JPMorgan is changing its tune on Chinese stocks.
Just about two months after deeming dozens of Chinese companies 'uninvestable,' analysts at the bank upgraded a handful of Chinese tech stocks, including Tencent, Alibaba and Meituan as regulatory fears start to ease. Brendan Ahern, CIO, KraneShares joined Cheddar's Opening Bell to discuss.


Opening Bell

JPMorgan Upgrades Chinese Stocks After Calling Them 'Uninvestable'

Welcome back to Cheddar is opening bell. Jpmorgan is changing its tune on chinese stocks just about two months after deeming dozens of chinese company quote un investable analyst at the bank are going all in now, Jpmorgan upgrading a handful of chinese tech stocks including Tencent and Alibaba and mate juan as regulatory fears start to ease for more on this as bringing Brendan, Ahern ci o at crane chairs, Brendan. Why did the bank initially call these stocks un investable? And it's only been two months since kind of making that claim And we're seeing this stark change here. What's behind that change in tune? Yeah, the main catalyst for the downgrade back on March 14 was a regulatory delisting and geopolitical risks that we had been really weighing on the securities, I would argue for up to a year at that point. Uh, so, so those were the three primary drivers for the initial downgrade. And obviously we've seen a pretty significant flip flop the other way. Obviously this upgrade comes at a time where china's economy is starting to suffer. We're seeing that impact and pull back in the economy as they just had these persistent, um, you know, lockdowns, it's really tight kind of covid 19 policy that's lingered behind most of the world. Quite honesty and it's had an effect on almost every sector, not only in china's economy, but more globally. Right on this, on this macro level. Do you see this as a potential kind of buying opportunity, you know, which specific companies are you having an eye on and which would you avoid here? Well then, you know, two years ago we called these Hong kong and us listed china internet stocks work from home stocks. So, so there's a slight argument that despite the obviously the significant effect lockdowns, particularly we've seen in shanghai, which, you know, you've got a significant court there. Uh, These companies in some ways are arguably beneficiaries to the lockdown policies. You know, you have to order food, you're spending more time on online video, online gaming. So, so yes, I think it's it's gonna be, it's gonna weigh on the on these companies were seeing that to some degree in Q. Q. One financial results? We know Q two will probably be be mediocre at best, at the same time, the stock market is forward looking and policies support toward the sector is an area that I think investors need to focus on in the second half of this year. So obviously, again, China is showing signs of easing its regulatory crackdown on the tech sector. But there are cautionary tales out there, You know, analysts saying, listen, this should not be a this may not be a blanket reversal and likely won't be a blanket reversal of policy. What are your thoughts on that? And do you think that we could ever see china make this total reversal of full U. Turn here? Well, we we do believe that that the china internet regulatory cycle is is likely over if not already over based on the statements from the Vice Premier liu, who who has really created the catalyst for the big reversal we saw in the markets on in mid March at the same time. His statements been backed up by the State council by Premier li So, so there's a lot of talk about more transparency, more communication about the regulatory oversight of these companies, user data user protection laws went into effect and the latter, um, in the latter part of last year. So, so I think, I think we're much less concerned about the china internet regulation, though, there's obviously other other factors at play that have weighed on investor sentiment. You know, I look at names like Alibaba and 10cent, these kind of, you know, traditional Chinese tech names. Those obviously have taken a quite significant beating over the past year amid, you know, even Pullbacks in the tech sector. And then obviously, the increased regulatory picture that has been painted over in China, both those stocks, I think down here today, at least 20%. What in particular, you know, from your perspective, has weighed on these companies the most. And do you think, um, you know, this Jpmorgan upgrade really re signaling for investors to have more confidence in these companies. And these could be winners amid a time where we're seeing that just this broader market pullback and people really looking for opportunity. Yeah, yeah. I think these companies do offer a fantastic opportunity for long term investors, just based on really, really significant discounts from a valuation perspective that's, you know, on on their own historical basis at the same time, relative to us tech, These companies look very, very inexpensive. So, so the fundamentals are a strong impetus. I think what investors need to recognize is what's weighed on. The names are non fundamental things. You have things like the internet regulation from