Stock of the week: Alibaba
China’s zero-covid policy means ongoing lockdowns and restrictions in Shanghai & Beijing, severely impacting the economy. However, there might be some light at the end of the tunnel. Shanghai’s ports are now operating at 90% daily container throughput, and Beijing’s restrictions seem to be containing the outbreaks, although Beijing’s daily case total of 99 on Sunday was the highest to date and might have put the brakes on Chinese equities to start the week.
President Biden and Treasury Secretary Yellen are both openly discussing the possibility of reducing tariffs on China approved by the Trump administration, while Chinese policymakers have pledged support for the economy and tech companies. Can Alibaba put in a rally?
Alibaba will report earnings on May 26th. Investors will be combing through the details for clues about the tech firm's prospects. Will they do better than e-commerce rival jd.com who recorded a 3 billion yuan loss rather than the estimated 383 million yuan profit?
Alibaba’s share price is down by just over 70% from the 2020 highs with sellers having the upper hand ever since that peak was hit:
The chart hints that things haven’t been going especially well. China has spent the last eighteen months cracking down on internet companies and implementing policy measures to rein in the expansion of big tech into all corners of the economy.
However, back in March, China’s financial committee agreed that regulation of internet platform companies should be “standardised, transparent and predictable”, stoking hopes that perhaps the worst of the crackdowns are now in the rear-view mirror.
There’s still plenty of uncertainty to navigate, although JP Morgan analysts expect that the “significant uncertainties facing the sector should begin to abate on the back of recent regulatory announcements,”.
And, just two months after labelling China’s markets as”uninvestable”, the analyst team led by Alex Yao upgraded their view from underweight to overweight on a basket of Chinese names. Their price target for Alibaba was upgraded from $75 to $130, representing around 50% upside from Friday’s closing price of 86.72.
They expect “early cycle” sectors such as digital entertainment and e-commerce “to be the first batch of outperformers”.
Could there be a stimulus package to boost spending as seen in U.S.?
Although Chinese policymakers have always vowed not to respond to the pandemic challenges with “flood-like stimulus” as seen in the U.S., it's worth keeping an eye out for any targeted stimulus measures.
The PBoC also lowered the 5 year mortgage rate last week from 4.6% to 4.45%, the largest cut on record. .
Morgan Stanley analyst Wang is cautiously optimistic:
“We need more patience even though we believe we might be in the final leg of a very long bear market for China,”
“Near term, there is some chance for the market to stay very volatile. We want to be cautious and wait for that true inflection point.”
If and when that inflection point comes is open to debate. If investors see improvement in China’s outlook, Alibaba, one of China’s largest companies could benefit.
Not investment advice. Past performance does not guarantee or predict future performance.