Tencent, Alibaba profits key to $44 billion China tech run

(Bloomberg) — The financial performance of Tencent Holdings Ltd and Alibaba Group Holding Ltd may test the strength of China’s tech sector’s $44 billion rebound this month.

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As China’s major technology companies begin reporting third-quarter earnings this week, Tencent is expected to show strong growth given cost cuts and a friendlier gaming regulatory environment, which also benefits rival NetEase Inc. However, the likelihood that Alibaba will continue to suffer from a broader consumption slowdown is also putting pressure on rival JD.com.

The sector has outperformed Chinese stocks this year due to more resilient earnings, making it one of the few bright spots in the world’s second-largest economy. That momentum got another boost this month as bets on U.S. interest rate hikes cooled. , increasing the total market value of Hang Seng Technology Index companies by US$44 billion.

Bao Xiadong, a fund manager at Edmond de Rothschild Asset Management in Paris, previously said: “Due to previous cost-cutting measures and relatively low market expectations, online profits have been the highlight of these two quarters. This will definitely help Further boost to market sentiment.” If they continue to report better-than-expected results and provide constructive guidance. “

Morgan Stanley predicts that Tencent’s sales may rise 11% year-on-year in the July-September quarter, and operating profit will rise 24%, which is partly attributed to the increase in gaming revenue after the launch of two new games. Earnings are scheduled to be released on Wednesday.

Similarly, data compiled by Bloomberg show that analysts expect strong gaming demand to boost NetEase’s third-quarter revenue by 12%, the fastest growth in more than a year. The Hangzhou-based company will report earnings on Thursday.

Goldman Sachs Group Inc. strategist Ronald Keung wrote in a note that Internet stocks have upside potential as the sales outlook downgrade may be coming to an end. Sustained earnings growth momentum and a stable regulatory environment resulting from the approval of new gaming licenses are also favorable factors. he added.

Tencent’s options position shows traders have stepped up bullish bets on the stock over the past two weeks, with data compiled by Bloomberg showing a larger increase in demand for so-called out-of-the-money calls relative to puts.

In contrast, analysts remain cautious about e-commerce giants such as Alibaba and JD.com, as Chinese consumers continue to tighten their wallets amid a weak economy and weak demand intensifies fierce competition in the industry.

Alibaba will report earnings on Thursday, and analysts have lowered their forecasts over the past month, suggesting that the company’s September quarter revenue growth may be 8.2%. Rival JD.com on Wednesday was expected to report sales growth of just over 1% for the quarter.

Vey-Sern Ling, managing director of Union Bancaire Privee, said: “Investors are anticipating poor performance from Alibaba and JD.com, as this is not only due to weak consumption in China but also intensified industry competition from companies such as Pinduoduo and Kuaishou. “At current valuations, I don’t think either company’s share price will fall. It just means it will take longer for the share price to recover.”

—With help from Akshay Chinchalkar.

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