Hot Streak Continues for China ADRs. Will Earnings Season Add Fuel to the Fire?

As U.S. tech stocks grapple with volatility and corrections, China ADRs and Hong Kong stocks show strength against the trend. This divergence is supported by the recovery in Chinese tech companies' performance and the breakthrough progress of the domestic large language model DeepSeek-R1, prompting global capital to reassess the long-term value of Chinese tech assets.

The upcoming fourth-quarter earnings season for major China ADRs is generating significant anticipation amid the current market enthusiasm. Investors are keenly watching these Chinese tech giants to see if their financial results will further fuel the current market enthusiasm and validate the optimistic outlooks from major financial institutions.

With a year-to-date stock price gain exceeding 40%, Alibaba stands out among Chinese ADRs. The market consensus expects Alibaba to achieve revenue of $38 billion in Q3 FY2025, a 7% year-over-year increase, with earnings per share of $2.17, a 180% year-over-year increase.

JPMorgan anticipates Alibaba to benefit from e-commerce GMV recovery and cost control, forecasting an 8% YoY revenue growth, surpassing market expectations by 1 percentage point. They also project a 6% YoY increase in adjusted profit for Taobao and Tmall Group.

Bank of America Securities is even more bullish, projecting a 9% YoY revenue increase, 2% above market consensus. They expect core Taobao and Tmall Group revenue to rise 7% and forecast China market Customer Management Revenue (CMR) to grow 7% YoY to $13.5 billion, driven by Double 11 promotions, home appliance subsidies, and enhanced user engagement.

Alibaba's recent collaboration with Apple for AI features on Chinese iPhones could potentially boost cloud revenue growth beyond 11% from FY2026, although short-term profits may be impacted by increased R&D and infrastructure investments.

Leading financial institutions, including Goldman Sachs and BlackRock, express optimism about future trends in Chinese ADRs. They believe that DeepSeek's breakthrough in low-cost AI models has become a "catalyst" for global investors to reassess Chinese assets. Factors such as continued macroeconomic recovery, low market valuations, and catalysts from related innovative technologies have drawn global market attention to Chinese assets.

HSBC's Fan Cheuk Wan emphasizes DeepSeek's technological advancements as indicative of Chinese AI models entering a deep reasoning stage, potentially reshaping the global AI landscape and boosting investor confidence in Chinese stocks.

Goldman Sachs maintains an overweight rating on the MSCI China Index, predicting a 14% rise this year. They point out that DeepSeek's rise indicates a shift in AI industry development from hardware infrastructure to software applications. In the AI software field, Chinese tech ADRs have significant advantages, with software technology accounting for 37% of earnings and 32% of market capitalization in the MSCI China Index.