Daily Brief - Earnings High Noon

TLDR: As Chinese tech giants Tencent and Alibaba gear up to release their earnings next week, all eyes are on whether their performance can sustain the recent rally in China's stock market.

Having rebounded from multi-year lows, the market's fate seems heavily pinned on these tech behemoths, which together with JD.com and Baidu, make up a substantial slice of the MSCI China gauge.

The timing is critical. While Chinese indices have recently flirted with bull market territory, they remain significantly lower than their 2021 peaks. Investors are pondering whether the rally, spurred by favorable valuations and a pivot from Japanese stocks, has real legs or if it's merely a sugar high, ready to crash on any signs of earnings weakness.

With early signs mixed – Morgan Stanley has hinted at a "sizable miss" in Q1 across Chinese firms, and JPMorgan noted a decline in earnings among early reporters. Tencent is expected to post a 6% revenue gain, and Alibaba a 5.6% rise, but with the backdrop of a broader economic softness in China, as recent retail sales data showed, the pressure is palpable.

The tech sector's outperformance last year offers a glimmer of hope. Yet, with these stocks now appearing technically overbought, the upcoming earnings could either fuel further gains or snuff out the nascent optimism.

Scenario Spotlight: If Baba can beat estimates

The chart above displays the median 1-month response from Alibaba, based on data from the past 10 instances where the company beat revenue estimates and its stock was trading below $100/share.

Market Movers: Tech Titans on the Move

Here is the historical 1-month response from Chinese ADRs following previous revenue beats by BABA, while the stock was under $100:

1. Pinduoduo: 30.36%
2. KE Holdings Inc ADR: 7.83%
3. Tencent Music Entertainment Group ADR: 6.69%
4. Baidu: 6.41%
5. JD.com: 5.88%
6. Trip.com Group: 4.94%
7. Netease: 3.86%
8. Alibaba ADR: -1.02%
9. Yum China Holdings: -1.04%
10. Li Auto ADR: -5.37%

Earnings Spotlight: Tencent Music reports on Monday

In the last quarter, Tencent Music reported a net profit of RMB1.41 billion. This performance was largely driven by a significant 39.1% year-over-year increase in music subscription revenues. Despite these gains, the company faced challenges in its social entertainment services, which saw revenues decline due to adjustments in live-streaming functions and stricter compliance measures.

As investors look forward to the next earnings release, they should focus on the potential for continued growth in the music subscription sector and watch for strategies to rebound the social entertainment segment, along with how the company manages operational efficiency and cost control in light of recent expense reductions