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Analysis

Is winter over for China Big Tech?

China Big Tech has been hording the limelight for the entire year of 2021 but not on the positive side of things. Since Alibaba’s Ant Group mega initial public offering of $35 billion (the world’s largest on record if listed) was suspended abruptly in Q4 2020, the share prices of the major China Big Tech firms such as Tencent, Alibaba, Baidu, JD.com and Meituan have tumbled by close to -50% and wiped out around $1.5 trillion in combined market capitalisation from a February 2021 peak.

The primary reason for such a drastic weak sentiment towards China Big Tech has been a year-long of regulatory clampdowns orchestrated by the Chinese government on almost the entire spectrum of the online technology platform industry in China that ranges from e-commerce, peer-to-peer lending, ride-hailing, online gaming, and online education as well as the management of big data being harnessed by their respective business operations that are deemed as a potential internal security concern.

All in all, all these stringent measures to curb the business expansion activities of China Big Tech have been reflected in their respective Q3 2021 earnings results; Tencent has reported that its revenue for Q3 grew at the slowest pace since 2004; rose 13% to 142.4 billion yuan ($22.3 billion). Even though Baidu has managed to meet expectations for its Q3 revenue where its AI cloud business division recorded a jump of 73% in revenue that helped to offset a slowdown in its main internet advertising division but warned that China’s regulatory environment and the pandemic would weigh on advertising sales in the coming quarters.

Alibaba’s latest quarterly earnings for July to September 2021 has taken a massive hit on the downside where both profit and revenue missed expectations. Profit for July- September period came in at 5.37 billion yuan ($833 million) from 8.77 billion yuan earned over the same period last year which has translated to earnings per share of 11.20 yuan versus 12.36 consensus estimates: a -38% year-on-year decline. Revenue came in at 200.69 billion CNY ($31.4 billion) vs. 204.93 billion CNY consensus estimates. It has also slashed its revenue growth guidance for the current fiscal year to between 20% to 23% year-on-year from 930 billion yuan, an initial growth expectation of 29.5%.  

Alibaba’s main e-commerce rival JD.com Q3 earnings report fared better where its revenue has managed to beat expectations; climbed to 218.7 billion yuan ($34.3 billion) compared with 215.6 billion yuan consensus estimates but earnings took a hit on the downside as well. Its net loss was 2.8 billion yuan, compared with the consensus estimate of 1.67 billion yuan profit due to a non-operating loss of 3.1 billion yuan because of a change in the value of its equity holdings.

What matters next

Despite the current gloomy climate that hinder the growth of China Big Tech, there are several potential forward looking positive factors.

Encouraging news flow that indicated the momentum of the regulatory clampdowns seen in the past one year has started to ease; Didi Global Inc, the Chinese rail-hailing platform that was inflicted by a stringent regulatory smackdown on its operations after its recent controversial US initial public offering listing in June has mentioned that it is preparing to reintroduce its apps in China by end of 2021 and the Chinese government is expected to finalize any penalties for Didi Global by December as reported by Bloomberg.

Dow Jones reported that Beijing has planned to issue more than a dozen licenses to Chinese online education firms; under the new licensing agreement, education firms will be required to operate after-school tutoring on a non-profit basis while being allowed to make a profit on other businesses, such as tutoring adults for professional exams.

On the online gaming front, the 21st Century Business Herald reported that China’s regulators may restart the approval process for new online games for game developers such as Tencent and NetEase after a three-month halt.

Improving macro data; China’s retail sales has starting to show signs of improvement; rose to 4.9% year-on-year in October from 4.4% in September, its strongest pace of growth in three months and managed to beat expectations of 3.5%.

In conjunction, China’s consumer confidence has improved significantly as well; it increased to 121.10 points in September from 117.50 in August, a one-year low.

Improving technicals ; the Kraneshares CSI China Internet ETF (KWEB) listed in US stock exchange where its top three constituents stocks are Tencent, Meituan and JD.com has started to show a potential major bullish basing formation based on technical analysis (see chart below).

Since its 52-week low of 43.39 printed on 19 August 2021, the price action has shaped a rebound of +27% and the rebound has taken shape right at a long-term secular ascending trendline support in place since August 2015 low of 26.00. In addition, in the past three months, KWEB has traced out an impending bullish “Triple Bottom” basing configuration with its neckline resistance at 55.30. A clearance with a weekly close above 55.30 may kickstart a multi-month up move towards the next resistance at 65.70 in the first step. On the other hand, a weekly close below 43.39 invalidates the bullish basing scenario for a continuation of the major downtrend in place since 18 February 2021 high to set sight on the next support zone of 38.60/38.00 (swing low areas of August 2019/Mar 2020).

KraneShares CSI China Internet ETF (KWEB) – Potential “Triple Bottom” in progress  

Source: TradingView (click to enlarge chart)

Source: CMC Markets (click to enlarge chart)

 


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