China's Tech Titans Outpace U.S. Rivals -- WSJ
June 08 2017 - 2:03AM
Dow Jones News
Shares of Tencent and Alibaba have surged and analysts say they
have more room to run
By Steven Russolillo
HONG KONG -- If you thought the FANG trade in the U.S. had
teeth, it pales in comparison to what is happening in Asia.
Facebook Inc., Amazon.com Inc., Netflix Inc. and Google parent
Alphabet Inc., which make up the FANG acronym, have each gained
more than 20% so far this year, propelled by strong earnings growth
and overall investor enthusiasm for technology stocks. But China's
tech giants, Tencent Holdings Ltd. and Alibaba Group Holding Ltd.
are motoring at an even faster pace. They have each surged more
than 40% so far this year and hover around record highs.
Still, analysts and investors say these stocks have more room to
rally. The companies are growing rapidly, their business models are
diversified beyond just pure tech plays and their share prices are
cheaper than the FANG group.
Tencent and Alibaba, which together make up one-fourth of the
MSCI China Index by market capitalization, have helped push the
index 24% higher so far this year, far outpacing U.S. benchmarks.
The MSCI China Index, which includes mostly Chinese companies
listed in Hong Kong and the U.S., is a vehicle for stock investors
to gain exposure to China despite capital controls that limit
direct foreign investment in domestic markets.
For now, analysts are only getting more optimistic about
Tencent's and Alibaba's futures, thanks to strong earnings and
revenue growth. More than 90% of analysts who cover both companies
say they are a buy; neither company has a sell rating, according to
FactSet. Based on 12-month price targets, these analysts forecast
double-digit gains for both companies over the ensuing year.
"Fundamentals for these large-cap internet stocks have been
pretty resilient," said John Choi, head of Hong Kong and China
Internet research at Daiwa Capital Markets. "The overall momentum
is still very strong and I think there is more to come."
Hong Kong-listed Tencent is the owner of China's largest social
network, WeChat, and the world's largest videogame publisher by
revenue. The company has a market capitalization of around $330
billion, or roughly the size of Exxon Mobil Corp. It has been
investing and forming partnerships outside of China, including a 5%
stake in Elon Musk's Tesla Inc. Tencent logged $171 billion in
revenue last year. Analysts expect that to nearly double within two
years, according to FactSet.
Caroline Yu Maurer, the Hong Kong-based head of Greater China
equities at BNP Paribas Asset Management, which has a stake in both
companies, said Tencent is benefiting from a growing audience and
increasingly sticky user base. WeChat had 938 million monthly
active users in the first quarter, up 23% from a year earlier.
"If Tencent can show more signs of monetizing WeChat, it would
only give investors even more confidence," Ms. Maurer said. "But
for now they're not desperate to find a new revenue source."
Alibaba, which is listed on the New York Stock Exchange, is the
e-commerce giant that runs popular online-shopping websites Taobao
and Tmall. It has also surged to record highs, thanks to a string
of strong quarterly results. Alibaba's fiscal fourth-quarter
revenue, reported last month, climbed 60% from a year earlier, a
sign of strength for China's consumer economy. After shares rose
following its initial public offering in New York in late 2014, the
stock struggled for a few years before jumping in 2017.
Even following these big rallies, Tencent's and Alibaba's
valuations are rich but not exorbitant. Tencent fetches 35 times
projected earnings over the next 12 months, below a recent high in
2014. Alibaba trades at a more reasonable 27 times forward
earnings, which is roughly around its average in its three years on
the public markets. By comparison, the four FANG stocks in the U.S.
trade at an average multiple of about 90 times projected earnings.
Amazon and Netflix, historically richly valued stocks, sport
triple-digit multiples.
"When companies like Tencent and Alibaba have earnings growth at
40% or 50% even though they are already so big, you can justify a
higher [valuation] multiple," Ms. Maurer said.
Piling into tech has been beneficial for investors so far.
Active U.S. fund managers collectively are outperforming their
benchmarks for the first time in years, according to Goldman Sachs,
thanks in part to their large positions in tech. But there are
risks that ring true around the world. A fund-manager survey last
month from Bank of America Merrill Lynch found the tech-heavy
Nasdaq Composite was "the most crowded trade."
"Investors are wondering what they should do, whether they
should lock in profits or invest in other areas," said Mr. Choi of
Daiwa Capital Markets. "But there aren't many other attractive
alternatives."
Write to Steven Russolillo at steven.russolillo@wsj.com
(END) Dow Jones Newswires
June 08, 2017 02:48 ET (06:48 GMT)
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