Will improved profit outlook boost the Alibaba share price?

Chinese regulators have issued further fines to Alibaba for failing to disclose transactions, with five deals receiving the maximum penalty of 500,000 yuan each. However, despite these short-term headwinds, analysts are bullish on the prospects for China tech.

Last weekend, Chinese regulators slapped yet more fines on Alibaba [BABA] for failing to disclose transactions. The ecommerce firm has received a 2.5m yuan bill for not reporting on five deals identified by the State Administration for Market Regulation as having violated rules. These include Alibaba’s purchase of equity in streaming platform subsidiary Youku Tudou last year.

ADR shares of Alibaba dropped sharply on Monday 11 July, closing 9% down at $109.57. It ended Thursday 14 July 5.3% lower at $103.76. While the Alibaba share price is 49% above its 52-week low of $73.28 set on 15 March, the latest fine has unwound most of the progress the stock had made in recent weeks.

“The dip is likely to be temporary. The market was more wary about the US. raising interest rates so sharply, but it’s just been overrun by the new fines,” said Francis Lun, a Hong Kong-based veteran investment manager, AP News reported.

A focus on profitability

Investor flight from Chinese stocks has reversed over the past month or two largely due to signs that Beijing is loosening its regulatory grip. Some of the best performing European-domiciled ETFs in June, according to Morningstar data, include the Xtrackers Harvest MSCI China Tech 100 [XCTE] and KraneShares CSI China Internet [KWEB]. Both have Alibaba in their top 10 holdings.

Morningstar Asia senior equity analyst, Chelsey Tam argues that Chinese internet stocks are experiencing a swing in sentiment because their low valuations are more attractive in the face of a bear market in the US and Europe. It helps that the Chinese government is boosting its economic stimulus.

“The Chinese authorities have been signalling support for the economy, which in turn has given investors comfort that the worst for tech names may be over,” said Tam. These names might “surprise on the upside because these companies are now less focused on growth and more on profitability”.

Reasons to be optimistic on Alibaba

The consensus estimate for Alibaba’s EPS for the next 12 months has climbed more than 7% from a three-year low in May, reported Bloomberg. The internet giant’s profitability is also expected to bounce back.

Citi analyst Alicia Yap has added Alibaba to the firm’s ‘focus list’ ahead of the Q1 2023 earnings next month, according to a note seen by Street Insider. Yap sees the Alibaba share price trading in tandem with China’s recovery in the second half of calendar 2022. Although Citi cut its target for the Alibaba share price from $176 to $172, Yap believes there are reasons to be positive.

“Given [management’s] target of driving high quality [revenue] growth and further optimising cost with narrowing losses in several initiatives, together with the low base effect, we believe profit could potentially improve more than expected,” wrote Yap.

Citi is expecting Q1 2023 revenue and profit to be lower than previously forecast, given that April was a brutal month for equities. Revenue estimates for fiscal 2023 through 2025 have also been lowered, but profit estimates have been raised.

Alibaba CEO Daniel Zhang Yong (pictured) remained optimistic on the company’s outlook at the Q4 earnings release in May. While he highlighted headwinds such as Covid-19 lockdowns and supply chain issues, he said that the new fiscal year would bring a greater focus on “cost control and…improv[ing] our operating efficiency”, and spoke positively about China’s efforts to promote “the development of [an] internet platform economy through a healthy, regulatory environment”.

Second half rebound

Despite near-term headwinds facing the broader Chinese economy, namely the risk of rising Covid-19 infections and further lockdowns, analysts are bullish on Chinese tech’s prospects for the second half of calendar 2022.

Mark Haefele, chief investment officer at UBS Global Wealth Management, wrote in a note seen by Barron’s that “we retain our most preferred rating on China within Asian equities”. Share prices are trading at a discount to the US market, which leaves plenty of “room for Chinese equities to catch up in the months ahead.”

A number of brokerages, including Citi, reiterated a buy rating for Alibaba last week. JP Morgan raised its price target from $130 to $140, while Benchmark increased its price target from $200 to $205. MarketWatch data shows the stock has 40 ‘buy’ ratings in total, as well as six ‘overweight’, eight ‘hold’ ratings and one ‘sell’ rating. According to CNN Money, the consensus price target among analysts is $150.59, implying a 45% upside on the 14 July closing price.