Chinese stocks were surging broadly today on signs that Beijing was taking steps to support the stock market following a brutal decline over the last three years.
This morning, reports that China’s sovereign wealth fund would pump cash into the stock market had investors feeling suddenly bullish about Chinese stocks. China’s own stock market indexes surged with the Shanghai Composite up 3.2%, and the tech-heavy Shenzhen Component Index rose 6.2%. The Hong Kong-based Hang Seng, meanwhile, rose 4%.
Chinese stocks finally get a break
China stocks have been suffering for years as a crackdown on the tech sector by Beijing, the COVID-19 pandemic, and a weak economic recovery after the pandemic have all contributed to a long slide in Chinese stocks. Foreign investors, meanwhile, seem to have moved on from China as many of the sector stocks are trading at dirt cheap valuations.
Alibaba was the poster child for China’s crackdown on the sector after founder Jack Ma made insulting remarks about Chinese finance officials. That led to the initial public offering (IPO) of Ant Group, Alibaba’s financial arm, being blocked, a multibillion-dollar fine, and sluggish revenue growth due to weak economic growth and intensifying competition. Alibaba’s most recent quarterly earnings report revealed a new challenge. The company said it was abandoning a plan to spin off its cloud computing business because of the U.S. CHIPS Act, which restricts U.S. semiconductor technology from being sent to China. That could also weigh on companies like Alibaba.
PDD Holdings, which owns Pinduoduo and Temu, has been a rare winner in the Chinese tech sector. Pinduoduo’s social commerce model has also helped drive strong growth, taking market share from Alibaba and JD.com, and forcing increased price competition. Meanwhile, Temu, PDD’s international e-commerce site known for rock-bottom prices and widespread marketing, has seen blistering growth as well, challenging Shein for supremacy among Chinese international e-commerce sites. Revenue jumped 94% in its most recent quarter, a sharp contrast to Alibaba and JD. Still, PDD is reliant on the Chinese economy and consumer spending so it’s not surprising that it’s moving on today’s news or general economic data.
JD.com is the worst-performing of these three Chinese tech stocks, and it’s also the slowest growing. In its third quarter, the company’s revenue grew by just 1.7%. JD has arguably been the biggest loser due to competition from Pinduoduo, TikTok parent ByteDance, and others. Of the three stocks above, JD has the least international exposure, making it the most sensitive to the Chinese economy, JD is also mostly focused on low-margin products like electronics, appliances, and general merchandise like groceries. While the company has seen some decent growth in its logistics segment, the challenges it’s faced in its retail business indicate it doesn’t have a competitive advantage, especially as it loses market share to Pinduoduo. In December, founder Richard Liu urged employees to be more competitive and fight back against Pinduoduo.
Can Chinese stocks keep gaining?
Two days of gains do not constitute a pattern, but plenty of investors are looking for a bottom in Chinese stocks after so much pain over the last three years. Alibaba and JD.com trade at price-to-earnings ratios around 10, but that valuation isn’t meaningful if investors are unwilling to invest in China, and their growth rates remain mired in the single digits.
Investors should learn more when Alibaba delivers its quarterly earnings report tomorrow, the first of these three tech companies to do so.
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Jeremy Bowman has positions in JD.com. The Motley Fool has positions in and recommends JD.com. The Motley Fool recommends Alibaba Group. The Motley Fool has a disclosure policy.