(Bloomberg) — A rebound in Chinese stocks from multi-year lows threatens to lose momentum if the country's tech giants fail to report results next week.
Leading companies in the index, Tencent Holdings and Alibaba Group Holding, will both announce their financial results next Tuesday, and two days later, JD.com and Baidu will announce their results. Baidu) followed. These four companies alone account for more than a quarter of the MSCI China index.
The earnings scorecard comes at a critical time for the country's major stock indexes, which have recently entered a bull market but are still about 40-60% below the highs reached in early 2021. The key question is whether the recovery was partially driven. With cheap valuations and rotation from Japan, this company will either be durable or suffer another disappointing result.
“If we can solidify these returns, the momentum will continue,” said Sean Taylor, chief investment officer at Matthews Asia in Hong Kong. “At this point, there are signs that downward revisions to earnings will be less likely.”
China's tech companies have spread their tentacles across the economy through online sales, advertising and mobile gaming, and are something of a bellwether for China's overall stock market. The rally in the company's stock is largely due to renewed interest from global funds in China's largest and most liquid stock, which is currently technically overbought and faces an earnings test. ing.
Tencent is expected to report a 6% revenue increase in the quarter ending in March, while Alibaba's revenue is expected to rise 5.6%, according to average analyst forecasts compiled by Bloomberg.
Early financial results statistics were not necessarily favorable. Morgan Stanley said in a note to clients last week that while Chinese companies' first-quarter results have so far been “significant failures,” there has been gradual improvement from the past three months.
Earnings per share of MSCI China Index member companies, which have already released first-quarter numbers, fell by an average of 3% year-on-year, with real estate, utilities and materials companies performing the worst. JPMorgan Chase also made the announcement last week.
However, there is still room for optimism, as tech companies were some of the best performers in increasing profits last year. Future profit forecasts for the MSCI index of 100 Chinese tech companies in 2023 rose by about 20%, even as forecasts for other industries fell, according to data compiled by Bloomberg.
And even after the Hang Seng Tech Index has risen 13% since the end of March, the sector remains relatively cheap. Although the forward price/earnings ratio (PER) has increased to 16 times, it is still below the one-year average of 18 times and below the five-year average of 26.5 times.
Traders were quick to jump on the positive business development. Tencent's stock price has been boosted by news that the company plans to release the long-awaited Chinese version of Nexon's mobile game “Arad War'' this month, a title that could help revamp its aging portfolio. Dew. Xiaomi shares rose to a two-year high after the smartphone maker announced better-than-expected initial orders for a new electric car.
Still, investors say sales growth is needed to further boost confidence in the technology. Both Tencent and Alibaba's fourth-quarter results were below analysts' expectations, raising concerns over disappointing retail sales data from China released last month.
“The overall backdrop for the Internet industry is not consistently positive,” said Vivian Lynn Thurston, a fund manager at William Blair Investment Management in Chicago. He said it was still unlikely that e-commerce companies, which represent China's entire retail market, would make a strong recovery.
Skeptics also say the improved profitability is driven primarily by cost reductions, rather than higher sales or better pricing power.
“There's always room to cut costs, but that's not a source of sustainable profit growth,” said Nicholas Chui, a fund manager at Franklin Templeton Investments in Hong Kong. “Naturally, investors are looking for more repeatable sources of information.”
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