Share prices of Hong Kong Tech stocks have continued to perform poorly. On the other hand, many of these companies have focused on its bottom line either by way of sustaining revenue or cost reduction.
| HK Tech Stock | Ticker | P/E Ratio | PEG ratio | Decline from ATH |
|---|---|---|---|---|
| Tencent | HKSE: 700 | 13.7 | 0.57 | -58% |
| JD.com | HKSE: 9618 / NASDAQ: JD | 13.4 | 0.67 | -72% |
| Vipshop | NYSE: VIPS | 8.1 | 0.38 | -66% |
| Lufax | HKSE: 6623 / NYSE: LU | 7.4 | 0.22 | -94% |
| SMIC | HKSE: 0981 | 14.13 | 0.65 | -50% |
Here we look at 5 Hong Kong stocks that are trading below a P/E ratio of 15. All of these stocks have fallen at least 50% from their all time high and used to trade at valuations that are multiples of current levels.
All of these 5 stocks also have a PEG ratio of below 1.0 which suggests that the stock is relatively undervalued when comparing their current P/E ratio to their expected future earnings growth.
We will summarily look about why these stocks have seen their share price decrease and what will help secure their upcoming growth.
1) Tencent (HKSE: 700)
Shares of the Tencent have fallen 28% from the January 2023 high, trailing the broader HSTech and HSI indices despite it buying back more shares than any other company.
Tencent is the largest Chinese internet company and has investments in many companies across all sectors in tech. Its underperformance serves as a symbol of investor disillusionment with China. Investors remain cautious that broad global selling of Chinese assets and a perceived weakening economy will remain key pressure points.
Recently, Apple Inc.’s (NASDAQ: AAPL) CEO Tim Cook showed up at a Tencent gaming tournament in China, endorsing Tencent as one of its game, Honor of Kings is one of the biggest earners for Tencent and is also a big earner for the Apple app store.
Tencent has been reviving its growth as China resumed approval of gaming licenses. It published Valorant in Jul 2023 after it was approved in Dec 2022, 2 years after the international community received the game. Valorant is one of the most popular games globally and will be a growth driver for Tencent.
One of Tencent’s significant revenue stream is advertising. The company introduces a product, ramps up users and looks to monetised it via advertisements. Tencent took this approach with its video sharing service, monetising the product as users exceeded 800 million in just two years since the debut of the video sharing service
Tencent is also growing its WeChat Pay ecosystem as it will allow foreign users to link their Visa cards to their WeChat mobile payments accounts from July 2023, after a similar move by Alipay
This will allow tourists to use their smartphones to pay tens of millions of Chinese merchants that already accept the domestic version of WeChat Pay.
2) JD.com (HKSE: 9618 / NASDAQ: JD)
JD.com’s shares slumped to a record low recently as rumors swirled that a businessman with the same surname as the company’s chairman had been arrested.
As Alibaba emerges from the regulatory crackdown, there are also worries that Alibaba with its stronger balance sheet and cashflow will now switch focus back to winning back market share from JD.com, its nearest competitor via a price war which will include cash coupons and lowest price matching. Pinduoduo is also hot on its heels, building on Temu, its overseas e-commerce platform to seize growth overseas.
JD.com remains focused on strengthening its flywheel in an attempt to be the next big Chinese tech conglomerate and to support its core e-commerce business,
JD.com expanded other parts of its ecosystem such as JD Logistics, JD Health and JD Technology. It not only succeeded in increasing market share but was also able to build an ecosystem of other businesses which are not solely reliant on JD.com. The IPO of JD Logistics and JD Health also attests to the ability of these businesses to stand on their own.
As the Chinese economy is expected to continue to grow at a 4-5% range, this macroeconomic performance may provide for ample growth headroom for all e-commerce players. JD.com currently has the #2 market share in China and over time as the China economy continues to grow, revenue and profits will gradually increase as well.
3) Vipshop (NYSE:VIPS)
Although Vipshop is significantly off its all time high, it has actually performed relatively well this year with a 7% YTD gain in share prices.
Vipshop’s business model as an online discount retailer for brands is one that optimises the ‘flash sales’ model of limited-time purchases.
Although China reported a 5.5% growth in retail sales in September from a year earlier, due to a lack of confidence in China’s prospective economic conditions, consumer confidence and inflation is low. As an online discount retailer, Vipshop stands to benefit from this current environment.
To diversify its growth and income, Vipshop has set out big expansion plans and recently entered Southeast Asia including Malaysia.
4) Lufax (HKSE: 6623 / NYSE: LU)
Lufax has seen its share price decline from more then US$15 to US$1, a more than 90% decline. Consequently, Lufax offers the best value from a P/E ratio and PEG ratio perspective.
Lufax provides loans to core small business owners and many of these customers faced difficulties in 2022 & 2023. There were also concerns of crackdown on its business models as a portion of the loans were originated by Lufax with a peer to peer lender model.
Lufax is a subsidiary of Ping An and benefits greatly from this relationship. Lufax leverages its parent firm’s financial database and customer pool to source high-quality clients.
Over the past years, the Ping An ecosystem has been providing a significant portion of Lufax’s new clients for the credit and wealth management sectors. The synergies derived between the two firms further reinforces customer stickiness.
As a Fintech company, Lufax’s total addressable market is expected to grow significantly not only due to China’s growth but also as consumers embrace technology as seek more a broader range of financial products and options at more efficient prices and at higher quality service levels.
Additionally, Lufax is also a beneficiary of the Chinese government lowering interest rates, boosting loans and growth.
5) SMIC (HKSE: 0981)
Semiconductor Manufacturing International Corporation or SMIC is China’s biggest chip foundry.
The U.S. Department of Commerce announced that it planned to curb the sale of more advanced artificial intelligence chips to China. The new export restrictions will restrict the export of Nvidia’s A800 and H800 chips.
The restrictions could also affect chips sold by Intel and AMD. Other rules will likely hamper the sale and export to China of semiconductor manufacturing equipment from companies such as Applied Materials, Lam and KLA.
The tech curbs affect SMIC’s ability to quickly improve and achieve its goal of making cutting edge chips. There are unlikely to be any Chinese companies that are able to fill the gaps that could be left by SMIC being cut off from these pieces of equipment.
The Chinese government has placed this tech race as one of its top most priorities and has provided strong support to SMIC and to the industry. This has led to the revenues of Chinese chip manufacturing recording rapid growth. SMIC’s 2022 revenue totaled $7.2 billion, up 34% YoY year while its gross margin stood at a record 38%, a second year of sales growth above 30% for the company.
Closing statements
Hopes that the Chinese economy would recover strongly and Chinese shoppers to embark on a post-lockdown revenge spending spree had already been dashed. Despite Covid-19 curbs having ended at the close of last year, that rebound has not yet materialised substantially.
Although this was partially attributed to the global economic environment, the Chinese government was also not able to spark growth amidst a climate of regulatory focus which affected all these 5 tech stocks.
However, these 5 stocks all still have a growth story which are underpinned by current government support and considering their prospects are cheap at their current valuation.
