Why Alibaba, Tencent Music Entertainment and Huya came together this week

What happened

Chinese internet stocks shares Alibaba (BABA -4.71%), Tencent music entertainment (TME -6.22%)and Huya (HUJA -9.81%) was up 19.1%, 35.1% and 23.9% respectively through Thursday trade.

All three companies reported their third-quarter results this week. While Alibaba slightly missed revenue expectations, all three companies beat earnings expectations and maintained positive profitability despite the slowdown in China’s economy. The newfound cost discipline, a stark contrast to the US big tech stocks that are spending more freely, was welcomed by investors.

In addition, Chinese authorities unveiled reforms to stabilize the struggling real estate sector and others expected an easing of COVID-19 restrictions.

so what

It’s worth noting that all three of these stocks have fallen significantly over the past few years. Even after this week’s big moves, Alibaba is down 75% from its all-time highs, Tencent Music Entertainment is down 82%, and Huya is down 94%.

With the Chinese economy suffering from the country’s crackdown on tech companies, its tough “zero-COVID” restrictions, and the demise of its massive real estate sector, the bar has been set fairly low for these stocks. So rewarding was the fact that each of these companies had at least some positives in their otherwise lukewarm results.

Alibaba grew revenue just 3% for the quarter, but its non-GAAP (adjusted) earnings before interest, taxes, depreciation and amortization rose 29% year over year on the back of cost controls and cuts.

While Tencent Music saw declines in revenue, monthly active users, and online karaoke or “social entertainment” users, management’s focus on paying users allowed the company to grow its paid subscriptions by 19.8% to 85.3 million users increase. And thanks to cost controls, net income increased by 38.7%.

Meanwhile, Huya had a tougher period as revenue, paying users and profit all fell year-on-year; But even Huya saw some silver linings as Huya Live’s overall monthly active users grew and both revenue and profit exceeded low expectations.

Those numbers, which came in better than fears, combine with some renewed optimism about the broader Chinese economy to start the week. Last Sunday, Chinese authorities unveiled 16 measures to support the country’s real estate sector. Chinese real estate developers have run into trouble over the past year as authorities attempted to burst the massive real estate bubble that had been building for many years. But some fear the contagion could spread to the country’s banking system and even healthier real estate developers. So it was heartening to see the government step in with an estimated $184 billion package.

What now

Better-than-feared earnings, the real estate bailout package and China’s potential to ease some of its COVID-19 guidelines helped these stocks gain ground at least through Thursday.

Going forward, investors in Chinese equities will need to weigh the higher risks of investing in the country against their low valuations and the potential for some incremental improvement.

Eventually, if the decline in the real estate sector is contained, the country eases overall “zero COVID” next year, and if the China-US relationship improves, these stocks could continue to rise. That’s a lot of ifs, though, so investors should invest cautiously in Chinese equities, with an allocation that makes sense for your risk appetite.

Billy Duberstein has no position in any of the stocks mentioned. Its customers may own stocks of the named companies. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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