Financial Trading Blog
Alibaba, Tencent Brace for China's Economic Challenges
Chinese companies have soared and slacked due to China's stimulus measures and Trump's re-election, but can upcoming earnings from major firms provide clarity on their growth trajectories?
Return to Mean or Rebound
Alibaba was one of the companies that gained substantially in October when Chinese officials announced it would implement unprecedented economic stimulus measures. The share price of BABA rose by almost 50% since the summer lows. However, as more details of the stimulus emerged, markets have expressed their disappointment with lower share prices. BABA has lost most of its stimulus-related gains, decreasing by around 25% since the highs. Donald Trump's re-election and the increased threat of a trade war also contributed to the latest price declines. Nevertheless, there are some indications that his presidency might help reverse the trend, especially if Alibaba can report solid earnings this week.
After the initial high-profile stimulus announcements in China, authorities have gradually rolled out a series of less significant measures, leaving markets underwhelmed. However, the Chinese government continues to introduce new measures to bolster the domestic economy and address "hidden lending" issues, indicating that the stimulus measures are far from over. Analysts speculate that the threat of a trade war with the US, now that Trump has assumed the presidency, will prompt Chinese officials to increase support for the domestic market once again.
Baba and Tencent Earnings Outlook
Around two-thirds of Alibaba's revenue originates from domestic markets, often seen as a bellwether for the Chinese economy. Lately, its earnings have been somewhat lacklustre, mirroring the challenges faced by the Asian giant in meeting its growth targets. Analysts expect this trend to continue, with the company experiencing top-line growth but declining earnings as it grapples with increased competition in its core e-commerce business. The cloud unit, however, has emerged as a bright spot, posting double-digit growth in the previous quarter. Investors will be keen to see guidance that would sustain this momentum. Alibaba is expected to report a decline in earnings per American Depositary Share (ADS) to $2.07 from $2.17. However, it should be noted that the recent price fix of the renminbi was at its lowest level in a year. On the other hand, sales are projected to have risen by 5.4% over the last twelve months, reaching $33.3 billion.
Tencent might be particularly vulnerable to China's economic underperformance, as spending on gaming is more discretionary, explaining why the share price has almost entirely erased its stimulus gains. Nevertheless, it has remained at plus 35% so far this year, as investors have high hopes for the company's cloud and AI investments. Its subsidiary, Tencent Music, missed earnings expectations on the bottom line when it reported on Tuesday, which could indicate that the parent company might also disappoint. Additionally, Rakuten showed slowing demand for mobile sales. On the positive side, the release of popular games such as Brawl Stars and Valorant might have supported user metrics in the latter half of the year. Tencent is expected to see its earnings per ADS increase to $0.88 from $0.65, with revenue up by 8.7% to reach $23.4 billion.
BABA Ending C&H Pattern?
BABA formed a bottom at $57.50, but after subsequently doubling to $120, it pulled back to $90. Notably, the peak coincided with the January 2023 high, suggesting the potential formation of a cap-and-handle (C&H) pattern nearing completion. Based on the measured-move projection method, BABA could extend its gains to $175 if prices rebound from this critical juncture. In the short term, $145 is a potential resistance level when measuring the pullback length. Conversely, if prices slide under the local floor, a decline towards $80 would be possible, exposing $66 and the 2023 low.
Key Takeaways
Upcoming earnings from major Chinese firms Alibaba and Tencent are expected to provide insights into their growth trajectories, following market fluctuations due to China's stimulus measures and Donald Trump's re-election. Alibaba's share price initially surged on stimulus announcements but later declined as details emerged. Meanwhile, Tencent's gaming business faces challenges from China's economic underperformance. Analysts expect Alibaba's earnings per ADS to decline to $2.07 from $2.17, with revenue up 5.4% to $33.3 billion. Tencent's earnings per ADS are projected to increase to $0.88 from $0.65, with revenue up 8.7% to $23.4 billion. Technically, BABA price action suggests the potential completion of a C&H pattern, indicating further gains towards $175 if prices rebound from current levels.
It's easy to open an account
- Fill in our simple online application form
- Fund your account
- Start trading the global markets instantly!
SEARCH FOR AN ARTICLE:
Enter a keyword and search for all relevant articlesMARKET ANALYSIS
RECENT POSTS
DISCLAIMER
Spread bets and CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 64% of retail investors lose money when trading spread bets and CFDs with this provider. You should consider whether you understand how spread bets and CFDs work and whether you can afford to take the high risk of losing your money. For professional clients, spread betting and CFD trading can also result in losses larger than your initial stake or deposit.
Spreadex Ltd is authorised and regulated by the Financial Conduct Authority, provides an execution only service and does not provide advice in any way. Nothing within this update should be deemed to constitute the provision of investment advice, recommendations, any other professional advice in any way, or a record of our trading prices. This update does not constitute or form part of an offer of, or solicitation for a transaction in any financial instrument, nor shall it or the fact of its distribution form the basis of, or be relied on in connection with, any contract therefore. Any persons placing trades based on their interpretation of the comments or information within this update does so entirely at their own risk.
No representation, warranty, or undertaking, express or limited, is given as to the accuracy or completeness of the information or opinions contained within this update by Spreadex Ltd or any of its employees and no liability is accepted by such persons for the accuracy or completeness of any such information or opinions. As such, no reliance may be placed for any purpose on the information and opinions contained within this update.
The information contained within this update is the intellectual property of Spreadex Ltd and is protected by UK and International copyright laws. All rights reserved. Users may however freely download, distribute and reproduce extracts of the contents, subject always to accrediting Spreadex Ltd as the source and providing a hyperlink to www.spreadex.com.