Why Alibaba, JD.com and TAL Education Group Drop Today

What happened

Major Chinese stocks trading on US exchanges continued to struggle today with important industry-wide news and the start of the earnings season.

Shares of Chinese e-commerce specialists Alibaba (BABA -11.12%) and JD.com (JD -4.23%) were about 8.5% and 5.5% lower, respectively, as of 9:52 a.m. ET. Meanwhile, shares of the online tutoring company TAL Education Group (TAL -7.69%) down nearly 9%.

And then

Earlier this week, Alibaba announced that it plans to double-list and list shares in Hong Kong in addition to its current listing on the New York Stock Exchange. The company said it will list in Hong Kong before the end of the year. Management cited the fact that Hong Kong is an important part of the company’s “globalization strategy” and that it has “complete confidence in China’s economy and future.”

Chinese stocks also faced news this week that billionaire Jack Ma plans to part ways with major tech giant Ant Group, a subsidiary of Alibaba. Ant Group has been trying to go public since 2020.

The move appears to be part of a wider effort to further separate Ant from Alibaba, which Ma founded. Several Ant executives have also recently severed ties with Alibaba. All of this could accelerate Ant’s eventual IPO, but investors may not see this as a positive for Alibaba.

Alibaba will also report earnings on Aug. 4, and analysts expect the company to record slowing sales, which would mark its first quarterly decline in sales ever.

The Financial times reported on Wednesday that Alibaba’s US subsidiary no longer expects to meet its goal of adding 1 million small-to-medium businesses. The target is part of a broader push for the US e-commerce market to compete with companies like Amazon.

In other news, TAL Education Group just reported profit for the first quarter of fiscal 2023. TAL generated a loss of $28.3 million on total revenue of $224 million. Sales were down nearly 84% year over year.

The market expected a significant slowdown in earnings at TAL following the Chinese government’s crackdown on private tuition, but it appears investors were disappointed nonetheless.

What now

This week was one to forget soon Chinese stocks, despite a mostly positive month for US equities. Alibaba appears to be facing some legitimate business headwinds, although it’s a little unclear how Ma will affect its disassociation with the company going forward.

In recent months, the Chinese government has begun to ease the regulatory crackdown, which put a lot of strain on stock markets last year. The country has also seen an uptick in COVID-19 cases, leading to many lockdowns in major Chinese cities.

I’m really more concerned about these issues now. If regulatory pressures can continue to ease and lockdowns don’t affect the Chinese economy too much then I think the sector is up, but it’s still a big if. If you are considering buying one of these stocks, prepare for the long term and expect short term turbulence.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, serves on the board of directors for The Motley Fool. Bram Berkowitz has no position in any of the listed shares. The Motley Fool holds positions in and recommends Amazon and JD.com. The Motley Fool recommends TAL Education Group. The Motley Fool has a disclosure policy.

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