Hong Kong, China - For investors nursing the wounds of plummeting Chinese tech stocks, a glimmer of hope emerges: these once-mighty giants have transformed into compelling value plays. While the heady days of breakneck growth may be over, these companies now boast attractive valuations, brimming cash reserves, and a renewed focus on shareholder returns. However, the trade-off is clear: slower growth is the new reality.
The once-unthinkable has come to pass – investors have cast aside former market favorites like Alibaba and Tencent. The KraneShares CSI China Internet ETF, a bellwether for Chinese tech stocks listed in Hong Kong and the U.S., has witnessed a staggering 75% decline since its 2021 peak. This dramatic reversal has ushered in an era of unprecedentedly cheap valuations for Chinese tech. Alibaba currently trades at a mere 8.6 times forward earnings, a stark contrast to its five-year average of 18.1. Tencent sits at 13.8 times, significantly lower than its historical average of 25.8.
These diminished multiples reflect a new market landscape defined by slower growth, intensified regulatory scrutiny, and fierce competition. Alibaba's revenue, previously soaring at 30% or more annually, grew a meager 7.3% in 2023. Tencent experienced a similar slowdown, with sales rising just under 10% in 2023 compared to a robust 25% growth in 2019.
While growth may have slowed, plummeting share prices have already factored this in to a large extent. However, beneath the surface lies a hidden treasure trove: Alibaba and Tencent's core businesses continue to generate significant cash flow, further augmented by their hefty cash reserves. As of last year, Alibaba boasted a war chest of roughly $55 billion in net cash and short-term investments, nearly a third of its market capitalization.
These former growth champions are strategically embracing their new value-stock persona. This shift translates to potential downside protection for investors willing to cautiously re-enter the fray. Furthermore, Chinese tech companies are demonstrably prioritizing shareholder returns through aggressive buybacks and dividend increases.
Tencent's commitment to shareholder returns is undeniable. The company plans to double its share repurchases in 2024, reaching nearly $13 billion, while simultaneously raising dividends by 42%. Combined, these measures represent almost 5% of Tencent's market capitalization. Alibaba has also followed suit, declaring its first-ever dividend in November and recently expanding its share-repurchase program for the next three years by a staggering $25 billion.
While a definitive return to high-growth trajectories remains uncertain, this current climate presents an attractive opportunity for long-term investors. With market exuberance elsewhere reaching potentially unsustainable levels, China's value plays offer a compelling alternative, albeit with the caveat of slower growth.
For investors with a discerning eye and a long-term perspective, China's tech sector, once synonymous with explosive growth, has morphed into a haven for value-seeking individuals. While the future growth trajectory remains unclear, the combination of attractive valuations, robust cash flow, and a renewed focus on shareholder returns paints a potentially lucrative picture for those willing to weather the current storm.
