EQUITIES UPDATE: Alibaba and Chinese internet names


Alibaba and Chinese internet names

Last week was a tough week for Chinas internet shares as more earnings disappointments grabbed the headlines. Of note, Tencent (previewed in last weeks Blotter), missed even lowered profit expectations, online retailer JD.com reported large net losses on higher expenses and VIPShop, a Chinese e-commerce platform, announced third-quarter guidance below analyst forecasts.

Also weighing on the sector was last Tuesdays report from China's National Bureau of Statistics on July total retail sales which printed at 8.8%, slightly lower than the 9% expected by economists. This, as well as a recent string of weaker economic data, prompted several investment banking analysts to lower their assessment of commerce names, including those in the internet space.

However, there may be some short-term relief for these stocks on the macro front on the report that a China delegation will be sent to Washington, D.C. this week for trade talks that may be able to make some progress and set up a potential a summit later this year between President Trump and President Xi. Additionally, for some of these companies, that are down 15-20% from their recent peaks, this quarter may be the bottom in earnings that will set the stocks up for a rebound in the coming quarters. Key for sentiment in this sector will be Alibabas 1q fiscal results which will be announced before the US market open on Thursday.

Recently, Alibaba has reported strong year-over-year growth in revenues across segments, however, concerns have recently mounted as increased acquisitions into the bricks and mortar space have caused a sharp contraction in margins which looks unlikely to rebound anytime soon.

For the 1q FY results, analysts are expecting revenues of $12bn up about 60% y/y and 25% on a quarterly basis and an EPS of $1.21, an increase of 3% y/y. It appears as if the whisper numbers complied from investor crowdsourcing sites are a bit higher than this and, interestingly, short interest on the stock going into the numbers is estimated to be about 8% of total free-float. Also of note, is that the company translates each quarter's revenues and earnings from RMB into USD as of the day that they report. When it reported its last set of results, the currency was at 6.33.

The biggest focus of the company call will be its efforts to merge its online and offline experiences with its new retail initiatives. Investors will be interested on the progress of recent acquisitions in Hema supermarkets, Intime department stores and food delivery group, Ele.me and how they are being integrated into the Alibaba ecosystem and when will they start contributed to earnings. Additionally, analysts will be curious on any details about this months announced partnership with Starbucks.

Another aspect that analysts will be watching, which is a one-off rather than a long-term theme, is the impact from Alibabas participation in the World Cup. Some in the investment community believe that the advertising and contents spending related to event may have far exceeded any contributed revenue and may have a hit to the bottom line.

This week Alibaba will be the biggest earnings focus this week in the China space. With many internet and technology-related stocks down 15-20% from their recent highs, and the history of this company announcing upside surprises, this report may spark a short-term rally in this beaten down sector.


The View