China’s largest consumer companies are reporting weaker-than-expected revenues, dampening hopes for a swift recovery in the market. Instead of a rebound, the MSCI China consumer staples index is on track for its most significant sales underperformance in over two years. Major technology firms, including Alibaba Group Holding Ltd. and Kuaishou Technology, have led the earnings disappointments, while retailers such as Li Ning Co. have scaled back their revenue growth forecasts.
This earnings season has reinforced concerns that the 11% stock decline since May may persist, particularly as the government struggles to restore consumer confidence. Investors are now closely watching the upcoming results from key players like car manufacturer BYD Co. and online travel agency Trip.com Group Ltd.
“The latest earnings season has once again highlighted the very weak domestic demand,” said Joohee An, Chief Investment Officer at Mirae Asset Global Investments Co. in Hong Kong. Even among online retailers whose earnings were stable, the growth was primarily driven by cost-cutting measures rather than impressive revenue performance, she added.
Investor optimism had returned to Chinese stocks in the second quarter, driven by hopes of an economic and corporate profit recovery. However, as sentiment has deteriorated, market participants have shifted their focus to the lackluster revenue performance or cautious outlooks, rather than profit growth, indicating growing concerns over consumer demand.
Tencent Holdings Ltd. saw a 1.4% drop after reporting robust profit growth but cautioning that weak consumer spending was impacting its fintech and cloud divisions. Baidu Inc. fell as much as 7% in Hong Kong after delivering weaker-than-expected revenue, despite an increase in earnings.
In contrast, investors gravitated toward companies that exceeded revenue expectations, such as Xiaomi Corp. and JD.com Inc., whose shares jumped more than 8% following their earnings announcements. However, JD.com has since lost much of those gains after Walmart Inc. sold its stake in the Chinese e-commerce giant, ending an eight-year partnership.
“The trend we’ve seen over the past two weeks is that unless a company significantly exceeds revenue expectations or offers an optimistic sales forecast, investors are likely to sell off the stock, even if earnings beat expectations,” said Kenny Wen, Head of Investment Strategy at KGI Asia Ltd. “This reflects the level of concern among investors, who are likely to remain cautious until we see some positive macroeconomic data.”
Analysts have already downgraded their revenue forecasts for Alibaba and Tencent for the third quarter, according to Bloomberg data. Next week, more companies, including BYD and Trip.com, will release their earnings, potentially testing investors’ resolve further.
However, there are some who remain optimistic.
“We have observed that internet companies like Tencent and Alibaba are focusing on increasing monetization, which could boost revenue growth in the coming quarters,” said Jian Shi Cortesi, Portfolio Manager at Gam Investment Management. “Additionally, companies are enhancing shareholder returns through increased dividends and buybacks. Given the current low valuations, we believe that the market has already priced in the consumption weakness.”
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