Tencent, Alibaba's rocketing valuations may augur a pullback

[HONG KONG] Asia's much-vaunted tech stocks could be getting ahead of themselves.

Projected price-to-earnings multiples for companies like Tencent Holdings Ltd - the chief driver of Hong Kong's region-beating equity rally this year - are re-valuing at a much faster pace than profit estimates, which could weigh on share prices, according to Northern Trust Capital Markets LLP.

Chinese e-commerce giant Alibaba Group Holding Ltd's 2017 projected 12-month P/E has risen 38 per cent since the start of the year, while earnings-per-share for the current year have climbed by just 10 per cent, North Trust said in a note Monday. For Shenzhen-based Tencent, the projected P/E has advanced 32 per cent as estimated EPS added 2 per cent.

"For those stocks where there is a significant gap between the two metrics we wonder if we may seem some pressure on stock prices in the short term," London-based analyst Neil Campling wrote in the note.

An exception is search engine operator Baidu Inc, which has seen its projected P/E fall 9 per cent this year, while EPS has climbed 6 per cent.

While tech titans such as Tencent and Alibaba deserve premium valuations, Campling said, they need to grow into them rather than skyrocket higher.

"It just feels this is as good reason as any that tech is not 'kicking on' during the second-quarter earnings season." Both Tencent and Alibaba are due to report results next week, while Baidu posted better-than-estimated second-quarter profit and revenue last month.

BLOOMBERG