Recent announcements move us to Stage Two. Our note published 14 Mar 2022  introduced a three-stage investment model, with the sector unattractive in Stage 1 due to rising uncertainty from regulatory, de-listing and geopolitical risks for 6-12  months. Indicative of this risk, Tencent and Alibaba saw implied volatility  increase 7-8 times (Figure 1-2), with KWEB volatility peaking in mid-March. We  now see the sector moving to Stage 2 of our framework after only two months vs. 

the 6-12 months we forecast due to recent announcements, which catalyzes our  deeper dive into the sector’s short- and long-term fundamental drivers. This  analysis drives lower short-term earnings paired with target multiples higher than  the trough targets in our 14 March report, but lower than those used at YE21 due  to Common Prosperity impacts. This leads to a more balanced view on the stocks,  as evidenced by our new rating distribution (39% OW, 44% N, 17% UW; Table  1). We expect early-cycle sectors such as digital entertainment, local service, and  ecommerce to be the first batch of outperformers. Late-cycle verticals such as  travel and ads should lag the early-cycle ones by 1-2 quarters. Our sector  pecking order is Meituan, NetEase, Tencent, Kuaishou, Alibaba and PDD.