Chinese stocks look cheap. Fund manager explains why he gambles on Alibaba

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Investors may still be nervous about Chinese stocks despite massive declines that have made them attractive, but portfolio manager Sid Choraria assures tech titan Alibaba is not a “value trap.”

To classify Alibaba as one of those, investors would have to believe the e-commerce giant’s growth will be in the single digits, SC Asia’s Choraria said.

A drop in value is a stock that appears cheap because of a low valuation, as measured by metrics such as P/E ratio, which compares the current share price to the company’s earnings per share. But these low-priced stocks can become “traps” for investors if the company is plagued by financial instability or slow growth.

Choraria said Alibaba’s growth is healthy, well into double digits for its e-commerce and cloud computing business.

“I mean, the cloud computing division is… $11 billion in revenue that I expect to be $25 billion in three years,” he told CNBC’s “Street Signs Asia” in a recent interview. “Digitalization is not going away in China – and that’s an important part of development.”

“If Alibaba generates the kind of money it is” [making], it’s not a drop in value at these levels. Now, if it’s … just at low single digits, it’s going to turn out to be a value drop,” he said.

He said Alibaba is one of “less than 10 companies worldwide” generating $15 billion in free cash flow, the money a company has on hand after paying off its operating expenses and capital expenditures.

And for growth to fall so sharply from recent levels, Choraria said the economy would have to slow down significantly.

“As a fund manager, I bet on Alibaba,” he said. “I like the opportunities with Alibaba for the next 5 to 10 years,” but notes that he “has no idea of ​​the near term”.

Chinese technology stocks have collapsed over the past year due to the crackdown on Chinese regulations and the looming risks of delisting Chinese stocks in the US.

The Hang Seng technology index has collapsed about 40% from a year ago. Hong Kong and US-listed Alibaba shares fell nearly 49% over the same period.

Valuations have “become way too attractive,” which is why Chinese stocks have significantly outperformed the Nasdaq this year, Choraria said. He added: “We may also be nearing the end of the important regulatory measures” against the Chinese tech giants.

In the past three months, the KraneShares CSI China Internet ETF is up about 43%, while the Nasdaq has lost about 14%.

Some investment banks have also urged investors to get back into Chinese stocks. Goldman recently mentioned stocks that it says are now attractively valued.

China has begun reopening some cities as the worst of the recent Covid wave ebbed, and the government is ramping up fiscal investment.

In a recent note on Chinese stocks, Morgan Stanley said investors should “start adding growth exposure during the final leg of” [the] bear market.” However, it warned investors should keep an eye on lingering uncertainties “before they turn downright bullish” on Chinese stocks.

Some risks include pressure on China’s beleaguered real estate bond market as companies struggle to meet repayment deadlines, as well as uncertainties surrounding the US-China audit dispute. Chinese companies could potentially be delisted from US stock exchanges if US regulators fail to review company audits for three consecutive years. The two countries have discussed a possible deal to avoid scraps.

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