June 23, 2020 / 10:32 AM / 11 days ago

Policy and patriotism turn Chinese tech shares frothy

SHANGHAI, June 23 (Reuters) - Chinese investors are redoubling bets on already pricey domestic technology shares, playing for reforms and stimulus in a sector key to Beijing’s power rivalry with Washington.

The frenzied buying has seen Shenzhen’s Nasdaq-style ChiNext board of start-up companies rally 36% from its February lows, disregarding economic concerns and reports of a second wave of coronavirus infections that have hobbled the mainland’s main share indexes.

While technology businesses globally have been shielded from the volatility wrought by the pandemic, the splurging on Chinese tech shares is driven by several other factors.

“You must look at investment from a broad perspective, which is the Sino-U.S. competition, especially in the tech space,” said Wu Kan, fund manager at Soochow Securities.

“Investors are being incentivised to put money into innovative companies,” said Wu, whose portfolio includes chip-makers and artificial intelligence companies.

Chinese chip-makers have been at the fore of the rally, after U.S. President Donald Trump’s move to cut Shenzhen-based Huawei Technologies off from global chip supplies galvanised Beijing’s drive to make the country more technologically self-sufficient.

In addition, reforms to the listing processes on ChiNext, the imminent launch of an index for Shanghai’s STAR market and a long overdue overhaul of the main Shanghai stock index have helped stir patriotism and speculative interest.

China’s semiconductor shares trade at over 100 times earnings on average. ChiNext is up more than 14% so far this month and at four-year highs, double the gains of the blue-chip CSI300 index and dwarfing Nasdaq’s 6% rise.

“Despite their relatively high valuations, tech stocks boast high growth potential, suffer less from the pandemic, and enjoy policy support. Therefore, they’re safe haven assets,” said Yang Qiuping, fund manager at Beijing Jinghong Investment Co who mainly holds tech and pharmaceutical companies.

“The government is channeling money away from the real estate market into innovative start-ups. It’s a major economic transformation toward technology,” said Wen Hao, founder of investment adviser Haofei Investment.

But with ChiNext shares trading at an average price-earnings ratio of 51 and the Star Market at 85, the start-up sector is looking frothy. In contrast, Shanghai stocks trade at a multiple of just 13.7.

“There’re signs of irrational investment in ChiNext,” said Xie Chen, fund manager at Shanghai JianWen Investment Management Co.

Investing in tech requires deep understanding of new technologies that typically have a short lifespan, so it’s “beyond our investment capabilities,” said Xie, who focuses on banks, insurers, pharmaceutical and consumer firms.

Reporting by Samuel Shen, Luoyan Liu and Andrew Galbraith Editing by Vidya Ranganathan and Jacqueline Wong

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