Macquarie Upgrades China Internet Stocks, Highlighting Improved Fundamentals and Growth

Macquarie has recently upgraded several Chinese internet stocks, highlighting improved earnings visibility and sustained policy support from the Chinese government.

In a note released on Monday, Macquarie analysts pointed out the upside potential for this sector, which has been trading at roughly half the valuation levels observed at the start of 2023, despite stronger fundamentals.

According to the brokerage, major players in e-commerce, travel, and local services are in an advantageous position to benefit from both economic stimulus measures and operational efficiencies.

The analysis indicates that while overall revenue in the sector has been impacted by broader macroeconomic challenges, larger platforms have demonstrated resilience through effective operational leverage and cost-cutting strategies. This resilience has resulted in an upward trend in earnings. Macquarie’s analysts have raised their valuations for several stocks, aligning them with an optimistic outlook for fiscal year 2025, anticipating additional government initiatives to boost economic growth, especially in the areas of consumption and digital services.

Among the sector’s top picks, Macquarie has upgraded Alibaba and Pinduoduo to “outperform” from “neutral,” while also favoring JD.com, Meituan, and DiDi Global. These companies are predicted to benefit from a stabilizing competitive environment in e-commerce and continued strength in local services. Meituan and DiDi, in particular, are regarded as “quality at a discount,” possessing solid market positions and earnings potential.

Furthermore, the brokerage noted that the prospects for overseas expansion could serve as a long-term growth driver, with companies like Tencent, Pinduoduo, and Trip.com Group well-positioned to harness international opportunities.

The note also advised investors to consider the global prospects of the sector, despite potential short-term volatility stemming from geopolitical tensions, including U.S. elections and trade policies, which may create buying opportunities.

On the other hand, Macquarie expressed caution regarding the online healthcare and logistics sectors, downgrading Alibaba Health and JD Health due to concerns over competitive pressures and profitability challenges.