China Stock Roundup: Alibaba, Baidu Beat On Earnings

Markets gained and lost on alternate days of a week hugely influenced by global developments. The benchmark index slipped on Monday following warnings from key political figures about asset bubbles. The Shanghai Composite index rebounded on Tuesday following the release of encouraging manufacturing data.

The benchmark index declined on Wednesday after investors sought safety following a worldwide decline of assets carrying higher risk components. The Shanghai Composite increased on Thursday after private data indicated that China’s economy was attaining stability.

Alibaba Group Holding Limited BABA reported second-quarter fiscal 2017 (ended Sep 30, 2016) earnings of 63 cents per share, exceeding the Zacks Consensus Estimate of 47 cents. Baidu, Inc. BIDU, reported third-quarter 2016 earnings of $1.28 per share, which exceeded the Zacks Consensus Estimate of 87 cents.

Last Week’s Developments

Last Friday, the Shanghai Composite declined 0.3% after losses from large infrastructure stocks negated gains made by financials. Meanwhile, investors digested a large number of earnings results to determine China’s economic health. The CSI 300 lost 0.1%. The benchmark index as well as the CSI 300 increased by 0.4% over last week. This was their third successive week of gains. Weekly gains were curbed by indications that the economic recovery was faltering.

Encouraging third quarter results from banks and brokerages lifted markets to some extent last Friday, boosting the wider financial sector. The majority of the other sectors declined as losses in infrastructure and industrial stocks continued to weigh on stocks. Meanwhile, stocks in Hong Kong slumped to a two-month low in Friday after fears of a Fed rate hike in December intensified. The Hang Seng lost 0.8% while the Hang Seng China Enterprises Index moved 1% lower.

Markets and the Economy This Week

The benchmark index slipped 0.1% on Monday following warnings from key political figures about asset bubbles. Additionally, fears surrounding the outcome of the U.S. Presidential election also dampened investor sentiment. The CSI 300 also lost 0.1%.

However, the benchmark index gained 3.2% over the month of October while the CSI 300 advanced 2.6% over the same period. President Xi Jinping said that China would have to stick to “prudent monetary policy” and also provide liquidity while remaining vigilant about asset bubbles and likely financial risks.

Investors also remained worried about the FBI’s plans to investigate more of Hillary Clinton’s personal emails. Safe haven stocks such as gold gained. Meanwhile, 14 IPOs received approval, adding to the pressure on markets. The Hang Seng lost 0.1% while the Hang Seng China Enterprises Index declined by 0.5%.

The Shanghai Composite index rebounded on Tuesday, gaining 0.7% following the release of encouraging manufacturing data. The official PMI came in at 51.2 for October, marking the steepest increase in more than two years. This was also higher than the figure of 50.4 recorded last month. The CSI 300 also advanced by 0.7%. Most stock sectors increased, with property stocks leading the gainers for the gains.

Analysts opined that a construction boom was helping to stabilize China’s economy. Stocks in Hong Kong also rebounded with the Hang Seng gained 0.9%. The Hang Seng China Enterprises Index added 1.5%. Energy stocks led gainers on the Hong Kong exchange. 

The benchmark index declined 0.6% on Wednesday after investors sought safety following a worldwide decline of assets carrying higher risk components. This phenomenon was triggered after the race for the White House tightened. Fresh polls indicated that Donald Trump may be gaining significantly on his Democratic counterpart. Gold mining stocks surged while industrials and infrastructure stocks dragged down stocks once again.

The CSI 300 declined by 0.8%. Stocks in Hong Kong moved below a two month low even as energy stocks declined following a fall in oil prices. The Hang Seng declined by 1.5% while the Hang Seng China Enterprises Index lost 1.9%.

The Shanghai Composite increased 0.8% on Thursday after private data indicated that China’s economy was attaining stability. Enthusiasm over the likelihood of a linkup between the Hong Kong and Shenzhen exchanges also boosted investor sentiment. The CSI 300 gained 1%.

The Caixin/Markit services PMI increased to 52.4 in October from the level of 52.0 recorded in September. Infrastructure and financial stocks were the leading gainers for the day. The Hang Seng China Enterprises Index declined 0.4% while the Hang Seng lost 0.6%.

Stocks in the News

Alibaba reported second-quarter fiscal 2017 (ended Sep 30, 2016) earnings of 63 cents per share, exceeding the Zacks Consensus Estimate of 47 cents. The adjusted figure excludes one-time items but includes stock-based compensation expense.

The solid growth in its core e-commerce business as well as growing cloud computing services led to the better-than-expected results.  However, Alibaba shares were down more than 2% on Nov 2, 2016 due to higher-than-expected expenses incurred on new growth initiatives.

Zacks Rank #1 (Strong Buy) rated Alibaba reported revenues of RMB34.29 billion (US$5.1 billion), up 6.6% sequentially and 54.7% year over year. Revenues were in line with the Zacks Consensus Estimate. The increase was driven by continued revenue growth in the China commerce retail business and the consolidation of newly acquired businesses (namely Youku Tudou and Lazada).

Mobile MAUs grew to 450 million, improving 30% year over year, as adoption of mobile devices by consumers grew as the primary method of accessing Alibaba’s platforms. China retail marketplaces had 439 million annual active buyers in the 12-month period ended Sep 30, 2016, representing 14% year-over-year growth.

