Morningstar names its top picks as investors sell off Chinese stocks

Published Sun, Aug 1 20217:46 PM EDTUpdated Sun, Aug 1 20217:54 PM EDT

Beijing's recent crackdown on the tech and private education sectors led to a sharp sell-off in Chinese stocks — but there are opportunities for long-term investors, according to Morningstar. The Hang Seng Tech index, which tracks the 30 largest technology stocks listed in Hong Kong, is down more than 19% year-to-date — far worse than the broader Hang Seng Index which fell nearly 5% the same period. Top picks for tech While there are still a lot of uncertainties and risks, the sharp fall in Chinese tech shares presents "selective opportunities" — especially the ones with a durable competitive edge, said Lorraine Tan, director of equity research in Asia at investment research firm Morningstar. "Given the fall in share prices we saw in leaders like Baba [Alibaba] and Tencent, these are the two names we still think that they have promise in the long-term positive free cash flow that we are looking at," she told CNBC on Friday. Chinese e-commerce giant Alibaba and gaming behemoth Tencent have built massive consumer networks, after years of investing in various sectors and numerous tech start-ups. For a long time, they have excluded each other from their main networks, but that's about to change after Beijing launched antitrust investigation into both companies, Tan said. "The strength of the networks these two companies have built up, basically enable them to bring up new services and new products ... they will also be able to benefit from opening up of each other's platforms as well," said Tan. "So overall, we think at the current share price levels, a fair bit of risk is already factored in." In her notes to CNBC, Tan acknowledged that concerns over tightening Chinese regulations have not faded. Those concerns and the government calls for internet companies to play a larger role in creating social value will continue to put pressure on profit. "Only if we see a clear change in the tone of regulators or the Internet companies trading at an attractive valuation — below one standard deviation forward multiples— would lead to more confidence for investors to buy into the sector," she wrote. Top pick for energy Oil demand is expected to continue growing as vaccination rates in developed countries rise, according to Morningstar. As such, it appears the firm's forecast for a full recovery in demand in 2022 is on track, she said. Lorraine's top energy pick in Asia is China National Offshore Oil Corp , or CNOOC. "We hold a long-term view on oil prices, the equilibrium rate to be coming in at around $60 [per barrel]," she told CNBC. "CNOOC is a pure upstream player, still good upside for its free cash flow. Based on current efficiency that it has, it has a pretty low extraction cost for oil." An upstream company is one that deals primarily with the early stages of exploration and extraction in the oil and gas industry. The key risk she highlighted in the stock is that CNOOC is currently on the ban list from the U.S., "but I don't think it will have huge impact on the actual operations." "It has strong enough cash flow not to require capital raising at this stage," she added. CNOOC was among the companies blacklisted by the Pentagon in December over its alleged ties to the Chinese military.

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Morningstar: Selloff in Chinese tech stocks presents selective opportunities

Squawk Box Asia

Beijing's recent crackdown on the tech and private education sectors led to a sharp sell-off in Chinese stocks — but there are opportunities for long-term investors, according to Morningstar.