Key Takeaways:
Citi sees Chinese internet stocks approaching a valuation floor after the sector's sell-off created what the bank calls attractive entry points.
Citi said Chinese internet stocks are nearing a bottom after the sector's underperformance versus the broader market pushed valuations to compelling levels.
"Even under stress tests assuming potential earnings cuts of 10% to 30%, valuations on an ex-cash basis remain highly attractive," Citi analysts wrote in a June 26 report.
The report highlighted massive net cash positions across major names. Baidu (9888.HK) held $27.9 billion in net cash, representing 78.8% of its market capitalization, while NetEase (9999.HK) had $24.3 billion, or 33.1% of its market value. On a one-year forward ex-cash basis, Baidu trades at 2.8 times earnings, JD.com (9618.HK) at 5.3 times and Kuaishou (1024.HK) at 4 times.
The sector has been used as a funding source for the rally in global AI hardware stocks, Citi noted, but the sell-off has created what the bank believes is a buying opportunity. Companies with strong core businesses and cash flow generation are expected to navigate the cycle.
Buyback Firepower Tops $33 Billion
Alibaba (9988.HK) still had $19.1 billion in outstanding share repurchase authorization, the largest among the group. Trip.com (9961.HK) had $5 billion remaining, Baidu $4.8 billion, NetEase $2.9 billion and JD.com $1.4 billion. Citi expects these companies may accelerate buybacks in the coming weeks, providing a floor under share prices.
Valuations vs. Global Peers
The one-year forward P/E ratios for the group highlight the valuation gap versus US peers. Tencent (0700.HK) trades at 12.3 times earnings, or 11.8 times on an ex-cash basis. Alibaba is at 12.5 times (10.4 times ex-cash), while Meituan (3690.HK) trades at 0.8 times price-to-sales (0.6 times ex-cash). NetEase is at 12 times (8 times ex-cash), and JD.com at 7.2 times (5.3 times ex-cash).
The Citi call could trigger institutional buying and short covering in Chinese internet stocks. A re-rating of the sector would likely lift the Hang Seng Tech Index, which tracks these names.
This article is for informational purposes only and does not constitute investment advice.
