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China's Tech Stock Comeback Faces Earnings Test From Alibaba, Meituan Amid Slower Growth And Tougher Regulations

Alibaba, Meituan, Kuaishou, Baidu are expected to post weaker earnings in the quarter ended September 30 Report cards to test new-found optimism among tech fund managers after a 14 per cent rebound from this year's low in October

China's Tech Stock Comeback Faces Earnings Test From Alibaba, Meituan Amid Slower Growth And Tougher Regulations

A 14 per cent rebound in Chinese tech stocks in Hong Kong from this year's low in October is being challenged by potentially weaker earnings from industry bellwethers in the coming days. Can investors look past the report cards with valuations near record lows?

The first test will come from Alibaba Group Holding, when the e-commerce group releases its quarterly report on Thursday. Meituan and Kuaishou Technology are due to report next week. The trio are among the top five biggest Hang Seng Tech Index constituents, with more than 25 per cent of weightage combined.

Net income for Alibaba, the owner of this newspaper, probably fell 17 per cent to 24 billion yuan (US$3.76 billion) from a year earlier, according to consensus analyst forecasts tracked by Bloomberg. Meituan, China's biggest on-demand delivery service operator, is expected to incur a 5.3 billion yuan loss based on US accounting standards, versus a 6.3 billion yuan profit previously.

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Kuaishou, the largest index member, may have incurred a loss of 8.6 billion yuan for the same quarter, according to Bloomberg data. It will report on November 23, three days ahead of Meituan's earnings. At least 30 of the Nasdaq Golden Dragon Index members are also due to report later this month. They include search engine Baidu, which is expected to post an 82 per cent slump in net income.

The nation's antitrust body fined Alibaba US$2.8 billion in April and Meituan US$533 million in October. Ride-hailing operator Didi Global is said to be relaunching its app by year end following a cybersecurity probe. Analysts now expect authorities to ease up on the Big Tech crackdown, removing a major market overhang and allowing investors to focus on fundamental value.

"Tech stocks in Hong Kong have fully reacted to the headwinds and valuations are close to historical lows," said Chen Ping, a fund manager at HSBC Jintrust Fund Management in Shanghai. "Some of the internet giants will retain their core competitiveness. We continue to be positive on them in the long run."

The forthcoming earnings reports will be crucial to traders who are enjoying a rare bounce in the Hang Seng Tech Index, which saw US$1 trillion of market value eroded during China's year-long crackdown on the tech sector.

Members of the Hang Seng Tech Index currently trade at an average price-earnings multiple of 16.2 times realised earnings, versus 26 times on average over the past year.

Alibaba's stock has rebounded 22 per cent from an October low in Hong Kong, while Meituan rallied 52 per cent from a trough in August. Even so, Alibaba still trades at 17 times one-year forward earnings, having cheapened from a two-year average of 23 times, according to Bloomberg data.

Some investors are betting the worst of China's crackdown has passed. BlackRock expects near-term easing of monetary, fiscal and regulatory policies to shore up faltering economic growth. Others remain cautious, with BCA Research saying the clampdown is ongoing.

Any earnings surprise to the downside could rattle the market, given the outsize gains some of the Big Tech stocks have made since their lows in October. To recap, Tencent Holdings, the WeChat operator and China's biggest online game developer, reported its slowest earnings growth in two years last week.

One additional risk to Alibaba's earnings stems from an economic slowdown that has weighed on consumer spending in the world's second-biggest economy, according to analysts at Essence Securities and Jefferies. The Singles' Day gala saw the slowest growth in gross merchandise sales since the annual shopping gala began in 2009.

China's economy is seen growing at 3.5 per cent pace in the final quarter, according to consensus estimates tracked by Bloomberg. Growth slowed to 4.9 per cent last quarter from 7.9 per cent as a resurgence in Covid-19 cases, flooding and power outages knocked factories out of operation.

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