Chinese Stocks: One to Fall, One to Rise
Chinese-rooted e-commerce giant Alibaba Group (BABA) ADRs plummeted by nearly 7.5%, diving into the lower $77.7-$79.5 range on May 14 from the lonely mountain peak at almost $85 per share where the stock price climbed only a day before on hopes for better financial results in the first quarter. The reality was much more severe. Earnings fell short of consensus expectations. Profit per share indicated 10.14 Yuan, that is 0.13 Yuan below the average estimate and 0.57 Yuan lower than it was in Q1 2023, even though the total sales number rose by 7% from 208.2 billion Yuan to 221.87 billion Yuan. Even worse, the holding actually reported an 86% nominal drop in its net profit, which was mostly because of valuation changes from equity investments when it split into six business units to refocus on its core e-commerce segment. As a result, the declared net value amounted to 3.27 billion Yuan, compared to 23.5 billion Yuan in the quarter ended March 31, 2023.
In early April, Alibaba Group announced its second biggest ever share repurchase with equivalent cost of $4.8 billion. It also increased its total buyback plan by another $25 billion, in a supposed attempt to calm the crowd of Wall Street investors who are still worried about the company's growth prospects vs challenging peers from China such as Pinduoduo (PDD) and TikTok owner ByteDance. During the conference call, Alibaba's CEO Eddie Wu said some weaker performance was related to the strategy on more comfortable customer experience. However, the point could be also closely connected with domination of low-cost goods when domestic and international visitors are not ready to pay much. Especially, Chinese buyers were not as active as they used to be before, so that households were spending more carefully after the corona boom faded, when economy is slowing and property balloon is deflating. In particular, the holding's domestic commerce divisions, which are Taobao and Tmall Group, added 4% YoY in profit, despite physical order volume rose by double-digits percentage.
Alibaba's international appetites are greater, yet it needs time and marketing money contribution to go ahead on a global scale. Larger sum should be placed to shorten delivery times as well. Even the hyping cloud business of the group cut prices by 59% for products that are powered by its offshore data centres. This new branch helped AI-related contributions to the company's revenue to grow at triple-digits YoY, yet the return would not be so big because of large discounts.
Therefore, we recommend weighing carefully the balance of pros and cons before making a decision on possible investing into the shares of Alibaba, as investors on Wall Street are inclined to react painfully to any sign of weakness here. It would be no surprise if the stock face new dips below $70 per share before the bullish camp will arise out of stupor.
Meanwhile, another Chinese giant, Tencent Holdings, which provides a domestic analogue of Facebook messenger integrated into WeChat social network published a 6% increase in its sales number, and a 52.5% rise in its earnings per share (EPS) YoY on the same day, mostly due to growing advertising sales. Tencent is also a video game company while many Chinese are fond of gaming. Its EPS of 0.7272 Yuan was also 17% better than 0.62 Yuan in consensus estimates. A 5% price jump on the reporting date was added to a nearly 20% growth which was already achieved for the last three weeks on positive expectations. However, the nearest price target could be at least 20% higher, from a technical point of view, if the stock would use the current bullish momentum in summer. Many investment houses already lifted their target levels for Tencent, citing gaming rebound, which is already happening and additionally anticipated in Q2, and brighter financial outlook. Tencent also may see further ad segment growth by more than 15% during the year. Therefore, we see 450 Hong Kong Dollars (HKD) per share as the first target for Tencent Holdings on HKEX.
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