Roughly a year after China's internet technology stocks took a beating from new regulations, JPMorgan now sees clear business opportunities for a few companies. Stocks of tech giants like Alibaba have fallen in the last year as Beijing scrutinized monopolistic practices, and called for greater distribution of wealth. "Instead of bottom-fishing the entire sector, we recommend investors be selective on trends and stocks with high certainty events that are not priced into the current share price," Alex Yao and other JPMorgan analysts said in a Jan. 17 report. "Our top picks include: Kuaishou , Tencent , Baidu , JD , Meituan and NetEase ," said analysts at the Wall Street bank. Earnings revisions offer the best entry point for investors in the longer term, since the bank's analysis indicates earnings cuts were a bigger driver of Chinese tech stocks' performance last year than regulatory developments, they said. Here are three of JPMorgan's picks and why the investment bank is bullish on them. Tencent Tencent fits right into JPMorgan's investment thesis for a company-specific, "high certainty event," the analysts said. They expect the Chinese gaming giant to sell more of its investment portfolio, helping the stock as the divestures reveal previously unrecognized value. "As of Jan 14, 2022, Tencent's public equity investment book adds up to USD118b, accounting for 20% of Tencent's market cap," the analysts said. Some divestures are already happening. The tech company sold shares this month in Singapore-based e-commerce and gaming company Sea. Last month, Tencent pared its holdings in Chinese e-commerce and logistics company JD.com through a special dividend distribution to shareholders. Tencent's investments had grown so large that by 2020, holdings in publicly listed companies, excluding subsidiaries, rose by more than the profit earned that year, according to the annual report. Baidu JPMorgan's analysts believe Baidu "is a clear beneficiary" as China cracks down on alleged monopolistic practices by large tech companies. The anti-competitive practices, which can prevent users of one platform from easily accessing a rival's platform at the same time for a similar product, are sometimes called walled gardens. "An opening of Chinese walled gardens to Baidu's search engine will increase content and service supply of the search engine, which should lead to both greater value proposition to consumers and higher commercial value, in our view," the report said. "Among the currently unsearchable content, we believe product listing information of [Alibaba's] Tmall and Taobao offers the most value to Baidu's ads monetization and therefore an opening of Tmall/Taobao to Baidu should be a key catalyst to the stock," the analysts said. More than 60% of Baidu's revenue comes from online marketing. Bilibili Amid China's tech crackdown, the JPMorgan analysts expect investment opportunities can come from new media platforms like Bilibili that are gaining market share. The gaming and video platform is popular with young Chinese people, known as Generation Z — loosely defined as those born between the late 1990s and early 2010s. That means Bilibili is a likely beneficiary of new marketing trends in which brands advertise on specific platforms ahead of product launches to reach a target audience, the analysts said. They expect Bilibili to be among the new media platforms that will benefit this year from strong advertising revenue growth of 60% to 80%. Such growth would come at the cost of brands reducing advertising spending on traditional media platforms, including long-form videos and online blogs, the report said. "We recommend investors avoid operators that will likely lose market share in 2022." Bilibili said revenue from advertising more than doubled in the third quarter from a year ago to the equivalent of $181.9 million, accounting for about 22.5% of total revenue. — CNBC's Michael Bloom contributed to this report.
A man stands next to a 5G sign at the Tencent Global Digital Ecosystem Summit in Kunming, China, May 23, 2019.
Stringer | Reuters
Roughly a year after China's internet technology stocks took a beating from new regulations, JPMorgan now sees clear business opportunities for a few companies.