s restructuring of the back-end operations of its Taobao and Tmall platforms “could bring when the market recovers”.

Alibaba, in particular, is looking relatively cheap given that it’s China’s ecommerce market leader, said Danny Law, an analyst at Guotai Junan Securities. However, investors still have long-term policy risks to consider, while future economic downturns could impact big tech operations and growth outlooks, Law told Barron’s.

Karim Chedid, head of investment strategy for iShares in the EMEA region, noted the firm was “modestly positive on Chinese equities, reported Financial Times. We think the equity risk premium compensates for the risk. In other words, they are cheap … Now might be a good time to allocate on a long-term view.”

Disclaimer Past performance is not a reliable indicator of future results.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.

The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.

CMC Markets does not endorse or offer opinion on the trading strategies used by the author. Their trading strategies do not guarantee any return and CMC Markets shall not be held responsible for any loss that you may incur, either directly or indirectly, arising from any investment based on any information contained herein.

*Tax treatment depends on individual circumstances and can change or may differ in a jurisdiction other than the UK.

Continue reading for FREE

  • Includes free newsletter updates, unsubscribe anytime. Privacy policy

Latest articles