Chinese stocks recently saw significant panic selling as investors raised concerns about a range of issues. Now contrarian investors stateside are taking a closer look at undervalued Chinese stocks.
Soaring Covid-19 cases and talks of delisting Chinese equities in the U.S. have put pressure on a large number of stocks. In addition, the heavy hand of the state imposing penalties on tech companies have continued.
As a result, China’s benchmark CSI 300 Index has fallen 16% year-to-date, while the Hang Seng China Enterprises Index has declined more than 12% over the same period. As such, undervalued Chinese stocks offer compelling buying opportunities for risk-tolerant investors.
The recent Covid-19 outbreak has led to lockdowns in Shanghai and other parts of the country, posing a significant threat to economic growth. But, in March, the government announced that it would ease its crackdown on tech companies and take measures to stimulate the broader economy.
Moreover, after several regulatory reforms, authorities offered reassurances to boost investor confidence. They highlighted that the regulation of internet companies should be “standardized, transparent and predictable.”
Undervalued Chinese Stocks: Tencent
Tencent has businesses and investments in a wide range of internet services, and is currently the largest video game publisher worldwide.
Tencent announced Q4 results in late March. Revenue increased 8% from a year ago to $22.6 billion, its slowest quarterly growth since its IPO in 2004. Adjusted net profit declined 25% to $3.9 billion. Cash and equivalents ended the period at $44.1 billion.
Revenue for the value-added services segment increased 7% to $11.3 billion, down from 28% a year ago. The slowdown was due to sluggish growth in its domestic gaming business.
In 2021, the government imposed online video game playtime restrictions for minors and suspended the approval of new games. However, investors are now hoping the crackdown is coming to an end, and pressures on the group might decrease soon.
Tencent has declined nearly 48% over the past year. Compared to its peers, shares look undervalued at 22.8x forward earnings and 5.2x trailing sales.
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