Tencent thrives, Alibaba struggles amid digital sector’s uneven recovery
Chinese technology giants — once emblematic of the country’s growing and quickly innovating new economy — delivered mixed quarterly results this week, offering a snapshot of the sector’s mounting competition and a patchy recovery in the world’s No 2 economy.
Analysts said the consumer and technological bellwethers for China may have bottomed out after continuous scrutiny, but sounded a note of caution as the market still struggles to juggle major policy signals, the artificial intelligence “gold rush”, and a new reality of price-sensitive consumption.
Bittersweet earnings
China’s most valuable company, Tencent Holdings, on Wednesday reported a better-than-expected rise in second-quarter earnings thanks to a turnaround in its core video-game section and advertising business.
The Shenzhen-based video-game and social media firm’s net profits surged 82 percent year-on-year to 47.63 billion yuan ($6.65 billion) for the three months ended in June. Revenue rose 8 percent from a year earlier.
However, e-commerce giant Alibaba Group isn’t faring that well. Its net income dropped about 29 percent year-on-year to 24.3 billion yuan in the quarter ended in June, with a lackluster sales growth of 4 percent. Revenue from Taobao and Tmall — Alibaba’s core online retail platforms — fell 1 percent.
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Meanwhile, smaller rival JD.com announced Thursday that its quarterly profit nearly doubled, though sales grew just marginally by 1.2 percent.
Kenny Wen, head of investment strategy at KGI Asia, said Alibaba’s quarterly results prove that retail consumption in China still lacks momentum.
“Overall, the soft data from online sales and corporate spending on online advertising further shows that policy support needs to be stepped up in a timely manner,” Wen said.
Consumption shift
Giant firms’ latest quarterly prints came at a time when the country is grappling with a myriad of economic challenges, including a real estate crash and an aging population.
On the consumption front, Hebe Chen, a market analyst at IG, said that Chinese companies are facing a notable shift in domestic spending habits, with consumers becoming ever more price-sensitive, as evidenced by a “widening disconnect” between the pace of consumer price changes and the broader retail sales growth trend.
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China’s retail sales advanced 2.7 percent year-on-year in July, compared with a 2 percent growth seen in June, data from the National Bureau of Statistics showed. Meanwhile, the consumer price index — a key gauge of inflation — gained by 0.5 percent from a year ago, versus an increase of 0.2 percent in June, according to the statistics bureau.
This evolving landscape presents a mixed bag for tech giants. On the bright side, fierce competition is fueling a surge in demand for product and service promotion, which significantly boosts major players in online advertising — Tencent’s impressive 19 percent revenue jump is a testament to this.
However, on the flip side, shrinking margins may become the new normal for e-commerce giants like Alibaba and JD.com as they reel from the relentless pressures of price competition, said Chen.
By offering low-price products, PDD — the owner of bargain shopping platforms Pinduoduo and Temu — has become a formidable presence in the consumer market. Last year, PDD overtook Alibaba as the largest e-commerce player in market capitalization for the first time through its strategy of low pricing.
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The competitive landscape in the industry is reflected by a situation in which revenue growth does not translate into profitability, said Kenny Ng, securities strategist at Everbright Securities International.
“Major e-commerce players are gradually shifting their focus to lower-tier cities, with some subsidy policies and low-price strategies posing strong challenges,” said Ng.
Relaxed scrutiny
A tailwind is that recent policy signals fuel hope that stringent scrutiny has turned the corner after the likes of Alibaba and Tencent bore the brunt of stepped-up regulations on private businesses.
In July, a quinquennial top-level policy meeting pledged support for China’s private sector as part of a reform-themed blueprint to jumpstart the country’s growth engine.
Redmond Wong, chief China strategist at Saxo Markets, said that the wording of “disorderly expansion of capital” is not seen in official narratives this time, instead highlighting the importance of developing better market mechanisms.
“Whether this rhetoric can comfort entrepreneurs and investors remains to be seen,” Wong said, describing it nevertheless as “moderately positive” as it signals that private capital is facing a “green light” for the time being, and the “red light” will not be turned on anytime soon.
Ng from Everbright Securities International said regulatory factors are expected to persist, but tech firms may have already survived the worst of it amid the country’s determination to achieve a full-year GDP growth target of around 5 percent.
In the second quarter, China’s economy grew at a slower-than-expected 4.7 percent year-on-year.
“At this stage, the main consideration should be to ensure different sectors maintain relatively good growth, in order to promote overall stable economic growth,” Ng said.
AI push
A big question hanging over the Chinese tech firms’ prospects is whether their venture into AI could turn into fresh growth levers as they have invested heavily in this sizzling-hot battlefield following the rise of Microsoft-backed OpenAI’s ChatGPT chatbot.
According to Tencent, its quarterly operating capital expenditure soared 144 percent, partly due to investments in GPU servers. It also reaffirmed to further navigate and incorporate AI into their current services once they are prepared.
Chen from IG said the AI push could potentially help tech firms secure an early lead. “With Alibaba’s cloud services and Tencent’s expansive consumer ecosystem, they are well-positioned to lead the upcoming all-around growth surge.”
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Both Alibaba and Tencent have invested in an array of China’s generative AI startups, such as Moonshot and MiniMax.
Nevertheless, Jason Chan, senior investment strategist at the Bank of East Asia, holds a more prudent view, saying it is still too early to see AI as a growth driver given their nascent models’ capabilities.
Up until now, AI has been widely employed by online platforms to enhance advertising precision. “Developing AI capabilities is good for the health of the industry, but the near-term focus should probably be more on its synergy with existing business sections,” Chan said.
