What happened
Shares in Chinese Internet Stocks Alibaba (BABY -4.69%), Tencent Music Entertainment (TME -6.12%)and Huya (HUYA -9.07%) rose this week, rising 19.1%, 35.1% and 23.9%, respectively, through Thursday trading.
All three companies reported third-quarter earnings this week. While Alibaba slightly missed revenue expectations, all three companies beat profit expectations and were able to maintain positive profitability, despite China’s economic slowdown. Investors welcomed the newfound cost discipline, a stark contrast to the big US tech stocks that are spending more freely.
In addition, Chinese authorities unveiled reforms aimed at stabilizing the ailing real estate sector and others expected an easing of COVID-19 restrictions.
And what
It should be noted that all three stocks have dropped significantly in recent years. Even after this week’s big moves, from all-time highs, Alibaba is down 75%, Tencent Music Entertainment is down 82%, and Huya is down 94%.
As the Chinese economy reeled from the country’s crackdown on tech companies, tough “zero-Covid” restrictions and a slowdown in the massive property sector, the bar was pretty low for these stocks. Therefore, the fact that each of these companies had at least something positive in their otherwise lackluster performance was rewarded.
Alibaba grew revenue by just 3% in the quarter, but its non-GAAP earnings before interest, taxes, depreciation and amortization rose 29% year-over-year, thanks to cost controls and cuts.
While Tencent Music saw declines in revenue, monthly active users and online karaoke or “social entertainment” users, management’s focus on paid users allowed the company to grow its paid subscriptions by 19.8% to 85.3 million users. And thanks to cost control, net income actually increased by 38.7%.
Meanwhile, Huya struggled, with revenue, paying users and profits down from a year ago; however, even Huya posted some silver linings, as the total number of monthly active users for Huya Live increased, and both revenues and earnings exceeded low expectations.
These better-than-expected numbers combined with renewed optimism about the broader Chinese economy at the start of the week. Last Sunday, the Chinese authorities introduced 16 measures aimed at supporting the country’s real estate sector. Chinese real estate developers have been in trouble over the past year as authorities tried to pop the huge real estate bubble that had been building for years. However, some now fear that the contagion could spread to the nation’s banking system in a significant way, as well as to even healthier real estate developers. That’s why it was heartening to see the government step in with a package estimated to total $184 billion.
what now
Better-than-expected earnings, the real estate bailout and the potential for China to loosen some of its COVID-19 policies helped these stocks gain traction, at least through Thursday.
Going forward, investors in Chinese stocks will need to weigh the higher risk of investing in the country against its low valuation and potential for further improvement.
Barring a slowdown in the real estate sector, the country eventually eases to “zero COVID” overall next year, and if Sino-US relations improve, these stocks could continue to rise. However, there are many ifs, so investors should invest in Chinese stocks carefully, with an allocation that makes sense for your risk tolerance.
Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares in the mentioned companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
