JPMorgan says 3 stocks could be winners if U.S.-listed Chinese stocks avert delisting

Published Mon, Apr 4 202211:23 PM EDT

JPMorgan has new confidence that U.S.-listed Chinese stocks may be poised to gain amid hopes that they may not have to delist. U.S. government announcements in recent months have rattled investors with fears that Chinese companies traded on U.S. exchanges via "American Depositary Receipts" would fail to meet audit requirements and face delisting. "We believe that easing geopolitical tensions and improving US-China cooperation over audit records for US-listed China ADRs should improve investor sentiment for this group of stocks," Wendy Liu, the firm's chief China equity strategist, and a team wrote in a recent report. "Such a cooperative outlook is far more positive than spillover sanction fears in the past month." The investment bank's equity macro research team cited news reports and the team's conversation with an unnamed expert the week of March 21 as offering positive signals of greater China and U.S. cooperation on finance. On March 16, a Chinese state media report of a financial stability meeting chaired by Chinese Vice Premier Liu He said Chinese and U.S. regulators are progressing toward a cooperation plan on U.S.-listed Chinese stocks. The U.S. Public Company Accounting Oversight Board confirmed in a statement to CNBC it has been meeting with Chinese authorities, but warned that "speculation" about a final agreement is "premature." "Closer accounting and audit cooperation between the US and China should improve the quality of reported financials to the benefit of minority shareholders," the JPMorgan report said. "Investors who agree with this positive view can consider expressing the view via the following custom basket." Here are the basket's top three holdings, as selected by the firm's quant and derivatives team: Alibaba Chinese e-commerce and tech giant Alibaba ties with Tencent for the greatest weighting in the stock basket, at 20%. Over the last 18 months, the company has become a poster child for Beijing's crackdown on alleged monopolistic practices by internet technology companies. Regulators suspended Alibaba affiliate Ant's massive IPO just days before the planned listing in November 2020. Then authorities fined Alibaba about $2.8 billion in April 2021 after an anti-monopoly probe. Alibaba's U.S.-listed shares have risen from 52-week lows hit on March 15, but are still down over 60% from just before Ant's IPO suspension. Tencent Hong Kong-listed Tencent also has a 20% weighting in JPMorgan's selection of stocks, called the "China Internet + Re-open Basket." The gaming and social media giant has come under Beijing's regulatory crosshairs in the last several months, which weighed on business performance. In March, the company reported revenue of 144.18 billion yuan in the fourth quarter, missing Refinitiv expectations for 147.6 billion yuan. Year-over-year revenue grew by 8% — the slowest pace since the company went public in 2004. Shares are up about 32% from 52-week lows hit on March 15. But the stock trades near lows last seen during the height of the pandemic in China in the first quarter of 2020. JD.com JD.com , Alibaba's main e-commerce rival in China, has the next highest weighting in JPMorgan's stock basket, at 15.7%. The Chinese company has sought to compete by building out its own logistics network that can deliver goods the same day or the day after customers place orders. In March, JD.com reported a 23% year-on-year increase in net revenue to 275.9 billion yuan ($43.11 billion) for the fourth quarter. That beat analyst expectations for 274.45 billion yuan, according to Reuters. Shares have surged by 52% since a 52-week low on March 14, but the stock remains 9% lower year-to-date. Although the stocks may have been included in JPMorgan's basket play for a specific investment theme, the investment bank still rates the individual names underweight. That's based on expectations of underperformance versus the analyst team's overall coverage over the next six to 12 months. — CNBC's Michael Bloom and Arjun Kharpal contributed to this report.

A US and a Chinese flag wave outside a commercial building in Beijing, 09 July 2007.

Teh Eng Koon | AFP | Getty Images

JPMorgan has new confidence that U.S.-listed Chinese stocks may be poised to gain amid hopes that they may not have to delist.

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