Investor sentiment towards Chinese stocks like JD.com, Tencent and NetEase is improving as the government signals an easing of Covid-19 regulations and a return to growth. Investors will be hoping the encouraging set of results from three of the country’s largest ecommerce businesses will only further spur the trend.
- Tencent and NetEase join JD.com in positive earnings reports
- Analysts upbeat on China’s return to growth
- KraneShares CSI China Internet ETF outperforms Amplify Online Retail ETF
The MSCI China Index gained 27.2% in the first 17 days of November, buoyed by a change in tone from the Chinese government that looks set to revive economic growth. Goldman Sachs analysts led by Timothy Moe expect the index, as well as China’s CSI 300 Index, to grow by 16% over the next 12 months.
Chinese ecommerce companies often look to Singles Day, the largest online shopping event in the world, as a measure of their fiscal health. While initial reports following this year’s event suggested sales had stalled, recent figures compiled by Xingyun Data suggest that sales increased by 14% this year.
Despite this, JD.com joined Alibaba [BABA] in not releasing its own results for the event in its immediate aftermath, adding to uncertainty among investors as to how well China’s ecommerce companies are performing. Nevertheless, JD.com’s share price gained 50.2% through November, Tencent gained 40% and NetEase gained 25.35%.
Positive results for the preceding quarter have, however, further fuelled the positivity surrounding China’s ecommerce stocks. Tencent reported revenues down 2% year-over-year on 16 November. However, non-IFRS diluted EPS of ￥3.306 Chinese yuan exceeded analyst expectations by 9.8%.
On 17 November, NetEase reported a 10.1% year-over-year increase in net revenues to ￥24.43bn, slightly beating a Financial Times analyst consensus of ￥24.35
Gaming revenues increased for both Tencent and NetEase, by 3% and 9.1% respectively. NetEase set out to reassure investors concerned about its failure to renew agreements with Activision Blizzard [ACTVI] to release titles like World of Warcraft in China beyond January 2023 by saying that “the expiration of such licenses will have no material impact on NetEase’s financial results.”
JD.com’s earnings report on 18 November announced a 11.4% year-over-year increase in revenues and a non-GAAP diluted earnings per ADS of ￥6.27 marked an incredible 98.42% year-over-year increase.
Gaming divisions in focus
Ma Huateng, chairman and CEO of Tencent, said in the earnings statement that the company was seeing the benefit of its repositioning for “a new industry paradigm.” Adjustments included infeed adverts in video accounts, “breakthroughs in international games publishing,” and improved cost efficiencies.
“Tencent remains very strong,” TechBuzz China analyst Rui Ma told Bloomberg Australia. “There seems to be some warming up when it comes to policy towards the broader tech sector,” although this was predominantly in relation to gaming.
“[Tencent’s] management cares about shareholder interests,” Ma continued, “so they have been cutting costs, they have been divesting businesses that they feel like is mature or non-core.”
In NetEase’s earning statement, CEO William Ding drew much attention to the strong performance of the company’s games division, whilst also acknowledging NetEase’s “differentiated offerings with Youdao, Cloud Music and Yanxuan businesses.”
Meanwhile, Lei Xu, CEO of JD.com, praised the company’s “focus on efficiency across various businesses,” saying this drove “healthy growth even when the industry continued to face significant challenges.”
Funds in focus: KraneShares CSI China Internet ETF
All three companies feature in the top ten holdings of the KraneShares CSI China Internet ETF [KWEB] as of 17 November, with Tencent topping the list with 9.29% of assets. JD.com is the third largest holding with a weight of 7.47%, and NetEase is number nine at 4.57%. The fund has dropped by 28.5% year-to-date, but is up 15.65% in the past month.
Despite China’s economic woes, the fund outperformed Amplify Online Retail ETF [IBUY], which has lost 51.7% year-to-date, but rallied a modest 5.9% in the past month. The also holds JD.com with a 1.24% weighting as of 18 November.
Analysts, on average, expect a 53% upside for NetEase shares over the next 12 months, compared to 39.6% for Tencent and 34.2% for JD.com.
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