Tech-stock rally on Alibaba results may be short-lived, as pandemic impact on industry, consumer spending come into focus

Two prominent brokerages on Friday cut their earnings forecasts for Alibaba Group Holding this year by as much as 11 per cent
Regulatory matters recede as a concern, as lockdown-driven slowdowns in consumer spending and industrial output come into focus

Alibaba

Zhang Shidongin Shanghai

Published: 4:16pm, 27 May, 2022

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Alibaba Group Holding’s better-than-expected results may offer only a temporary boost to Chinese technology stocks, as fallout from pandemic lockdowns depresses consumer spending and causes analysts to cut earnings forecasts by as much as 11 per cent.

Alibaba’s shares surged 12 per cent in Hong Kong on Friday after the release of its quarterly report, as the Hang Seng Tech Index rose nearly 4 per cent.

However, major brokerages China International Capital Corp (CICC) and Citic Securities cut earnings projections for the e-commerce giant. They cited the Covid-19 outbreaks that have ravaged about 40 cities in China this year, disrupting supply chains and prompting consumers to tighten their purse strings.

A weak result from Baidu has bolstered the argument. The nation’s biggest search-engine saw its advertising revenue drop 4 per cent from a year earlier in the first quarter, reflecting a tough macroeconomic environment.

The latest brokerage calls reinforce the view that the worst for China’s tech juggernauts is yet to come, as the pandemic takes over from the regulatory crackdown as the factor holding sway over the sector.

Alibaba, Tencent soar in Hong Kong as report cards ease earnings concerns

A flurry of high-level government meetings over the last month signal an end to the year-long regulatory storm that wiped out more than US$1 trillion in market cap. Top policymakers have made it clear they want tech platforms to play a bigger role in reviving growth, as the outlines of a consumer-spending slowdown and a “big shock” to industrial profits become clear following lockdowns that started in April.

“Consumer spending and the development of the pandemic are the key to the tech stocks now,” said Dai Ming, a fund manager at Huichen Asset Management in Shanghai. “People won’t spend even online now, with the courier service devastated by the pandemic. The regulatory factor is less of a major concern now.”

CICC reduced Alibaba’s earnings forecast for the financial year by 7 per cent to 131.8 billion yuan (US$19.6 billion) and that for the following year by 1 per cent to 169.1 billion yuan. The investment firm also slashed the price target of Alibaba’s Hong Kong-traded shares by 4 per cent to HK$137, representing 13 times estimated earnings, amid a compressing valuation within the tech sector.

A Tesla Model 3 at a showroom at a shopping mall in Beijing on April 29, 2022. The US-based carmaker is one of thousands of manufacturers whose production plunged amid Shanghai’s long lockdown. Photo: AFP

Citic Securities, China’s biggest publicly traded brokerage, also slashed Alibaba’s profit forecast, by 11 per cent to 124.9 billion yuan for this year and by 12 per cent to 147.7 billion yuan for next year. The share-price estimate is set at HK$160.

Alibaba’s customer management revenue (CMR), its biggest source of revenue, will probably decrease by more than 10 per cent for the quarter ended in June as a result of dwindling demand for online shopping and supply-chain disruptions, the brokerage said in a report on Friday.

“Looking to the whole year, investors still need to wait until the recovery in the macroeconomy for the improvement in Alibaba’s earnings,” Citic analysts led by Xu Yingbo wrote in the report. “We estimate that earnings will begin to pick up after the third or the fourth quarter.”

03:14

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Beijing has reaffirmed its adherence to the zero-Covid policy, which JPMorgan has said the government sees as necessary because of a low vaccination rate among China’s elderly and a fragile healthcare system. The US bank, as well as Swiss private bank Union Bancaire Privee, predict a contraction in China’s growth in the second quarter. Premiere Li Keqiang highlighted the gravity of the situation for the nation’s economy at a meeting this week, saying that it was even worse in some aspects than the aftermath of the Wuhan Covid-19 outbreak in 2020.

Alibaba, the owner of the Post, jumped 12 per cent to HK$90.85 on Friday in Hong Kong. The rally has pared the stock’s loss to 23 per cent this year after a 49 per cent slump in 2021. Revenue for the March quarter rose 9 per cent from a year ago, beating estimates, but the company swung to a net loss in the span on increased investments in new businesses, according to results released on Thursday.

Alibaba’s future earnings may risk trailing the estimate, “given the uncertainty of putting the pandemic under control,” said Tang Jiarui, an analyst at Everbright Securities in Shanghai. “The logistics snarls have reduced consumers’ willingness to spend.”

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