Tencent, Alibaba earnings reports brighten outlook for tech giants as bets on China reopening draw more funds
- Tencent Holdings returned to profit growth in the third quarter after posting declines over the past two quarters
- While Alibaba posted a net loss of 20.6 billion yuan, it was profitable under the Chinese accounting standard as net income rose 19 per cent
The outlook has brightened for China’s biggest technology companies trading in Hong Kong, as their latest earnings results helped remove some of the risks clouding the sector’s prospects.
Traders wagering on a sustainable rebound in equities may also take some comfort from a halt in aggressive cuts in price targets by tech analysts over the past year. The buy-rating of Tencent rose to 91.7 per cent in November from 90.5 per cent a month earlier, according to Bloomberg data. The proportion for Alibaba remains unchanged at 97.6 per cent.
“There is easing on both regulatory scrutiny and macro policies and that is the main catalyst for the internet sector,” said Shawn Yang Zixiao, the deputy research head and managing director at Blue Lotus Capital Group in Shenzhen. He upgraded Tencent to a buy in August, and has a hold rating on Alibaba, the owner of the South China Morning Post.
China’s relaxation of its Covid restrictions, and expectations that US inflation may have peaked have fuelled a rally in technology stocks over the last three weeks. Tencent has climbed 43 per cent from an October low, and Alibaba has risen 30 per cent.
Mainland investors spent a combined HK$6.4 billion (US$815.3 million) buying Tencent’s shares through the Stock Connect programme last week, according to stock exchange data. They contributed to about US$400 million in southbound inflows for the week, taking the year-to-date net purchases to US$47 billion in Hong Kong, according to data compiled by Goldman Sachs.
Tencent’s third-quarter net income increased 1 per cent from a year earlier to 39.9 billion yuan (US$5.6 billion), beating the consensus estimate by 59 per cent. While Alibaba posted a net loss of 20.6 billion yuan, the e-commerce platform was still profitable under the Chinese accounting standard, with net income rising 19 per cent to 33.8 billion yuan.
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“With the recovery of the economy and fine-tuning of the pandemic control [measures], earnings for Tencent and other tech companies will improve further,” said Sun Xiaolei, an analyst at CSC Financial.
Blue Lotus’s Yang prefers Tencent to Alibaba, because of the promising outlook for the monetisation of its video-account business, which is expected to bring a new source of advertising revenue. Such revenue may exceed 1 billion yuan in the fourth quarter, according to BOC International. Tencent’s advertising revenue fell 5 per cent from a year ago to 21.5 billion yuan in the third quarter.
Tencent’s shares slipped 1.4 per cent to HK$287.80 on Friday, versus the consensus 12-month price target of HK$399.30. Alibaba’s stock rose 2.2 per cent to HK$79.95 after its earnings release. Analysts expect the stock to reach HK$135.74 over 12 months.
The strength of Alibaba’s shares signals that investors have looked past last quarter’s numbers and are now focusing on a potential rebound in consumption as China takes steps to reopen its economy by rolling back some of the toughest zero-Covid rules on the planet.
China’s economic growth may accelerate to 4.5 per cent next year from 3 per cent in 2022, with a spike in consumption, as the world’s most populous nation is set to exit zero-Covid after March, Goldman Sachs said in a report on Thursday.
“The three pillars of its growth – consumption, globalisation and cloud – are intact,” analysts led by Thomas Chong at Jefferies wrote in a note on Thursday. “We view the market has priced in the near-term impacts of the pandemic and suggest investors to look into the recovery story ahead.”
