China signaling support for its tech stocks is ‘a sea change,’ equity manager says

Great Hill Capital Chairman Thomas Hayes sits down with Yahoo Finance Live to talk about the surge in China's internet companies, China's past tech crackdowns, and the forecasts for Chinese stocks like Alibaba.

Video transcript

RACHELLE AKUFFO: Welcome back, everyone. Now you might have noticed that some of today's top performers in today's session were Chinese tech and internet stocks. The moves coming after top officials signaled support for financial markets to keep them running smoothly. Joining me now is Thomas Hayes, Great Hill Capital's chairman and managing member.

So, Thomas, quite the reversal for Chinese stocks Wednesday. We saw that China's top financial body was saying it would ensure stability in capital markets, support overseas stock listings, resolve risks around property developers, and of course, this crackdown on big tech as well as soon as possible. What were your big takeaways from this and the sort of what you saw with the relief rally?

THOMAS HAYES: Yeah, well, this was huge, Rachelle. This was a C change. Thanks for having me, by the way. You know, the underlying businesses, the China tech businesses which have been hit the hardest, a day ago or a week ago, if you had asked money managers, what's the least thing that you'd like to own in your portfolio, they would have all said China. And we've been actively adding to our position. You know, we've been in the position for a few months. So it's been a long slog, but what they did last night changed the game overnight.

And, you know, while the businesses were growing, despite the regulatory crackdowns, despite the zero COVID, COVID shutdowns, you know, you had Alibaba grow revenues 20% last quarter, not-- 10%, and not take down their guidance of 20% to 23%. So the only two things holding these companies back that have huge moats around them were the Chinese government's positioning.

Number one, the tech crackdown that started over the summer in earnest started with some fines to Alibaba beforehand, and then the delisting risk because a lot of retail holders of the stock in the United States were scared that they were going to get nothing because that happened with China Mobile a couple of years back in a previous administration because they didn't have the fungibility of the Hong Kong listing. Anyone owning these China ADRs that have the dual listings in Hong Kong, these shares are fungible. So if you call your broker for a nominal fee, you can switch out to the Hong Kong shares and hold them on the Hong Kong Exchange.

So that's a non-issue. We did get forced selling and a final capitulation yesterday on those delisting fears in the last couple of days, but both of those risks were largely taken off the table last night when they decide to actively introduce policies to benefit the markets. In addition to the policies that you mentioned, Rachelle, the banking regulator said they were going to support insurance companies to increase investment in stock markets. They're going to outright just start buying stocks hand over fist. And they should, by the way, because they're cheaper than ever.

And they're working with the SEC to resolve the Holding Foreign Companies Accountable Act to work out the US listings. They actually recently approved a tech listing, an IPO in the US in the past week, week and a half, which was the first one in a long time. They're also going to amp up the monetary policy and be proactive this quarter and grow loans, et cetera.

These things are going to be critical. They did start this type of policy stimulus in November, but as we know, all stimulus and policy works on a lagged basis by about four to six months. So we're coming up on it. And we saw it this week with the high retail sales, and the industrial production numbers were good as well.

RACHELLE AKUFFO: So then what do you think might pressure how far these proposals will go? What are some of the external pressures also weighing on Chinese financial markets?

THOMAS HAYES: Well, capital flight. I mean, that's the name of the game. I mean, when they shut down the education sector, they lost 300,000 jobs. And what we see every five years into the China National Congress, which happens November this year, which is the transition of power, as you know very well, is that on average, the MSCI China increases about 31% in the 12 months leading into the China National Congress.

So, inevitably, it's the same thing. You get the crackdown two years before. The market goes into the tank. They assert their authority over business. They show the strength of their party. And then they realize they've gone too far because hundreds of thousands of people become unemployed. Unemployed people are not happy people. And that does not help with the transition. And both in China and in the United States, the number one job of a politician is to get reelected. They figured that out. They want the transition to go smoothly. They're juicing the economy.

And I think you're going to see China stocks rip for the next eight or 12 months into the China National Congress. And when you look at some of them in particular, which we're focused on Alibaba, I think the returns are going to be spectacular. No one wanted it at $75. I think when you look two, three, four years out, everyone's going to want it over $200 and beyond, because this business is still cheap.

RACHELLE AKUFFO: And it's interesting because I mean, you saw legendary investors like Charlie Munger still solid on Alibaba, even as the stock was still going down. For the average retail investor out there, trying to see how they can get a piece of the Chinese tech market or how they should approach their strategy there, what advice would you give them?

THOMAS HAYES: Yeah, well, I would say this. I mean, we were adding into the hole all week, white knuckling it, [INAUDIBLE]. And the reason we were is very simple. The underlying businesses have not changed, OK? The crackdown, the capital flight has changed. People were worried about the government policies. That got alleviated last night. As of yesterday, this stock, when you backed out the cash and you backed out the short-term investments, it was trading at six times next year's earnings.

By the way, they're going to grow revenues 32% over the next two years. Earnings are going to grow 30.7% over the next two years. And it reminds me a lot of Microsoft. Microsoft, from 2006 to 2013, it grew revenues by 112% over that time, cash flow by 193%, earnings by 120%. And the stock did nothing over that seven-year period. But the next nine years, it went up 1,500%.

Well, let's compare that to Alibaba. Over the last seven years since it IPO'ed, revenues are up 900%, cash flow is up 550%, and earnings per share went up 600%. And the stock did nothing. You could buy it below the IPO price of 2014. I think people started figuring that out today, and the stock is up 35%. So I think there's still tremendous opportunity there. Even at these levels, 105 bucks, it's still trading at 11 times next year's earnings. With its growth rate, it should be trading at 20 or 25 times, more in line with its historical multiple in the high 20s.

And just like things overshoot on the downside, like we saw max pessimism this week, when it goes on the upside, the euphoria is going to be the same. It'll trade over 25 times earnings. Everyone will want it. And that's the time to start laying it off.

RACHELLE AKUFFO: Quite the turnaround, indeed. Always good to have you on. Thomas Hayes there, Great Hill Capital's chairman and managing member, thank you for your time this afternoon.