The lone bear on Alibaba sees ‘no point catching a falling knife’ as tech investors not rewarded for embracing China risk

• Members of the Hang Seng Tech and Nasdaq Golden Dragon China indices lost US$163 billion in market value last week
• Analysts at Citigroup, Morgan Stanley, CLSA, Mizuho and others have lowered their price targets again after earnings miss, weaker guidance

The only stock bear on Alibaba Group Holding said investors are not being rewarded for embracing China risk while the market struggles to price risk premium in tech stocks amid an unpredictable regulatory environment.

Manuel Muhl at Frankfurt-based DZ Bank trimmed his price target for the American depositary shares last week to US$130 from US$135 on November 18, after the e-commerce group last week reported an 87 per cent slump in profit in its second-quarterly results. He had lowered the target to US$135 on October 10.

He downgraded Alibaba to a sell in late July with a price target of US$196, making him the lone bear globally among 61 analysts who cover the stock. Analysts at other brokerages including Citigroup, CLSA, Morgan Stanley and Mizuho have also slashed their price targets yet again following the earnings shock last week.

The current 12-month price-target for Alibaba stands at US$215.24, according to analysts tracked by Bloomberg. The consensus has been slashed by 21 per cent since late August. DZ Bank has the most bearish target while Macquarie is at the opposite end with a target of US$339.

“We are currently witnessing a ‘price discovery’ process and so far we have still not found the adequate risk-premium for the sector,” Muhl said in an interview late on Friday. “And again, why would you embrace China risk right now, when it’s not even rewarded?”

Alibaba, based in the city of Hangzhou in eastern Zhejiang province, is the owner of this newspaper. Alibaba’s ADRs slumped 14 per cent in New York last week, the most in three months. Its shares sank 16 per cent in Hong Kong, the worst week on record. Alibaba fell 1.6 per cent to HK$137.10 in Hong Kong on Monday.

The earnings shock contributed to a US$163 billion erosion in market value last week among members of the Hang Seng Tech Index and the Nasdaq Golden Dragon China Index, underscoring the fragile rebound in the sector. Investors were chasing “historic buying opportunities”, Muhl added, some betting on an imminent end to crackdowns only to post one of their worst losses on record last quarter.

Both indices are trading more than 21 per cent below their levels from early November last year, when Chinese regulators slammed the brakes on Ant Group’s stock offering.

Morningstar analyst Chelsey Tam slashed her fair-value estimate to US$188 from US$284 (HK$182 from HK$275 for Hong Kong stock) on November 19. The stock is undervalued but competition is chipping away at its advantages.

“We think it is unlikely the stock will re-rate until Alibaba demonstrates that its investments have generated industry-leading user scale, user stickiness, or a monetisation level that will serve as strong entry barriers to deter competitors,” Tam wrote in a report. “At present, we are not convinced that Alibaba will be the final winner in this war.”

Alibaba’s second-quarter results were preceded by weak report cards by Chinese tech peers including Tencent Holdings, whose earnings grew at the slowest in two years last quarter. Others like video-sharing platform operator Bilibili and search-engine operator Baidu recorded steep losses.

“What happened is not surprising. There is a very unfavourable mix of ad-revenue weakness, regulation, a significant uptick in costs, increasing competition and in turn increasing investments that has significantly impacted operating margins across the board,” Muhl said. “Overall the whole earnings season was quite a letdown and thus, we find it hard to see how sentiment could improve from there.”

Poor tech earnings is a reflection of slowdown in the economy, with growth fast losing its momentum over the past two quarters. Consumer sentiment has ebbed amid lacklustre retail spending, with liquidity issues afflicting the nation’s property developers.

Managements have downplayed the impact of regulation in earnings calls but it’s quite clear that there is a very distinct correlation. Upticks in corporate investments and a rising cost base will pressure margins and cash flows well into the first half of 2022, Muhl added.

“From a top down perspective, the risk-reward profile is still not very favourable for the [tech] sector,” Muhl said. “For someone who can freely allocate across sectors and countries, we really do not see much of a point in catching a falling knife right now.”

Source: SCMP