Macquarie upgrades China internet stocks, citing stronger fundamentals and growth

Investing.com -- Macquarie has upgraded several Chinese internet stocks, citing improved earnings visibility and ongoing policy support from the Chinese government. 

Macquarie analysts in a note dated Monday flag upside potential for the sector, which has been trading at half the valuation levels seen in early 2023, despite stronger fundamentals. 

As per the brokerage, key players in e-commerce, travel, and local services sectors are positioned to benefit from both economic stimulus and operational efficiencies.

The note mentions that even though revenue across the sector has been affected by broader macroeconomic challenges, larger platforms have shown resilience through operating leverage and cost optimization. 

This has translated into an upward trend in earnings. Macquarie's analysts have increased their valuations for several stocks, aligning them with the outlook for fiscal year 2025, where they anticipate further government action to spur economic growth, particularly in consumption and digital services.

Among the top picks in the sector, Macquarie has upgraded Alibaba (HK:9988) and PDD (NASDAQ:PDD) to "outperform" from "neutral," while JD (NASDAQ:JD).com (HK:9618), Meituan (HK:3690), and DiDi Global (OTC:DIDIY) remain favored. 

These companies are expected to benefit from stabilizing competition in the e-commerce space and continued dominance in local services. Meituan and DiDi, in particular, are seen as "quality at a discount," with solid market positions and earnings potential.

Additionally, the brokerage flagged the potential for overseas expansion to serve as a long-term growth driver, with companies like Tencent (HK:0700), Pinduoduo , and Trip.com Group Ltd (HK:9961) well-positioned to capitalize on international opportunities. 

The note also mentions that investors should place greater value on the sector's global prospects, even as short-term volatility related to geopolitical tensions, including the U.S. elections and trade policy, may create buying opportunities.

Conversely, Macquarie remains cautious on online healthcare and logistics sectors, with Alibaba Health and JD Health downgraded due to concerns about competitive pressures and profitability.