JPMorgan names the Chinese tech stocks to buy as Beijing ramps up regulation

Published Wed, Dec 23 20202:12 AM EST

(This story is for CNBC PRO subscribers only.) SINGAPORE — Chinese internet stocks made "remarkable" gains in 2020 as the Covid-19 pandemic pushed more commercial activities online — but this year also marked the end of China's easy regulatory environment for tech companies, according to J.P. Morgan. Chinese regulators, like their peers in the U.S. and European Union, are figuring out new rules to rein in monopolistic behavior in the tech industry. That "will likely keep the investors on the sidelines until there is further clarity on anti-trust rules, including detailed guidance and, more importantly, the law enforcement," J.P. Morgan analysts wrote in a Tuesday report. For investors still interested in buying Chinese tech stocks, the analysts shared one way to get around risks brought on by the tightening rules on the sector. "In terms of positioning, to circumvent the regulatory overhang on e-commerce in the coming months, we favor the online gaming industry on the back of its resilient growth prospects," they wrote in the report. J.P. Morgan's top picks in the online gaming space are Tencent and NetEase within the big-caps, as well as Archosaur Games among the small- and mid-cap stocks. The bank estimated that the industry could grow by 15% every year on average — or on a compound annual growth rate (CAGR) basis — from 2020 to 2023. The analysts explained that such growth will be driven by three factors: Strong potential in China's domestic market to grow average revenue per user (ARPU) and online gamer penetration — both metrics that are still lagging compared to global peers. Higher revenue contribution from international markets. Prospects to increase margins due to strong bargaining power of top game developers. Still 'constructive' on China's internet sector China has in recent months proposed new regulations affecting tech players in the country. Among draft regulations that have been released include those aimed at microlending and anti-competitive practices. Those additional rules will ultimately help Chinese internet companies grow in a sustainable way — and will not likely dash their growth prospects, said J.P. Morgan. That's why the bank remains "constructive" on the internet sector. "The accelerating structural shift of consumer behavior from offline to online also bodes well for the long-term growth potential," the bank's analysts said. "Essentially, the internet sector remains a critical pillar of China's economic transformation scheme and technology self-reliance initiative," they added, recommending investors should accumulate shares in the sector as prices turn weak.

People play computer games at an internet cafe in Fuyang, China's Anhui province.

Lu Qijian | Visual China Group | Getty Images

(This story is for CNBC PRO subscribers only.)

SINGAPORE — Chinese internet stocks made "remarkable" gains in 2020 as the Covid-19 pandemic pushed more commercial activities online — but this year also marked the end of China's easy regulatory environment for tech companies, according to J.P. Morgan.

Chinese regulators, like their peers in the U.S. and European Union, are figuring out new rules to rein in monopolistic behavior in the tech industry.

That "will likely keep the investors on the sidelines until there is further clarity on anti-trust rules, including detailed guidance and, more importantly, the law enforcement," J.P. Morgan analysts wrote in a Tuesday report.

For investors still interested in buying Chinese tech stocks, the analysts shared one way to get around risks brought on by the tightening rules on the sector.