Alibaba, Tencent beat forecasts with strong results, a harbinger of China's improving corporate earnings as economic growth takes root

Two of China's largest technology companies beat their earnings forecasts, as Chinese consumers spent more online on retail goods and games, a harbinger of improving corporate profits in the nation's post-pandemic economy.

Alibaba Group Holding, one of the world's largest e-commerce platforms, reported a 10-per cent jump in net profit, its biggest annual earnings growth since 2021, as its revenue beat analysts' forecasts in the financial year that ended on March 31.

Net profit at Tencent Holdings, the world's largest games publisher, jumped by 62 per cent in the first quarter, comfortably beating the consensus forecast compiled by Bloomberg, while sales rose 6 per cent.

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Strong financial results by the two companies - with more than 300,000 staff between them - are the touchstones of the growth in corporate earnings and economy that global investors are looking for, as they debate whether China's post-pandemic recovery was a flash in the pan.

The outlook for profitability among Chinese companies looks bright because China's economic growth is showing signs of stabilising after emerging from the Covid-19 pandemic, UBS said on May 8.

That is a relief for investors, helping them recover from the 4-per cent average decline in first-quarter net income among the 5,000 companies listed on the stock exchanges of Beijing, Shanghai and Shenzhen, according to UBS. Earnings had fallen earlier because consumers had refrained from spending amid a property slump.

"From a macro perspective, recent property sales and new starts have yet to hit bottom, while overall earnings remained pressured amid subdued demand in the first quarter," said Meng Lei, a strategist at UBS in Shanghai. "Looking ahead, earnings are set to pick up as property activity stabilises and inflation recovery fuels household income and consumer spending growth."

UBS was among the global investment banks and brokers that dialled down their scepticism about China's growth prospects in recent months, joining Goldman Sachs and BNP in saying that they are now "positive" on the world's second-largest economy. HSBC switched its position on China's equities from "underweight" to "neutral."

China's economy expanded by 5.3 per cent in the first three months, at a faster pace than the previous quarter, according to official data.

The state of retail sales is of particular importance to economists and China watchers, as spending by consumers is key to restarting the country's economic growth engine. Sales growth slowed to 3.1 per cent in March, as consumers eschewed big ticket purchases such as residential property and vehicles.

Here, the corporate earnings by Alibaba and Tencent are important indicators. Alibaba, which operates Taobao and Tmall Marketplace, sells everything from personal and household goods to fresh produce, and even conducts land and ownership auctions for companies. Tencent earned 180 billion yuan last year, or about 30 per cent of its group revenue, from the world's largest catalogue of mobile games, including such blockbusters as Honour of Kings and PUBG Mobile.

Improved corporate earnings are crucial to the upwards momentum in Chinese stocks listed on the mainland, Hong Kong and New York, analysts said.

"We are seeing a resurgence in investor interest in Chinese stocks, including the internet industry, and Tencent is poised to be a top choice for larger funds due to its decent profit growth," said Shawn Yang, a senior analyst at Arete Research.

China's benchmark CSI 300 Index has risen 15 per cent from its February low after a slew of state measures such as direct stock purchases and restrictions on short selling. Overseas investors snapped up yuan-traded stocks for a third consecutive month in March largely because of improving sentiment and recalibration of portfolios by global money managers.

Tencent is the largest stock on Hong Kong's benchmark Hang Seng Index, which crossed the 19,000-level this week, capping a 27.8-per cent rally from January's low to return to a bull market. Tencent's stock has gained 45.6 per cent in the same period.

This article originally appeared in the South China Morning Post (SCMP), the most authoritative voice reporting on China and Asia for more than a century. For more SCMP stories, please explore the SCMP app or visit the SCMP's Facebook and Twitter pages. Copyright © 2024 South China Morning Post Publishers Ltd. All rights reserved.

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