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China Tech Megacaps in a Funk Despite Upbeat Sales: Tech Watch

(Bloomberg) -- Slowdown fears are weighing on Chinese tech stocks and even upbeat sales figures from the industry’s bellwethers can’t revive them.

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Shares of Tencent Holdings Ltd. have fallen more than 2.5% in Hong Kong since China’s most valuable company announced its fastest revenue growth in more than a year on Wednesday. Similarly, the nation’s Internet search leader Baidu Inc. has declined over 2% following a stronger-than-expected sales report on Tuesday.

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The Hang Seng Tech Index has dropped more than 7% this year, trailing the Nasdaq 100 gauge’s gain of more than 26% in a reflection of the broader malaise afflicting Chinese equities. A slowing economic recovery with few signs of policy support and Beijing’s rift with Washington are undermining sentiment toward China’s assets.

“I don’t really see much upside in the short term,” said Dickie Wong, executive director of research at Kingston Securities Ltd. “On the earnings front, JD.com and Baidu actually beat my expectation while Tencent and Alibaba are in line. But with a weaker yuan, geopolitical risks from the upcoming G-7 meeting and unresolved auditing issues, the market is more likely to remain in range-bound trading.”

Chinese tech stocks have succumbed to the pull of gravity after investors’ hopes for a swift rebound in growth failed to materialize. Official data released this week showed China’s industrial output, retail sales and fixed investment grew at a much slower pace than expected in April. As a result, traders have been focusing more on bad news of late.

Case in point: Alibaba Group Holding Ltd. slumped as much as 5.9% in Hong Kong on Friday as traders zeroed in on the firm’s weak sales growth even after the company laid out IPO plans for its logistics and grocery arms to unlock the group’s long-term value.

During this earnings season, all the industry bellwethers seemed to have gotten a lid on costs — the new fixation for markets as once-phenomenal growth evaporated at the tail-end of the pandemic years. Investors are expecting more of the same when Kuaishou Technology and Xiaomi Corp. report next week.

But that may not be enough to reverse the negative sentiment. Investors have pulled $256 million from the KraneShares CSI China Internet ETF this month, putting the vehicle on track for a fourth month of outflows, according to data compiled by Bloomberg.

Given all the uncertainties, tech shares are likely to remain in the doldrums for now.

“The results of Baidu, JD and Tencent have lifted the bar for people’s expectation on the net profit side,” said Willer Chen, a senior research analyst at Forsyth Barr Asia Ltd. For tech companies reporting next week, investors are expecting topline growth to be “pretty tepid” while they wait for the guidance, he added.

Tech Chart of the Day

The buzz around artificial intelligence and broad tech optimism are driving large bullish bets on the Nasdaq 100, with call-option volume hitting the highest level since 2014. The likely end of the Federal Reserve rate-hike cycle, and prospects of a positive outcome in US debt-ceiling talks have given fresh impetus to tech bulls. The benchmark edged higher, up 0.1% on Friday.

Top Tech Stories

  • Alibaba Group Holding Ltd.’s surprise move to fully spin out a potentially transformative $12 billion cloud business is stirring speculation about whether the Chinese e-commerce leader bowed to market or political realities.

  • Bank of America Corp. strategist Michael Hartnett reiterated his call to sell US stocks, saying tech and artificial intelligence are forming a bubble and the Federal Reserve’s rate hikes may not be over, with rising bond yields posing a risk.

  • OpenAI Inc. is bringing its ChatGPT generative AI tool to smartphones for the first time, releasing an iPhone version on Thursday and promising a service for Android devices in the future.

  • Elon Musk’s top outside attorney sent Microsoft Corp. Chief Executive Officer Satya Nadella a letter Thursday, saying Microsoft had accessed Twitter’s data for unauthorized purposes.

  • A diverse group of Montana TikTok creators with hundreds of thousands of followers sued to challenge the first statewide ban of the popular app, arguing the law violates free-speech rights and will disrupt their livelihoods.

  • A delegation of Tesla Inc. executives to India discussed the possible local sourcing of components and incentives, but stopped short of proposing to build vehicles in the country, people familiar with the matter said, after the electric carmaker reopened dialog with the government after a year-long impasse.

--With assistance from Edwin Chan, Jeanny Yu, Subrat Patnaik and Michael Msika.

(Updates to add index move to Tech Chart of the Day section.)

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