china, you have the holding foreign companies accountable act which could see a potential delisting In 2024 though, there's been a lot of chatter about a potential solution coming there. You had tax loss selling on the securities at the end of last year and then obviously the Russian invasion of the Ukraine and the subsequent sanctions just just have made investors have come out of these names again for non fundamental reasons. At the same time, we believe these companies have gone through a decline reminiscent of The original Internet bubble back in the late 90s and where these stocks are down 60, 70, 80%. You know, you have a lot of companies buying back stock, very strong free cash flow yields, they're all trading below enterprise value. So, so I don't think you're ever going to be able to plant the flag and say, you know, the worst is 100% behind us. We just think the stocks encompass so much negativity that there's more likely to be upside than downside at this juncture. Yeah. Part of what I think I hear you saying also and I'm really glad you point out, you know, the fundamental picture is not necessarily what has been the biggest catalyst to pull these companies back because fundamentally a lot of them have continued momentum and growth moving forward. They're pretty sound companies. It's just that that you know, layer of, you know, geopolitical uncertainty or whether it be in a regulatory environment and the other things he pointed out there. Um, but but I also didn't think, you know, just last month, we look at the sec and that added over 80 companies to a list of entities facing possible delis king. Um you know, risk from american exchanges, you know, looking at JD dot com neo nazis, do you think these risks are starting to scare some U. S. Investors off even amid, you know, a bullish kind of call from, from Jpmorgan here. Yeah, I mean since last summer when the sec started to articulate how they would enforce the holding foreign companies accountable, Like I think you've seen a lot of investors come out of these names, you know, we here at crane shares, we've converted a significant amount of K. Web out of the U. S. A. DRS into the Hong kong share classes. So so we don't hold baba us anymore. We hold 9988 hk. We've done the same for JD Badu Billy Billy and Netease and we certainly do believe that while while there seems to be a lot of dialogue taking place between the US and china and solving this long running audit review issue it is a risk and we recommend all investors that if you're going to hold the individual names that you ensure that your broker dealer, your custodian allows for a D. R. Conversion something again that we've done within within K. Web already, you know, Instead of just specifically the tech sector want to get a broader read on China from you. Especially when it comes to like manufacturing. We've seen apple announcing plans to expand its production outside of China amid these persistent COVID-19 lockdowns and that's really weighing on the business there but not really unique to apple because that manufacturing component is really more broad especially for a lot of American companies that have part of their supply chains tied to china. What do you see as the future of manufacturing in china And how might kind of you know this impact china in the long term. Especially as you're seeing the word, even friend shoring being more of a thing right? You know a lot of you know M and S here in the US looking at places like India other countries that offer kind of cheap labor but with the possibility of having more friendly relationships and less risk. Well certainly for a company like Apple, it's not just that they manufacture in china but a lot of what they manufacture in china gets sold not only in china to the tune of over $60 billion in the trailing 12 china represents kind of mid teens in terms of aggregate revenue for apple and but but also china's in the heart of Asia, you've got four billion people across Asia. So so this idea that these these plants are coming back to the United States I think is a misnomer. The plants are gonna migrate across asia just because as china has gotten wealthier and wealthier, a lot of the low end manufacturing will migrate to cheaper countries if it's Vietnam Indonesia Malaysia Bangladesh. Right so so so china just because of its economic rise, low end manufacturing for more skilled skilled manufacturing, china is very, very ahead as well as the supporting infrastructure. It's it's not just you can manufacture and sell in china, you can move that via high speed rail via great highways and ports and the logistical know how so, so I think I think China will continue to be very important though. I would 100% agree that it will lose a lot of its low end manufacturing as you've seen saying lower, lower and clothing has moved out of China. Yeah, I mean china has been smart and really strategic in decades of building, building, building up that infrastructure to then have the dominance that it does have in the manufacturing space especially with some of these top names like an apple and beyond here, Brennan really appreciate your insight and your time, Brendan hearne, ci O at crane chairs.