Since late 2020, Chinese technology companies have endured years of share price decline on the back of a regulatory crackdown and a weakening Chinese economy.
But Hua Cheng, director of Asia corporate credit research at AllianceBernstein, believes Chinese technology companies have finally reached the trough in their fundamentals.
“We’re confident in this sector,” she told FSA in an interview. “This is really where we own risk from a credit perspective.”
“We think we’ve seen the trough. We believe going forward the regulatory environment – which is one of the biggest drivers of the fundamentals – will be benign and will be friendly to these companies.”
“We have confidence in their balance sheet strength and some of these companies are net cash companies with dominant market positions in the verticals they operate in.”
Cheng (pictured) noted that despite their strong market positions, there is a “decent” spread differential between Chinese technology company bonds and US technology company bonds.
“That makes that investment quite attractive from a valuation perspective,” she added.
This may stand true from an equity investors’ perspective too. After falling roughly 70% from their highs, some Chinese technology firms such as Alibaba, Tencent and Meituan have recently seen their share prices rally as much as 20% from their multi-year lows in the past few weeks.
These firms, as well as many other Chinese technology companies, are set to report their quarterly earnings in the weeks ahead.
Focus on the “new economy” industries
Despite the weakness the Chinese economy has experienced during the past few years, Cheng is optimistic on the country’s “new economy” sectors.
“We like sectors that are more linked to China’s new economy,” she said. “For example, aside from technology we like advanced manufacturing, consumer companies and new energy – these are the companies where we’re exposed to.”
“Property developers or local infrastructure companies that are largely debt-driven: we are more cautious towards old economy sectors, such as debt-driven property developers and local infrastructure companies.”
When it comes to lending to banks however, Cheng said that the firm has become more selective since many banks have been exposed to the property downturn.
“Chinese banks that have large enough balance sheets can’t completely shy away from the old economy,” she explained. “They lend to all parts of the Chinese economy.”
“But eventually I think banks will shift their focus to the new economy because it drives productivity growth for China – which bodes well for the credit quality of the banks.”
Although there is a widespread push from the Chinese government to encourage investment into areas of the new economy – Cheng hopes to see more evidence that the banks are actually shifting their focus.
“We like banks that really take calculated, appropriate credit risk on their balance sheet,” she said. “We don’t like banks that aggressively expand their balance sheet to unproductive areas of the economy.”
“That requires us to monitor closely where this credit goes to, and then whether the bank has the appropriate risk appetite.”
Although there are concerns given that China’s banking sector is under immense pressure from the defaults across the property sector, Cheng points out that credit investors have historically been more protected than in the West.
“If you look at the history of how the authorities deal with distressed or nearly distressed banks in China, it shows that a bail out instead of bail-in (imposing losses on creditors) is still a preferred way to resolve distressed or nearly distressed banks in China,” she said.
“I think there has been strong evidence that shows the Chinese government is still very willing to step in to provide support either in the form of equity capital injection, or in the form of liquidity support to banks in China that are deemed as a systemically important.”
