(Nov 13): After a rapid cooling in Chinese tech stocks on cloudy domestic macro prospects and rising geopolitical risk, investors are looking to major earnings reports due this week for a second wind.

Results from Tencent Holdings Ltd and Alibaba Group Holding Ltd will shed light on how their efforts to streamline businesses and lower costs have tided them over until Beijing stimulus can lift consumer spending. They may also provide insight on their ability to weather the higher US tariffs threatened by Donald Trump.

The Hang Seng Tech Index is down 17% from a high last month, while the Nasdaq Golden Dragon China Index is down 18%. Investors like James Kenney, a senior investment manager at Pictet Asset Management, note that valuations remain attractive for a sector primed for recovery.

“We have seen a step change for China — the authorities understand the economy has been difficult and there are measures in place to improve it,” Kenney said. Companies have been doing “exactly the right things” to ensure sales and margins will grow when the economy turns around.

Earnings forecasts for the tech index have climbed steadily to a record high, though estimates have pared slightly in recent weeks for e-commerce firms including Alibaba and JD.com Inc.

Tencent, China’s largest company by market cap, kicks off this week’s key results on Wednesday. Management comments on the firm’s game pipeline and the status of the recovery in advertising sales will be closely watched. Its stock is up more than 30% this year, helped by its targeted HK$100 billion (US$13 billion or RM57.15 billion) in buybacks for 2024.

Recent data point to resilient results for internet firms overall, while their guidance for the rest of the year will provide an outlook on the health of Chinese demand, said Fanwei Zeng, an investment analyst at GAM Investments. While higher tariffs under Trump have been “widely anticipated,” Zeng is cautious on firms with high US sales exposure.

As such, domestic focus is taking on extra importance. Food-delivery platform Meituan is seen as a beneficiary of local government consumption voucher programmes. Its shares have more than doubled this year, topping the Hang Seng Tech, with estimates for its earnings per share rising about 10% since the end of August, to an all-time high. 

Traders are also focused on guidance from JD.com, on expectations for a lift from trade-in subsidies, thanks to its high sales exposure to home appliances and consumer electronics. Its Hong Kong-listed shares have climbed more than 40% from a September low.

Despite gains, the sector remains cheap. The Hang Seng Tech Index is trading at 16 times forward earnings estimates, compared with 27 times for the Nasdaq 100 Index.

After the “non-investable to investable rally” in Chinese internet stocks, it’s now time for them to perform based on improving results, said Xiadong Bao, a fund manager at Edmond de Rothschild Asset Management. “I’m keen to see more share buybacks, not only to defend shareholder value, but also to show managements’ increasing confidence in business fundamentals.”

Uploaded by Isabelle Francis