Top Global Fund Manager Says China's Alibaba, JD Look Cheap

(Bloomberg) -- Chinese technology stocks like Weibo Corp. are cheap as long as investors consider their long-term growth prospects, says a Canada-based fund manager whose portfolio is outperforming 554 global peers.

“Some of the earnings of these companies have been understated due to the fact that they’re undertaking some pretty heavy investments right now,” said Noah Blackstein, who runs the C$1.52 billion ($1.2 billion) Dynamic Power Global Growth Class fund. “I believe that over the next three to five years there will be fruits to these expenses and you’ll see that in the earnings line."

Weibo and Tencent Holdings Ltd. -- two of the Dynamic Power fund’s top holdings -- aren’t cheap by the usual metrics. They have price-earnings ratios of 83 and 57, respectively, compared with a P/E of 22 for the S&P 500 Index.

The Dynamic fund, a unit of Canada’s Bank of Nova Scotia, is the top-performing fund based outside China with more than $1 billion in assets and at least 25 percent of its investments in the Asian country. The fund has beat its global peers this year, and over the past five and 10 years. It’s also Canada’s top-performing international equity fund, with a cumulative three-year return of 72 percent.

The fund’s top holdings are YY Inc., Tencent, Weibo, ServiceNow Inc. and PayPal Holdings Inc., and it’s highly concentrated, holding approximately 25 names. The fund also owns Alibaba Group Holding Ltd. and JD.com. YY has gained 147 percent over the past 12 months, while Tencent has risen 113 percent.

Blackstein, speaking at a Bloomberg investment conference in Toronto Wednesday, said he’s watched the Chinese technology sector shift from "me-too companies" like Weibo, often called China’s Twitter, to a stage where "some of these companies are really beginning to evolve out of being just domestic plays."

Heavy spending to make that evolution possible has pressured margins and earnings, but that spending will pay off down the road, he said.

"They’re taking the right steps, they’re making the right investments," Blackstein said. "They’re not as expensive as you think if you look three to five years out."

--With assistance from Kyle Hart and Shin Pei

To contact the reporters on this story: Kristine Owram in Toronto at kowram@bloomberg.net, Matthew Winkler in New York at mwinkler@bloomberg.net.

To contact the editors responsible for this story: Arie Shapira at ashapira3@bloomberg.net, David Scanlan, Jacqueline Thorpe

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