As the country’s major tech firms start reporting third-quarter earnings this week, expectations are for Tencent to show strong growth given cost reductions and a friendlier regulatory climate for gaming that also benefits rival NetEase Inc. Alibaba (NYSE: BABA), however, likely continued to suffer from a broader consumption slowdown that pressured competitor JD.com Inc. too.
The sector has outperformed China’s broader stock market this year, thanks to more resilient earnings that turned it into one of the few bright spots in the world’s No. 2 economy. The momentum got another boost this month amid cooling bets on US interest-rate hikes, lifting the aggregate market value of companies in the Hang Seng Tech Index by $44 billion.
“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.”
Tencent’s sales likely rose 11% on year in the July-September quarter, leading to a 24% jump in its operating profit, Morgan Stanley predicts, attributing the solid performance partly to rising gaming revenues following the rollout of two new titles. The Shenzhen-based firm is scheduled to release its results Wednesday.
Similarly, analysts expect strong gaming demand to raise NetEase’ third-quarter revenue by 12%, the fastest pace in over a year, Bloomberg-compiled data show. The Hangzhou-headquartered company’s earnings are due Thursday.
There’s upside potential for Internet shares as downward adjustments to their sales outlook are likely nearing an end, Goldman Sachs Group Inc. strategist Ronald Keung wrote in a note. Sustained earnings growth momentum and a stabilized regulatory environment with new gaming licenses approval are also tailwinds, he added.
Options positioning on Tencent suggests traders have ramped up bullish bets on the stock over the last two weeks, with Bloomberg-compiled data showing demand for so-called out-of-the-money calls register a bigger increase relative to puts.
In comparison, analysts remain cautious about e-commerce giants like Alibaba and JD.com, as the Chinese consumer continues to tighten their purse strings in a weakening economy. Anemic demand has made the industry’s cut-throat competition even worse.
Alibaba, whose earnings are due Thursday, will likely report 8.2% in revenue growth for the September quarter after analysts lowered their estimates over the past month. Rival JD.com on Wednesday is expected to report sales growth just above 1% for the 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.”