Investors may still be nervous about Chinese stocks despite the massive decline that has made them attractive, but portfolio manager Sid Choraria assured that Alibaba’s tech titanium is not a “value trap “.
To classify Alibaba as such, investors have to believe that the e-commerce giant’s growth is in the single digits, SC Asia’s Choraria said.
Trapped value is a stock that looks cheap due to low valuation measured by metrics such as price-earnings ratios, which compare the current price of the stock to the company’s price. revenues per share. But the low prices of these stocks can be “traps” for investors if the company is plagued by financial instability or sluggish growth.
Choraria said Alibaba’s growth is healthy, in double numbers for its e-commerce and cloud computing businesses.
“I mean, the cloud computing division is … an $ 11 billion revenue business that I think will be $ 25 billion in three years,” he told “Street Signs Asia” from CNBC in a recent interview. “Digitalization is not disappearing in China – and it is an important part of development.»
“If Alibaba makes that kind of money [making], it is not value trap at these levels. Now, if … just single digits, a value trap will appear, ”he said.
He said Alibaba is one of “less than 10 companies in the world” that generates $ 15 billion in free cash flow, the money a company has after recouping costs and operating costs. in capital.
And for growth to fall sharply from recent levels, Choraria said the economy needs to slow down drastically.
“As a fund manager, I bet on Alibaba,” he said. “I like Alibaba’s chances for the next 5-10 years”, but mentioned that he had “no idea in the short term”.
Chinese tech stocks have fallen in the past year following China’s regulatory crackdown as well as threatening delisting risks for Chinese stocks in the United States.
The Hang Seng Technology Index is about 40% since last year. Alibaba shares listed in Hong Kong and the United States fell nearly 49% in the same period.
Appreciations have “become too compelling” and that’s why Chinese stocks significantly outperformed the Nasdaq this year, Choraria said. He added that “we are also, potentially, close to the end of significant regulatory action” with the Chinese tech giants.
Over the past three months, the KraneShares CSI China Internet ETF has risen approximately 43%, while the Nasdaq has declined approximately 14%.
Some investment banks have also called on investors to return to Chinese stocks. Goldman recently named the stocks it says now have attractive valuations.
China has begun to reopen some cities as the worst of the recent Covid wave subsided, and the government is increasing financial investments.
In a recent note on Chinese stocks, Morgan Stanley said investors should “start adding exposure to growth in the final stages of [the] bear market. He warned, however, that investors should monitor lingering uncertainties “before they become explicitly bullish” on Chinese stocks.
Some risks include the pressure on the real estate bond market that has plagued China as companies struggle to meet repayment deadlines, as well as the uncertainties surrounding the audit dispute. between the United States and China. Chinese companies are likely to be delisted from the U.S. stock exchange if U.S. regulators fail to review company audits for three consecutive years. The two countries discussed a potential agreement to prevent radiation.