Hong Kong Stock Focus: Is Hang Seng Tech expensive after the big rebound? How will the upcoming quarterly report be?

Hong Kong stocks continued their "May Day" rally yesterday, with the Hang Seng Index achieving a "ten consecutive gains" streak and the Hang Seng Tech Index surpassing 4000 points. Since April 19th, it has rebounded strongly by 21%.

The scale and speed of this "epic" rally in Hong Kong stocks far exceeded market expectations, attracting the attention of global market investors.

Internet companies have performed exceptionally well in this round of uptrend, leading to speculation: has the Hang Seng Tech Index become overvalued after the big rebound?

On May 6th, Morgan Stanley released a research report stating that currently, the forward P/E ratio of the Hang Seng Tech Index is 13 times, in line with the average for the fourth quarter of 2023, lower than the peak of 20 times in the first three quarters of 2023 and the first quarter.

Specifically, compared to the first quarter of 2023, except for Tencent Music which has a premium, the current stock prices of Ctrip Group, NetEase, Kuaishou, Tongcheng Travel, Joyy, Momo, and Weibo in the US or Hong Kong have all seen discounts. Among them, Joyy's current P/E ratio has dropped by 41% compared to the first quarter of 2023, indicating the greatest degree of undervaluation.

Tencent Music's current P/E ratio is 20.4 times, a 47% increase from 17.2 times in the first quarter of 2023.

The report also explains the reasons that may lead to these companies being priced at a premium or discount relative to 2023:

Ctrip Group (TCOM.O): Unique positioning in domestic, overseas, and international expansion, limited market competition/slowing domestic growth.

Tencent Music (TME.N): Accelerating music revenue growth, stronger profitability/premium already in 2023.

NetEase (NTES.O): Higher profit margins and dividends/current low P/E ratio, including soft growth in new and existing games.

Kuaishou (1024.HK): Strong profitability and buyback plan/user engagement has peaked, high P/E ratio in 2023 due to low profit margins.

Tongcheng Travel (0780.HK): Strong tourism consumption, more new businesses or M&A activities/slowing growth, weaker domestic growth than Ctrip.

Joyy (YY.O): Resumed growth since the third quarter of 23/Termination of YY Live acquisition agreement.

Momo (MOMO.O): Slowing growth, reduced profits (discount).

Weibo (WB.O): Slowing growth, decreasing market share (discount).

What about the upcoming quarterly report?

Regarding the upcoming Q1 2024 performance to be announced, combined with the current P/E ratio performance, Morgan Stanley expressed optimism for Ctrip and Tencent Music.

Benefiting from the travel enthusiasm during the May Day holiday, it is expected that outbound travel and long-distance travel will bring higher economic benefits and profit margins to CtripThe expected strong advertising business, expanding profit margins, and potential capital returns are expected to drive up Tencent Music's stock price. The company is expected to have a net increase of over 6 million users in the first quarter, reaching a new historical high.

The report also indicates a negative outlook on NetEase's performance in Q1, with the expected year-on-year growth rate of its gaming business revenue to be lower than the current general expectation of 5%, mainly due to the weak performance of its existing gaming business. In addition, the report suggests that Bilibili's Q1 game revenue may also fall short of expectations