A de-rating is possible for China’s richly valued tech sector, according to EFGAM’s Mansfield Mok.
‘Given the current stage of development, it is likely that China’s tech sector could witness a lot of merger and acquisition activity going ahead. Depending on how quickly they make these acquisitions and the valuations they pay, these might lead to higher operational expenses, which could lead to some earnings disappointments,’ Citywire A-rated Mok, who runs the New Capital China Equity fund, told Citywire Asia.
‘Growth might slow down from 40% to 35%, which, given the stock valuations, could lead to some de-rating.’
Mok noted that valuations in the sector are quite high currently. 'On a price to book basis, the sector is trading at 13-14 times and on a price to earnings basis, it is 30-40 times,' he said.
However, he noted that the e-commerce models of companies such as Alibaba and Tencent remain robust and unique. ‘I think their growth will continue to be strong, especially because e-commerce penetration is still very low in China,’ said Mok.
‘What these companies have established is a network. Now, they will be looking at the next step, which is making acquisitions to put their applications on various platforms.'
At the end of February, there was only ono e-commerce related stock in the top 10 holdings of the New China Equity fund.
More reforms coming soon
Overall, he’s more sanguine about prospects for China in 2015.
‘Reforms will be the dominating theme for this year,’ said Mok. ‘China’s 13th Five Year Plan starts from 2016, and as China hopes to make the transition from middle income to high income country, there will be much more by way of reforms,’ Mok pointed out.
These reforms could cover areas such as housing, corporates, financial markets, energy, etc, in addition to further state-owned enterprise (SOE) reforms.
Financial market reforms, in particular, will help SOE reforms as well, as lenders will be better able to price credit risk depending on the profile of the customer,’ said Mok.
‘Over the next few quarters, I expect securitisation of loans could be permitted,’ he added. 'It could start with mortgages.’
Given the current attractive equity valuations Mok maintains a positive stance on China. ‘We would consider opportunities to accumulate shares on any pull back, especially in view of a more market friendly action by People’s Bank of China – cutting the interest rates and the required reserve ratio (RRR),’ he added.