By Senad Karaahmetovic
Jefferies analyst Edison Lee has weighed in on the recent rebound in large-cap China software stocks.
Some stocks in this sector rebounded as much as 30% last week, fueled by COVID reopening, SOE reform talks, and oversold conditions.
“We see very different and positive fundamentals: 1) China's interest rate has been stable, and we could even see moderate fiscal/monetary stimulus to offset the impact of recent COVID lockdowns, 2) digitization and IT localization remain a high priority of the government, and 3) such efforts are led by large-scale SOEs, which are motivated to invest in IT and software as this is part of their KPIs, hence no budget constraint despite a slowing economy,” Lee told clients in a note.
The analyst sees China software as a “highly attractive sector” for investors who want exposure to China.
The last week’s rebound likely signals that valuation bottomed out while this morning’s positive news surrounding Didi Global (NYSE:DIDI) will also help increase the risk sentiment in China.
Net-net, Lee remains positive on industrial software, followed by localization play.
“Our top picks are 1) Baosight, 2) Supcon, 3) Yonyou/Kingdee and 4) Glodon. Baosight and Supcon remain the most resilient to any economic and consumption slowdown, and should benefit from their customers' consolidation. ERP localization is on track, so both Yonyou and Kingdee are attractive at these levels. With lockdown easing and more govt support for infrastructure projects, Glodon remains well positioned to grow its construction mgt business,” the analyst concluded.