(Bloomberg) -- China’s beleaguered technology sector may have finally turned the corner, if earnings from top firms are anything to go by.
Market watchers are growing increasingly upbeat about the sector’s prospects after a slew of top-line beats by industry behemoths such as JD.com (NASDAQ:JD) and Baidu Inc (NASDAQ:BIDU). The conviction is growing even as players like Alibaba Group Holding Ltd. (NYSE:BABA) continue to grapple with lackluster sales growth.
Investors are looking to unearth potential buys in the sector after the authorities rolled back some virus curbs and expectations grow that a regulatory crackdown may be drawing to an end. Still, China’s tech firms remain far from a one-way bet as a new wave of Covid cases threatens to derail a recovery in consumption and investment.
“On the fundamentals side, I do think the worst is probably behind” them, said Vivian Lin Thurston, portfolio manager at William Blair Investment Management. “The growth of those companies may not be as strong as we saw in the last decade, but it’s still very solid and probably more favorable than other sectors within China. The investment opportunities are very interesting and attractive.”
Optimists are calling a bottom in the sector after the Hang Seng Tech Index gained 25% in November to head for its first monthly advance since June. But even with the rise, the gauge is still down 37% for the year.
Among individual companies, Baidu’s shares in Hong Kong jumped 3.4% on Wednesday after the firm reported a surprise increase in revenue overnight. Similarly, Kuaishou Technology (HK:1024) rallied 5.7% on the back of a better-than-expected sales report.
Of the 14 Hang Seng Tech member companies that have reported third-quarter results, nine posted sales that beat expectations.
Sentiment has improved amid speculation that a fine of more than $1 billion on Ant Group Co. may signal an end to the year-long crackdown on the sector. A loosening of some virus curbs has been another positive, as well as a thaw in US-China tensions and progress in US audits of Chinese firms.
Tech shares are also looking attractive following a slump in their valuations. Tencent Holdings (OTC:TCEHY) and Alibaba, for instance, traded at just 15 times and 8.8 times their forward price-to-earnings ratio, respectively, heading into the earnings season.
‘Cost Discipline’
Cost controls and new growth engines are key to separating the winners from losers, market watchers said.
“Some companies which had good cost discipline to face a slower economic growth environment resulted in good earnings growth,” said Pruksa Iamthongthong, senior investment director of Asian equities at abrdn. Firms with strong competitive advantages and better earnings visibility are best positioned for a recovery, she added.
Still, that’s not to say all the worries surrounding the sector have disappeared. A renewed surge in China’s Covid cases is fanning fears of stricter curbs while Beijing and Washington remain locked in a battle for leadership of the tech industry.
The Hang Seng Tech Index has retreated 5% this week to head for its first weekly drop since the end of October.
“I do feel that this sector has become more of a proxy of China macro and consumption stories,” said William Blair’s Thurston, adding that tech stocks may face more volatility in the near term depending on how China’s Covid situation evolves.
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