Can Alibaba, Baidu and Tencent stocks gain from China’s recovery?

Chinese tech stocks like Alibaba, Baidu and Tencent have climbed from their 52-week lows as the country eases its crackdown on big tech and cities start to lift lockdown restrictions.

Chinese big tech stocks including Alibaba [9988.HK], Baidu [9888.HK] and Tencent [0700.HK] have rallied in the past few weeks as Beijing’s regulators appear to be loosening their grip and the country emerges from Covid-19 lockdowns. 

The iShares MSCI China Multisector Tech ETF [TCHI], which has all three stocks in its top 10 holdings, has outperformed the S&P 500 year-to-date. It’s delivered a positive return in the past month versus a negative return for the benchmark (as of 6 July).  

“Chinese internet stocks are experiencing a real change in market sentiment, with investors attracted by low valuations and the search for performance at a time of a bear market in the US and Europe,” Morningstar reporters noted. 

Fred Hu, who set up one of China’s leading private equity firms Primavera Capital, is bullish on Chinese big tech and believes the sector is poised for a comeback. “This could be the beginning of a new era for China tech. There’s a lot of value to be discovered,” Hu told Bloomberg last month.  

Here, we take a look at how the share prices of Alibaba, Baidu and Tencent have been performing recently and what’s driving their investment cases. 

Alibaba focused on sustainable revenue growth 

The Alibaba share has recovered from setting a 52-week low of HK$71 on 15 March to close at HK$116.70 on 7 July. The stock has climbed roughly 18% in the past month although in the year-to-date it has fallen by 1.8%. 

In his review of the first half of the year, UBS head of China equities Bin Shi wrote: “China is still growing, and the recent period of weakness has made many companies much cheaper. Because of the slowdown, many companies are better positioned for a rebound. We’ve seen this play out with Alibaba and Tencent — not because they’ve reported blockbuster earnings, but because of strong top-line growth.”

Revenue was up 19% year-over-year in fiscal 2022, although it slowed down in the second half as the ecommerce tailwinds of the pandemic were no longer behind it. Guidance hasn’t been issued for fiscal 2023, but the company is focused on “generating sustainable, high-quality revenue growth”.

Baidu poised to gain cloud market share

The Baidu share price set a 52-week low of HK$99 on 15 March. It closed at HK$149.20 on 7 July. 

The tech giant posted better than expected results for Q1 2022 in May, which has helped to drive positive sentiment. Going forward, Mizuho analyst James Lee, who recently hosted an investor call with the company, believes there are some strong tailwinds that should help to push the share price higher. These include advertising spend continuing to recover and the company’s advanced driver assistance systems, reported Benzinga. 

Lee also expects Baidu to gain cloud market share. In the three months to the end of March, the company’s revenue may have only risen by 1% year-over-year, but non-ad revenue grew 35% year-over-year, with cloud revenue the standout performer up 45% from Q1 2021. 

Tencent seen as a metaverse play

Like Alibaba and Baidu, the Tencent share price also set a 52-week low on 15 March at HK$297. It closed on 6 July 18.4% higher at HK$351.60.

At the end of June, the conglomerate launched its new cloud computing service for automakers, Tencent Intelligent Automobile Cloud. According to CNBC, the target market is foreign automakers looking to penetrate China’s electric vehicle market. 

Tencent is also seen as a metaverse play. As well as being a major games publisher, it’s a stakeholder in livestreaming companies DouYu [DOYU] and Huya [HUYA]. If it can apply its gaming capabilities to the vast number of users on its social networks, it’s well positioned to make the metaverse accessible, Charlie Chai, vice head of research at 86Research, told S&P Global Market Intelligence in March. 

“Tencent dominates in promotional and marketing resources where it can repeatedly push its products to customers to encourage adoption — this is a strategy that has proven effective and could help Tencent lead the metaverse gold rush as opposed to NetEase [999.HK] and ByteDance,” Chai said.