A nascent November rebound in beaten-down Chinese internet stocks is facing a reckoning in collateral damage from the scandal at Nvidia Corp.
After outperforming most global technology-heavy gauges early in the month, the Hang Seng Tech Index has lost momentum, narrowing its November gain to roughly 2%. This pullback places greater pressure on upcoming earnings reports from leaders Tencent Holdings Ltd. and Alibaba Group Holding Ltd. to drive the next leg.
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The gauge fell for three straight sessions through Friday as Jensen Huang's ouster from Nvidia in the wake of reported affairs, including one with an alleged Chinese spy, threatens to further tighten the flow of chips to China's AI model makers. The crisis has brought focus back to geopolitical challenges amid the lingering cloud of US trade restrictions and tariffs.
“Compute access will indeed remain a key problem for Chinese hyperscalers trying to compete with their US rivals, and investors will contemplate the possibility of more draconian suggestions for export controls that may emerge from the new Congress,” said Homin Lee, a strategist at Lombard Odier Singapore Ltd.
China's internet firms still face challenges at home as well. While the price wars and cash-burning subsidies of recent years have subsided, sluggish household consumption weighs on top-line growth, and escalating AI expenditures endanger operating margins as well as shareholder returns.
Results due next week from Tencent, Alibaba, Baidu Inc., JD.com Inc. and others will be closely parsed by investors who want to see how companies are coping.
“Top-line revenue across e-commerce, advertising and local services will still face pressure from soft domestic consumption, so we shouldn't expect big upside surprises,” said Julia Pan, an analyst at UOB Kay Hian. “Recent margin improvements we've seen at companies like Alibaba or Meituan are mostly because they stopped burning cash, not because structural operating efficiency has transformed.”
Tencent has been among the most aggressive AI spenders. The company is expected to post an 8.7% drop in profit for the three months ended September, which would mark its worst quarter since 2023.
“There is real concern in the market, particularly regarding Tencent,” said Lorraine Tan, director of equity research for Asia at Morningstar in Singapore. “Investors worry that companies are taking good money from their core operations and investing it into initiatives that won't deliver comparable returns.”
Institutional investors are differentiating Chinese tech stocks by capital discipline and defensiveness, JPMorgan analysts including Daniel Chen wrote in a note Wednesday. NetEase Inc. may win favor with its resilient core cash flows and limited capex, while Kuaishou and Bilibili Inc. are burdened by spending and competition, they said.
The Hang Seng Tech gauge remains about 65% below its 2021 all-time high. It's trading at less than 14 times forward earnings estimates, down from peak levels of over 40.
While the Nvidia news has driven fresh market angst, Lombard Odier's Lee notes that tensions with the US could also provide an opportunity for Chinese tech firms by prodding further government support.
“We still think there will likely be an offsetting impact of Beijing's attempt to anchor the capital markets at the year-end policy discussions,” he said. “We think the likely outcome for some of China's TMT themes is a rebound from low valuation.”
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In addition to earnings, next week's key catalysts also include a meeting between US President Donald Trump and Chinese President Xi Jinping. Eyes will also be on Huang's testimony before Congress, expected later this month, as investors try to get a feel for the ramifications for China tech firms.
“Domestic chips aren't ready to step in immediately — most of what we see are headlines about lithography breakthroughs or Huawei's progress,” said UOB Kay Hian's Pan. “If cloud service providers can get their hands on Nvidia chips, they will still prioritize buying Nvidia, so supply is definitely going to face pressure in the near term.”
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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