Chinese internet tech companies Alibaba, Tencent and Baidu have all reported solid quarterly earnings this month without reflecting on the market performance. Tencent has fallen four weeks in a row. Alibaba and Baidu ended the week higher in U.S. trading after posting three consecutive weeks of declines — still not enough to erase losses of more than 10% for the month so far. All three stocks have double-digit gains ahead of them if FactSet analysts’ average price target hits. The current mood doesn’t help. Worries about contagion from worsening problems in China’s housing market in the absence of strong economic stimulus are fueling headline uncertainty about future growth. But Louis-Vincent Gave, CEO and founding partner of Gavekal, points out that even here the market is telling a more dovish story, as Chinese bank stocks are showing a positive 200-day moving average trend. “When we see bank stocks breaking out to new lows, it’s usually a signal that investors should look to exit as soon as possible,” he said, noting that this happened in 2007-08 in the US and was the case in Europe in 2010 to 2011. But Chinese bank stocks have not broken their bottom since October, while US regional banks have seen two massive sell-offs in the past five years, he said. Nonetheless, economists’ GDP forecasts for China have fallen. UBS analysts lowered their estimate to around 4.8%, after previously reading just over 5%. “We continue to anticipate real estate action over the next few weeks that would be critical to restarting the economic recovery and restoring market confidence,” the company’s investment strategists said in a report on Wednesday. “Given the expected sequential recovery in fundamentals, as well as heightened sensitivity to anticipated policy action, we continue to favor the internet sector, particularly e-commerce stocks, as a direct beneficiary of the recovery,” said UBS strategists. Note that the shares are trading at low price-to-earnings ratios. According to FactSet, Alibaba outperformed on both sales and profits, increasing its average sales-side price target by 0.8% the next day to $136.83. Baidu also exceeded expectations. According to FactSet, the average target price rose 1.1% to $178.52. Tencent failed as revenue growth came in slower than expected. According to FactSet, the average target price fell 0.3% to HK$441.67. However, Barclays China tech analyst Jiong Shao and his team said Tencent’s potential is underestimated. On Aug. 17, the day after the earnings release, they upgraded the stock to “overweight.” “We believe Tencent is in full swing and should continue its recent strong growth, even if the overall economy is slightly weaker than expected,” the report said. The second quarter results also revealed new growth trends in e-commerce and gaming for some companies. Live-streaming and video app Kuaishou outperformed on both sales and earnings, prompting analysts to raise its target price by an average of 2.6% to HK$85.60, according to FactSet. Nomura raised its price target by HK$10 to a below-average HK$72. That’s up 10% from Kuaishou’s close on Friday. Analyst Jialong Shi said that despite an increase in daily active users, daily time spent per user has declined amid a highly competitive environment where ByteDance’s Douyin remains resilient and Tencent’s WeChat video accounts are growing rapidly. NetEase, a growing gaming competitor to Tencent, reported quarterly profit up but revenue down on Thursday. Still, its average price target rose 2.4% to $118.90 per share, according to FactSet. Morgan Stanley also added NetEase to its China/Hong Kong Focus list this week, as the company expects it to continue “to deliver a suite of blockbuster game titles over the next 6 to 12 months.” According to Chinese internet analyst Alex Poon, one game received a domestic license in June, while international versions of other games can also boost business. The report didn’t reveal a target price, but noted that NetEase is up nearly 27% from the company’s target since Wednesday. Such double-digit gains are not unattainable when sentiment around China’s politics and economy recovers. KraneShares CSI China Internet ETF (KWEB) is up nearly 19% over the past month. But it faces losses of more than 10% this month. In the near term, Rob Sanderson, CEO of Loop Capital, summed up sentiment well in an Aug. 22 note on Baidu: “Will (solid earnings) change investor minds? We expect breakthroughs in the monetization of Baidu’s AI businesses (AI cloud, robotic taxis, intelligent driving solutions) to lift sentiment, but this was not the quarter for breakthroughs. “We expect the stock to remain volatile in the near term as well as its Chinese internet peers on macroeconomic uncertainty,” the report said. Loop has a $210 target price on Baidu, up more than 50% from the stock’s close on Friday. – CNBC’s Michael Bloom contributed to this report.
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