Alibaba Split Boosts Optimism in Chinese Tech Stocks

Today’s announcement by Alibaba Group Holding (BABA) that it will split its $220 billion business into six main units encompassing e-commerce, media, and the cloud is another factor that may extend the recent rally in Chinese technology stocks.

In addition, mostly better-than-expected earnings results from China’s mega-cap technology stocks and signs of a more relaxed regulatory environment have improved market sentiment and may help sustain the recent rally in Chinese technology stocks. 

Aided by a recovery in advertising, China’s three largest internet companies, Baidu (BIDU), Alibaba Group Holding, and Tencent Holdings (TCTZF), reported better-than-expected Q4 earnings as China’s economy reopened from the pandemic.  GAM Investment Management said, “the earnings announcements of big Chinese internet names confirmed our view that earnings will continue to improve this year for the sector.”

Lenovo Group (LNVGF), which has surged more than +26% since releasing its Q4 earnings results, is the leading gainer in Chinese technology stocks. Gains in Lenovo Group accelerated last week when JPMorgan Chase double-upgraded the stock to overweight.  According to data compiled by Bloomberg, among the 19 companies in the Hang Seng Tech Index that have reported sales results, eight reported better-than-expected results, seven saw in-line estimates, and only four companies missed estimates.

Not all Chinese technology companies have upbeat earnings prospects, however.  Meituan (MPNGF) slumped more than -6% Monday, despite reporting better-than-expected quarterly sales as the stock fell on a weaker-than-expected margin outlook.  Also, shares of Alibaba Group Holding have fallen about -10% since its February 23 earnings release after it expressed cautious guidance about future earnings. However, that was before Alibaba announced today’s split.

JPMorgan Chase, which in March 2022 called the Chinese technology sector “uninvestable” due to regulatory risks, turned positive on the sector last May after the crackdown on the sector by government regulators eased.  JPMorgan said it expects China’s pro-growth policies and the diminishing risk of delisting of American Depositary Receipts (ADRs) to boost the sector’s valuation.

As a result, JPMorgan said, “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, as there are still ample opportunities” to generate long-term sustainable growth.   

On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.