Excerpts from OCBC Investment Research report
| What to focus on? |
| We continue to prefer internet and platform plays, which could be regarded as Chinese consumption proxies, as they benefit from the consumption recovery in the coming quarters. For global and emerging market equity funds looking to narrow their underweight positions in Chinese equities, this sector would be of interest as it accounts for more than one-third of MSCI China Index’s weight. We expect rotation within internet and platform companies to continue until the quarterly results season, where investors would cross check valuations with results and guidance. Also, share buybacks could potentially become a catalyst to watch out for at the upcoming quarterly results announcements. |
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To recap, Alibaba (9988 HK / BABA US) has signalled that it will spend about 50% of free cash flow on buybacks.
Tencent’s (700 HK) management has also indicated that more free cash flow could be used for buybacks.
Among the large caps, Meituan (3690 HK, Fair value HKD252) has been a laggard owing to the near-term technical overhang, which is expected to last till end of March in light of the share distribution by Tencent (700 HK).
Looking beyond the near-term technical overhang and concerns over increasing competition from Douyin’s venture into food delivery service, the expected solid recovery trend, supported by demand recovery and solid execution, could shift the focus back to its strength in fundamentals.
The upcoming 4Q22 results announcement in end-March and management guidance could offer earnings upgrade opportunities.
We maintain our preference for Tencent (700 HK, Fair value HKD480) on the back of a normalisation of the games approval process and a broader economic recovery that could drive average revenue per user (ARPU) growth and its leading position in overseas market expansion.
Overall domestic games revenue is expected to recover to 6-7% this year (after declining by about 7% last year).
| Travel sub-sector |
Among sub-sectors within internet and platform plays, the travel sub-sector has seen profit-taking over the past week after CNY. High frequency data highlighted demand recovery continued after CNY but at a modest pace.
We maintain our preference for Trip.com (9961 HK / TCOM US, Fair value HKD314 / USD40) in light of supportive margin trend and recovery momentum, and we believe improving visibility of growth beyond 2019-level would be one of the positive catalysts.
We recommend accumulating on pull back.
We also prefer China Tourism Group Duty Free Corp Ltd (CTGDF, 1880 HK / 601888 CH, Fair value HKD290 /CNY278).
Despite its 4Q22 results pre-announcement highlighting that the bottom line would come in below consensus estimates, we believe the Hainan government’s robust duty-free sales target, the rebound in airport duty-free business and potentially more favourable downtown duty-free policies would be positive catalysts
to watch out for.
We maintain our preference for the cyclical recovery reopening theme, which primarily focuses on consumption related companies and industries, but we expect rotation to continue as the results season approaches.
We view recent market pull backs could offer opportunities to accumulate for earning recovery later this year. We prefer AIA (1299 HK, Fair value HKD110), Anta (2020 HK, Fair value HKD128.37) and Mengniu (2319 HK, Fair value HKD49.16).
In light of increasing mobility, regulatory guidance aimed at normalisation and a focus of economic development, it sets the stage for markets to focus more on the fundamentals of companies. We believe the market will start to re-engage in structural themes that are aligned with the policy directions and would benefit
from policy tailwinds.
The upcoming NPC in March would shed more light as the new leadership and economic teams will reveal plans to reset the economy for the next five years. We believe structural themes, such as, “Common Prosperity” (e.g. consumers), decarbonisation (e.g. renewables, NEV and its supply chain), industrial automation and technology upgrades will stay as key policy priorities in the medium- and longer-
term.
In the NEV supply chain, we prefer the upstream plays given rising competition among NEV makers. We have added CATL (300750 CH, Fair value CNY517) to the focus list as EV battery offers a more stable market structure and CATL has a dominant market share with cost competitive advantage.
The stock is trading at 26x 2023 P/E vs. 79x for LG Energy Solution (373220 KS) and 31x for its global peers.
We have removed the following stocks from the focus list given their share prices have outperformed, leaving relatively limited upside potential in the near-term: China Telecom (728 HK, Fair value HKD3.96), Pinduoduo (PDD US, Fair value USD90.0), Samsonite (1910 HK, Fair value HKD23.47), Shenzhou International (2313 HK, Fair value HKD96.2).
