China’s top consumer earnings show stocks recovery is a ways off
ONE by one, China’s biggest consumer companies are reporting revenue misses, upsetting expectations for a market recovery to take hold.
Instead of a rebound, the MSCI China consumer staples gauge is set for the biggest sales underperformance in at least two years. Major tech firms from Alibaba to Kuaishou Technology led the disappointment, while retailers including Li Ning have toned down guidance for future revenue growth.
The latest earnings season suggests that the 11 per cent stock slump from May will extend, with the government showing few signs of being able to revive consumer confidence. Investors now await results from bellwethers such as carmaker BYD and online travel agency Trip.com.
“The latest results season confirmed the very weak domestic demand again,” said Joohee An, chief investment officer at Mirae Asset Global Investments in Hong Kong. Even for online retailers whose earnings were holding up, that was mainly because of “cost-saving efforts rather than top line surprises,” she said.
This was not supposed to be how it turns out when investors returned to Chinese stocks in the second quarter on hopes the economy and corporate profits will rebound. As sentiment soured, market players zoomed in on companies’ tepid revenue performance or outlook rather than profit growth, a sign that consumer demand became a top concern.
Tencent shed 1.4 per cent after it delivered strong profit growth but warned flagging consumption was hitting its giant fintech and cloud division. Baidu slumped as much as 7 per cent in Hong Kong after reporting weaker-than-expected revenue despite earnings expansion.
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Investors instead chose to huddle around firms that managed to deliver outstanding top line performance, such as Xiaomi and JD.com, whose shares surged more than 8 per cent immediately after their earnings releases. That said, JD.com has lost much of its earlier gains after Walmart sold its stake in the Chinese e-commerce firm, a move that wound down an eight-year partnership.
“What happened in the past two weeks was that unless you have a sharp revenue beat or optimistic sales guidance, investors would sell after results, ignoring earnings beats,” said Kenny Wen, head of investment strategy at KGI Asia. “It shows how worried investors have been and they will stay on the sidelines given the weak momentum, until some macro data shows signs of recovery.”
Analysts have lowered their revenue forecasts for Alibaba and Tencent for the third quarter, Bloomberg data show. More companies will test investors’ nerves next week with fresh earnings reports, including those from BYD and Trip.com.
But not everyone is pessimistic.
“We observed that internet companies like Tencent and Alibaba are making efforts to increase monetisation, which could help revenue growth in the coming quarters,” said Jian Shi Cortesi, a portfolio manager at Gam Investment Management. “Companies are also increasing dividends and buybacks to improve shareholder returns. We think the current low valuations have priced in the consumption weakness.” BLOOMBERG
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