There’s a lot of renewed belief that the worst is over for Chinese technology companies, and that now’s a good time to get into one of the most lucrative investment categories of the past decade. But before we dive further, first we explain what the Hang Seng Tech Index is.
What is the Hang Seng Tech Index?
The Hang Seng Tech Index (HSTech) was launched in 27 Jul 2020 and represents the 30 largest technology companies listed in Hong Kong and have high business exposure to themes such as Cloud, Digital, E-commerce and Fintech. These companies are widely considered as having a strong focus on innovation and high levels of investment on Research & Development.
In this list of 30 stocks below, many are recognisable and well known names such as Meituan, Alibaba, Kuaishou, Tencent, Xiaomi, JD.com, Netease, Sunny Optical, Lenovo, Baidu, NIO, Xpeng and Trip.com.
| Code | Constituent Name | Weighting (%) | Price to earnings ratio (times) | Price to book ratio (times) |
| 3690 | MEITUAN – W | 9.94 | Loss | 7.7 |
| 9988 | BABA – SW | 8.55 | 34.2 | 2.2 |
| 1024 | KUAISHOU – W | 7.90 | Loss | 6.6 |
| 700 | TENCENT | 7.75 | 12.2 | 3.4 |
| 1810 | XIAOMI – W | 7.62 | 14.1 | 2.0 |
| 9618 | JD – SW | 7.24 | Loss | 3.0 |
| 9999 | NTES – S | 7.09 | 22.6 | 4.2 |
| 2382 | SUNNY OPTICAL | 5.98 | 20.8 | 5.1 |
| 981 | SMIC | 5.18 | 10.2 | 1.0 |
| 6690 | HAIER SMARTHOME | 4.53 | 16.1 | 2.7 |
| 992 | LENOVO GROUP | 3.79 | 5.2 | 2.2 |
| 6618 | JD HEALTH | 3.78 | Loss | 4.1 |
| 268 | KINGDEE INT’L | 2.55 | Loss | 6.9 |
| 9888 | BIDU – SW | 2.34 | 34.2 | 1.6 |
| 2015 | LI AUTO – W | 1.84 | Loss | 6.2 |
| 9866 | NIO – SW | * | Loss | N/M |
| 3888 | KINGSOFT | 1.59 | 81.4 | 1.3 |
| 241 | ALI HEALTH | 1.28 | Loss | 4.3 |
| 6060 | ZA ONLINE | 1.26 | 26.4 | 1.8 |
| 1347 | HUA HONG SEMI | 1.18 | 16.4 | 1.5 |
| 9626 | BILIBILI – SW | 1.11 | Loss | 3.1 |
| 772 | CHINA LIT | 1.07 | 15.8 | 1.7 |
| 285 | BYD ELECTRONIC | 0.93 | 18.2 | 1.8 |
| 2018 | AAC TECH | 0.84 | 12.6 | 0.8 |
| 9868 | XPENG – W | 0.79 | Loss | 4.2 |
| 909 | MING YUAN CLOUD | 0.52 | Loss | 3.1 |
| 9698 | GDS – SW | 0.52 | Loss | 1.5 |
| 1833 | PA GOODDOCTOR | 0.49 | Loss | 1.6 |
| 9961 | TRIP.COM – S | 0.49 | Loss | N/M |
| 20 | SENSETIME – W | 0.23 | Loss | 2.2 |
Previously, we had shared why it is time to buy China now, listing the following six reasons:
- Share price momentum shows recovery in Chinese stock indices
- Easing of monetary and fiscal policies
- Increasing momentum of positive news flow
- Worst is over for the real estate debt crisis
- International relations in a benign situation
- One step closer to the reopening of China’s borders and the end of COVID-zero policy
Here we shall look at why it is also time to buy into the HSTech.
Reason #1: Bottom is in and turnaround is occurring
Many would note the turnaround point as the day the Politburo called for regulators to act in alignment and support the platform economy.
The positive momentum was further enhanced when it was reported that Chinese regulators were wrapping up their investigation into Didi Global and make its main apps available for download again.
The growth and revenue outlook for the Chinese tech companies have been somewhat positive for the rest of the year after the companies spent time digesting and implementing the various regulatory measures. Policies and various forms of stimulus meant to stabilise and stimulate the economy are also being implemented at the same time to support the growth outlook.
For example, in Tencent’s FY21 earnings release, the company mentions its expectations to benefit from new game launches and also see its core advertising business resume growth in late 2022.
Reason #2 Fundamental valuations look cheap
The HSTech index traded as high as nearly 11,000 points in February 2021 and reached a low of just slightly under 3,500 points in March 2022. The index is currently around 4,800 points, still more than 50% below the all time high.
Although the HSTech index has a P/E ratio of 95 times, many of the 30 individual stocks whom are profitable are trading at low valuations when compared to historical levels and when compared to similar US stocks. For example, Tencent and Xiaomi are trading at a P/E ratio of approximately 12 and 14 times respectively while Alphabet and Apple are trading at 22 times and 24 times respectively. In total, 9 stocks are trading with a P/E of less than 20 times.
24 out of 30 HSTech stocks are also at a valuation of less than 4 times P/B, with 16 of them having a P/B of less than 3 times.
Reason #3: Technical analysis indicates that the HSTech index is on a bull run
Looking at the chart, we can see that the HSTech broke out of the downtrend channel in June 2022 and has been in an uptrend channel since April 2022 during which it also made a double bottom. While not presented in the chart so as to maintain clarity, the HSTech also broke out of its 50 day moving average. However, we note that as there are multiple support turn resistance points as the HSTech went on a prolonged downtrend between June 2021 and March 2022, it leaves to be seen as to how far the trend can go.
Should the HSTech index meaningfully break down from the lower end of the uptrend channel of around 4400 points, this may reflect the end of the bull run until such time another uptrend is formed.
Reason #4 China tech stocks are strategically important.
The Chinese government has admitted that the Chinese technology sector is strategically important and plays a crucial role in helping China built its technological capabilities.
It went as far as to say that Tech entrepreneurs are the most important agents of innovation and that it is necessary to support the platform economy and the continued healthy development of the private economy. At the same time, the Chinese government has asked these tech companies to contribute to economic growth, retain jobs and even increase headcount.
Closing statement
We have previously listed six reasons why we think it is time to buy China now. In addition, we think that the bottom is in for the HSTech from both fundamental and technical analysis perspectives.
From a fundamental perspective, with regulatory actions easing and growth policies and various forms of stimulus being implemented, China is expecting to see stronger growth for the rest of the year. The technical analysis also shows the HSTech breaking out of its downtrend channel, forming a double bottom in the process and is currently in an uptrend channel.
Most importantly, the Chinese government has acknowledged that these Chinese technology stocks are strategically important and also play a crucial role in China’s economic growth. We would like to leave you with the same final thought – Follow the trend.
