Are Analysts Getting Too Bearish On These 3 Chinese Consumer Stocks?

While China’s property sector faces a tight credit crunch, consumer stocks might be oversold after new data shows that the mainland economy is bouncing back better-than-expected, say some investors.

Wednesday, major consumer names Alibaba Group Holding Limited BABA, Tencent Holdings Limited TCEHY TCTZF and JD.com JD all hit fresh year-to-date lows after more bank analysts downgraded their target prices for the stocks. In the case of JD.com, shares hit an all-time low as well.

So far, 8 banks have revised down price targets for Alibaba by between 2.2% and 9.8% lower, 12 banks have changed their annual targets for JD.com by between 7% and 39.2% down while HSBC plc HSBC and Goldman Sachs Group Inc. GS have lowered their targets for Chinese tech giant Tencent by 3.4% and 1.9% lower, respectively.

The Doomsayers Vs. The Reality

Analyst comments range from disappointment about the Chinese sector’s growth (“Most of the tech companies may, overall, just have tepid revenue growth in the third quarter” according to Forsyth Barr Asia’s Willer Chen) to the China macro bears who think a bad period for Chinese growth recently will spill-over into profits (“We expect corporate growth to stagnate following a deep contraction last year,” Arthur Budaghyan, BCA’s chief China strategist says).

The sentiment follows similar revisions by Citigroup Inc. C and the International Monetary Fund (IMF) about China’s prospective pace of growth going into 2024.  

But the latest data coming out of the Chinese economy Wednesday shows something of the opposite: growth is rebounding more than expected in spite of woes in the real estate sector. Third-quarter GDP grew much faster than expected at 4.9% while retail sales rebounded 5.5% in September, again significantly higher than analysts anticipated. Most thought growth for these two metrics would come in around the 4.7%-mark.

Payroll data in China was also encouraging, with unemployment down to 5% now, contradicting reports of a prospective four-fold higher rate of youth unemployment that is being rumoured about on bank desks.

That reinforces the picture of stronger domestic demand seen in the rising activity of Chinese manufacturers reported at the start of October and in the new surge in earnings of power companies on the mainland lately.

Marcella Chow, global market strategist at JP Morgan Asset Management, is one of those analysts who are bucking the trend of the doom-sayers. She wrote in a note Wednesday that contrary to reports of growth in the mid-4% range, the Chinese economy could bounce back significantly higher by the end of the year as a result of increased government stimulus efforts.

“On the basis of very weak growth in 4Q2022, we believe the year-on-year growth rates will rebound in 4Q2023, and China could achieve the 5% annual growth target for 2023. That said, economic and market sentiment remain subdued, hence we continue to expect an escalation in policy support to boost expectations,” wrote Chow.

Analysts haven’t had a great track record this year: many of the big banks failed to predict the extent of the Chinese property market woes, with most forecasting a recovery in China and Hong Kong property prices during 2023 when the opposite has been the case.

In the same way but in reverse, they may now be neglecting to take into account the purchasing strength of the Chinese consumer, say contrarians. BYD Company Limited BYDDF is a case in point – while a few saw the company as potentially undervalued, not many forecast the huge improvement in the EV maker’s earnings it announced Tuesday in Hong Kong.

A Bloomberg analysis showed that while household savings were 34% of income in the third quarter this year vs. 35% the year before, they were also up significantly over 2019 when household savings represented just 32% of annual income as Chinese consumers have hoarded their savings in the downturn.

Oversold Consumption

All this data points to the possibility that analysts are being too bearish about Chinese consumer stocks, specifically the three that hit fresh lows this week.

Going by what the companies believe their own stock is worth, that certainly appears to be the case: Alibaba, Tencent and JD.com have been some of the biggest buyers of their own stock during this year’s downturn.

Nikolaos Sismanis, executive director of Sismanis Researcxh & Capital Ltd, says that for Tencent, which is trading at a forward P/E multiple of 15x after the company’s earnings per share leaped around 25% year-on-year in the second quarter, to 3.975 RMB, or $0.53 per share, that’s too cheap to pass on right now.

“Considering the stock's substantial double-digit growth, formidable competitive moat, and unparalleled economies of scale, this multiple severely undervalues the stock,” wrote Sismanis in a recent note.

Sismanis cites a familiar story among China stock investors today – that bearishness is not so much about core growth as it is about how global investors are ascribing value with respect to geopolitical risk attached to Chinese stocks.

“The venture into Chinese equities poses a heightened level of risk for western investors compared to domestic securities,” said Sismanis. “This phenomenon isn't confined to Tencent alone but extends to numerous rapidly growing and highly profitable Chinese equities. Alibaba is a great example.”

About Alibaba, bulls on the stock point out that the company is probably priced at as much as half of its fair value, given the company’s dominant position among Chinese exporters.

For JD.com, a close competitor of Alibaba’s, the stock price is too cheap to resist picking up here, say others. Geoffrey Seiler, a former analyst for $600 million asset manager Raging Capital and now an independent research analyst for global funds, is of such a view. With a forward P/E multiple of 8.5x earnings, JD.com is significantly cheaper than other companies in the sector, he says.

“JD has gotten too cheap at this point,” Seiler writes in a note published last week.

“The stock is inexpensive, as are its Chinese e-commerce peers, and it should benefit from any recovery with the Chinese consumer. At the same time, its logistics unit is solid and one of the gems of the company.”