Strong China Tech Earnings Spur Optimism Downturn May be Over

Better-than-expected earnings results from several mega-cap Chinese technology companies have sparked optimism that the worst of the tech downturn may be over.  Eight of the 11 Hang Seng Tech Index ($HSI) stocks that have reported Q2 earnings results have beaten estimates, including Alibaba Group Holding (BABA) Ltd and NetEase Inc (NTES).

At least half of the Nasdaq Golden Dragon China Index stocks that have reported Q2 earnings results have surpassed revenue expectations.  Barings said, “this earnings season so far is a confirmation that Q2 marks the bottom for Chinese tech firms.”  Chinese technology stocks have been hammered this year due to China’s strict Covid Zero Policy, property debt woes, and the crackdown on the tech sector from Chinese regulators.

Much of the peak pessimism from the regulatory crackdown and pandemic-linked troubles have likely been priced into Chinese technology stocks.  For example, Tencent Holdings Ltd (TCEHY), which reported its first-ever decline in quarterly sales earlier this week, rose more than +3% the day after the results. Some of the mega-cap Chinese tech companies are making concerted efforts to control costs after years of unfettered growth.  In their earnings calls, executives at both Tencent Holdings and Alibaba Group Holding said they want to focus on more “quality” growth as well as streamlining and curbing loss-making activities. 

The outlook for Chinese technology stocks has improved as forward earnings estimates for the Nasdaq Golden Dragon China Index have risen.  According to Bloomberg data, analysts revised up their earnings estimates by more than 7% from a low in late June.  That compares to a drop of about 3% for stocks in the Nasdaq 100 Index ($IUXX) (QQQ).

Many analysts calling for a rebound in China’s technology stocks have been burned by being too early. Over the past year and a half, large money managers have been caught wrong-footed many times as Chinese tech firms saw billions of dollars of value erased.  In regulatory filings this week, some of the world’s largest money managers, including BlackRock and Bridgewater Associates, disclosed a reduction in Chinese tech stock holdings in Q2.  GAM Investment Management said Chinese technology stocks will rally when “we see supportive policies that could lead to a strong economic recovery and clear resolution of Chinese tech ADR delisting.” 

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