What happened
Shares of Chinese real estate transaction platform operator KE Holdings (BEKE 3.02%) were down by roughly 5% as of 1:37 p.m. ET Monday despite the stock receiving a nice upgrade from Wall Street. Investors are also evaluating new economic data out of China and the evolving COVID-19 situation in that country.
So what
UBS analyst John Lam on Monday morning upgraded KE Holdings -- also known as Beike -- from a neutral rating to a buy, and increased his price target on the stock from $18.60 to $22.50. That implies about 70% upside from current levels.
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"We think the market is now aware of Beike's cyclical nature, and has priced in multiple risks from property (eg. developers' credit risks) and internet sectors (eg. antitrust risks)," Lam wrote in his research note. "However, we think the market has not been appreciating its market share and earnings upside potential in the expected market upcycle, especially in its secondary business."
Additionally, new data released Monday showed that China's gross domestic product (GDP) rose by 4.8% year over year in the first quarter, beating expectations. However, China's 2022 GDP growth target is 5.5%, so that result was still behind what its leaders are hoping for. In addition, due to ongoing COVID-19 surges, the government has reimposed strict lockdowns in parts of the country, which could hinder its GDP growth for the rest of the year.
Now what
KE Holdings looks to be feeling some macro headwinds from broader market forces including COVID-19 and relatively tepid economic growth.
But the share price is down by 60% since KE Holdings went public in 2020, and analysts -- who appear to believe that the risks have been priced in -- see the stock as potentially poised for a turnaround. Chinese stocks are, by and large, inherently riskier than U.S.-based stocks, but this one may present a decent risk-reward opportunity for investors.
However, before buying shares of KE Holdings, investors should carefully evaluate the regulatory scene in China and the country's real estate market.
