Chinese stocks are looking cheap. Fund manager explains why he’s betting on Alibaba

Investors may still be nervous about Chinese stocks despite massive declines that have made them compelling, but portfolio manager Sid Choraria assures tech titan Alibaba is no “value trap.”

To classify Alibaba as one, investors would have to believe that the e-commerce giant’s growth will be in the single digits, said Choraria of SC Asia.

A value trap is a stock that appears cheap because of a low valuation as measured by metrics like price-to-earnings ratios, which compares the current share price to the company’s earnings per share. But these low-priced stocks could become “traps” for investors if the company is plagued by financial instability or sluggish growth.

Choraria said Alibaba’s growth is healthy, well in the double digits for its e-commerce and cloud-computing businesses.

“I mean, the cloud computing division is … an $11 billion revenue business that I expect will be $25 billion revenue in three years’ time,” he told CNBC’s “Street Signs Asia” in a recent interview. “Digitalization is not going away in China — and that’s a significant part of development.”

“If Alibaba generates the type of cash that it is [making], it’s not a value trap at these levels. Now, if it’s … only at low single digits, it’s going to turn out to be a value trap,” he said.

He said Alibaba is one of “less than 10 companies globally” that generate $15 billion in free cash flow, the money a company has on hand after paying off its operating expenses and capital expenditure.

And for growth to drop that much from recent levels, Choraria said the economy would have to slow down significantly.

“As a fund manager, I’m betting on Alibaba,” he said. “I like the odds with Alibaba for the next 5 to 10 years,” noting, however, he has “no idea about the short term.”

Chinese tech stocks have plunged in the past year in the wake of China’s regulatory crackdown as well as looming delisting risks for Chinese stocks in the U.S.

The Hang Seng tech index has cratered around 40% from a year ago. Alibaba shares listed in Hong Kong and the U.S. have dived nearly 49% in the same period.

Valuations have “become way too compelling” and that’s why Chinese stocks are outperforming the Nasdaq significantly this year, Choraria said. He added “we’re also approaching, potentially, the end of the significant regulatory action” on the Chinese tech giants.

In the past three months, the KraneShares CSI China Internet ETF has risen around 43%, while the Nasdaq has lost around 14%.

Some investment banks have also been calling for investors to get back into China stocks. Goldman recently named stocks it says are now at attractive valuations.

China has started to reopen some cities as the worst of the recent Covid wave ebbed, and the government is increasing fiscal investment.

In a recent note on Chinese equities, Morgan Stanley said investors should “start adding growth exposure amid final leg of [the] bear market.” It warned, however, that investors need to monitor lingering uncertainties “before turning outright bullish” on Chinese stocks.

Some risks include pressure on China’s beleaguered real estate bond market as firms struggle to meet repayment deadlines, as well as uncertainties around the U.S.-China audit dispute. Chinese companies could potentially be delisted from U.S. exchanges if American regulators cannot review company audits for three consecutive years. The two countries have discussed a potential deal to avoid delistings.