JPMorgan analyst Alex Yao has upgraded the firm’s stance on the China internet sector to “Stage 2,” which is calling for a more balanced investing approach. The prior “Stage 1” rating described the sector as “unattractive” for investing.
Yao is now more positive on Chinese tech stocks and expects “digital entertainment, local service, and ecommerce to be the first batch of outperformers.”
“Significant uncertainties facing the sector should begin to abate on the back of recent regulatory announcements. These include statements after the State Council meeting on 16 March and the Politburo’s meeting on 29 Apr, CSRC and PCAOB meetings from mid-March through 9 April, and the CSRC draft recommendation paper issued 2 April. These announcements came earlier than we expected, moving us to Stage 2 of our framework in two months vs. the 6-12 we forecast in our 14 March note,” Yao said in a client note.
The analyst upgraded a handful of tech stocks to reflect the new sector rating, but specifically outlined these 6 stocks: Meituan (OTC:MPNGY), NetEase (OTC:NETTF), Tencent (HK:0700) (TCEHY (OTC:TCEHY)), Kuaishou (HK:1024), Alibaba (NYSE:BABA), and Pinduoduo (NASDAQ:PDD).
Still, the analyst realizes a risk to earnings given recent COVID lockdowns.
“COVID will impact earnings differently in 2022 relative to 2020 due to 1) logistic and supply chain networks, 2) gaming supply, and 3) consumers’ willingness and ability to spend (page 15). As such, we cut 2022E revenue and earnings by 3%/15% on average for large-cap names under our coverage. We expect significant downside risk to consensus 2Q22 earnings for Meituan, Alibaba, PDD, Baozun (NASDAQ:BZUN), and Baidu (NASDAQ:BIDU), and FY22 downside risk to Alibaba, PDD, Kuaishou, and Tencent. Our FY22 earnings forecasts for large caps are 10% below consensus on average,” Yao concluded.
Both BABA and PDD are double upgraded to Overweight.
By Senad Karaahmetovic