Alibaba, NetEase Slump as Earnings Fail to Impress Investors

(Bloomberg) — China’s technology stocks took a beating after more firms reported earnings, just when price wars and geopolitical tensions cloud the growth outlook for the sector.

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NetEase Inc. slumped 11% Friday after a profit miss, while Alibaba Group Holding Ltd. closed 5.4% lower, as analysts remained cautious about its sales growth prospect. The Hang Seng Tech Index fell 3.3%, taking its decline from a January peak to 17% and reaching the lowest in two months.

As the recent selloff in Chinese and Hong Kong stocks extended on Friday, the tech gauge as well as the broader Hang Seng China Enterprises Index erased all their gains for the year so far.

While the worst of the regulatory crackdowns that bruised the tech sector over the past few years may be over, there is growing concern that burgeoning price wars and fresh rounds of cash burn will further hurt profits as the strength of the country’s economic recovery remains in question.

A report earlier this week that JD.com Inc. is launching a $1.5 billion subsidy campaign to fight back against the advances of rival PDD Holdings Inc. caused the sector to tumble. Also, a move by Meituan to hire 10,000 people on the mainland was seen as an effort to beat back heightened competition.

Raj Shant, portfolio specialist at Jennison Associates, said that $164 billion manager is “worried” about price wars in China tech. The asset manager has been conducting scenario analysis for Pinduoduo, which is in the top ten holdings of its emerging market portfolio.

“We will run the numbers. We’ll say, well does it necessarily stop there? Or then model what it would be if it just stayed there, or if it got more extreme,” he said, referring to the price wars.

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Meanwhile, US Secretary of State Antony Blinken said Thursday that China’s government probably approved of local firms providing Russia non-lethal, “dual-use” support for its war in Ukraine, adding to growing Sino-American tensions.

READ: China Tech Faces Uphill Battle to Revive Rally: Earnings Watch

“China Internet is becoming a more beta-flow driven sector, more top down driven by geopolitics, global positioning, and traded as a China proxy rather than too much of a bottom up,” said Winnie Wu, chief China equity strategist at Bank of America.

It remains to be seen if earnings from other tech firms will be able to stand up to the test. Li Auto Inc. is due to report next Monday, while Weibo Corp., Nio Inc. and Bilibili Inc. are also scheduled to report next week.

To be sure, Chinese onshore investors net bought HK$8.2 billion ($1 billion) worth of Hong Kong-listed stocks on Friday, the most since last March, according to Bloomberg data.

“While earnings are not all bad, there are still plenty of risks — the amount of clarity for tech firms listed is still sparse given the mid to long-term threat to fundamentals with price wars,” said Zhang Hao, fund manager at Granford (Beijing) Capital Management Co.

–With assistance from Charlotte Yang and Ishika Mookerjee.

(Updates prices throughout, adds mainland flows)

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