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Chinese Internet Stock Earnings: What to Expect
Tencent and Netease have been star performers but watch out for Vipshop and Ctrip this earnings season.
By ISABELLA ZHONG
July 27, 2016
China’s six big internet stocks have had mixed fortunes in 2016 and the looming earnings season will showcase the performance gap between the leaders and laggards, but analysts are closely watching two beaten-up stocks that could beat expectations.
Barron’s Asia’s call in December for Tencent (ticker: 700.HK ) to outperform Alibaba ( BABA ) and Baidu ( BIDU ) has played out superbly, with the shares in Asia’s largest internet company rising 24% this year compared to Alibaba’s 2% gain and Baidu’s 15% decline. Netease ( NTES ) has also been a strong performer with an 11% advance thanks to its strong online gaming business. The laggards include Ctrip ( CTRP ) and Vipshop ( VIPS ) - down 6% and 12% respectively – as cooling growth expectations dragged on their lofty valuations, while a short selling report helped pushed shares in loss-making JD.com down 32% this year.
While its share price performance has underwhelmed, Nomura analyst Jialong Shi reckons Vipshop may beat revenue and profit forecasts this earnings season. While its active customer growth has slowed in recent quarters, Shi expects the flash online retailer will maintain growth at around 50% in the second quarter. He expects revenues to grow 38% year-on-year in the second quarter, which is in line with the e-tailer’s 37% to 42% forecast but above the 32% estimate from analysts surveyed by FactSet. Average order size may have shrunk as lower spending millennials now account for a larger share of its customer mix but Vipshop expects its net profit margin to land in line with its 5% forecast. At 13.39 dollars a share, Vipshop trades at 20 times forward earnings, which is well below a five-year average of 37 times. Shi has a buy rating on the stock with a 17 dollars a share target price.
Online travel group Ctrip is another laggard that may also surprise. At around 44 dollars a share, the stock trades at 57 times forward earnings, which still looks pricey but is a marked reduction on its five-year average of 87 times. While China’s slowing economy and a weaker yuan have stoked concerns about a squeeze to travel demand, Nomura’s Shi notes growth in Chinese visitor numbers to Southeast Asia, North America and Oceania “remained robust” at 40% to 50% year-on-year in the second quarter. However, a slowdown in tourism to Hong Kong, Macau, Europe and Japan may have crimped the overall pace of growth to 20%. Shi also expects Ctrip to beat both revenue and profit expectations in the second quarter. While changes to airline commission structures may pressure near term revenues, BNP Paribas analyst Vey-Sern Ling expects Ctrip’s ability to cross-sell value added services to cushion the impact and keep its take rates stable at 4% over the longer term. Ling has a buy rating on the stock with a 50 dollars a share target price.
Barron’s Asia wrote positively on Ctrip in June and the stock has gained 12% since. We took a closer look after the acquisition of rival Qunar (QUNR) late last year gave the combined company a 70% to 80% share of China’s air ticketing and hotel booking markets. We argued Ctrip was set to regain altitude on lessened competition following the merger. Nomura’s Shi notes Qunar is likely to have raised the commission rate for hotels to around 10% from 8% in June, underscoring its stronger bargaining power.
The global success of Pokemon Go underscores the allure of the online gaming industry and analysts will be eager to hear what China’s two big players have to say. Shares in Netease and Tencent have delivered handsome returns as strong growth in mobile gaming revenues bolstered their top lines. Nomura’s Shi expects Netease to beat on both the top and bottom lines in the second quarter, while Tencent is forecast to deliver stronger-than-expected revenues but inline earnings. Shi expects Tencent to grow mobile gaming revenues 68% year-on-year in the second quarter thanks to the popularity of new titles. At around HKD190 a share, the well-loved blue chip has been a consistent outperformer in both share price and in its ability to develop new sources of growth such as fintech. However, the stock isn’t cheap at 32 times forward earnings.
Netease continues to attract investors with its combination of strong earnings growth and relatively attractive valuation. Brean Capital analyst Fawne Jiang initiated coverage of Netease – China’s second largest online gaming company – this month with a buy rating and a 235 dollars a share target price. Jiang likes Netease’s strong game development and operation capabilities, while its cross border e-commerce and online advertising businesses should bolster growth. At roughly 200 dollars a share, Netease trades at 18 times forward earnings, which is above its five-year average of 13 times but looks attractive next to forecasts for earnings growth to average 20% a year over the next three years.
Among the two fiercely competitive e-commerce rivals fighting it out for a share of the wallet of China’s online shoppers, it is Alibaba that is expected to have fared better than rival JD.com in the second quarter. Nomura’s Shi expects Alibaba to beat consensus forecasts of 47% year-on-year revenue growth, though earnings may land in line with the consensus call for 13% growth despite a likely four percentage point fall in operating margin. Unlike online retailer JD.com, Alibaba is mainly an e-commerce platform operator and earns around 60% of revenues from marketing services, which are more resilient to slowing gross merchandise volume growth in China. Shi expects JD.com’s revenues to be in line with the 42% growth pace forecast by analysts and for its net losses to narrow to CNY190 million, which is also in line with consensus estimates.
It’s been a tough year for Baidu shares as investors have reacted to Beijing’s tougher rules for online advertising. Baidu last month lowered its second quarter revenue forecast to between 2.807 billion dollars and 2.823 billion dollars, which implies 9% year-on-year growth, from an earlier 3.119 billion dollars to 3.192 billion dollars due to the stricter rules. The search engine is expected to suffer a 26% year-on-year decline in earnings and Shi warns that at 160 dollars a share, Baidu’s stock may not fully reflect the negative impact of new regulations.
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