Optimism Returns to US China Stocks 乐观情绪回归中概股
Three of China’s leading tech companies have just posted results, with online travel services firm Ctrip (Nasdaq: CTRP), chip maker SMIC (HKEx: 981) and web portal Sohu (Nasdaq: SOHU) all providing reports with very mixed messages. But perhaps most interesting is the fact that shares for all 3 firms rallied sharply in response to the reports, in the latest sign that investors may finally be ready to return to this battered group of companies that has suffered for nearly 2 years due to a series of accounting scandals. If that’s the case, we could perhaps be looking at a nice rally for shares of many firms, especially some of the sector leaders, and we could also see a flurry of new IPOs following a hiatus of more than a year.
Let’s look at the stock market reactions first, since they’re what lies at the center of this story. Sohu shares shot up as much as 7 percent after the company released its lukewarm earnings report, though they fizzled later in the day and closed up just 1.3 percent. (company announcement) Meantime, Ctrip shares were also up nearly 8 percent in after hours trade after its results came out painting a similarly mixed picture. (company announcement) SMIC’s US-listed shares also jumped 8 percent after announcing results that showed the company posted a second consecutive quarterly profit. (company announcement)
My main conclusion in this is that investors are looking for any reason they can find to buy into these stocks and are focusing on the fact that most of these companies are seeing their business stabilize after longer-term declines due to competition and China’s economic slowdown.
Let’s take a quick look at all 3 of the reports so readers can see what I’m talking about, starting with Sohu. The company reported its net profit tumbled 47 percent for the quarter and predicted continued weakness in its key brand advertising revenue. But that downbeat news was partially offset by stabilizing margins and strong gains for its Sogou search business, which should finally make a meaningful contribution of about 14 percent of revenues in the fourth quarter after years of investment.
Meantime, Ctrip also reported a steep plunge of 40 percent in its third-quarter profit; but that was partially offset by news that its gross margins and revenue growth showed signs of stabilizing despite recent bruising competition in its sector.
Finally there’s SMIC, a chronic underperformer, which reported a second consecutive quarterly profit after years of operating in the red due to poor management and tough competition from better-run Taiwanese rivals. SMIC also reported accelerating revenue growth, though it predicted that growth rate would slow in the current quarter.
It should be clear from all this that each of these 3 reports had some positive elements and some negative ones, and investors were choosing to focus on the good news rather than the bad. If their interest continues and no major new accounting scandals emerge, look for some of the more undervalued stocks to make a nice rally in the months ahead to return to more historical levels. But the rally could be largely confined to top names in each category, and certain companies that remain overvalued might also get the cold shoulder from investors.
Bottom line: Sharp share gains in response to mixed results from 3 top US-listed Chinese firms indicate investors are looking for reasons to buy into the group, which could see a year-end rally.
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