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March 18th, 2022 | 10:42 CET

The China stock rally - Alibaba, Hong Lai Huat, Tencent, Baidu: Buy or Sell?

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What a rebound! For months, SEC threats pounded the Chinese ADRs on the NASDAQ. Lack of transparency, arbitrary government intervention and flawed accounting could negatively impact US investment goals. With her investment firm ARK, Cathie Wood was an early responder, blowing the whistle on Chinese tech stocks as early as mid-2021, but even her ARK Innovation ETF is down over 50% from the high. However, the Alibaba share took the cake, plummeting a full 75% from its high by mid-March 2022. In the aftermath of the sell-off, the Hang Seng Index made its most significant positive daily jump in 15 years, gaining 11% at its peak. Is this the turnaround now? We take a closer look.

time to read: 4 minutes | Author: André Will-Laudien
ISIN: HONG LAI HUAT GROUP LIMITED | SG1EE1000009 , BAIDU INC.A ADR DL-_00005 | US0567521085 , TENCENT HDGS ADR/1DL-0001 | US88032Q1094 , ALIBABA GR.HLDG SP.ADR 8 | US01609W1027

Table of contents:

    Alibaba - The revival of China tech shares

    Alibaba shares shot up by a good 30% on Wednesday alone - a gain of USD 60 billion in market capitalization in one move. Such was the case recently when Facebook crashed in the opposite direction. Midweek, tech stocks in particular rallied across the board in Hong Kong and China. Earlier, the state news agency Xinhua reported that the government would like to see the stock markets stabilize. As a measure, Chinese Vice Premier Liu He announced market-friendly measures by the government.

    China wants to mend its ways and stimulate its economy instead of over-controlling it. Such a move is expected to mitigate latent risks in the real estate sector and lead to the healthy development of the Internet-based industry. Deputy Premier Liu said that any policies with a significant impact on capital markets should be coordinated in advance with the financial administration to maintain stability and consistency.

    Talks between Chinese and US regulators on US-listed Chinese companies appear to have made real progress. The regulators are working on specific cooperation plans to align transparency guidelines. "That is quite positive, at least for now, as Liu has addressed some important concerns in the market, especially in terms of regulatory crackdowns," said Ting Lu, chief China economist at Japanese investment bank Nomura.

    Alibaba has long been under scrutiny from Chinese authorities, who want to crack down with reforms, particularly in the tech sector, to limit the power of companies and their owners. Last year, China's gross domestic product had still grown by 8.1%, while the government had only expected 6%. The country now expects reduced economic growth in 2022 of only 5.5%.

    Technically, Alibaba's gap reversal could be interpreted as the completion of a long downtrend. The next few weeks will show whether it is enough for a turnaround. For speculative investors, enter with a stop of EUR 73 at the current level of EUR 84 to 88 and remain vigilant.

    Hong Lai Huat - Great figures for 2021 and a dividend announcement

    The Asia region as a whole remains on a steep growth path. The economies of China, Singapore and Indonesia achieved growth of 4.5% to 8.1% in 2021. Prosperity is not yet comparable with the West, but the developed zones around the metropolises have already shown high momentum for years. The real estate market, in particular, is booming in China as well as in Hong Kong, Singapore and Japan.

    Close behind, however, Cambodia is also growing very conspicuously. The Hong Lai Huat Group is a real estate developer with an operational focus on Cambodia and has built up a promising pipeline there in recent years. Listed and based in Singapore, they operate from the emerging region of a major Asian city with a Western flavor.

    At the end of February, there were good numbers to report for 2021. Due to picking up property sales in Cambodia, there was a marked turnaround in earnings. Net profit from continuing operations rose to SGD 6.1 million compared to a loss of SGD 7.8 million in the previous year. Sales exploded by 132% from SGD 7.2 million to SGD 16.7 million, with gross margin reaching 62%. Net liquidity thus climbed to over SGD 20 million, which is a sound basis for further promising new projects in 2022. Furthermore, the Group declared a dividend of SGD 0.002, representing a payout ratio of approximately 32% of the owners' net profit for the year.

    Mr. Ong Jia Jing, the General Manager and Executive Director of Hong Lai Huat Group, commented, "Our Group remains on track with its earnings recovery and recorded good property sales in Cambodia. We continue to keep a tight rein on cost management and remain focused on our growth strategy to accelerate our business recovery." In February 2022, the Group launched Cambodia and Singapore's largest agricultural center ("Agri-Hub"). The stock benefits from Asian growth momentum and is available for purchase at around SGD 0.09 in Singapore, while trading is somewhat thin in Frankfurt.

    Tencent and Baidu - Up in the slipstream

    Another analytical look at the two Internet giants, Tencent and Baidu. Both titles are also on the list of criticism from the Chinese authorities and were punished similarly to Alibaba in the USA. There are now increasing signs of a buyback movement.

    Tencent has reached the level of autumn 2019 again with the last crash to EUR 33.80. Then it went up in one go to EUR 47, a handsome daily return of 35%. Tencent is restructuring its online and gaming holdings after the Chinese regulator wants to crack down on some business models again. With current estimates, the P/E ratio is now around 17.7 based on 2023. With 54 individual valuations, the analyst community votes 48 to buy, a handsome commitment to former stock market darling Tencent.

    Baidu recently went down to EUR 92.60. The rebound carried the share back to EUR 137, a whopping 40% premium. As a Chinese "Google", the Company grows consistently at 15-20% per year. It is listed at a P/E ratio of 13.8 based on estimates for 2023. Technically, the EUR 100 mark is a bastion, the sell-off of the past few days and the strong GAP rebound should mark the long-term reversal. Tencent and Baidu are clear buys and only suitable for risk-conscious investors due to the American ADR issue.

    Finding the right stock market strategy in a political crisis with strong economic dampening effects is not easy. Therefore, it is crucial to focus on fundamental growth indicators. These are pointing upwards for China tech stocks, and the real estate market in Cambodia is likely only at the beginning of a long-term upward trend.

    Conflict of interest

    Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.

    In addition, Apaton Finance GmbH is active in the context of the preparation and publication of the reporting in paid contractual relationships.

    For this reason, there is a concrete conflict of interest.

    The above information on existing conflicts of interest applies to all types and forms of publication used by Apaton Finance GmbH for publications on companies.

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    Der Autor

    André Will-Laudien

    Born in Munich, he first studied economics and graduated in business administration at the Ludwig-Maximilians-University in 1995. As he was involved with the stock market at a very early stage, he now has more than 30 years of experience in the capital markets.

    About the author

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