Taking the market by surprise, Alibaba Group Holding Ltd has cancelled plans to spin off its cloud computing division, stirring renewed concerns among investors about the stability of Chinese technology stocks, according to a report in the Australian Financial Review.
This decision comes amid a broader context of mixed earnings reports in the sector.
Alibaba shares have witnessed a significant 10% drop in Hong Kong following the decision, which was influenced by the United States' restrictions on the sale of advanced semiconductors to China.
This development mirrors a similar statement from Tencent Holdings Ltd, highlighting the impact of these trade restrictions.
Weakness in fundamentals
The overall lacklustre earnings performance underscores a persistent weakness in the fundamentals of Chinese tech companies.
Concerns over the country's economic slowdown, cautious consumer spending and the ongoing trade tensions with the US are affecting the transition to advanced technologies.
Particularly for Alibaba, its core business of selling goods to Chinese customers online has reported sales below expectations, indicating a slow economic recovery.
The company has also suspended the listing for its popular grocery business Freshippo.
Growth prospects muted
Analysts, including JPMorgan’s Alex Yao, have expressed reservations about the growth prospects of domestic e-commerce businesses.
“We think the outlook for domestic e-commerce growth has weakened and the amount of value-unlocking capital market activities has decreased (following Alibaba’s results), Yao wrote in a note.
Hong Kong-based BNP Paribas Asset Management investment specialist for Asian and Greater China equities Liu Minyue echoed a similar concern.
“Some of these China tech stocks are no longer growth stories but are turnaround trades, with upside pinned on valuation recovery,” Liu said.
“However, these positions are shorter term (and) can be quickly reversed if (a) turnaround doesn’t happen.”