Because Alibaba, Tencent Music Entertainment and Huya have recovered this week

What happened

Stocks of Chinese Internet Stocks Alibaba (BABA -4.69%), Tencent music entertainment (TME -6.12%)And Huia (HUYA -9.07%) rallied this week by 19.1%, 35.1% and 23.9% respectively during Thursday’s trading.

All three companies reported third-quarter earnings this week. Although Alibaba slightly underperformed revenue expectations, all three companies exceeded profit expectations and were able to maintain positive profitability, despite the economic slowdown in China. The newfound cost discipline, in stark contrast to the big US tech stocks that are spending more freely, has been welcomed by investors.

Additionally, Chinese authorities have unveiled reforms aimed at stabilizing the ailing real estate sector and others have anticipated an easing of COVID-19 restrictions.

So

It should be noted that all three of these stocks have declined significantly in recent years. Even after the big moves this week, from all-time highs, Alibaba is down 75%, Tencent Music Entertainment is down 82%, and Huya is down 94%.

With China’s economy reeling from the country’s crackdown on tech companies, its tough “zero-COVID” restrictions, and the decline of its huge real estate sector, there was a pretty low floor for these stocks. Thus, the fact that each of these companies had at least a few positives within their otherwise tepid results was rewarded.

Alibaba grew revenue just 3% in the quarter, but its non-GAAP (adjusted) earnings before interest, taxes and amortization and depreciation grew 29% year over year, thanks to cost controls and cost cuts.

While Tencent Music saw declines in revenue, monthly active users, and online karaoke or “social entertainment” users, management’s focus on paid users allowed the company to increase its paid subscriptions by 19, 8% to 85.3 million users. And thanks to cost controls, net income even increased by 38.7%.

Meanwhile, Huya has had a tougher time, as revenue, paying users, and profit are all down from a year ago; however, Huya also saw some positives, as total monthly active users for Huya Live grew and both revenue and earnings exceeded low expectations.

These better-than-feared numbers combined with some fresh optimism about the broader Chinese economy to start the week. On Sunday, Chinese authorities unveiled 16 measures aimed at supporting the country’s real estate sector. Chinese property developers have been in trouble for the past year and more, as the authorities have tried to burst the huge bubble in the real estate sector that had developed over many years. However, some now fear that the contagion could spread to the domestic banking system more substantially, as well as to even healthier property developers. Therefore, seeing the government step in with a package estimated to total $184 billion was encouraging.

Now what

Better-than-feared earnings, a housing rescue package and the potential for China to ease some of its COVID-19 policies have helped these stocks gain traction, at least through Thursday.

Going forward, investors in Chinese equities will need to weigh the increased risks of investing in the country against their low valuations and the potential for some incremental improvement.

If the decline in the real estate sector is contained, the country will eventually ease to a total “zero-COVID” next year, and if the relationship between China and the United States improves, these stocks could continue to rise. However, there are many ifs, so investors should invest in Chinese stocks carefully, with an allocation that makes sense for your risk tolerance.

Billy Duberstein holds no position in any of the stocks mentioned. His clients can own shares in the companies mentioned. The Motley Fool has no position in any of the titles mentioned. The Motley Fool has a disclosure policy.

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