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Chinese Internet Rally Soothes Slowdown Fears

13 May 2015 in Trading Ideas

It hasn’t been a great year for Alibaba investors, but the company’s most recent earnings report helped quell fears that China’s top e-commerce destination was losing momentum.

Last week, shares of Alibaba jumped after the company said that it processed $97 billion in gross merchandise volume, up 40% from the same quarter a year earlier.1

Overall, the company said revenue rose 45% to $2.81 billion, beating analysts’ expectations.

“That’s blistering growth,” Kevin Carter, founder of exchange-traded fund EMQQ told Investor’s Business Daily. “For a company the size of Alibaba to be growing at that rate is remarkable.”

IBD noted that analysts had previously raised concerns about the company’s results, citing its aggressive investments; competition from companies such as JD.com and Tencent; a government investigation into alleged counterfeit merchandise sold on Alibaba platforms; and profit margin pressures tied in part to doing more business via mobile; as well as the lock-up expiration of 437 million employee-owned shares on March 17, which raised fears about a flood of selling.

However, Alibaba is fortunate to be riding a wave of investor love toward Chinese tech stocks. As the Financial Times recently reported, the tech-heavy ChiNext board is up 109% in 2015.2

Another investment alternative, the China Internet motif, has gained 3.3% in the past month. In that same time, the S&P 500 has increased 0.8%.

Over the past 12 months, the motif has gained 23.1%; the S&P 500 is up 13.3%.

Part of this buoyancy likely feeds from the current positive feeling toward all China equities. The boom has been driven in large part by expectations that authorities will resort to aggressive monetary easing to cushion an economic slowdown after GDP grew at its slowest pace in six years in the first quarter, the FT noted.

The rate cut announced Sunday was the central bank’s third since November, and most analysts expect at least one more this year. They also expect further reductions to banks’ required reserve ratio, which, unlike rate cuts, directly inject base money into the banking system.

But last week, fears of a crackdown on margin financing hit the Shanghai index, which tilts toward large, state-owned companies.

Tech stocks, however, largely escaped the correction, as loans from brokers to investors to play the markets are mostly linked to investment in large-cap shares.

Yet another lift for China’s Internet companies seems to involve the ongoing secular change in consumer-based technology demand growing amid the country’s rising middle-class.

For example, a recent report by Niko Partners showed that online PC gaming revenues in China are up 22% this year, jumping to $14.5 billion due to an increased demand for online battle arena games and first-person shooters. By 2019, the revenue is projected to total $22.3 billion.3

For investors in Chinese tech stocks, the ultimate question may be whether the rally can continue after the government’s moves to sustain it are used up.

1Brian Deagon, “Alibaba Earnings Ease Fears Of Momentum Slowdown,” investors.com, May 7, 2015, http://news.investors.com/050715-751559-alibaba-earnings-report-china-internet-stocks.htm?ven=djcp&src=aurlabo, (accessed May 11, 2015).

2Gabriel Wildau, “China tech mania propels start-up board to record high,” ft.com, May 11, 2015.

3Dale North, “China’s PC online gaming market revenues grew 22 percent to $14.5B in 2014 – MOBAs helped,” venturebeat.com, May 1, 2015, http://venturebeat.com/2015/05/01/chinas-pc-online-gaming-market-revenues-grew-22-percent-to-14-5b-in-2014-mobas-helped/, (accessed May 11, 2015).

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