Consumers enjoy themselves at Nanjing Road Pedestrian Street, the busiest commercial tourist landmark in Shanghai, China, May 5, 2023.
CFOTO | Future Publishing | Getty Images
Analysts are bullish on Chinese tech majors even as the recovery looks uneven between companies and their latest earnings.
While the search engine giant Baidu beat revenue and profit estimates for the first quarter of 2023 and Tencent bounced back to growth after consecutive negative and flat quarters, Alibaba missed first-quarter revenue expectations and its Hong Kong-listed shares fell nearly 5% on Friday.
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“Baidu, Alibaba, Tencent reported — most of the earnings were a beat,” Ronald Keung, head of Asia Internet Research at Goldman Sachs, told CNBC’s “Street Signs Asia” on Friday.
Alibaba missed analysts’ revenue estimates, but revenue rose 2% year-on-year to 208.2 billion Chinese yuan ($29.6 billion).
The tech giant’s domestic trading unit fell 3% in the first quarter, while its cloud business shrank 2% – underscoring concerns that a recovery in Chinese consumer spending may not be as strong as expected.
Jiong Shao, an analyst at Barclays, noted the decline in Alibaba shares on Friday, ahead of this weekend’s Group of Seven summit: “I think there have been some geopolitical concerns … Investors are concerned about a potential sort of sanction against China. and against Chinese companies.”
G-7 leaders were in Hiroshima, Japan this weekend to discuss global and regional issues, including challenges posed by China’s policies and practices.
In a joint statement, the G-7 leaders acknowledged that there is a need to de-risk and diversify away from China – not disengage. They highlighted the need to “address challenges posed by China’s policies and practices” and “counter malicious practices, such as illegal technology transfer or data disclosure.”
But analysts expressed optimism when Alibaba announced plans to spin off its cloud business as a separatelisted company, as well as its list logistics and grocery departments during the tech giant’s earnings call on Thursday.
Shawn Yang of the Blue Lotus Research Institute said in a report that the company is “positive to the effect of separate listing and disclosure of multiple business units.”
Wedbush Securities analyst Dan Ives told CNBC that Alibaba’s plan to spin off its cloud unit was a “nobrainer strategic move that we believe adds to the sum of the parts’ valuation at Baba” and a “step in the right direction for the Alibaba story.”
The regulatory environment for Internet companies seems light and we see Alibaba as the main beneficiary as a Chinese proxy.
Alibaba Cloud, the computing unit behind the tech company’s ChatGPT-like product Tongyi Qianwenis “really the jewel in the crown,” said Shao, who noted that artificial intelligence has the ability to change the way people do things and even humanity.
“The value of Alibaba Cloud could easily be north of about $100 billion two, three years down the line,” Shao said.
Still recovering
Baidu, Tencent and Alibaba attributed their financial results to domestic recovery after China’s aggressive zero-Covid policy ended in December – ending strict lockdowns and quarantine measures.
At the company’s first-quarter earnings presentation on Thursday, Daniel Zhang, chairman and CEO of Alibaba Group, said: “As the Covid-19 cases subsided after the Chinese New Year, business and social activities gradually recovered in China. This change had affected some of our activities to varying degrees.”
Tencent Chairman and CEO Pony Ma said the company bounced back to double-digit revenue growth as payment volumes and ad spending in most categories benefited from the recovery in consumption in China.
Advertising is doing very well, Barclays’ Shao said, noting that both Tencent and Baidu said their ad business has grown by double digits year over year.
The latest official data showed China’s economy grew at a faster-than-expected 4.5% annual rate in the three months to March.
E-commerce is recovering, but not as quickly as the market hopes, both Keung and Shao said.
“I think the e-commerce numbers are showing some recovery on a one-year basis and on a two-year basis we’re seeing some signs that this consumption is gradually recovering,” Keung said.
“Travel has been strong and merchandise really started to pick up in the month of March with clothing.”
Keung said they “expect some attractive prices to drive demand during the 618 shopping festival.” The 618 Shopping Festival, which takes place on June 18, is one of China’s most important shopping festivals.
[pub1]