Alibaba Group Holding Ltd.’s surprising announcement to cancel the spinoff of its cloud division has sent shockwaves through the China tech industry, leading to a sell-off in tech stocks during this earnings season. The decision was made in response to US restrictions on advanced semiconductor sales to China, which has had a significant impact on Chinese technology companies.
Investors were quick to react, with Alibaba’s stock plunging 10% on Friday in Hong Kong. The cancellation of the cloud spinoff comes after a similar warning from peer Tencent Holdings Ltd. regarding the impact of chip trade curbs. These developments have raised concerns about the future of China tech stocks, as the nation’s economic malaise and cautious consumer spending persist. Additionally, the ongoing trade dispute with the US has hindered the movement towards cutting-edge technologies.
The disappointing earnings results across the industry have highlighted the underlying weaknesses in the fundamentals of China tech companies. Despite some firms exceeding earnings estimates, there are troubling signs beneath the surface. Tencent, for example, saw muted stock performance despite beating expectations, as analysts pointed to underwhelming advertising revenue and game sales.
This lackluster performance has led to a realization that domestic growth may have reached its limit for these companies. Xu Dawei, a fund manager at Jintong Private Fund Management, explained, “They’ve yet to find a large source of international growth, and new cloud and AI businesses are up in the air, which means we see them as mainly a rebound trade for now.”
While eased regulations on games and corporate cost-cutting initially boosted hopes for positive surprises, the recent earnings reports have quickly doused that optimism. Notably, China onshore traders have been cautious, selling stocks such as Tencent during the busy earnings week. Foreign investors are also not expected to provide substantial support, as many remain focused on macroeconomic and geopolitical factors rather than short-term company fundamentals.
What was the reason behind Alibaba’s cancellation of its cloud spinoff?
Alibaba canceled the spinoff of its cloud division due to US restrictions on advanced semiconductor sales to China.
How did investors react to the cancellation?
Investors responded to the news by selling off China tech stocks, leading to a 10% drop in Alibaba’s stock price.
What are the concerns surrounding China tech stocks?
Investors are concerned about the nation’s economic malaise, frugal consumer spending, and the ongoing trade dispute with the US, which have hindered growth in the industry.
Why are domestic tech companies struggling to find international growth?
Chinese tech companies have yet to find a significant source of international growth, and the uncertainty surrounding new cloud and AI businesses has made them mainly a rebound trade for now.
Why are foreign investors not providing much support?
Many foreign investors are focused on macroeconomic and geopolitical factors and are not looking at short-term company fundamentals, which affects their support for China tech stocks.