Alibaba, Netease Earnings Stand Out as Chinese Economy Shifts

  • Chinese tech and consumer companies beating sales estimates
  • Better-than-forecast results reflect new economic growth model

China’s delicate transition to a new economic growth model may be starting to pay off -- at least when it comes to the earnings of some of the country’s biggest technology and consumer-oriented companies.

Alibaba Group Holding Ltd., Weibo Corp. and NetEase Inc. are among Chinese companies listed in the U.S. that have reported better-than-estimated results for at least a second consecutive quarter. Out of 25 technology and consumer discretionary companies on the Bloomberg China-U.S. Equity Index that have reported this earnings season, 80 percent have posted fourth-quarter sales above analyst forecasts. Overall, U.S.-traded Chinese companies have on average beaten revenue expectations by 5.3 percent, according to data compiled by Bloomberg.

As China shifts its economic model from one centered on manufacturing to more of a focus on services and consumption, policy makers are promoting innovation and technology to drive growth. The initiatives include subsidies and efforts to nurture industries from software development to mobile apps. The change has proven challenging for the world’s largest economy, which last year grew at the slowest pace in a quarter century.

“Chinese demand for health care, education, business services and e-commerce is still strong,” said Peter Halesworth, the founder of Heng Ren Investments, whose firm invests in Chinese stocks. “These sectors are very attractive and should outperform in the long term.”

Improving Outlook

The strong performance by new economy stocks on the Bloomberg index is resembling past patterns. The majority of the companies that beat analysts’ expectations on earnings during the most recent period were from the technology, consumer discretionary and health-care industries. Alibaba beat third-quarter earnings estimates by 11 percent, while NetEase’s and Weibo’s beat estimates by 24 percent and 56 percent, respectively.

Analysts have become more bullish on the technology companies that are scheduled to announce results, raising their first-quarter earnings estimates by at least 6.9 percent in the past month for online travel retailer Ctrip.com International Ltd. and search engine Qihoo 360 Technology Co. They are scheduled to release results later this month as about half of the 68 companies on the Bloomberg China-U.S. Equity index still are due to report earnings.

Rapid Growth

Analysts covering Baidu Inc., China’s largest Internet search engine by users and revenue, have increased their earnings per share forecasts by 1.2 percent for the current quarter. Baidu expects revenue for the first quarter this year to jump between 21 percent to 26 percent from the same period in 2015, Chief Executive Officer Robin Li said on the conference call. 

Yet there are signs that China’s Internet industry may be expanding too fast, too soon.

Baidu’s operating margins have declined as it plows money into video content and on-demand services and Alibaba’s gross merchandise volume growth came under pressure in the last quarter, intensifying concern about the impact from China’s economic slowdown. JD.com Inc. continued to post losses as investment in new areas amid a slowdown in its core electronics business further squeezed margins.

“New economy stocks didn’t escape from the downturn just by being new exciting areas of economic development,” said Joe Gubler, who oversees about $2.3 billion at Causeway Capital Management in Los Angeles. “But at least they are on the right side of that divide, so they could benefit from that being more important going forward.”

Mobile Shift

Brad Gastwirth, chief executive officer of ABR Investment Strategy, remains optimistic.

“We still have a significant amount of people using 3G devices with screen sizes of less than 3 inches,” said Gastwirth, who favors JD.com and Chinese travel firms. As more Chinese move to faster connected devices with larger screens, he expects an “even more robust growth environment for the Internet companies as both will be enablers to usage and growth.”

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