With the recent developments, value is emerging in the most unlikely places namely the China Technology sector. It is now widely known that China’s government hard-handed approach through regulatory policies have rattled investors’ confidence.
More than half a trillion dollars worth of capitalisation has been lost given the huge outflow of funds with a wait and see attitude. We are not sure if the regulatory discount has been too excessive or this is just the start of a long ordeal. The stroke of a brush by their regulators to turn educational companies into non-profit organisations have eroded the market value by up to 90% for companies like New Oriental. Would Alibaba go back to its IPO price of 80 dollars?
With the two big brothers in China’s market (Tencent and Alibaba) trading at PE of below 20, it certainly seems tempting to dip our feet in. It is anyone’s guess if this will be an optimal move. The crucial question to ask ourselves is if China’s objective is to destroy its crown jewels? I doubt so, therefore my take is that this is a good opportunity to invest in tranches in these 2 well-managed companies, with good returns on capital, but we must have a long term perspective in mind.
Also, the thesis of China replacing the US as the world’s number one economy is not only on the cards but a foregone conclusion with the only uncertainty being when. Therefore, with China’s market trading at a bargain is enticing as returns could be multi-fold with the US market as a benchmark. Stock selection is important where we have to select companies that would likely not be on the regulator’s radar, the impact would be limited or they have a commanding presence.
These are some of the stocks with some short snippets of their merits apart from Tencent and Alibaba, which I think is worth researching if you are looking at capitalising on this sharp fall.
Meituan
The Foodpanda and Deliveroo of China with a foray into the Travel industry and now they are also expanding into group buying. This is one of the super apps played in China and they are generating positive operating cash flow that shows their business model is viable.
Moreover, they are committing 10 billion dollars to invest in autonomous delivery modes (vehicles, drones, etc). This could be a game-changer as they could bypass the labour intensive current business model in turn leading to better profitability. It is better to deal with mechanical issues rather than emotions.
360 Digitech
This would be a fintech play and is in the online lending business. Their main target clientele would be those with a credit card that is not a norm in China. This would aid in lowering their bad debts ratio as they could be able to analyse the credit history before deciding how much credit to offer.
They are on a good growth trajectory and their recent quarterly results show a profit increment of 86% which is commendable given the backdrop of the pandemic. The balance sheet is strong and more importantly, it is trading at a PE of below 5.
Netdragon
Netdragon is in the gaming industry and education tech business. With the likely crackdown on gaming which was described as akin to opium for the young. Not forgetting the directive for educational companies to be non-profit. It certainly seems like a bad investment on first look.
However, I find the education technology business is interesting as they are not only based in China but have a worldwide presence (US, UK, Eygpt, Thailand, Malaysia, etc), they took over Promethean (British Firm) known for the hardware in the form of interactive screens for education. They also control Edmodo (US company) which is known for its software that is deemed as the Facebook of Education.
Trading at a PE of around 7x with net cash of 4 billion RMB, it seems a value growth play as the education arena is turning towards online and being more interactive. However, the cash cow business (Gaming) and where the current huge margins are (Education Tech is still not at their inflexion point), is under huge uncertainty, regulatory wise.
Trip.com
With only one-tenth of China’s population with a passport, the travel industry post covid should have a promising secular uptrend and future. With the acquisition of Skyscanner, they also have a big international presence. Trading at the current price to book ratio of 1, would be a play for the future when travel goes back to normalcy.
Precious Metals
To end off this post, gold and silver are also worth a look at given the current economic outlook, the US market is trading at a high valuation based on historical comparison and with the current tapering talks, it might not be a bad idea to add some defensive instruments.
Moreover, inflationary pressures are still ongoing which would be beneficial for gold and silver. Another positive would be they are currently trading near the lower end of their recent consolidation range.
Disclaimer:
The content here is for informational purposes only and should NOT be taken as legal, business, tax, or investment advice. It does NOT constitute an offer or solicitation to purchase any investment or a recommendation to buy or sell a security. The content is not directed to any investor or potential investor and may not be used to evaluate or make any investment. Do note that this is not financial advice. If you are in doubt as to the action you should take, please consult your stockbroker or financial advisor.
