(Bloomberg) -- After a rout that rivaled the burst of the US dot-com bubble, things are looking better for Chinese tech stocks in 2023 as regulatory headwinds ease and earnings prospects improve.
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The sector, once dubbed “uninvestable”, has regained favor among Wall Street analysts and investors as China’s reopening spurs hopes for an economic recovery and a long-standing auditing spat with the US looks set to be resolved. The growing bullish chorus includes strategists at Morgan Stanley, UBS Group AG and JPMorgan Chase & Co.
The Hang Seng Tech Index has surged about 47% since an October trough, with shares of Bilibili Inc. and Alibaba Health Information Technology Ltd. more than doubling during the period. The Nasdaq Golden Dragon Index — a gauge of the sector’s American Depositary Receipts — has rallied even more as delisting risks eased.
“Investor focus could return to fundamentals with the regulatory overhang gradually removed,” Mark Haefele, chief investment officer for UBS Global Wealth Management, wrote in a note this week. “China’s internet platform names are key beneficiaries of the country’s move toward an eventual reopening. We see further upside for the sector.”
Authorities’ stance has also shifted to become more supportive after the years-long crackdown on some of the biggest tech giants ended a period of largely unfettered expansion.
The forward earnings estimate for e-commerce firm Alibaba Group Holding Ltd. has increased 21% from a May low, while estimates for mobile gaming giant Tencent Holdings Ltd. has recovered around 8% since August.
“For a lot of the Internet companies, what we are seeing is that they have been very early in cutting costs, so their cash flow does look better,” Wendy Liu, chief Asia and China equity strategist at JPMorgan said in an interview earlier this month. “At the same time, the top line is also benefiting to some degree from reopening.”
In the year ahead, investors will be seeking further signs that the crackdown is done and dusted. A key indicator would be the revival of Ant Group Co.’s initial public offering. The sudden scuttling of that debut in November 2020 largely marked the beginning of China’s regulatory squeeze that at one point wiped out more than $2 trillion from the sector’s valuation.
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Morgan Stanley, which upgraded Chinese stocks to overweight in early December, expects consumer and Internet platform companies to lead the market’s return-on-equity recovery.
The view is based on a more favorable backdrop of macro recovery, a wrap-up of the regulatory reset, and “diligent self-help efforts on cost-cutting and shareholder return enhancement,” Morgan Stanley strategists led by Laura Wang wrote in a note early December.
Take JD.com. The e-commerce company is slashing salaries for about 2,000 managers by 10% to 20%, joining a wave of job and cost reductions worldwide by big tech.
Yet even with the recent rally, the Hang Seng Tech gauge remains more than 60% below its February 2021 peak. President Xi Jinping’s “common prosperity” agenda — the cornerstone of the campaign that includes curbing the influence of powerful tech firms — also continues to weigh with many scaling back any growth plans.
“There’s a cautiously positive outlook I would say for next year,” said Mabrouk Chetouane, global head of market strategy at Natixis Investment Managers. “The underlying message from the Chinese authority is that these tech companies are allowed to make money, but are not allowed to aggressively make money.”
(Updates prices as of Friday close.)
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