(Bloomberg) -- A top-performing Chinese hedge fund is buying the dip in Hong Kong-listed China technology stocks, saying valuations remain cheap even after their strong rally this year.
Shenzhen Huaan Hexin Private Investment Fund Management Co., which manages almost 6 billion yuan ($849 million), is adding such holdings after a 14% two-day slump in the Hang Seng Tech Index earlier this week. “Such a correction is more like a buying opportunity,” Yuan Wei, founder and fund manager, said in an interview on Wednesday. “If you compare to their fundamentals, the stocks remain very cheap.”
The firm’s flagship Huaan Hexin Stable fund surged 35% in the final week of September after internet stocks like Meituan rallied, extending this year’s return to 60% as of Sept. 30. That pushed its total gain since inception seven years ago to 825%, according to data compiled by Shenzhen PaiPaiWang Investment & Management Co., which tracks Chinese hedge funds.
Chinese tech stocks have soared since the government announced an economic stimulus package, fueling gains at long-only hedge funds like Huaan Hexin that have placed heavy bets on a sector once favored by short sellers. The Hang Seng Tech Index, which tracks 30 Chinese tech firms traded in Hong Kong, surged more than 50% since mid-September before paring gains this week.
“The market is just rebounding from an extremely bearish level to a level that’s still undervalued,” Yuan said.
While further upside partly depends on the effects of the stimulus measures on the economy, internet firms have seen turning points in profitability since last year, he said. The boost from an improving industry environment can offset any pressure on earnings from the economic slowdown, rendering firms like Tencent Holdings Ltd., Alibaba Group Holding Ltd. and Meituan “safe havens,” he added.
“Their profit elasticity by far exceeds the impact from macroeconomic volatilities,” Yuan said. “And if the economy improves, they benefit as well.”
Yuan said his positions are primarily in Hong Kong-traded stocks and mostly held since last year, without providing details. The company has recently started buying shares of a Chinese manufacturing firm due to its growth prospects and low valuations, he said, declining to name the target.
Yuan tops PaiPaiWang’s rankings for the best 10-year returns among hedge funds, and was the third best-performing stock fund manager for the first nine months of this year.
He sees a 50% chance the onshore market is starting a bull run rather than a short-term rebound. While that mostly depends on the effects of measures to turn around the property sector, “the bear market should have ended.”
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