Despite Major Gains, Asia Tech Stocks Are Still a Bargain

By Kenan Machado Features Dow Jones Newswires

Asian tech stocks have been on a tear this year, outpacing robust gains made by the Nasdaq Composite benchmark, Amazon.com Inc. and Apple Inc.

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And yet, the sector appears to be undervalued when compared with its U.S. counterpart.

The MSCI AC Asia Pacific Information Technology Index, which is made up of stocks in 12 countries from Pakistan to Japan, was up 56% through October, its best performance since a rebound from the global financial crisis in 2009.

But on a forward price-to-earnings basis, a common measure of stock valuations, the Asia index finished last month at 15.9. A comparable MSCI index of American firms was at 19.6. That isn't surprising because over the past five years, Asian technology companies have carried a lower multiple than their peers in the U.S.

The sector has had to grapple with an economic slowdown in China, which is one reason Asia tech stocks look cheaper, noted Guillermo Felices, a portfolio manager at BNP Paribas Asset Management.

And while Asian tech valuations are historically high relative to other sectors in the region, "we are seeing earnings going up continuously," said Claire Teng, executive director at J.P. Morgan Private Bank in Asia.

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Some investors believe Chinese internet company Tencent Holdings Ltd. is undervalued, even though its Hong Kong-listed shares have doubled this year, putting its market capitalization at about $470 billion. That puts it within $75 billion of Amazon and Facebook Inc.

Kevin Tam, an analyst following the Shenzhen-based company at Core Pacific Yamaichi, said Tencent's cloud-computing and payment operations aren't properly valued. Their combined revenue nearly tripled from a year earlier in the second quarter and third-quarter earnings are due next week.

Properly valuing those operations would give a lift of about 10% to Tencent shares, Mr. Tam said.

Tencent shares are trading at 50 times this year's projected earnings, the highest point since early 2014, according to data provider FactSet. But Tencent has been logging earnings-per-share growth of at least 40% recently, making such a price-to-earnings ratio reasonable. The company's shares have been a big driver for Hong Kong's Hang Seng benchmark, which is up 31% this year.

Tencent is the parent of messaging app WeChat, web portal QQ.com and internet library operator China Literature Ltd., whose shares surged 86% in their Hong Kong debut Wednesday, valuing the company at more than $12 billion.

Shares of South Korea's Samsung Electronics Co., which are heavily weighted in the MSCI AC Asia Pacific IT index like Tencent, have surged 56% this year after jumping 43% in 2016.

But despite strong profit growth this year, Samsung's 2017 price-to-earnings ratio is just 9.6, FactSet said. Since the start of 2012, the forward ratio has for the most part been below 10. In comparison, Apple's forward price-to-earnings ration has been in a range of 13 to 17 for the past decade.

Write to Kenan Machado at kenan.machado@wsj.com

(END) Dow Jones Newswires

November 09, 2017 00:14 ET (05:14 GMT)