Investors may still be nervous about Chinese stocks even though the massive drop has made them attractive, but portfolio manager Sid Choraria assures the tech giants Alibaba not a “value trap”.
To categorize Alibaba As one, investors will have to believe the e-commerce giant’s growth will be in single digits, SC Asia’s Choraria said.
A value trap is a stock that looks cheap because of its low valuation as measured by metrics like the price-to-earnings ratio, which compares the current stock price to the company’s earnings per share. But these undervalued stocks can become “traps” for investors if the company struggles due to financial instability or sluggish growth.
Choraria said Alibaba’s growth was good, in double digits, for its e-commerce and cloud businesses.
“I mean, the cloud division is… an $11 billion business that I expect to see $25 billion in revenue in three years,” he told CNBC on “Street. Signs Asia” in a recent interview. “Digitalization isn’t going away in China – and that’s an important part of growth.”
“If Alibaba Creates Cash [making], it’s not a value trap at these levels. Now, if it’s… just in the low single digits, it becomes a value trap,” he said.
He said Alibaba is one of “less than 10 companies globally” generating $15 billion in free cash flow, the amount a company has on hand after paying off operating expenses and capital expenditures.
And for growth to drop much from recent levels, Choraria said the economy would have to slow down significantly.
“As a fund manager, I am betting on Alibaba,” he said. “I like the odds with Alibaba over the next five to 10 years,” however, he noted, “no idea about the short-term.”
Chinese technology shares have plunged over the past year due to China’s repressive policies as well as the risk of delisting for Chinese stocks in the US.
The Hang Seng Technology Index is up about 40% from a year ago. Shares of Alibaba listed in Hong Kong and the US have fallen nearly 49% during the same period.
Valuations have “become too tempting,” Choraria said, and that’s why Chinese stocks are outperforming Nasdaq significantly this year. “We are also approaching, potentially the end of, significant legal action” against the Chinese tech giants, he added.
Some investment banks are also urging investors to return to Chinese stocks. Goldman Recently named stocks it says are currently at attractive valuations.
China has begun to reopen some cities as the recent Covid wave subsides at its worst and the government is ramping up financial investment.
In a recent note on Chinese stocks, Morgan Stanley said investors should “start adding to the upside amid the late phase of the market.” [the] bear market. “However, it cautioned that investors need to watch for lingering uncertainties ‘before fully bullish’ for Chinese stocks.
Some of the risks include pressure on China’s beleaguered real estate bond market as companies struggle to meet repayment deadlines, as well as uncertainties surrounding the US audit dispute- Central. Chinese companies are likely to be delisted from US exchanges if US regulators are unable to review company audits for three consecutive years. The two countries discussed a potential agreement to avoid disagreements.