China’s economic recovery may boost Tencent and JD’s share price?

Tencent’s [TCEHY] share price got off to a good start for 2021, reaching its highest-ever close of $99.10 on 12 February, up 37.85% year to date. However, Tencent’s share price hasn’t managed to top this value, instead, the stock has followed a downward trend for several months.

On 6 July, Tencent’s share price fell into the red when it closed at $71.63, down 0.36% year to date. Since then, the stock has fallen even lower and as of its last close of $57.14 on 20 August, it was down 20.51%. Interestingly, both JD.com [JD] and Ping An [PNGAY] have followed similar trends.

JD peaked when it reached its highest-ever close of $106.88 on 17 February, up 21.59% year to date. However, the stock was quicker to fall than Tencent, closing at $85.36 on 8 March, down 2.89% year to date. Since then, the stock has sunk even lower and as of its last close of $65.73 on 23 August, was down 25.21% year to date.

Meanwhile, Ping An closed at its highest value ever on 15 January when it reached $26.60, up 8.57% year to date. Since then, the stock has spent most of this year in the red and as of its last close on 23 August of $16.38, was down 33.14% year to date.

With the share prices for all three companies hitting near their 52-week lows on their last close, the future could look bleak for some investors. However, a report from Goldman Sachs suggests the tables may turn for these companies as ‘vast new profit pools are being created’ in the Fintech space.

Championing change

Following years of linear growth, China’s economy has slowed down due to COVID. As the economy grew, traditional Chinese banks focused on serving enterprises owned by the state and the financial needs of consumers and independent businesses went underserved.

As a result, a range of ‘hybrid tech/finance’ companies ‘have emerged at the heart of China’s financial industry, making financial services more convenient and accessible for consumers,’ according to a Goldman Sachs report titled The Rise of China FinTech. Now, China’s economy has reached a pivotal moment that could rely on consumer spending to pick up the pace. The investment bank republished its earlier report which has once again gained significance.

According to the report, companies including Tencent, JD and Ping An had gathered a considerable number of consumers and SMEs as users of their core business before offering financial services. Now, with a strong following among those that have been underserved for so long, they’ve managed to tap into this market and ‘capture the unique opportunity set of Chinese consumers.’

Despite the recent slump that’s affected many Chinese stocks, there’s still a bullish outlook among some analysts. For starters, the general consensus among the analysts polled by CNN for Tencent, JD and Ping An is to ‘buy’..

Tencent has also been given a median price target of $83.44 among 49 analysts, JD’s median price target among 41 analysts sits at $94.80 and the one analyst offering a 12-month forecast on Ping An has set a target of $32.31. These targets suggest each stock has the potential to increase by 46.03%, 44.29% and 97.25% respectively.

Bull or bear?

Tencent’s core businesses continue to be video games, social media, fintech and cloud computing, with gaming being the biggest segment by revenue, which grew 12% year on year. According to Billy Duberstein writing for The Motley Fool, this was ‘against very difficult comparisons to last year's pandemic-fuelled second quarter.’

However, during Tencent’s second-quarter earnings call earlier this month, management stated that 97% of gaming revenue came from users over the age of 16 and that 25% came from international markets — outside of China’s control — and grew 37% year over year. This may be a good sign for investors as a lot of the disruption to Chinese stocks is a direct result of its government’s regulatory crackdown on technology companies.

“Given the current state of regulatory uncertainty, it’s difficult to say that tech stocks are currently cheap” - Sean Taylor, DWS APAC chief investment officer

Of course, there’s a likelihood that more regulations will be imposed and Tencent won’t be the only company to be affected. So, while some analysts believe it’s a good time to buy, others remain wary. ​​“Given the current state of regulatory uncertainty, it’s difficult to say that tech stocks are currently cheap,”, noted Sean Taylor, APAC chief investment officer and head of emerging market equities at DWS as reported by Yahoo Finance.

“If earnings keep getting downgraded, it’s still expensive” at current levels, he said in comments to Bloomberg TV also reported by Yahoo Finance. “We don’t know where the bottom is.”

Spreading investments

Investors looking to gain diverse exposure to Chinese stocks during the disruption may consider an ETF such as the KraneShares CSI China Internet ETF [KWEB], for which both Tencent and JD are among its top-three holdings. Where Tencent makes up 10.98% of the portfolio, JD is worth 7.61%.

While the ETF has, unsurprisingly, fallen in recent months, closing at $45.47 on 23 August, down 40.79% year to date, it could be a good opportunity for investors that want to spread their investment.