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These three firms are Bernstein's "top picks" in China's internet sector

Published 09/10/2024, 09:35 AM
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Investing.com -- The largest platforms in China's internet sector performed "reasonably well" during the second-quarter earnings season despite recent economic headwinds, according to analysts at Bernstein.

Concerns have been rising around how these firms will fare during a time when weak consumer spending and sluggish growth have dented hopes for a recovery in the world's second-largest economy.

"A volatile [second-quarter] reporting period stood in contrast to widespread China macro optimism just a few short months ago," the analysts wrote. " The recent macro evidence in China has done little to inspire confidence."

However, the analysts noted that big-name groups, particularly gaming giant Tencent, Temu-owner PDD and shopping platform Meituan, were able to withstand the economic drag thanks to "a combination of monetization growth and self-help."

For Tencent, the Bernstein analysts said the magnitude of its profit margin beats was "smaller" in the second quarter, the company's guidance "remains confident" and on track to harness "multiple vectors for medium-term growth." They said they were "very constructive" on the stock.

PDD, meanwhile, fell "a couple of notches" in Bernstein's rank order after the Pinduoduo (NASDAQ:PDD) operator warned in August that revenue growth will face pressure due to intensified competition and external challenges -- a comment that sent the stock falling sharply. But the analysts said that their discussions with merchants and other industry contacts suggest that the "real changes taking place at the company have been much less dramatic."

Meituan, finally, was "the stand-out print this quarter," the Bernstein analysts argued. "The company’s near-pristine record for guiding to beat should imply sequential growth acceleration in [the third quarter], and offers some growth visibility through the year-end."

All three of the companies were named as Bernstein's "top picks."

"We consider Tencent the most durable growth story we cover. The [second-quarter] margin beat was smaller, but guidance remains solid all in, and we expect earnings growth to drive compound growth in capital returns," they said, adding that "[a]ds monetization has the potential to be very impactful for Meituan earnings."

Lastly, they said that "[a]s much as [the second quarter] was an egg-on-face moment for PDD bulls, our channel checks suggested changes at the company were (and thus earnings impact should be) less dramatic than implied by the share price drop."

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