Once upon a time, the acronym BAT signified sure-fire stock market bets, which bar the occasional blip was a winning, one-directional investment strategy. That story, however, seems to be firmly consigned to the realms of fairy tales, at least for now. Over the past year, it’s the word ‘BATTERING’, which has proven a far more apt description of the pounding that Baidu, Alibaba and Tencent (the BAT) have taken at the hands of fund managers.
All three companies’ share prices have experienced a particularly torrid ride in 2022. This has especially been the case since mid-February when they lost almost half their value in the space of one month, before regaining a lot of the lost ground during a single trading day in mid-March.
As of April 1, the troika are still trading close to individual historical valuation lows.
As we wrote in WiC578, the whole sector staged a sharp rebound after Chinese Vice Premier Liu He (reputedly President Xi Jinping’s most trusted economic advisor) emphasised the need for stock market stability during a meeting by the Financial Stability and Development Committee under the State Council. Alibaba’s ADR price surged 37% from $74.76 on March 15 to $104.98 on March 16.
Investors seem to have decided that while the company might not have put its regulatory woes behind it, the government has, at least, agreed to a ceasefire after spending one-and-a-half years cutting it down to size following founder Jack Ma’s ill-judged speech attacking the state run banking system (public remarks made in the run up to the aborted IPO of Alibaba’s fintech sister arm Ant Group). These must be viewed – in retrospect – as some of the most expensive words in business history. In October 2020, the ADR was trading at around the $317 level, almost three times higher than where it is today.
Alibaba is currently being quoted at around the $116 level, with the company trying to stabilise its stock price by expanding a share buyback plan from $15 billion to $25 billion. On March 22, the ADR rose 11% off the back of the announcement.
The question that investors and financial analysts are asking now is where the BAT troika and China’s other internet giants go from here? Do historical valuation troughs present equally historic buying opportunities?
So far, the stock market downturn has been fairly consistent across the board, with rival e-commerce platforms like Pinduoduo faring ever more badly than Alibaba. Its shares had dropped from a $200 level in mid-February 2021 to around $44 just over a year later.
S&P Global Market Intelligence data shows that financial analysts have consensus price targets that still suggest significant upside. Alibaba’s is $171.88 (a 48% uptick), Tencent’s HK$525.37 (a 38% premium on its present HK$380.6 level) and Baidu’s is $217.68 (49% upside).
At present levels, Alibaba is trading at roughly 13 times consensus forward earnings forecasts, while Tencent is at 20 times and Baidu at 14 times. For much of the past decade, Tencent has typically traded above 30 times, while Alibaba has traded in the mid- to high-20s.
Baidu has endured the widest range, spanning more than 30 times five years ago to depressed levels in the mid- to high-teens when it was struggling to find a new growth engine away from internet searches during 2020.
The problem all three now face is a fundamental change in investor mindset. Big global funds, in particular, are reported to be paying far less attention to business-as-usual valuation metrics.
There has been a wholesale shift away from a familiar world of pricing growth, which embrace more definable financial metrics like sales and margins. Instead, investors have moved into a landscape that is much harder to price: an investment context shaped by uncertainty risk.
The difficulties of quantifying intangible risks such as climate change and wars, meant that for many years investors were, to a greater or lesser extent, content not to price them into stock values. That era has lapsed.
Crises of leadership now extend over a wide geopolitical stage – embracing military conflict, the exodus of millions of refugees, and vast disruption to trade and investment flows.
Likewise, many investors initially thought that the Sino-US trade war was just that, a tug of war over trade deficits.
Now they have decided they need to price in an enduring geopolitical fault line between the US and China – one that is fanning out and impacting the economic decionmaking of their nearest allies too.
That flared up again this week after China’s foreign minister, Wang Yi, met his Russian counterpart Sergei Lavrov. Last month, US national security advisory Jake Sullivan had warned that China would face consequences (secondary sanctions; see page 9) if it helped Russia in Ukraine.
Unsurprisingly, the Chinese stocks which are on the front line of investors’ altered capital allocation strategies are the most liquid ones such as Alibaba and Tencent. As we wrote in WiC577, the outflows also picked up speed in mid-March after the US Securities & Exchange Commission (SEC) started the delisting process for Chinese companies on American bourses, following a political row about securing full access to their audit reports. The Accelerating Holding Foreign Companies Accountable Act (HFCA) further stipulates that US regulators must receive information about any Chinese government or individual official’s holdings too.
Bloomberg reported on Thursday that Baidu was among the worst performing Chinese tech stock after “the US securities regulator played down the prospect of an imminent deal to keep local firms listed on American exchanges”.
Another cloud hanging over BAT heads is China’s ongoing zero Covid-19 policy and its impact on the economy and consumer spending. It is another reason why financial analysts do not believe that investors will re-rate the three for some months to come.
All three reported big drops in net profits during their recent quarterly results: Alibaba and Tencent were down a quarter year-on-year, while Baidu was down by two-thirds.
Over the longer-term both Alibaba and Tencent emphasise how they are transitioning to new profit models. During the recent fourth quarter results briefing, Tencent founder Pony Ma articulated how China’s internet industry is “structurally moving towards a healthier model, returning to its roots centred on user value, technological innovation and social responsibility”.
The future will be about the quality of growth rather than its speed, although Alibaba is likely to shortly highlight the crossing of a key milestone – one billion annual active customers in China.
One key segment of its growth plans involves under-penetrated e-commerce segments such as food and home furnishings. Tencent, meanwhile, has seen high growth in overseas gaming revenues and will be hoping that the Chinese government will change tack over its domestic licence freeze for new gaming titles, which has been in place since last July.
Baidu also flags its own transition from search to intelligent driving and cloud services. During its recent results, founder Robin Li said that within three years, the company has set a goal of generating more revenue from its non-advertising businesses than its traditional advertising ones.
Of course, underlying all of what has been discussed above is something more fundamental, the very ‘investability’ of the Chinese private sector. The internet platforms are at the forefront of this debate. As the Financial Times reported last month, the main Australian pension funds have pulled back from buying A-shares, for instance, with UniSuper’s chief investment officer John Pearce telling the newspaper that regulatory crackdowns had just created too much uncertainty. The ‘Common Prosperity’ drive, he said, has also heightened the risk of government interference in the private sector. Rapid changes in policy could destroy an entire industry sector’s viability with “a stroke of a pen”, Pearce told the FT.
Indeed, investment bank JPMorgan downgraded 28 internet stocks a fortnight ago and declared them “uninvestable” over the next 12 months.
Ultimately the biggest challenge facing the BAT will be changing this market perception. Once a vase shatters it is very hard to put it back together. Such is the case with the damage to the BAT’s blue chip aura, perhaps.
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