Chinese tech giants JD.com Inc., Alibaba Group Holding Ltd., and Tencent Holdings Ltd. are all set to report a slowdown in revenue growth for Q1 2023, according to estimates by analysts. This trend reflects a more muted consumption-led rebound in China than initially anticipated.
JD.com will kick off the reporting season this Thursday, with projections indicating less than 1% revenue growth for Q1, which would mark the slowest pace on record. Following next week, Alibaba is expected to report a sub-3% sales increase, while Tencent may still lag behind the double-digit growth rates of the past.
These lackluster projections have prompted traders to accumulate bearish bets in the options market. Alibaba’s Hong Kong shares have seen their put-to-call ratio rise to the highest level since October, as per Bloomberg data. Earnings consensus for members of the Hang Seng Tech Index remains close to the record lows reached in March.
Robert Lea, an analyst for Bloomberg Intelligence, suggests that the market may have overreached earlier this year, rallying in anticipation of a more benign regulatory environment and potential upside from reopening. However, this has not translated into improved earnings outlooks for most companies.
One of the challenges has been that consumer spending following China’s reopening hasn’t lived up to expectations. This has been illustrated by the recent Golden Week holiday, where booking volumes surged, but spending remained weak. Investors are also grappling with an uncertain economic outlook, exacerbated by an unexpected contraction in the manufacturing sector.
Despite the gloomy forecast, there are signs of a pickup in activity. China’s e-commerce industry saw its gross merchandise value growth accelerate to 11% in March, up from 5% in the first two months of 2023, according to Goldman Sachs Group Inc. Still, growth rates for Alibaba and JD.com continue to trail the industry average.
Looking ahead, a return of risk appetite and substantial earnings upgrades will be needed to trigger the next stage of China’s tech rally, according to Lea. However, some analysts caution that the market’s momentum has now shifted away from tech and into more popular trades, such as financial shares linked to the government.
Kenny Wen, head of investment strategy at KGI Asia Ltd., stated, “The current earnings momentum is not very good and it will be hard to attract investors back to this sector when other sectors like SOEs have much more attractive valuation and favorable policy support.”
As Chinese tech giants grapple with these challenges, the broader tech market seems to be faring better. The S&P 500 Information Technology sector is nearing record levels relative to its parent benchmark index, with tech stocks surging 23% this year as inflation cools and investors anticipate the Federal Reserve will begin cutting rates by year-end.
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