For the past three years, investors in Chinese tech stocks have endured a rough ride. However, current valuations and other favorable catalysts are making these stocks more appealing than ever. The prolonged struggle has led to a significant number of investors holding large short positions, forming a compelling contrarian case.
Certainly, concerns about the weak economy and geopolitical risk in China have made potential investors wary. Nevertheless, the exodus from these stocks has created an opportunity, much like the best fishing grounds being in uncrowded waters.
Adding to the allure, Chinese banking authorities are injecting liquidity into the economy, which is expected to provide a tailwind. Furthermore, the appealing valuations of these stocks limit the downside, as they likely trade below intrinsic value, even as analysts raise earnings estimates.
Additionally, with the China Internet ETF KWEB down 75% from its peak, technical signs point to a potential bottom. Observing the bullish wedge pattern, a breakout above $27.25 could signal the start of a new bull run.
On the flip side, failure to sustain levels above $24.50 may indicate otherwise.
Image Source: TradingView
Tencent Holdings: A Conviction Buy
Tencent Holdings Limited, a multinational conglomerate and one of the world’s largest technology companies, is a major force in social media, gaming, and entertainment. Its diverse portfolio includes widely used platforms such as WeChat and significant holdings in the global gaming industry.
Clearly convinced of its undervalued status, Tencent has been aggressively repurchasing its shares. Analysts, too, have raised earnings estimates, awarding Tencent a Zacks Rank #1 (Strong Buy). Projected earnings show robust growth, with the stock currently trading at a decade-low earnings multiple.
Image Source: Zacks Investment Research
PDD Holdings Group: Riding the E-commerce Wave
PDD Holdings Group, also known as Pinduoduo, has emerged as a formidable player in the e-commerce landscape, challenging industry giant Alibaba. With soaring sales and earnings estimates, the stock earns a Zacks Rank #1 (Strong Buy) despite relatively higher forward earnings multiple, justified by its rapid growth rates.
Image Source: Zacks Investment Research
NetEase: Diversified Growth Play
NetEase, a prominent presence in online gaming, e-commerce, and internet services, exhibits strong growth prospects, reflected in its Zacks Rank #2 (Buy). With a solid projected sales growth and upward trending earnings revisions, the stock offers an enticing value proposition.
