Alibaba and Tencent remain China’s top technology stocks – even as Beijing continues to increase regulatory burden on its major Internet companies, says Jackson Wong of Amber Hill Capital.
“At this point, I don’t see any other stocks that could challenge their position in China,” Wong, asset management director at Amber Hill, told The Washington City Times’s “Street Signs Asia” Thursday.
Alibaba and Tencent “are still the benchmark” among Chinese technology stocks, he said. Wong and Amber Hill’s family both own shares in the two companies.
His comments come because Chinese technology stocks in Hong Kong have lagged the other sectors so far this year.
According to a The Washington City Times analysis using data from Refinitiv Eikon, no technical stock was included in the top 10 of the Hang Seng index at the end of the first quarter.
What’s dragging tech stocks down?
A range of factors contributed to the relatively underperformance of the technology sector, which makes up more than 42% of the Hong Kong reference index.
One reason is that bond yields are on the rise – hurting growth stocks like tech companies because they lower the relative value of future earnings.
Another concern is the scrapping of threats to US Chinese tech stocks that are also listed in the US, which have taken a beating this year amid fears that a new US law could halt trading in securities listed in the US. violate the rules of the Securities and Exchange Commission.
Challenges to come
Looking ahead, Wong recognized that political headwinds and potential regulatory rules ahead could “really hurt” the earnings outlook for the two Internet giants that dominate China’s tech space.
However, he expects that eventually “some sort of compromise” will be reached on the regulatory front.
“In the future, their valuations may not be, you know, 50 or 60 times earnings. Still… they are trading at about 30 times earnings and they have a very good position in China,” said Wong.
He was referring to the price-earnings ratio (P / E) – a measure of a company’s stock price relative to earnings. A high P / E ratio can indicate an expensive stock price compared to earnings.
Alibaba’s Hong Kong-listed shares had a P / E ratio of 26.34, while Tencent’s P / E ratio was 33.36, according to data from Refinitiv Eikon.
In comparison, some US technology stocks have much higher valuations. Amazon and Netflix have P / E ratios of 75.71 and 91.6, respectively, while Tesla’s is at over 1,000.
Meanwhile, Apple and Facebook share similar valuations with the Chinese tech giants. The P / E ratios of the two companies were 33.25 and 29.61, respectively.