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Why China Stocks Tencent, NetEase, and Hello Group Were Gaining Today


What happened

Shares of Chinese stocks were flying higher today as several different news items propelled the ongoing rebound in the beaten-down sector.

First, investors are responding well to the first face-to-face meeting between U.S. President Joe Biden and Chinese President Xi Jinping, which is fueling hopes that tensions between the two countries will subside. In recent years, the U.S. has threatened to delist Chinese stocks that trade in the U.S. if China does not allow U.S. auditors to examine their books, though there have been signs lately that the delistings will not go through.  

Meanwhile, China has also begun to pull back on COVID-19-related travel restrictions, though most of its zero-COVID policy remains in place, and the country introduced a new set of policies to help stabilize the ailing real estate sector, showing that a crackdown on real estate may have run its course. Investors might be thinking that development bodes well for the tech sector, which has also struggled under a Beijing crackdown, though that could be starting to reverse as Chinese stocks were decimated by the moves.

U.S. stocks were up today as well on signs inflation is cooling faster than expected, which may also be encouraging investors.

Among the China stock winners today were Tencent Holdings (TCEHY 10.33%), which was up 11.9% as of 11:41 a.m ET; NetEase (NTES 9.64%), which had gained 10.6% at the same time; and Hello Group (MOMO 10.83%), which was 12.1% higher.

So what

Like the rest of the Chinese tech sector, shares of Tencent, NetEase, and Hello Group have all fallen sharply over the last year as China’s zero-COVID policy has dampened sales for consumer-focused companies, and because of the crackdown on the tech sector, which has included steep fines over antitrust concerns, forced divestitures, and other restrictions.

Tencent, which is best known as the owner of WeChat, the super-app that enables everything from messaging to video entertainment, has been fined multiple times by the Chinese government over monopolistic practices and other issues, and under pressure, the company sold stakes in fellow tech giants like China’s No. 2 e-commerce company JD.com and food delivery giant Meituan.

In its most recent earnings report, Tencent actually reported declining revenue, something that would have probably been unthinkable just a few years, as sales fell 3%. Tencent may also be getting a boost today from strong results at Tencent Music Entertainment Group, in which it owns a majority stake.

As a smaller company than Tencent, NetEase hasn’t received as much scrutiny from the government, but last year, the video gaming company said it downsized some of its studios in response to regulations from Beijing that limit the amount of time minors can play video games, and due to slower approvals for new online games.

In its most recent earnings report, NetEase posted 13% revenue growth with a similar increase in its gaming division, showing that it has continued to grow in a difficult environment. As a gaming company, it may also be benefiting from the zero-COVID policy.

Finally, Hello Group, which is one of China’s biggest online dating companies, has fallen the most of these three stocks over the last year, down 57%. While Hello hasn’t been directly impacted by the crackdown, the business has underperformed in a challenging environment. Revenue was down 15% to $464 million in its most recent quarter as its live streaming business continues to struggle with a decline in revenue of 27%, and monthly active users were down for both paying and nonpaying users. Hello Group’s users seem to be moving to other platforms as the company was seeing these headwinds before the crackdown started.

Now what

China stocks have been rebounding rapidly in recent weeks as market sentiment seems to be shifting after nearly two years of sharp declines.

The Hong Kong-based Hang Seng index has even entered a bull market as the index has soared through November. While Chinese stocks remain risky, there could be significant upside to the sector if the Chinese economy continues to reopen and the government adopts a more supportive stance toward business.

Jeremy Bowman has positions in JD.com. The Motley Fool has positions in and recommends JD.com and Tencent Holdings. The Motley Fool recommends Hello Group and NetEase. The Motley Fool has a disclosure policy.



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