What We Learned from China's Tech Earnings, From Alibaba to Tencent

(Bloomberg) — A raft of sales beats from some of China’s largest tech firms and signs of a more relaxed regulatory environment are giving bulls new reasons to be optimistic.

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The nation’s three internet leaders — Baidu Inc., Alibaba Group Holding Ltd. and Tencent Holdings Ltd. — all reported revenue that came in ahead of analysts’ consensus for the final quarter of 2022, aided by a recovery in advertising. Alibaba co-founder Jack Ma’s return to China — after more than a year abroad having irked Beijing — was perceived by some as another indication of the regulatory setting shifting for the better.

Members of the Hang Seng Tech Index have gained 4% on average since their earnings reports through Monday, led by a 28% surge in Lenovo Group Ltd., data compiled by Bloomberg show.

This season took on greater significance as investors sought clarity on how tech firms are emerging from years of Covid restrictions and regulatory headwinds. The overall take is one of cautious optimism. While the sector is no longer growing at a dizzying pace, improving consumption and Beijing’s wind down of crackdowns build the case for a valuation re-rating.

“The earning announcements of big Chinese Internet names confirmed our view that earnings will continue to improve this year for the sector,” said Jian Shi Cortesi, a fund manager at Zurich-based GAM Investment Management, adding that the biggest surprise came from Tencent’s advertising recovery, which was stronger than expected.

READ: Alibaba Jumps After SCMP Reports Jack Ma Returns to China

Shares of Tencent have risen 4.5% since announcing a beat in quarterly revenue last week on the back of strength in online advertising and a resumption of gaming approvals. Lenovo has steadily trended upward since net profit came in better than expected, with shares surging last week as JPMorgan Chase & Co. double-upgraded the stock to overweight.

Among the 19 Hang Seng Tech companies that have reported sales results, eight notched better-than-expected outcome while seven saw in-line revenue and four missed estimates, according to data compiled by Bloomberg.

JPMorgan analyst Alex Yao — known for his “uninvestable” call on the sector before turning more positive mid-2022 — expects Beijing’s pro-growth policies and the diminishing risk of a delisting of American Depositary Receipts to boost the sector’s valuation.

Notable outliers include Alibaba, whose shares have fallen about 10% since its Feb. 23 release, after the company shared cautious guidance. Meituan also slumped Monday despite a surge in sales as traders’ focus turned to its weaker margin outlook.

All in all, the Hang Seng Tech Index has gained more than 4% so far in March, on track to outperform the the benchmark Hang Seng Index, which has fallen about 1%.

“We think 2023 will be a year of valuation re-discovery as global investors revisit China Internet stocks that have seen distorted historical financial results in the past three years,” Yao at JPMorgan wrote in a note last week. While key pillars of tech revenue have reached mature stages, there’s still “ample opportunities” to generate long-term sustainable growth, he added.