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China’s technology sector has hit a rough patch

China’s technology sector has hit a rough patch

‘It’s complicated.’

Two words that best describe how China’s technology investors currently feel about the sector amid additional US tariffs and key man risk.

On Thursday, retail investors oversubscribed to Meituan Dianping’s initial public offering (IPO) in Hong Kong by a mere 0.5 times.

The figure lies in stark contrast to the 653 times retail oversubscription of Ping An Healthcare and Technology earlier in May, and the 392 times oversubscription seen by ZhongAn’s IPO last year.

‘This year, we’ve seen a succession of Chinese IPOs that all seem to share two significant characteristics – high valuations and ongoing operating losses,’ said Brock Silvers, managing director of Shanghai-based private equity firm Kaiyuan Capital.

‘China’s slowing economy and intransigence on trade, in an atmosphere of globally rising rates, combine to paint a bleak near-term picture for China’s equity markets,’ he told Citywire Asia.

Chinese technology-focused indexes are down year-to-date, and the sector has been rocked by recent developments in US trade policy as well as company-related developments.

For instance, last week, technology giant Alibaba’s chairman Jack Ma announced that he will step down from his role in September next year. What's more, the CEO of JD.com, Liu Qiangdong, was arrested in Minnesota in a sexual misconduct case.

While markets reacted positively to Ma’s announcement, that wasn't the case for JD.com, which saw stock price fall to 25.75 from 31.30.

‘Should Liu be prosecuted in the US, the stock will probably plummet. But Liu could simply appoint a qualified outsider as his successor, and that tumult could be a buying opportunity,' Silvers said.

JP Morgan Asset Management’s Oliver Cox, meanwhile, suggests that investors should be selective within Chinese technology.

The portfolio manager of the JP Morgan Pacific Technology fund prefers internet and gaming companies, stating that the fundamental outlook for hardware and component makers are ‘somewhat cloudier’.

JP Morgan continues to be bullish on the big names in internet and gaming, such as Tencent, Alibaba and Baidu, backed by multi-year growth opportunities in the gaming, e-commerce, search and social media sectors.

‘The negative share price action over the past six months has provided us with the opportunity to increase exposure to this highly attractive area at valuations which we believe represent near-bargain levels on a five year view,’ Cox said.

Cox’s fund returned 48.4% last year, but has been down 5.3% so far in 2018.

In terms of hardware manufacturers, China’s Made in 2025 investment master plan is bound to create some leaders, but it is unclear which companies will make the cut, Cox said.

‘The impact of domestic and international competition as well as the short-run costs that tariffs impose make it difficult at this time to establish which businesses are more robust and able to sustain long-term profitability,’ he explained.

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