Valerio Baselli: Hello, and welcome to Morningstar. After a tough rout that we called the burst of the US dotcom bubble, things are now looking better for Chinese tech stocks as regulatory headwinds ease and earnings prospects improve. Here with me to talk about China tech sector's perspective is Chelsey Tam. She is Senior Equity Analyst at Morningstar.
So, Chelsey, 2022 was a very challenging year for China and the Chinese equity market. How would you describe today the health of the Chinese technology sector and how are global investors approaching it?
Chelsey Tam: Yeah, sure. Thank you for having me. So, I think that if we look at the balance sheets, the companies that we cover, most of them are pretty good except one or two small players, for example, Bilibili (BILI). But then, for the rest, they generally have either a lot of cash or sufficient cash. So, that's on the balance sheet's health side. If we look at the income statements and cash flow statements, we basically see a lot of cost cutting across the sector. That actually helps the margin, and it's actually better for the company in the future, because they can be run more efficiently.
With regards to the global investors' appetite, I think that they have gradually returned. We've seen the bounce in the share price for these companies. That is because of easing regulatory environments, reopening in China, and then we also see good progress for the PCAOB audit process.
VB: Right. Well, Chelsey, you cover a bunch of Chinese tech stocks, specifically physical goods, ecommerce stocks. Before talking of specific names, what is your outlook, your general outlook, for this sector? And how, in your view, external factors as Beijing's political decisions or even the economic relation between China and the US may affect such industry?
CT: Yeah, sure. So, I think this year, for example, we are expecting recovery in, for example, online shopping, online services, for example, food delivery. We are looking to good recovery in travel, which is good for the online travel names as well. So, I think that this year is a year of recovery. January will be still tough because we see more – we see different cities reaching the peak in terms of Covid-19 cases. But then, I think that after that we'll see gradual recovery in economic activities.
And with regards to China's political actions, for example, we see the Hangzhou government visiting Alibaba, for example, and they say that they will do more cooperations. So, obviously, there is a lot better prospect in terms of regulatory easing. And also, we, for example, see some progress is being made for Ant's restructuring as well. And then, the government also mentioned that they will support the platform economy. So, I think these are all very positives for investor sentiments.
Last but not the least, as I mentioned, we see some warming relationship between U.S. and China. Other than PCAOB, I think we also see, for example, China changing the head of foreign affairs, and he is more soft spoken compared to previous foreign affairs head. So, I think these are also positives to China as a whole, but I don't think it would have contribution to the rally for the share prices of these companies.
VB: Absolutely. That's very interesting. Now, to conclude, what are currently the best investment ideas among the companies that you cover and why?
CT: Yeah. So, for physical goods, ecommerce, we like Alibaba (BABA) the best, because discretionary categories will rebound, and Alibaba will benefit a lot from that. That's their core category. For gaming and media, we like Tencent (00700) and NetEase (09999) because of low valuation and our double-digit growth forecasts. And then, for online advertising, we also like Baidu (09888) because it will benefit from reopening as well.
VB: Chelsey, thank you so much for your time and your insights. For Morningstar, Valerio Baselli. Thanks for watching.
