Alibaba or Tencent: Which stock has the better outlook?
Alibaba and Tencent’s Hong Kong shares have returned over 28% and 40% to investors this year. Looking ahead, which stock has the greater price upside?
- Alibaba in talks to pump US$3 billion into Southeast Asian lifestyle app Grab
- Tencent reportedly considering establishing Singapore as regional hub
- Both stocks are up over 3% following the reports
- Analysts see double-digit share price upsides for both companies: What's the thesis?
Earlier this week, it was reported that both Alibaba and Tencent, the two biggest Chinese companies by market capitalisation, are seeking to invest in Singapore and launch new ventures and operations here.
Both stocks – among the most traded on the Hong Kong Stock Exchange – are up over 28% and 40% respectively this year.
Below, we take an in-depth look at the stock price predictions and fundamentals of each company.
Alibaba Group Holding (HKG: 9988)
Latest share price: HK$271.60 (US$35)
Average 12-month target price: HK$304.28 (US$39)
Estimated upside: 12%
The Alibaba Hong Kong stock has rallied 3.6% in the last one week, as equity markets steadied following a four-day tech correction that saw Alibaba accumulate an 8% erasure of market cap.
The e-commerce giant’s share price received a further boost this week, after Bloomberg reported that the group is currently in talks for a potential US$3 billion investment into Singapore-headquartered lifestyle and ride-hailing app Grab Holdings.
Following the news, Bloomberg Intelligence analysts Vey-Sern Ling and Tiffany Tam wrote that the planned investment could boost the user growth of its Singapore-founded e-commerce subsidiary Lazada, which ‘has been losing ground’ against Tencent-backed Shopee – also based in Singapore.
‘Lazada may tap the sizable ride-hailing and food-delivery user base of Grab, whose services typically have higher usage frequency than e-commerce,’ the analysts wrote.
The stock has a 12-month average target price of HK$304.28 (US$39) a share from 23 analysts polled by Bloomberg, alongside a majority ‘buy’ rating, as of 15 September 2020.
The target price represents a stock return potential of 12% from the last traded price of HK$271.60 (US$35) on 16 September.
Citic Securities analysts reiterated a ‘buy’ call and target price of HK$288 (US$37) on the same day that the Grab deal was reported.
Last month, analysts from Mizuho Securities raised their target prices on Alibaba after the company posted better-than-expected results for the June 2020 quarter.
Mizuho, which recommended a ‘buy’ call, stated that the impact of a potential US ban is low as the country represents less than 2% of the group’s consolidated revenue.
As such, they believe a FY21 revenue guidance of approximately 30% YoY growth ‘is conservative’. They raised their 2023 full-year core EBITA estimate by 2% to 373 billion Chinese yuan (US$55 billion) on potential ‘increased synergies and efficiency’.
On the other hand, Morningstar Research, which has a fair value price estimate of HK$264 (US$34), was more conservative in its thesis.
Sector strategist R.J. Hottoby wrote that he believes Alibaba’s adjusted EBITDA margin will not ‘revert to an upward trend in the next three years, unlike the consensus’ estimates’.
‘We continue to assume slow annual year-over-year adjusted EBITDA margin reduction due to the growing direct retail business and investments in the next three years,’ he said.
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Tencent (HKG: 0700)
Latest share price: HK$533.50 (US$69)
Average 12-month target price: HK$611.31 (US$79)
Estimated upside: 14.6%
Tencent Holdings has also reportedly picked Singapore as its main Asian hub, after facing bans in the US and India over national security concerns.
Bloomberg reported on Tuesday 15 September 2020 that the social media and gaming company has been considering establishing its regional headquarters in Singapore in light of the India eviction.
Tencent shares are up roughly 3.4% this week, and are trading at HK$533.50 (US$69) as of Wednesday 16 September 2020.
Earlier this week, Tencent’s main Chinese social media rival ByteDance was also reported to have decided on selling its TikTok operations in the US to software provider Oracle.
Following the news, Bloomberg Intelligence analysts Ling and Tam wrote that ‘Oracle’s TikTok win may increase competition for Tencent’, as ByteDance may now be forced to focus on the domestic market, with it losing its biggest market outside China.
The stock has a 12-month average target price of HK$611.31 (US$79) a share from 46 analysts polled by Bloomberg, alongside a majority ‘buy’ rating, as of 15 September 2020.
The target price represents an estimated stock return potential of 14.6% from the last traded price of HK$533.50 (US$69) on 16 September.
The most bullish of the latest price targets came from Credit Suisse, which raised its 12-month price target to HK$683 (US$88) from HK$643 (US$83) a week ago.
Mizuho Securities was much more conservative in its price prediction, with analysts giving the stock a ‘neutral’ rating and target price of HK$550 (US$71) – implying that the stock is trading close to peak market value.
In the middle of the pack was Essence Securities, which had a ‘buy’ call and HK$610 (US$78.70) target price on the stock, based on a 1.2X price/earnings to growth ratio.
The analysts wrote that they are optimistic about the company's game and social advertising long-term potential.
However, they noted that there are a couple of factors that could pose risks to their investment case.
Firstly, the performance of Tencent’s new games has not been as good as expected. Second, profit margin and advertising growth rate in the latest reporting quarter were also lower than expected.
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