What happened
Most Chinese stocks fell today after Wall Street analysts lowered their estimates for China's economic growth prospects this year.
Shares of the large Chinese tech conglomerate Alibaba(NYSE: BABA) traded roughly 4.5% lower as of 3:21 p.m. ET today. Meanwhile, shares of the online tutoring company TAL Education Group(NYSE: TAL) traded more than 11% lower, while shares of another online tutoring company, Gaotu Techedu(NYSE: GOTU), were down more than 15%.
Image source: Getty Images.
So what
Earlier today, Alibaba announced a surprise shake-up of its management team.
- CEO and board chairman Daniel Zhang is planning to leave those roles but stay on with the company as chairman and CEO of Alibaba's cloud intelligence group.
- Alibaba's executive vice chairman, Joseph Tsai, will become chairman of Alibaba on September 10.
- The chairman of Alibaba's e-commerce business, Eddie Yongming Wu, will become CEO and replace Zhang on the company's board of directors.
Earlier this year, Alibaba announced that it is planning to split the company into six different units and explore initial public offerings for all of them. Despite shares of Alibaba being lower today, analysts see the shake-up as a positive development.
Benchmark analyst Fawne Jiang said in a research note that the move "will enhance the independence" of Alibaba's cloud intelligence group as a business and improve its oversight. Jiang thinks Alibaba is a buy and has assigned the stock a $180 price target, which implies huge upside from its current roughly $88 share price.
The big thing sending Chinese stocks lower today, however, is a research note from a team led by Goldman Sachs analyst Hui Shan, who cut her growth estimates for China's economy from 6.0% to 5.4%. Shan also said that stimulus from the Chinese government might not come as quickly as some had hoped, specifically noting that investors are disappointed that a cabinet meeting held by the Chinese government Friday yielded no "concrete stimulus" measures.
"The readout suggests to us that the government faces various economic and political constraints. Going down the old route of boosting short-term growth with massive property and infrastructure stimulus goes against the top leadership's 'high-quality growth model,'" Shan wrote in her note.
Shan added that the Chinese government might not have a ton of options left, either, because stimulus measures to boost high-end manufacturing and electric vehicles might not prove to be material enough.
Now what
The situation regarding the Chinese government and stimulus seems to be fluid, so there still could be stimulus coming, as some news outlets reported last week. China's central bank might also cut interest rates later this year, so I think the performance of China's economy this year remains to be seen.
Of these three names, Alibaba remains my top pick. The company's plan to split into six different divisions could benefit shareholders because it could enable the market to value the company using a sum-of-the-parts valuation, which analysts believe would unlock a lot of value. That's why many have higher price targets.
The separation of Alibaba units could also create less regulatory risk within the company because a regulatory issue at one unit might not impact other units as much as it would if the company remained in its current form.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool recommends Alibaba Group and TAL Education. The Motley Fool has a disclosure policy.
