How bubbly are Chinese tech stocks?
Every day the Chinese market goes up (and it seems to go up only on days that it’s open), some Western commentator finds it necessary to explain after the fact why it shouldn’t. Chinese tech stocks are trading at an “average” 220 times earnings, Bloomberg News reports today under the headline, “U.S. Dot-Com Bubble Was Nothing Compared to Today’s China Prices.” Not exactly: the average factors in a lot of startups with no revenues. The majority of market capitalization in China’s tech sector, though, trades at far lower valuations–and nothing like the 500 times earnings at which the NASDAQ peaked in 2001.
The largest-cap Chinese tech stocks trade at P/E’s ranging from 20 to 60.
Alibaba’s P/E trades at the lower end of the range, at 28 times earnings.
Alibaba’s closest American equivalent is Amazon, which trades at 120 times earnings.
Considering that China’s e-commerce revenues are growing by 30% a year, and Alibaba has a dominant position in Chinese e-commerce, a valuation of 28 times earnings is not bubbly. The stock may do well or poorly–Asia Unhedged does not have an opinion on the merits of BABA US at today’s price–but the P/E ratio is not inherently unreasonable. In the U.S., where e-commerce revenues are growing only half as fast (by 15% a year), Amazon has a much more aggressive valuation.
China’s tech sector is hard to value, to be sure. In some ways China will leapfrog the United States: the Chinese have smartphones (the country shipped 389 million smartphones last year alone), but not always automobiles (China in 2013 had 100 cars per 1,000 people vs. over 800 in the United States). They do not drive to malls, but shop on the Internet. The Chinese are faster to adopt new technologies because they have not had the opportunity to get used to old ones. By 2020 China plans to offer free Wi-Fi in all areas of all its major cities, as well as half of rural areas. China’s protected “Intranet,” shielded from foreign competition for protectionist as well as national security regions, have given local companies the chance to thrive in the world’s largest market. Upstarts like Xiaomi offer smartphones that can do almost everything a top-of-the-line Samsung or Apple handset can do at half the price. Shopping, gaming and socializing on the Internet come naturally to a new generation of Chinese.
One can make a case for or against Chinese tech stocks, but the most important Chinese tech companies have real businesses with real revenues. The “bubble” characterization is wholly inappropriate.
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