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Chinese Tech Bulls Load Up, but Doubts Remain

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Alibaba this week reported its first revenue decline since its IPO eight years ago.
Photo: Zuma Press

After a more than $1 trillion selloff, many investors think China’s three largest tech stocks have bottomed out. But skeptics say the biggest problems facing the sector still haven’t been resolved.

Alibaba Group Holding Ltd.
,
Tencent Holdings Ltd.
and
Meituan
have collectively lost more than $1.2 trillion in value since February last year, when the combined market capitalization of the trio peaked. That was part of a wider rout in Chinese tech stocks. China’s ultra-strict “zero Covid” policy, a domestic economic slowdown and a crackdown on the sector by the Chinese government have all pushed down shares.

E-commerce giant Alibaba, once boasting an $858 billion market capitalization, was worth $240 billion on Wednesday. Internet giant Tencent slid to a multiyear low earlier this month and Meituan—the best performing of the three stocks—is about 60% down from its February 2021 peak. Tencent runs the dominant WeChat messaging app in China and has a minority stake in food-delivery giant Meituan.

Some investors now sense a buying opportunity. Although bulls have talked up the sector prematurely before, some large fund managers are betting that a more conciliatory approach by the government—and some signs of a bounceback in consumption—will help drive up stock prices.

The easing of political pressure is perhaps the most encouraging news. China’s Politburo, the country’s top policy-making body, indicated at the end of April that a crackdown against tech companies was coming to an end. The government also concluded a yearlong investigation into ride-hailing company
Didi Global Inc.,
fining the company $1.2 billion last month.

The Politburo meeting marked a turnaround from 2021, said Rebecca Jiang, Greater China equities portfolio manager at J.P. Morgan Asset Management. The $6.2 billion
China Fund,
which Ms. Jiang co-manages, has bought shares in Alibaba and rival
JD.com Inc.
this year.

There are also more fundamental factors encouraging China tech bulls, including early signs of recovery in consumption—something Alibaba mentioned in its recent results—and a sense that Chinese tech companies have learned how to endure the economic slowdown.

“People are assuming that the current environment of flat revenue growth for Chinese internet stocks like Alibaba is going to continue for a while,” said Nuno Fernandes, a partner and portfolio manager of New York-based GW&K Investment Management. “We don’t agree with that.”

The cost-cutting measures at some of these companies have created strong potential for earnings growth in 2023, he said. These companies’ revenues will likely grow at a slower but still attractive rate, said Mr. Fernandes, whose firm bought more Alibaba shares this year after previously slashing its holdings in the second half of 2020.

Ronald Cheung, a partner at Optimas Capital Management in Hong Kong, agreed that tech companies were now better at optimizing their costs, and said they were being more prudent with business expansion. “We believe the second half of 2022 will be better than the first half,” Mr. Cheung said.

Not everyone is convinced. Outflows from KraneShares’ CSI China Internet ETF, which currently invests 26% of its more than $6.8 billion assets in Alibaba, Tencent and Meituan, reached $386 million in July, the highest monthly outflow since December last year, according to Morningstar Direct data.

Part of the problem is that as domestic sources of uncertainty show signs of easing, geopolitical risks are going in the other direction. China’s support of Russia following the invasion of Ukraine, as well as heightened tension around Taiwan, have worsened an already fraught relationship between China and the U.S.

The worry is that geopolitical risks and the potential adverse economic impact of the ailing property market will deter further investment, according to Eva Lee, head of Greater China equities at UBS Global Wealth Management Chief Investment Office. “Our concern now is not investors backing out from these names, but the lack of new interest,” she said.

There is also a question of earnings multiples. Analysts say the days of heady growth for Chinese tech stocks are over, meaning that forward earnings projections will need to transition to a new normal.

“I don’t think the multiples we saw three to five years ago are going to come back any time soon,” said Kai Wang, a Hong Kong-based senior equity analyst at Morningstar.

Alibaba said this week that its revenue had fallen to $30.7 billion in the April-June quarter, the first decline since its IPO eight years ago. Tencent and Meituan are due to release their earnings later this month.

But the greatest shadow will be cast by the slowing economy. China recorded annualized growth of 0.4% in the April-June quarter, the weakest since the first quarter of 2020, when the emergence of Covid-19 wreaked havoc on the domestic economy.

That points to a key argument being made by China tech bears—that although the bad news might be fading for the sector, that doesn’t necessarily mean good news will follow.

“These tech stocks may be undervalued,” said Matthew Tuttle, managing director of AXS Investment, which runs the Short China Internet ETF. “But they may stay undervalued for a very long time.”

Write to Rebecca Feng at rebecca.feng@wsj.com and Michelle Chan at michelle.chan@wsj.com

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