CITIC Securities released a research report saying that the current external environment facing Hengke's leading technology internet company has clearly improved marginally, business performance has bottomed out and rebounded, and the valuation level is still at a historically low level. With rising valuation preferences and a positive trend in liquidity expectations, the implementation of performance fixes and valuation increases brought about by new businesses are expected to provide further upward catalysts. The bank recommended keeping an eye on the Hang Seng Technology Index and leading technology internet companies with undervalued values, stable competitive advantage, obvious performance improvement trends, and steady cash flow.
The views of CITIC Securities are as follows:
The Hang Seng Tech Index performance is still low, and market confidence has yet to recover.
The Hang Seng Technology Index peaked in February 2021, then continued to decline due to trade disputes between China and the US and continued outflows of allocated capital. On a long-term basis, since 2017, the Hang Seng Technology Index has accumulated a slight increase of 2.6%, while the Nasdaq index rose 178.9% during the same period. Looking at the short term, since 2023, the Hang Seng Technology Index has a cumulative decline of 16.6%. During the same period, the Golden Dragon China Index has decreased by 8.4%, and the NASDAQ index has accumulated a cumulative increase of 55.3%. Despite a slight rebound in February 2024, the Hang Seng Tech Index is still at a low point overall. Currently, the absolute valuation value of the Hang Seng Technology Index is at an all-time low compared to the US stock valuation discount level. The Hang Seng Technology Index currently has a PE-TTM value of 21.10, which is at a low of 10.4% percentile since July 2020. The current PE-TTM value of the NASDAQ index is 41.87, and Hengke PE is only 0.51 times that of the NASDAQ index. This level is also low at the 10.4% percentile.
Hengke's leading company's performance rebounded in 2023, and expectations stabilized.
Unlike Hengke's weak valuation performance, the bank found that the performance of leading technology companies bottomed out in 2023 and rebounded. The bank selected Meituan, Xiaomi, JD, Alibaba, Tencent, Kuaishou, NetEase, and Baidu as representatives of Hengke's leading companies, and their performance bottomed out and rebounded. In 2023, the eight companies' combined revenue increased by 7.4%. In terms of expectations, the market's consistent 2024 revenue forecast for Hengke's leading company experienced a continuous decline from January 2022 to the end of 2023, with a cumulative decline of 24.2%. However, in the last three quarters, the market's 2024 revenue forecast for Hengke's leading company remained relatively stable, and there was a slight rebound in April. The bank believes that the market's previous revenue expectations for Hengke's leading companies have fully reflected market pessimism, and improvements in performance and expectations are expected to catalyze the rise in stock prices. Operating conditions have improved and optimized the quality of cash flow. In 2023, the operating cash flow quality (operating cash flow/net profit) of the eight leading companies of Hengke reached 198%, the highest point in the past five years; the operating cash flow quality of the top seven US stock companies in 2023 was 139%, lower than that of Hengke's leading companies.
Vigorous buybacks may offset the impact of allocative holdings reduction by major foreign shareholders.
Adequate cash flow provides favorable support for large repurchases. As of April 9, 2024, Hengke's leading companies had a total repurchase amount of HK$185.334 billion over the past year. Looking ahead, Tencent's annual report shows that the company's repurchase scale will at least double in 2024, from HK$49 billion in 2023 to over HK$100 billion in 2024. Ali's FY2023Q4 financial report revealed that the company added a repurchase plan of 25 billion US dollars, bringing the total unimplemented repurchase balance to US$35.3 billion, which is expected to be completed by March 2027.
For some companies with a high foreign shareholding ratio, large repurchases can be a powerful hedge against the outflow of major foreign shareholders. Take Tencent Holdings as an example. Naspers Limited, the majority shareholder of South Africa, reduced its holdings on a large scale in March 2018 and April 2021, respectively. The company has repurchased a total of 206 million shares since 2023, accounting for 2.1% of the company's total share capital. The bank estimates that the repurchase amount has reached 59.273 billion yuan, which exceeds the number of shares that South Africa's majority shareholders have reduced their holdings in a single time. Naspers' shareholding ratio has also decreased from 31.17% in early 2018 to 24.99% now. Considering the decline in the share of foreign shareholders' shares, the bank believes that Hengke's leading company's repurchase intentions can hedge against the negative impact of foreign shareholders' holdings reduction on stock prices.
Investment Strategy:
According to the bank's judgment, the Hong Kong Stock Technology Internet Company is expected to usher in a valuation repair. Currently, Hang Seng Technology's Internet sector continues to be undervalued, which fully reflects the pessimistic expectations of global investors. At the valuation level, the absolute PE value of the Hang Seng Technology Index and its discount level compared to the NASDAQ valuation are at a low of 10.4%. In terms of performance, the revenue and profit growth rate of Hengke's leading companies bottomed out, and the ratio of operating cash flow to net profit continued to improve. The cash flow situation was better than that of similar US stock companies. At the same time, the scale of repurchases of Hengke's leading companies has increased significantly. Technology Internet companies represented by Ali and Tencent have all initiated large-scale repurchases over the past two years, reflecting the positive attitude of industrial capital. The bank continues to be optimistic about the long-term competitiveness of Chinese technology companies and their ability to continue to iterate in the face of new technology trends such as AI, prompting investors to pay attention to opportunities to repair the valuations of Hang Seng Technology and Internet companies.
Risk factors: 1) Higher macroeconomic growth than expected, leading to a further decline in sector valuations; 2) macroeconomic growth slowed, leading to growth in e-commerce, gaming, advertising and other industries falling short of expectations; 3) the pace of interest rate cuts by the Federal Reserve fell short of expectations, and the RMB exchange rate continued to be under pressure; 4) Internet companies' performance recovery fell short of expectations; new business and new market expansion fell short of expectations, or investment losses exceeded expectations; 5) The impact of new personal privacy and data security regulations on advertising revenue fell short of expectations; 6) the risk of core shareholders reducing holdings, etc.