(Bloomberg) — As shares of China’s giant internet companies struggle amid Beijing’s regulatory crackdown, some investors are turning to another part of the technology industry to find the next winners in the sector.
Chinese software companies will at least triple their earnings next year and post the fastest profit growth in the MSCI China Index, according to both Goldman Sachs Group Inc. and Morgan Stanley. Analysts see the sector growing at a pace that’s triple that of its peers in the U.S. during the next business cycle, according to data compiled by Bloomberg.
Contrary to the Internet behemoths, these smaller companies are booming with Beijing’s help. They’re benefiting from the government’s push to enhance data security and achieve technology self-sufficiency to cater to the country’s pressing need to develop high-end manufacturing and achieve a greener economy.
“When old heroes go, it leaves room for the new heroes,” said Wendy Liu, chief China equity strategist at JPMorgan Chase & Co. “There are a lot of new sectors that are interesting.”
Spending on software, for example, accounted for only 0.1% of China’s gross domestic product last year, well below the U.S. level of 1.1%, according to JPMorgan. Under China’s latest five-year economic plan, the country aims to boost the number of industrial apps to more than 1 million, which should help improve investor sentiment toward the sector, Citigroup Inc. said in a report.
New Wave
In the latest leg down for China’s technology sector, some semiconductor and biotech shares got pummeled Wednesday on concern that Washington will slap investment and export sanctions against more companies.
And software and services stocks haven’t been immune to the selloff. The 27 software companies in the MSCI China Index have dropped 26% year-to-date on average, for example.
Still, shares of some companies in the sector have been flying. Longshine Technology Co., which provides cloud-based networking services, has surged 160% this year, among the best perfomers in the ChiNext Index this year. Beijing SuperMap Software Co., while makes supply chain management software, jumped than 60%.
BlackRock Inc. portfolio manager Lucy Liu said new trends in the tech industry, such as the metaverse, could bring new investment opportunities. “We are really looking forward to the next generation of innovation,” said Liu. “If there is a new growth driver which will lead to the longevity of growth, the third wave of growth, we actually definitely have the reason to overly shift the capital back to the sector.”
Tech Chart of the Day
The correction in the most speculative stocks looks similar to the path of the dot-com bubble that imploded 20 years ago, signaling the potential for more pain ahead. While the backdrop might be different today, the performance of Cathie Wood’s ARK Innovation ETF from 2017 until now is looking exactly the same as the Nasdaq 100 Index during the late 1990s and early 2000s.
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