China technology stocks outlook improves year after $1.5trn rout

Bloomberg

A yearlong slide in Chinese technology stocks that wiped out $1.5 trillion in market value may finally be ending as investors look beyond regulatory hurdles to focus on valuations.
Just 12 months ago, a rally that pushed Hong Kong’s Hang Seng Tech Index to the highest level since a July 2020 inception started to unravel as traders raced to the exit over sky-high valuations and Beijing’s sweeping crackdown on private enterprise.
There are signs indicating that the rout may be nearing an end. Earnings estimates for the sector have been revised up 12% from a September bottom, while analyst target prices are implying robust returns. What’s more, the Hang Seng Tech Index is trading near its cheapest-ever valuation and outperforming offshore peers.
China’s growth stocks “still have very strong fundamentals,” Catherine Yeung, an
investment director at Fidelity International, said on Bloomberg Television. “They might change their business models accordingly given the regulatory reports we have seen. But valuation wise, they are looking very attractive.”
The Hang Seng Tech Index’s forward price-to-earnings ratio is trading near a record low, and is 21% below the historical average, according to Bloomberg data. Other valuation multiples, including price-to-sales and price-to-free cash flow ratios, are also hovering at historically low levels, suggesting buying opportunity.
The gauge has outperformed both the ChiNext Index, its smaller mainland peer, as well as the Nasdaq 100 since the start of 2022. Part of the divergence with the US comes as investors dump rate-sensitive technology shares ahead of the Federal Reserve’s looming tightening. China’s ChiNext gauge of small caps, on the other hand, is struggling with cooling enthusiasm over green stocks following a double-digit rally last year.
Investors have grappled with uncertainty over the extent of Beijing’s clampdown on Chinese tech firms. But confidence over profitability has been improving in recent months, as seen by a 12% rise in the aggregate forward earnings estimate for the Hang Seng Tech Index, almost triple the pace for
Nasdaq 100 stocks.
Bargain hunters have emerged. Half of the most popular ETFs that track Hong Kong-listed stocks have been ones that mirror the performance of tech shares listed in the city. The ChinaAMC Hengsheng Internet Science and Technology Industry ETF and ChinaAMC Hang Seng TECH ETF have drawn in nearly $840 million this year, Bloomberg data shows.
China tech bears are fading, with short-selling interest on video streaming giant Kuaishou Technology and delivery giant Meituan waning. Bets against Kuaishou – one of the most shorted stocks in Hong Kong previously and the biggest drag on the index in the past year – has fallen to about 4% of free float compared with 20% in mid-2021.