Chinese concept stocks had a strong start in September: amidst a series of policy changes and better-than-expected earnings reports, is the market finally responding?

Overnight, Chinese concept stocks "boiled over" and welcomed a "strong start" in September.

Overnight, the Nasdaq Golden Dragon China Index (HXC) surged nearly 5% in early trading and closed up about 3.2%. iShares MSCI China ETF rose nearly 2.2%, marking the largest increase since August 3rd. The FTSE A50 Index also rose 0.73%, while the SPDR S&P China ETF GXC soared 2%.

On one hand, since the end of August, heavyweight policies have continued to exert force. The central bank has lowered the reserve requirement ratio for foreign exchange deposits, and the policy of "recognizing houses but not loans" has been fully implemented in first-tier cities. The central bank and the regulatory authority have announced a reduction in the down payment ratio for first and second homes and a decrease in the interest rate for existing first-home loans. These favorable policies have boosted market sentiment.

On the other hand, during the interim report season, the performance of many popular technology and consumer stocks has exceeded analysts' expectations. Analysts believe that when investors start to focus on the fundamentals of these companies, these stocks will perform even better. Jian Shi Cortesi, a fund manager at GAM Investment Management, said:

"We had high expectations even before the earnings report was released, and the results still exceeded expectations. I believe that these companies still have room for growth when investors pay attention to the fundamentals."

Continuous Force of Policies

Since the end of August, a series of favorable policies have stimulated market sentiment.

On August 27th, the Ministry of Finance and the State Taxation Administration announced that starting from August 28th, 2023, the stamp duty on securities transactions will be halved.

On August 31st, the central bank and the regulatory authority once again issued two heavyweight policies: 1) a reduction in the down payment ratio for first and second homes, and 2) a decrease in the interest rate for existing first-home loans.

On September 1st, following the announcement of the new policy of "recognizing houses but not loans" in Guangzhou and Shenzhen, Shanghai and Beijing also announced the implementation of the policy, completing the full implementation of the policy in first-tier cities.

On September 1st, the People's Bank of China announced a reduction in the deposit interest rate for the renminbi. The interest rates for three-year and five-year fixed-term deposits were lowered by 25 basis points, and the reserve requirement ratio for foreign exchange deposits of financial institutions was also lowered by 2 percentage points. This is the first reduction this year and the third reduction in history. In addition to the recent frequent use of tools by the central bank to manage the pace of renminbi depreciation, it shows the strong determination of the central bank to stabilize the exchange rate.

Impressive Performance in Earnings Season

In addition to the policy factors, the better-than-expected profitability of popular Chinese concept stocks during the interim report season has also contributed to the "strong rebound" of Chinese concept stocks. As one of the indicators of consumer recovery, the financial report data of major e-commerce platforms is impressive. Alibaba, JD.com, Pinduoduo, and other e-commerce platforms have successively released their financial reports, with the following details:

Pinduoduo released an "explosive" earnings report, which showed that its total revenue in the second quarter was 52.2807 billion yuan, a year-on-year growth of 66.3%, far exceeding the market expectation of 43.2 billion yuan. Among them, the core e-commerce advertising revenue reached 37.9 billion yuan this quarter, far exceeding the market expectation of 32.07 billion yuan.

Pinduoduo's financial data have all exceeded market expectations. As a result, Pinduoduo's stock price has risen continuously, with a market value exceeding 130 billion US dollars and reaching 137.2 billion US dollars.

Alibaba's core Taobao and Tmall business generated domestic retail customer management revenue (CMR) of 79.7 billion yuan, with a year-on-year growth rate slightly exceeding 10%, turning positive after four consecutive quarters of decline. The growth rate of Taobao's daily active users (DAU) also maintained at 6-7%.

JD.com achieved a total revenue of 287.9 billion yuan in the second quarter, with a year-on-year growth rate of nearly 8%, outperforming analysts' expectations of around 5%.

From the perspective of internet companies' advertising revenue indicators, we can also see a significant rebound in their profitability:

Tencent's advertising revenue in the second quarter once again exceeded expectations. Despite already high market expectations, it achieved a quarterly revenue of 25 billion yuan, a year-on-year growth of 34%, with video advertising contributing 3 billion yuan.

The revenue growth rate in the second quarter was 14.6%, higher than the market expectation of 12%.

According to a recent report by JPMorgan Chase, after NetEase announced its second-quarter performance for 2023 last Thursday, its stock price fell by about 4% due to investors' concerns about a decline in its traditional gaming revenue. However, JPMorgan believes that investors should buy at a low price. Since June, NetEase has launched various new games, which will drive its online gaming revenue growth rate from 2% in the second quarter to 14% and 26% in the third and fourth quarters, respectively. At the same time, it is expected that the company's existing gaming revenue will rebound in the second half of the year.

According to data from Bloomberg Intelligence, in terms of Hong Kong dollars, the earnings per share of the technology industry (e-commerce + media + services) in the second quarter of this year increased by 35% compared to the same period last year. The growth in earnings per share of technology stocks reached the highest level since the third quarter of 2020.

Analyst Marvin Chen commented:

The second-quarter earnings of Chinese companies generally exceeded expectations, mainly driven by technology stocks. Coupled with recent policy support, it indicates that the worst period is over."