What happened
Chinese internet stocks iQiyi(NASDAQ: IQ), Bilibili(NASDAQ: BILI), and Tencent Music Entertainment(NYSE: TME) rallied in a big way in December, rising 78.5%, 36.5%, and 18.1%, respectively, according to data from S&P Global Market Intelligence.
The main reason behind the synchronous moves higher was China's abrupt about-face from "zero-COVID" lockdowns to a rapid reopening last month. Tencent Music had already seen a massive rally in November, following its better-than-expected earnings report in mid-November, which explains its more muted rise relative to other Chinese stocks in December, despite a nice analyst upgrade. In addition, iQiyi had an exciting product release in December, while Bilibili announced some layoffs in a bid to boost its bottom line.
So what
China stocks had sold off throughout 2022 as a result of zero-COVID lockdowns, which followed the prior year's sell-off that resulted from the government's crackdown on the nation's tech companies. That of course set the stage for the big rally when the government decided to reverse course on both counts.
Around the beginning of December, China decided to rather abruptly reopen its economy, after subjecting the country to draconian "zero-COVID" lockdowns since last March. In addition, the government appears to be taking its foot off the neck of the tech industry, with more video game approvals coming last month, and recent reports suggesting authorities approved Ant Financial to raise more financing. That's significant, as the failed Ant IPO was the very issue that began the tech crackdown in late 2020.
In addition to the countrywide reopening and loosening of regulations, each of these three companies also had some positive news last month.
On Dec. 1, Morgan Stanley analyst Alex Poon upgraded Tencent Music from "equal weight" to "overweight." Poon noted that TME's music streaming segment, which had been loss-making since 2020, achieved breakeven last quarter, even as the more profitable live streaming services segment had declined. Still, Poon sees those live streaming declines stabilizing, and when combined with the now-profitable streaming segment, they should pave the way for 10%-plus annual earnings growth over the next three years.
On a less-pleasant but also bullish theme, Bilibili announced some layoffs toward the end of the month, cutting about 30% of its staff across its newer streaming, video game, and operations units. While layoffs aren't necessarily a good sign in terms of growth, tech investors have applauded them of late as a necessary step in this new, lower-growth post-COVID world. Despite reigniting growth last quarter by about 11%, Bilibili still had an operating loss of $260 million last quarter alone. So the layoffs were probably applauded by many as necessary.
Meanwhile, iQiyi rocketed much higher; while iQiyi reported earnings back in November, it did have some exciting product launches during December. iQiyi released a much talked-about virtual reality game show called Memoon Land early in the month, and then followed that up with the release of its own VR/AR headset called Qiyu later in December.
Apparently, iQiyi's launch of its own hardware for mixed reality and the metaverse garnered lots of excitement, as the stock rocketed significantly higher throughout the month. The product launch follows November earnings in which iQiyi showed growing profits, even as revenue slightly declined.
Being able to show profits even with less revenue was impressive, especially as iQiyi is obviously still innovating at a lower cost base, as evidenced by the release of Qiyu.
Now what
Chinese stocks have had a big bounce on the news of the country's reopening, but much uncertainty remains. It's not clear that China's beleaguered economy will snap back, as COVID cases are raging across the country right now following the abrupt change of strategy. Meanwhile, even though the government appears to be easing up on its regulatory stance today, the prospect of excessive regulation will continue to be a risk looming over Chinese tech stocks.
That being said, there is certainly room for upside should China's reopening continue and the government stay out of the way. China's tech sector has been in a two-plus-year bear market, and many companies have cut their costs to become more efficient, so December's rapid rise could have further legs. Keep in mind that China stocks may be more of a trade than a long-term investment now, given the various political and geopolitical risks associated with investing in the country.
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Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares of the companies mentioned. The Motley Fool recommends Bilibili and iQiyi. The Motley Fool has a disclosure policy.
