As of the end of last week, the third quarter earnings season for China and the United States has basically come to a close. This earnings cycle has been quite interesting; starting in November, Chinese concept stocks quickly transformed from a state of undercurrents to a fervent enthusiasm. However, by the end of this quarter's earnings season, the enthusiasm has receded, and the market seems to have slid back to square one, with the market value of Chinese concept assets once again falling to around 10XPE.

1. Chinese Concept Stocks: Growth is Absolutely Scarce

Among the Chinese assets covered by Dolphin, any asset without any "foreign" component (no overseas business) has become a scarce asset that requires a telescope to find in terms of growth for the third quarter:

a. In the advertising sector, Baidu's advertising revenue fell 5% year-on-year in the third quarter and may drop 10% in the fourth quarter; Focus Media's advertising revenue grew 4.5% year-on-year; Weibo's advertising grew 5% year-on-year; opportunities for over 10% year-on-year growth are few and far between—Tencent's advertising grew 17%, Bilibili's advertising revenue grew 28% year-on-year, and Kuaishou's advertising revenue grew 20% year-on-year.

b. In the e-commerce sector: Alibaba's e-commerce GMV is estimated to grow only 2-3% year-on-year; JD.com's self-operated retail revenue grew 5%; Kuaishou's GMV grew 15% year-on-year; Pinduoduo's GMV should grow over 20%, with advertising revenue also growing over 20%.

c. In the product sector: Tencent's domestic games grew 14% year-on-year during a strong product cycle; NetEase's games barely achieved zero growth; other niche leaders like Tencent Music saw subscription revenue grow over 20%.

As the earnings season concludes, a clear fact emerges: Internet companies without a second curve, without overseas markets, and without solid business barriers have become thoroughly "weather-dependent" cyclical stocks. Just like the live-streaming stocks that have not seen growth for years, internet targets without growth are all converging towards a 10 times PE valuation.

Even for some internet economy stocks that can still achieve 15-20% growth, such as Pinduoduo and Kuaishou, as long as the market does not see clear business barriers, valuations are also very stingy.

2. What to do when the weather is not favorable during "weather-dependent" times?

Gradually losing their own Alpha and becoming cyclical stocks that depend on the weather, the "weather environment" in which individual stocks find themselves has become exceptionally important. The valuations of these companies, aside from their own struggles, are more importantly reliant on changes in the economic cycle.

Therefore, in the current internet economy, the efforts of individual stocks are equally important as the macro policy direction, making the macro policy direction exceptionally significant. Looking back at the policy signals since the 924 meeting:

a. The policy attitude has progressed from initially not acknowledging deflation to now starting to mention the "re-inflation" target;

b. The plan for 10 trillion yuan in debt replacement has also been announced;

However, after a period of expectations and actual transactions regarding policies, looking back:

a. Policies remain relatively restrained (strict control over new local government debt); b. Demand-side stimulus, aside from equipment upgrades and sporadic consumption vouchers, remains slow; c. With Trump in power, external demand pressure may be greater next year; d. With Trump in power, the duration of high interest rates for the US dollar may change again, potentially suppressing the domestic monetary and exchange rate policy space.

Moreover, the recent performance of Chinese companies like Baidu and Beike has almost confirmed for the market: if the cycle continues at the bottom, what the performance evolution path of individual stocks might look like. Therefore, the corresponding result is that while Chinese companies are indeed undervalued, the low valuation without a visible fundamental turning point is not a reason to buy.

In the absence of a practical upward cycle in the macro environment, the current investment strategy for Chinese companies has essentially become: a. Through financial reports, identify companies that still have a relatively reliable ecological position and have not been disrupted in the competitive landscape, such as Tencent Music; or product cycle companies with essential R&D capabilities, such as NetEase, preferably with generous dividends, or companies with upward product cycles, such as Bilibili and Tencent.

Then, during the process of macro policy game retreat, wait for these relatively high-quality companies to reach a relatively bottom position, anticipating the next round of macro policy expectations and the resulting stock price recovery. At the same time, select a few dividend-paying value stocks, such as China Mobile, to smooth out the strategy's volatility.

For the rest of the time, continue to pay attention to US stocks and assets with significant overseas opportunities.

3. Portfolio Adjustment and Returns

There were no adjustments to the portfolio last week. The Alpha Dolphin portfolio's return fluctuated at 0.6%, outperforming the Hang Seng Tech (-1.9%), MSCI China (-1.8%), and CSI 300 (-2.6%), but underperforming the S&P 500 (+1.7%).

Since the portfolio began testing (March 25, 2022) until last weekend, the absolute return of the portfolio is 64%, with an excess return of 78% compared to MSCI China. From the perspective of net asset value, Dolphin's initial virtual asset of 100 million USD has exceeded 166 million USD as of last weekend.

4. Individual Stock Profit and Loss Contribution

Last week, the overall Chinese companies were still in a volatile correction state, while US stocks were generally on an upward trend, especially small-cap stocks like the Russell 2000 performed strongly.

Among Dolphin's holdings, major stocks like TSMC and Nongfu Spring performed relatively stable, and Ctrip's earnings report was quite good. The weaker performers were Alibaba and Pinduoduo, both due to weak earnings.

Specific analysis is as follows:

5. Asset Allocation Distribution

The Alpha Dolphin virtual portfolio holds a total of 14 stocks and equity ETFs, with a standard allocation of 3 and 8 equity assets under-allocated. The remainder is distributed in gold, U.S. Treasury bonds, and U.S. dollar cash. As of last weekend, the asset allocation and equity asset holding weights of Alpha Dolphin are as follows:

6. Key Events This Week

The earnings season for Chinese concept stocks is basically over this week, with only Meituan remaining among important companies; additionally, hotel leader Huazhu will also release its performance, mainly to observe the downward trend of domestic hotel and travel in the fourth quarter.

Risk Disclosure and Statement of this Article: Dolphin Investment Research Disclaimer and General Disclosure

For recent articles from Dolphin Investment Research weekly reports, please refer to:

“This is the most down-to-earth, Dolphin Investment Portfolio has started!”

Sliding back to the starting point, where is the redemption of Chinese assets?