Alibaba plunged 10% on Friday in Hong Kong after withdrawing plans to spin off and list its $11-billion cloud business due to US restrictions on advanced semiconductor sales to China. The announcement followed a similar warning from peer Tencent Holdings on the impact of chip trade curbs.

Anticlimactic results overall show that fundamentals are still not strong enough to inspire renewed investor conviction on China tech. The nation’s economic malaise and more frugal consumer spending remain concerns, while the trade spat with the US has hindered shifts to more cutting-edge technologies.

Alibaba’s core business of selling goods online to Chinese customers recorded lower-than-expected sales amid the nation’s sluggish recovery. In addition to scrapping the cloud spinoff, the company also said it’s suspending a listing for popular grocery business Freshippo.

“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, Alex Yao, an analyst at JPMorgan Chase & Co. wrote in a note.

While some other firms have exceeded consensus earnings estimates, troubling signs remain under the hood. Tencent shares have been muted since earnings on Wednesday that beat expectations, as analysts pointed to underwhelming advertising revenue and less-than-exceptional game sales. JD.com Inc. and NetEase Inc. have seen small gains after seemingly good results. Most of the major Chinese tech stocks, including Alibaba, edged higher in early trading on Monday.

Growth ‘limit’

“No matter what the earnings look like, the bottleneck for these firms is that they’ve reached their limit in terms of domestic growth,” said Xu Dawei, a fund manager at Jintong Private Fund Management in Beijing. “They’ve yet to find a large source of international growth, and new cloud and AI businesses are up in the air, which means we see them as mainly a rebound trade for now.”

It had briefly seemed that the outlook was beginning to clear, as eased regulations on games, corporate cost cutting and already lowered estimates drove hopes for positive surprises. The Hang Seng Tech Index rose nearly 10% in the first half of November. The mood quickly shifted with the earnings reports, however.

China onshore traders have displayed caution, selling stocks including Tencent into gains during the busy earnings week. Foreign investors may not provide much support either. Three-fourths of Asia fund managers polled by Bank of America Corp. expect the long-term derating of China stocks to continue, and maintain a net underweight position on the market, according to a note last week. 

“Larger tech names normally need international flows to move the stock prices,”said Jian Shi Cortesi, a fund manager at GAM Investment Management. “Many international investors are still focusing on macro and geopolitics and no longer look at company fundamentals in the short term.”

On the positive side, earnings estimates for the Hang Seng Tech have rebounded from a low in April. But the latest earnings may present hurdles to a further advance.

Of course the slump in stock prices has made them look cheap, with the Hang Seng tech gauge trading at 19 times forward earnings estimates, well below its five-year average of 28 times. But some pros see risks in bargain-hunting.

“Some of these China tech stocks are no longer growth stories but are turnaround trades, with upside pinned on valuation recovery,” said Liu Minyue, an investment specialist for Asian and Greater China equities at BNP Paribas Asset Management in Hong Kong. “However these positions are shorter term, and can be quickly reversed if the turnaround doesn’t happen.”