Chinese technology sector valuations attractive despite rally, says Franklin Templeton

Asset manager favours mainland e-commerce firms because of their global expansion potential

PUBLISHED : Tuesday, 16 January, 2018, 6:46pm
UPDATED : Tuesday, 16 January, 2018, 10:43pm

Franklin Templeton Investments is confident about the Chinese technology sector despite a strong rally, as valuations remained attractive and the industry was only just starting to develop, the global asset manager said on Tuesday.

Traditionally, emerging economies have relied on increases in population and export of resources for economic growth, but technological developments mean these countries can now catch up with developed economies at a much faster pace, said Eric Mok, senior vice-president and portfolio manager at Templeton Emerging Markets Group, a part of Franklin Templeton.

“At this point, valuations of many big e-commerce [companies] are not expensive,” Mok said in Hong Kong. “Nobody has dominated the Southeast Asian or African emerging markets yet, so this opportunity is likely to be reflected in their valuations.”

Mok said China has the biggest number of internet users at 721.4 million, followed by India at 462.1 million and the United States in third place, with 286.9 million users.

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The US-based company said it prefers Chinese companies related to e-commerce, cloud computing and digital payments given the opportunities for these to expand abroad – which they have done so, in Southeast Asia and potentially also into African emerging markets.

The price-to-earnings ratio of the MSCI China Index based on earnings of the past 12 months was at 16.3, much lower than the MSCI World Index’s 20.8 . But the weight of the IT sub-sector of the MSCI Emerging Markets index rose to about 27 per cent in 2017 from about 23 per cent in 2016, and from less than 10 per cent in 2007.

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Mok said he was cautious about Chinese search engine businesses, while the biggest risk facing computer gaming and social media stocks was tighter regulation over banking and finance policies.

Nobody has dominated the Southeast Asian or African emerging markets yet, so this opportunity is likely to be reflected in their valuations
Eric Mok, senior vice-president and portfolio manager, Templeton Emerging Markets Group

In a research note by the Industrial and Commercial Bank of China International, analysts including Yu Jian-peng and Martin Bao said short internet videos were the latest internet trend to keep an eye on.

They cited iResearch data that shows China’s short video market rose by 183.9 per cent year on year to 5.73 billion yuan (US$889.8 million) in 2017, and that it would rise further to 35.68 billion yuan by 2020.

Ricky Chau, vice-president and portfolio manager at Franklin Templeton Investments (Asia), said valuations of Asian and Chinese e-commerce stocks were still considered attractive because the market was only starting to develop, and companies’ margins had not returned to previous peak levels yet.

Chau also said he liked Chinese commodities because overcapacity had been cut following industry consolidation, and that he expected the Hong Kong utility sector to underperform in an environment of increasing rates.

Franklin Templeton Investments has assets worth US$753.8 billion under management globally.