After China ended its strict Covid Zero program in late October 2022, Chinese technology stocks rallied sharply on the prospects of strong earnings as the country reopened from the pandemic. However, after peaking in early January, Chinese tech stocks have retreated as the Chinese economic recovery loses steam, and upcoming earnings results are unlikely to boost market sentiment.
On Thursday, JD.com (JD) will begin the quarterly earnings season for Chinese technology stocks, and Bloomberg data shows analysts are projecting less than +1% revenue growth for Q1, which would be the company’s slowest pace on record. Also, Alibaba Group Holding Ltd (BABA) will likely report sales increased by less than +3%, and Tencent Holdings (TCEHY) may also report lackluster sales results when they report earnings results next week.
The expectations for lackluster results for Chinese tech stocks have prompted traders to boost their bearish bets in the options market. The put-to-call ratio for Alibaba Group Holding rose to the highest since October, while earnings consensus for tech stocks in the Hang Seng Tech Index have barely moved from record lows reached in March. Moreover, Chinese technology stocks have lost momentum since January as China’s consumption-led rebound was more muted than expected.
Bloomberg Intelligence said the rally in Chinese tech stocks had “potentially gotten ahead of itself earlier in the year on anticipation of better times to come, with hopes pinned on the potential upside from reopening and a more benign regulatory environment. However, this did not lead to a change in the earnings outlook for most companies.” Consumer spending in China has not matched expectations, with consumers worried about an uncertain economic outlook, especially after a surprise contraction in China’s manufacturing sector last month.
According to Goldman Sachs estimates, there was a rebound in activity after gross merchandise value growth in China’s e-commerce industry accelerated to +11% in March after slowing to +5% in January and February. However, the growth in Alibaba Group Holding and JD.com was still below the industry average. KGI Asia Ltd said, “The current earnings momentum is not very good, and it will be hard to attract investors back to the technology sector when other sectors have much more attractive valuations and favorable policy support.”
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
