Alibaba, Baidu Estimates Slashed on Covid Lockdowns

Alibaba, Baidu Estimates Slashed on Covid Lockdowns

China’s technology giants have had their earnings estimates slashed for a second straight month amid the nation’s relentless pursuit of its Covid-Zero strategy.

Analysts have trimmed profit projections for Hang Seng Tech Index members by 4% in April, following a similar reduction in March, according to data compiled by Bloomberg. Among their reasons is the prospect for further Covid flareups in the world’s most populous nation. 

Alibaba, Baidu Estimates Slashed on Covid Lockdowns

The escalating concerns over Covid are adding to a raft of challenges facing China’s technology sector. These include more than a year of regulatory crackdowns, Federal Reserve interest-rate hikes that are luring capital away from riskier assets, and speculation that more of the firms may lose their U.S. stock exchange listings. 

Among the companies suffering the biggest earnings downgrades, travel booking platform Inc. has had its 12-month forward earnings estimates cut by 8.2%, while those for Alibaba Group Holding Ltd. and Baidu Inc. have been reduced by 4.2% and 8.1%, respectively.

“After the sustained regulatory tightening, the Covid resurgence in recent months and the stringent zero Covid policy are likely to exacerbate a slowdown in revenue growth for a number of companies, particularly the internet ones,” said Jessica Tea, investment specialist at BNP Paribas Asset Management Asia Ltd. in Hong Kong. “Slower sales are likely to impact future profits, translating into shrinking earnings expectations.”

The 30-member Hang Seng Tech Index has slumped 11% this month, extending its 2022 loss to 28%, as worsening Covid outbreaks in China’s biggest cities overtook earlier optimism over Beijing’s pledge in March to boost the economy and end tech crackdowns. U.S.-listed shares of Baidu have fallen 9% in April, while those of Alibaba slumped 16%.

Shanghai has been largely locked down since early April, while Beijing and Hangzhou -- home to many technology giants -- are also at risk of seeing tougher movement restrictions due to Covid outbreaks. 

Alibaba, Baidu Estimates Slashed on Covid Lockdowns

“Technology companies are directly impacted either through supply-chain disruptions or household and business spending,” said David Chao, a global market strategist for Asia Pacific ex-Japan at Invesco Hong Kong Ltd. “The sector’s earnings trend is directly linked to how authorities evolve existing pandemic policies.”

Still, the current bearish sentiment may mean that the technology sector will be one of the first to rebound once the economy starts to reopen, Invesco’s Chao said.

The effect of Beijing’s promised stimulus is yet to be widely felt. Online retail sales grew a meager 0.5% from a year earlier in March, almost 10 percentage points less than that seen in January and February this year.

China International Capital Corp. said the dramatic slowdown may result in companies posting weaker results for the first half, while Barclays Plc has warned about risks to Baidu Inc.’s search engine advertising business due to the extended Covid lockdown measures in Shanghai. 

Tech Chart of the Day

Alibaba, Baidu Estimates Slashed on Covid Lockdowns

Picking winners during any prolonged selloff is a tough task in its own right, but for investors trading technology stocks the difficulty has hit a level not seen in nearly two years. The Nasdaq 100 Index’s three-month realized correlation -- a gauge of how closely the top weighted stocks in the benchmark move relative to each other -- has climbed to its highest level since June 2020. That means stock pickers are increasingly at the mercy of the gauge’s biggest names, including Apple Inc. and Amazon Inc. which both report earnings after the close of trading Thursday.

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