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<Research>Nomura: Top Picks for CN Internet Are TENCENT (00700.HK)/ NetEase (NTES.US)/ MEITUAN-W (03690.HK)
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Nomura said it invited several Chinese internet companies to meet with investors at its recent Investment Forum Asia event. The broker believed that the investors it met at the event now have a more constructive view of the sector than they did earlier this year. Overall, Mainland internet companies have demonstrated strong spending discipline and a high degree of risk tolerance in the face of a weak macro environment.

The broker said the investors it met generally cited return on capital as a factor attracting them to consider adding Chinese internet stocks to their holdings. Most internet companies are committed to implementing large-scale share buyback programmes backed by ample cash.

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However, some investors have expressed dissatisfaction with the recent issuance of convertible bonds (CBs) by several companies, such as JD.com (JD.US), Alibaba (BABA.US) and Trip.com (TCOM.US). While understanding the benefits of CB issuance, such as lower financing costs for ongoing share buybacks, investors said the benefits of ongoing buyback programmes would be partially offset by the dilutive effect of CB issuance, and felt that companies should take steps to compensate shareholders.

Separately, Nomura said it preferred TENCENT (00700.HK), NetEase (NTES.US) and MEITUAN-W (03690.HK) in its coverage universe. Of the three, NetEase's stock price has underperformed so far this year due to adjustments to its Fantasy Westward Journey game, but the broker found NetEase's game pipeline in the next 3 months to look exciting, which could be a catalyst for its shares.



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