China is an 'attractive market' with 'inexpensive' stocks after big drops, fund manager says giving 3 picks

Published Mon, Oct 24 20228:29 PM EDTUpdated Tue, Oct 25 20229:36 PM EDT

Chinese stock markets have been unloved by investors recently. This week started with another fresh bout of selling , with Chinese tech giants Alibaba and Tencent shedding more than 11% on Monday alone. But the fact that the MSCI China Index is down by more than 50% since the start of 2021 means it is an "attractive market" for investors to return, according to Foord Asset Management's Brian Arcese. "China, in particular, is an attractive market [when stocks are] under 10 times earnings," Arcese said when speaking to CNBC "Pro Talks." "There are fantastic well-run private companies that are also trading at inexpensive valuations." Authorities in Beijing have enacted sweeping regulations primarily targeting its tech industry over the past two years. Investors have taken fright of such moves, leading to billions of dollars of value being wiped off China's stock markets. China's zero-Covid policy and the ongoing real estate slump have also taken a toll on its economy. As a result, official data showed third-quarter GDP growth of 3.9% from a year ago, well below the official target of around 5.5%. However, given the economic environment, the government is now looking for ways to boost the economy, and there are signs the crackdown on technology companies may be easing, according to Arcese. "We do believe that the regulatory overhang is abating," said Arcese, who manages two funds overseeing $1.6 billion in assets. "We think that as that uncertainty goes away, those companies that are quite cash generative [look] extremely inexpensive." Stock picks More than 12% of the $368 million Foord Global Equity Fund managed by Brian Arcese is allocated to three Chinese company stocks: Tencent, Alibaba, and JD.com . JD.com enjoys a buy rating from 17 out of 18 analysts covering the stock. The average price target of 291 Hong Kong dollars ($37.1) means analysts expect the stock to rise by 105% over the next 12 months. Xiao Ai and James Cordwell, analysts at Atlantic Equities, said in a note to their clients, "We expect JD to continue gaining market share in e-commerce, driven by demand shifting to less discretionary categories where JD has better exposure." Alibaba, JD's competitor and one of the largest companies in China, is buy-rated by 45 out of 47 analysts surveyed by FactSet. The median price target at 135 HKD signifies a 119% upside potential. Meanwhile, technology and entertainment company Tencent is rated as buy or overweight by 48 out of 55 analysts. On average, analysts have a 397 HKD price target on the stock equating to a 92% upside. James Lee of Mizuho Securities, one of a handful of analysts with a neutral rating on the stock, said, "Tencent reported a mixed quarter due to lower promotional activities for games and regulations on advertising. The gaming business in China remained challenging due to a lack of new major titles and a slower approval process." The overwhelming number of buy ratings come from analysts after shares of all three companies have fallen by more than 55% over the past year. Arcese said he was "comfortable" with current valuations and believes investors will return to China. "In the next 12 months, we would expect valuations to start to rebound in China," he added.