(Bloomberg) — Tencent Holdings Ltd. and Alibaba Group Holding Ltd. are set to reveal their financial results, putting the $44 billion rally in China’s technology sector to the test.
Expectations are high for Tencent to demonstrate strong growth due to cost reductions and a more favorable regulatory environment for gaming, which also benefits rival NetEase Inc. Meanwhile, Alibaba’s results are likely to reflect the impact of a broader consumption slowdown that has affected competitor JD.com Inc.
China’s technology sector has outperformed the broader stock market this year, thanks to resilient earnings that have made it a bright spot in the country’s economy. This momentum received a boost this month amid diminishing bets on US interest-rate hikes, resulting in a $44 billion increase in the aggregate market value of companies in the Hang Seng Tech Index.
“Internet earnings have been the shining point for the previous two quarters thanks to earlier cost-cutting efforts and relatively low market expectations,” said Xiadong Bao, fund manager at Edmond de Rothschild Asset Management in Paris. “It will definitely help lift sentiment further if they continue to report better-than-expected results and give constructive guidance.”
Morgan Stanley predicts that Tencent’s sales likely rose 11% year-over-year in the July-September quarter, with a 24% jump in its operating profit. The company is scheduled to release its results Wednesday. Analysts also anticipate a 12% increase in NetEase’s third-quarter revenue, the fastest pace in over a year.
Goldman Sachs Group Inc. sees upside potential for Internet shares, with sustained earnings growth momentum and a more stable regulatory environment contributing to this sentiment. Options positioning on Tencent suggests a ramp up in bullish bets on the stock over the last two weeks.
On the other hand, analysts remain cautious about e-commerce giants like Alibaba and JD.com, given the weak Chinese consumer spending and intensified sector competition. Alibaba is expected to report 8.2% revenue growth for the September quarter, while JD.com is anticipated to report sales growth just above 1% for the same period.
“Investors are expecting lackluster readings from Alibaba and JD.com as it’s not just a weak China consumption story but also intensified sector competition from the likes of PDD and Kuaishou,” said Vey-Sern Ling, managing director at Union Bancaire Privee. “But at their current valuations, I don’t see either company trading lower. It just means it will take longer for share price to recover.”
–With assistance from Akshay Chinchalkar.
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