Alibaba, Tencent and Chinese tech stocks are good values with policy conditions priced in, Lombard Odier says

  • Lombard Odier fund managers see values in beaten-down Chinese tech firms on optimistic outlook on online advertising revenue
  • The Swiss firm’s High Conviction funds in China and Asia count Alibaba and Tencent among their top 10 holdings

A year-long regulatory crackdown on Chinese internet-platform operators has created opportunities for global investors to pick up stocks at the cheapest valuation in years, according to Lombard Odier Investment Managers.

The money manager sees the likes of Alibaba Group Holding, Tencent Holdings and Kuaishou Technology among likely winners as growth in online advertising revenue remains firm despite a slowdown in the world’s second-largest economy.

“Digital media in China is more in demand than anywhere else,” said Odile Lange-Broussy, who is the co-head of Asian and emerging markets equities based in Singapore. “Brands want to establish recognition and you need to advertise online to get to the younger generation. There certainly is a future for online advertising and all the platforms that channel that.”

China had the world’s largest mobile internet population of 873 million users in 2019, representing 23 per cent of such users globally, according to Kuaishou, based on industry data published by iResearch. This is expected to reach 1.1 billion by 2025, boosting the penetration rate to 78.5 per cent from 62.4 per cent.

The mobile advertising market rose to 542 billion yuan (US$85.1 billion) in 2019 from just under 100 billion yuan in 2015, according to iResearch forecast. The market could expand to 1.7 trillion yuan by 2025, it added.

“The online advertising sector has been under a lot of pressure [lately] but in the longer run, this is a very large market,” Lange-Broussy said in an interview with the Post on December 13. “At the moment, a number of companies in that sector have attractive valuations.”

The policy conditions in China are mostly priced in, the money manager said in a report to clients on December 13. Technology stocks have become more resilient, offering investors a chance to be a part of China’s long-term growth story at attractive valuations, it added.

Lange-Broussy shares the role with June Chua, who joined the firm in early June from Harvest Global Investments in Hong Kong. They co-manage about US$2 billion of assets in the firm’s High Conviction funds, part of the more than US$75 billion of assets Lombard managed globally.

Alibaba, the owner of this newspaper, and Tencent each took up 4.1 per cent of its China fund based on the most-recent fund report on September 30 compiled by Bloomberg, while Meituan accounted for 3 per cent. In the Asia fund, Alibaba and Tencent each soaked up 4.2 per cent and 5 per cent of its net assets. The funds have declined by 14.9 per cent and 6.4 per cent respectively this year.

Chua said current valuations of Chinese technology companies have priced in a fair amount of concerns around China’s regulatory tightening moves, which began in November last year when authorities foiled Ant Group’s blockbuster global stock offering in Shanghai and Hong Kong.

A spate of crackdowns in other sectors, notably involving online education providers and recently cybersecurity and data privacy probes, have shaved billions of dollars off Chinese tech stocks traded in Hong Kong and New York.

Those stocks have struggled to shake off geopolitical concerns, making them a potential valuation trap.

The US market regulator has finalised efforts to force Chinese firms to open their books for audit or face expulsion. In recent days, the Biden administration also sanctioned more Chinese firms for alleged human rights abuses in Xinjiang.

“In terms of regulatory risk, we are closer to the end rather than at the beginning,” Chua said in the interview. “It’s the backdrop of why we would be more positive on Chinese equities.”

China’s long-term policy architecture and market forces for enduring growth persist, even in the embattled tech sector, Lombard Odier said in the December 13 report. This overarching policy direction will foster greater transparency and competition, and modernise China’s regulatory oversight in line with Western economy standards.

“But this view is not reflected by current valuations in China tech stocks – presenting opportunities for forward-thinking investors,” the money manager said. “Investors should stay focused on the big picture and not allow short-term volatility obscure long-term opportunities.”

Author: Cheryl Heng, SCMP

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