Pro-forma gross margin was 61.7%, down 174 basis points (bps) sequentially and 610 bps year over year. Alibaba’s adjusted operating expenses of RMB9.5 billion increased 4.4% sequentially.

On a GAAP basis, Alibaba generated net income of RMB7.6 billion (US$1.14 million) compared with RMB22.8 billion in the year-ago period.

Baidu reported third-quarter 2016 earnings of $1.28 per share, which exceeded the Zacks Consensus Estimate of 87 cents. The company reported revenues of RMB18.253 billion ($2.73 billion) up 6.7% year over year which beat the Zacks Consensus Estimate of $2.58 billion. Mobile revenues accounted for 64% of Zacks Rank #3 (Hold) rated Baidu’s total third-quarter revenue as against 54% in the year-ago quarter.

Revenues from Online marketing services were RMB16.5 billion, down 6.7% from the year-ago quarter. Revenue per online marketing customer was approximately RMB31,300 ($4,694), down 10.6% year over year.

For the fourth quarter of 2016, Baidu expects total revenue in the range of RMB 17.840 billion (or $2.675 billion) to RMB15.970 billion (or $2.756 billion), representing a year-over-year decline of 4.6% to 1.7%.

TAL Education Group XRS reported fiscal second quarter 2017 earnings of 61 cents per share, lower than 72 cents reported in the year-ago comparable quarter. However, this was a significant improvement over the figure of 16 cents reported in the last quarter.

TAL Education Group reported revenues of $271 million, representing a 56.4% increase over the figure of $173 million reported in the same period last year. Revenues also increased from the $195 million reported in the last quarter.

Additionally, student enrollments experienced a year-over-year jump of 77%. The physical network of the tutoring company increased from 363 centers across 25 cities as of Feb 29, 2016 to 422 centers covering 25 cities as of Aug 31, 2016. The stock has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

China Petroleum and Chemical Corporation SNP, also known as Sinopec, reported third-quarter 2016 earnings of $1.26 per ADR, higher than 20 cents reported in the year-ago comparable quarter. Revenues, however, fell 9.3% year over year to $70,809 million.

During the nine-month period ending Sep 30, 2016, Zacks Rank #3 rated Sinopec’s crude oil production fell 12.6% year over year to 229.36 million barrels. However, natural gas volumes improved 5.1% to 557.15 billion cubic feet during this period. Overall total oil and gas production shrunk 8.1% to 322.29 million barrels of oil equivalent.

Due to lower oil & gas prices and the decline in production, the Exploration and Production segment recorded profit of 75,373 million yuan, lower than the year-ago tally of 100,077 million yuan

The company’s refining business recorded refinery throughput of 175.25 million tons (down 1.7% year over year). The Refining unit’s profit fell to 610,851 million yuan from 710,651 million yuan a year.

The Marketing and Distribution segment sold 145.72 million tons of refined oil products, reflecting a 3.5% year-over-year upside. Capital expenditure during the first nine months of 2016 totaled 24.969 billion yuan. Out of this, 9.206 billion yuan was spent on exploration and production projects. (Read: Sinopec (SNP) Earnings Improve in Q3, Revenues Down Y/Y)

CNOOC Ltd. CEO reported third-quarter 2016 total revenue of 30.75 billion yuan ($4.6 billion), down 15.2% from the year-earlier level. The quarterly results were hurt by lower oil price realizations.

In the third quarter, Zacks Rank #4 (Sell) rated CNOOC’s net production was 117.7 million barrels of oil equivalent (MMBoe), down 7.7% from the year-ago level. The decrease in production is mainly attributable to a decline of production volume in oil and gas fields and weaker demand in the domestic downstream gas market.

The company’s average realized oil price was down 13.5% year over year to $42.26 per barrel. Realized gas price plunged 18.6% from the year-ago level to $5.22 per thousand cubic feet (Mcf).

During the third quarter, CNOOC’s capital expenditure was 11.67 billion yuan, down 20.9% from the year-earlier period. The Chinese firm used the capital mainly to enhance efficiency and lower costs to combat falling oil price. (Read: CNOOC's (CEO) Q3 Revenues Decline Y/Y on Lower Oil Price)

Performance of Most Actively Traded US-listed Chinese Stocks

The table given below shows the price movements of 10 Chinese companies with the highest three-month average trading volume on U.S. exchanges. Price movements over the last five days and during the last six months have been included.

Ticker

Last 5 Day’s Performance

6-Month Performance

BABA

-5.4%

+29.8%

JD

-7.1%

+1.4%

VIPS

-8%

-1.6%

CTRP

-9.8%

-3.8%

ZTO

-11.4%

NA

BIDU

-4%

-3.2%

MOMO

-11.8%

+41.6%

SFUN

-5.7%

-42.4%

WB

-10%

NA

NTES

-9%

+76.4%

Next Week’s Outlook:

External developments have guided China’s stocks to a large extent this week. The rush for safe haven stocks is likely a short term phenomenon. However, concerns over the U.S. Presidential election is likely to persist until results are finally announced.

Market watchers are convinced that in all likelihood, a worldwide relief rally will follow this announcement. Meanwhile, signs are rife that the domestic economy is stabilizing. In case the raft of economic data scheduled for release over the next few days is encouraging, stocks could move steadily upward next week.

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