Citic Securities released a research report sayingFreetoplaytoearnnftgamesAt present, Hengke head Technology Internet Company is facing a clear marginal improvement in the external environment, operating performance has bottomed out and rebounded, and the valuation level is still at an all-time low. Under the trend of increased valuation preference and better liquidity expectations, the cashing of corporate performance repairs and valuation increments from new business are expected to provide further upside catalysis. The bank recommends that attention be paid to the Hang Seng Technology Index and head technology Internet companies with undervalued, solid competitive advantage, obvious performance improvement trend and sound cash flow.

The views of Citic Securities are as follows:

The performance of the Hang Seng Technology Index is still low and market confidence has not yet recovered.

The Hang Seng Technology Index peaked in February 2021 and continued to decline due to trade disputes between China and the United States and continued outflows of allocation funds. In the long-term dimension, the Hang Seng Science and Technology Index has risen slightly by 2% since 2017.Freetoplaytoearnnftgames.6%, the Nasdaq index rose 178% over the same period.Freetoplaytoearnnftgames.9%. In the short term, the Hang Seng Technology Index has fallen 16.6% since 2023, while Jinlong China Index has fallen 8.4% over the same period, and the Nasdaq Index has risen 55.3%. Although the Hang Seng Technology Index rebounded slightly in February 2024, it remained low as a whole. At present, the absolute valuation of the Hang Seng Technology Index and the discount to the valuation of US stocks are at historic lows. The Hang Seng Technology Index currently has a PE-TTM of 21.10, a low of 10.4% since July 2020. The NASDAQ currently has a PE-TTM of 41.87, while Hengke's PE is only 0.51 times that of the Nasdaq, which is also at the low 10.4% percentile.

The performance of Hengke head Company rebounded in 2023 and is expected to stabilize.

Unlike the weak valuation performance of Hengke, the bank found that the performance of head technology companies bottomed out in 2023. The bank selected Meituan, Xiaomi, JD.com, Alibaba, Tencent, Kuaishou, NetEase and Baidu as representatives of Hengke head company, whose performance bottomed out and rebounded. In 2023, the combined revenue of the eight companies grew by 7.4%. In terms of expectations, the market consensus on revenue for Hengke head Company in 2024 experienced a continuous decline from January 2022 to the end of 2023, with a cumulative decline of 24.2%, but in the last three quarters, the market's revenue forecast for Hengke head Company in 2024 remained relatively stable and rebounded slightly in April. The bank believes that the previous market revenue expectations for Hengke head company has fully reflected the pessimistic mood in the market, and the improvement in performance and expectations is expected to bring upward catalysis to the share price. Improve operating conditions and optimize cash flow quality. In 2023, the operating cash flow quality (operating cash flow / net profit) of eight Hengke head companies reached 198%, the highest in the past five years.FreetoplaytoearnnftgamesThe operating cash flow quality of the seven giants of US stocks in 2023 was 139%, which was lower than that of Hengke head Company.

Strong buybacks may offset the impact of configuration reduction of major foreign shareholders.

Abundant cash flow provides favorable support for large buybacks. As of April 9, 2024, the total repurchase amount of Hengke head Company reached HK $185.334 billion in the past year. Looking ahead, Tencent's annual report shows that the size of its buybacks will at least double in 2024, from HK $49 billion in 2023 to more than HK $100 billion in 2024. Alibaba FY2023Q4 reported that the company added $25 billion to its buyback plan, bringing the total outstanding repurchase balance to $35.3 billion, which is expected to be completed by March 2027.

For some companies with a high proportion of foreign ownership, large buybacks can effectively hedge against the outflow of major foreign shareholders. Take Tencent Holdings as an example, its South African major shareholder Naspers Limited sold 1.92 and 190 million shares in March 2018 and April 2021 respectively, while the company has bought back 206 million shares since 2023, accounting for 2.1% of the company's total share capital. The bank estimates that the repurchase amount reached 59.273 billion yuan, more than the number of shares sold by South African major shareholders in a single time. Naspers's shareholding has also fallen to 24.99 per cent from 31.17 per cent at the beginning of 2018. Considering the decline in the proportion of foreign shareholders, the bank believes that the buyback willingness of Hengke head can hedge the negative impact of the reduction of foreign shareholders on the stock price.

Investment strategy:

The bank judged that Hong Kong technology Internet companies are expected to usher in valuation repair. At present, the valuation of Hang Seng Technology Internet sector continues to be on the low side, which fully reflects the pessimistic expectations of global investors. At the valuation level, the Hang Seng technology index PE absolute value and its relative sub-index valuation discount are both at a low of 10.4%. In terms of performance, the income and profit growth rate of Hengke head company hit bottom, the ratio of operating cash flow to net profit continued to improve, and the cash flow situation was better than that of similar companies in the United States. At the same time, the buyback scale of Hengke head company has increased significantly, and technology Internet companies represented by Ali and Tencent have launched large buybacks in the past two years, reflecting the positive attitude of industrial capital. The bank continues to be bullish on the long-term competitiveness of Chinese technology companies and their ability to iterate in the face of new technology trends such as AI, prompting investors to focus on opportunities for valuation repair for Hang Seng technology and Internet companies.

Risk factors: 1) policy regulation leads to further downward valuation of the sector; 2) macroeconomic growth slows, resulting in lower-than-expected growth in e-commerce, gaming, advertising and other industries; 3) the Fed's interest rate cut is not as fast as expected. RMB exchange rate continues to be under pressure; 4) Internet companies reduce costs and efficiency less than expected, resulting in lower-than-expected performance; new business and new market expansion falls short of expectations, or investment losses exceed expectations. 5) the impact of the new regulations on personal privacy and data security on advertising revenue exceeds expectations, which leads to lower-than-expected advertising revenue; 6) the risk of core shareholders' reduction.