Wall Street analysts are bullish on Chinese tech firms, even as recovery is uneven

Consumers enjoy themselves at Nanjing Road Pedestrian Street, the busiest commercial tourist landmark in Shanghai, China, May 5, 2023.

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Analysts are bullish on Chinese big tech firms even though recovery looks uneven across companies and their latest earnings.

While 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 slid almost 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” Friday.

Alibaba missed analysts’ revenue estimates, but revenue rose 2% year on year to hit 208.2 billion Chinese yuan ($29.6 billion).

The tech giant’s domestic commerce unit fell 3% in the first quarter, while the cloud business was down 2% — highlighting concerns that a Chinese consumer spending rebound may not be as strong as expected.

Noting the decline in Alibaba’s shares, Jiong Shao, analyst at Barclays said on Friday, ahead of the weekend’s Group of Seven summit: “I think that there have been some geopolitical concerns … Investors are concerned about potential sort of a sanction against China and against Chinese companies.”

The leaders of the G-7 were in Hiroshima, Japan on the weekend to discuss global and regional issues, including challenges posed by China’s policies and practices.

In a joint statement G-7 leaders acknowledged that there’s a need to de-risk and diversify from China — not decouple. They highlighted the need to “address challenges posed by China’s policies and practices” and “counter malign practices, such as illegitimate technology transfer or data disclosure.”

It'll be an 'audacious endeavor' for Alibaba to split company into six units, says Barclays

But analysts expressed optimism when Alibaba announced plans to spinoff its Cloud business as a separate, public traded company, as well as list its logistics and grocery divisions during the tech giant’s earnings call on Thursday.

Shawn Yang of Blue Lotus Research Institute said in a report that the firm is “positive on the effect of separate listing and disclosures of several business units.”

Wedbush Securities analyst Dan Ives told CNBC that Alibaba’s plan to spin off its Cloud unit was a “no brainer strategic move that we believe adds to the sum of the parts valuation on Baba” and a “step in the right direction for the Alibaba story.”

The regulatory environment for Internet companies appears to be easing and we see Alibaba as the key beneficiary as a China proxy.

Morgan Stanley

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Alibaba Cloud, the computing unit behind the tech firm’s ChatGPT-style product Tongyi Qianwen, is “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 be easily in the north of about $100 billion two, three years down the road,” said Shao.

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 Covid-19 cases waned after the Chinese New Year, business and social activities gradually recovered in China. This change had impacted some of our businesses in various degrees.”

Tencent’s chairman and CEO Pony Ma said the company bounced back into double-digit revenue growth as payment volumes and ad spend across most categories benefited from the consumption recovery in China.

Advertising is doing very well, said Barclay’s Shao, noting that Tencent and Baidu both said their ad businesses have been growing double digits year-over-year.

The latest official data showed China’s economy grew a faster-than-expected 4.5% year-on-year in the three months through March.

E-commerce is recovering, though not as fast as what the market is hoping for, said both Keung and Shao.

E-commerce competition in China will be 'more intense' this year, says Goldman Sachs

“I think the e-commerce numbers do show some of the recovery on a one-year basis and on a two-year basis, we are seeing some signs of this consumption gradually recovering,” said Keung.

“Travel has been strong and goods kind of started to really pick up in the month of March with apparel.”

Keung said they “expect some attractive pricing to drive demand during the 618 shopping festival.” The 618 shopping festival, which happens on June 18, is one of China’s most important shopping festivals.

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