Alibaba, Tencent Among JPMorgan's Top Chinese Internet Picks

JPMorgan said its top picks in Chinese Internet sector are Alibaba Group Holding Ltd (NYSE: wBABA), Tencent Holdings Ltd TCTZF TCEHY, JD.Com Inc(ADR) JD, Ctrip.com International, Ltd. (ADR) CTRP and Weibo Corp (ADR) WB.

Analyst Vivian Hao, who has an Overweight rating on all the above stocks, has a constructive view on China's Internet sector, after balancing pessimism on China macro against long-term secular drivers and sector-specific catalysts.

"Sector has fallen 21 percent from 4Q15 peak vs NASDAQ/MSCI EM's 10 percent/8 percent, providing opportunities for segment leaders," Hao said in a note to clients.

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Healthy cash flows and earnings growth should be sustained in e-commerce, digital ads, online travel and online/mobile games. In addition, low-hanging fruit from PC-to-mobile traffic migration largely reaped, improving unit economics will drive next leg of growth.

Looking Closer At Specific Names

On Alibaba, Hao said the stock is oversold amid pessimism on gross merchandise value slowdown. She expects the market to eventually recognize and give credit to the company's monetization improvement, which is evidenced in strong revenue growth and supporting its long-term EBITDA margins. Hao has a price target of $90 on Alibaba stock.

"After the revamp throughout 2015, Alibaba's platforms are healthier and better value-add to merchants on branding and user engagement. In addition, we believe Alibaba is well positioned in a handful of new initiatives, such as cloud and payment," Hao noted.

Meanwhile, the analyst said that JD.com is a major beneficiary of structural of C2C (consumer to consumer) to B2C (business to consumer) evolution with unique advantages on in-house logistics and product quality. JD' secular growth is likely to withstand macro headwinds better than peers, according to Hao, who has a target price of $33 on JD stock.

On Tencent, Hao expects the company to gain market share in China's mobile gaming space. It is well positioned in China's pan-entertainment market with clear leadership in online video, music, sports and digital reading services.

The analyst noted that Ctrip's integration and efficiency improvement is the main theme for 2016, with Qunar consolidation is the number one priority. Hao said the long-term growth thesis remains intact, especially on outbound travel, despite short-term macro headwind. Hao, who has $50 price target on Ctrip stock, added that margins will see significant improvement with the end of price war.

Hao initiated Weibo with Overweight and $18 price target, citing that it is the second largest social platform in China with unique media value proposition to advertisers. The analyst said that SME ads to drive revenue upside and margin expansion in the years to come.