JPMorgan’s China bear turns bullish, finds ‘20 to 25 pc upside’ in nation’s tech stocks

‘Macro indicators which are showing early indication of a stabilisation’ have driven a rally, according to a JPMorgan analyst known for his bearish stance

Tencent

Bloomberg

Published: 10:12am, 20 Jun 2024

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Chinese tech shares have raced ahead of earnings, and investors expect companies to deliver in an improving economy before buying more stock, according to an analyst who once questioned the sector’s investibility.

“We are still looking at roughly 20 per cent to 25 per cent of share price upside,” given improving cost structure and less aggressive competition, said Alex Yao, co-head of Asia TMT research at JPMorgan Chase. Yao had called a bottom for the sector in an April report.

Yao’s change in tone on China’s tech sector underscores how sceptics are returning to the world’s second-biggest stock market after years of underperformance. Bellwethers like Tencent Holdings have led the rebound as Beijing pivoted from a wide regulatory crackdown to focus on policies to bolster the economy.

“The top-down view is that if macro recovers, then the e-commerce names will benefit from the cyclical recovery of consumption,” Yao said in an interview last week. “This time the theme is China macro stabilisation.”

Investors have been closely watching data coming out of China – including consumption growth, inflation and developments in the property market – for clues on the strength of its economic recovery.

“Macro indicators which are showing early indication of a stabilisation” have been the main driver of the sector’s rally year to date, and will be a key factor for future share price trends, he said.

China’s growth remains highly uneven. The country’s housing slump deepened in May and industrial output fell short of forecasts. Still, improving consumption and strong exports offer some encouragement for traders.

Yao surprised the market two years ago when he downgraded 28 firms, including Tencent and Alibaba Group Holding, saying the sector was not investible amid geopolitical and regulatory risks. While he lifted ratings on some of the stocks just two months later, the term “uninvestible” has since become a closely associated catchphrase.

To be sure, any rebound in tech shares may be volatile given that sentiment in Chinese stocks remain weak. Investors are also worried about the potential impact of geopolitical risks and a burgeoning price war in China’s nascent artificial intelligence market. A gauge of Chinese tech shares recently entered a technical correction.

“If the sector is able to grow their earnings at, let’s say, teens or even twenties, over the long run, I think people should reward those corporates for the earnings sustainability,” Yao said.