Chinese Tech Stocks Extend Slide On Earnings, Macro Worries

Signals of a possible earnings recession triggered negative reaction among Chinese tech stocks, sending them lower for the second straight session Wednesday. 

The Guggenheim China Technology ETF CQQQ, which consists of 60 Chinese tech companies, shed 4.6 percent Tuesday and was down nearly 5 percent at the time of publication Wednesday. 

What Happened

The sharp drop in shares of Chinese tech stocks could be traced to dismal quarterly earnings reports from a few companies as well as weak Chinese retail sales in July.

Livestreaming platforms YY Inc (ADR) YY and HUYA Inc – ADR HUYA as well as Vipshop Holdings Ltd – ADR VIPS, which operates the ecommerce website VIP.com, reported Monday after the close with disappointing quarterly results.

Notwithstanding the forecast-beating results, YY issued below-consensus Q3 revenue guidance.

Huya reported in-line Q2 EPS but issued weak Q3 revenue guidance.

Vipshop's Q2 EPS trailed estimates, and Citigroup subsequently downgraded the stock and lowered its price target on the shares.

Chinese internet giant TENCENT HOLDING/ADR TCEHY reported its first quarterly profit drop in about 13 years, as a government clampdown on its gaming business hurt revenues.

Apart from company-specific factors, macro concerns also weighed down on the stocks, as the Chinese National Bureau of Statistics reported year-over-year retail sales growth of 8.8 percent, down from the 9-percent run-rate in June.

Why It's Important

Even as U.S. tariff fears remain an overhang, domestic consumers were expected to bail out the economy, and lukewarm retail sales data therefore acted as a dampener.

The potential slackening of corporate profit growth could have a cyclical effect on the economy. Smaller profits would mean less spending by corporations and slower growth in wages and salaries, which in turn could hurt consumer spending, the mainstay of most economies.

What's Next

Even as investors show a knee-jerk reaction, they are likely to look for more clues from upcoming earnings reports in the sector: 

• JD.Com Inc(ADR) JD is scheduled to report Thursday, Aug. 16 before the open.
• Bilibili Inc – ADR BILI is due to report Monday, Aug. 27 after the close.
• Uxin Ltd (ADR) UXIN will release quarterly results Wednesday, Aug. 22 before the open.

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