A screen shows the value of goods sold at Alibaba's 11.11 global shopping festival in Beijing, China. File picture: REUTERS/KIM KYUNG-HOON
A screen shows the value of goods sold at Alibaba's 11.11 global shopping festival in Beijing, China. File picture: REUTERS/KIM KYUNG-HOON

Hong Kong — It is getting tougher for China’s technology giants to live up to expectations.

After Alibaba and Tencent added more than $450bn of combined market value this year, investors are counting on the pair to at least match projections for quarterly revenue growth of more than 50%, and sustain a similarly blistering pace in 2018. The first test will come on Thursday with Alibaba’s results.

The market has reason to believe expansion can continue. Heavy spending in the cloud, finance and artificial intelligence could pay off in coming years. Alibaba and Tencent — largely confined for now to an increasingly saturated home market — are already beginning to take steps toward a more global business. Their financial muscle also helps them withstand new competition from the likes of Toutiao and retain pole position in Chinese e-commerce, gaming and social media.

All that props up a premium they enjoy over the so-called Fang quartet of Facebook, Amazon.com, Netflix and Alphabet’s Google.

"The rally is sustainable," said Billy Leung, a Hong Kong-based analyst with Haitong International Securities. "Tencent is more affected by China liquidity, it’s a rarity stock because there aren’t that many internet stocks in Hong Kong. Alibaba is a reflection of the China story: China retail and internet."

Investors can better gauge if their rich valuations are deserved after the quarterly numbers, with Tencent’s due on November 15. Alibaba’s beaten revenue estimates for two years straight, whereas Tencent’s only missed one quarter — a big reason Alibaba is trading at 38 times estimated earnings and Tencent at 46 times.

That compares with a multiple of 34 times earnings for Facebook and 32 times for Alphabet.

Investors are also set to pay particular attention to a string of investments intended to drive future growth but are compressing profitability: Tencent’s gross margins have slid nine straight quarters, while Alibaba has managed to grow that metric just once since 2015.

Rising high: The tall buildings centre left are Tencent’s new headquarters in Shenzhen, China. Picture: BLOOMBERG/QILAI SHEN
Rising high: The tall buildings centre left are Tencent’s new headquarters in Shenzhen, China. Picture: BLOOMBERG/QILAI SHEN

Alibaba is committing $15bn over five years to expanding its logistics network — preparation for a future in which it handles a billion packages a day. It’s spending the same amount over three years on research into artificial intelligence and quantum computing. Billionaire co-founder Jack Ma continues to pursue his ambition of revamping traditional retail. And by taking control of Southeast Asian online shop Lazada Group, they’ve kicked off a global expansion that could eventually pit it against Amazon.

For now, however, Alibaba’s e-commerce margins will soften as it spends to gain transaction share at home, according to Sanford C Bernstein analysts Bill Liu and Bhavtosh Vajpayee. The company and its main competitor, JD.com, are locked in a contest to provide six-hour deliveries across China’s largest cities. By buying out its logistics partner Cainiao, Alibaba plans to expand on a same-day delivery promise that covers 31 cities.

In Tencent’s case, Honour of Kings may prove a tough act to follow. The company is pushing back the North American roll-out of an adapted version called Arena of Valor from November to 2018. That’s a setback to Tencent’s plans to replicate its success at home, where it gets the bulk of its 229-million registered users, according to Shenzhen-based researcher Jiguang. Mobile gaming revenue is expected to jump 62% in the September quarter compared with 2016, according to estimates by Richard Ko, an analyst at China Merchants Securities.

But Tencent is already pursuing a second act. It’s plowing money into music, e-books and video streaming — the content it needs to keep users hooked on its WeChat social media and messaging service. The idea is to delve further beyond gaming and grow into an advertising behemoth akin to Alibaba, Google and Facebook.

"People treat them more as a leading indicator for the economy," said Steven Zhu, a Shanghai-based analyst at consultancy Pacific Epoch. "Except they probably are even better bets than traditional sectors."

Bloomberg

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