Chinese tech giants, including Alibaba, have seen slower growth and no growth as China’s economy faces weakness as a result of Beijing’s zero-Covid policy.
Qilai Shen | Bloomberg | Getty Images
Chinese tech giants are coming off their worst quarter of growth on record as a major slowdown in the world’s second-largest economy, fueled by Beijing’s tough Covid policy, wreaks havoc on own.
In the second quarter of the year, e-commerce firm Alibaba posted its first solid year-over-year rise in quarterly revenue, and social media and gaming company Tencent reported its first sales decline on record. JD.com, China’s second-biggest e-commerce player, posted its slowest revenue growth on record, while electric vehicle maker Xpeng posted a bigger-than-expected loss as well as weak guidance.
Combined, these companies have a market capitalization of more than $770 billion.
In the June quarter, China saw a resurgence of Covid cases. China has stuck to its so-called “zero-Covid” policy, a set of strict measures including lockdowns and mass testing to contain the virus. Major cities, including Shanghai, were shut down for several weeks.
China’s economy grew just 0.4% in the second quarter, and that weighed on consumer power as well as spending by companies in areas such as advertising and cloud computing.
These headwinds fed into China’s tech giants.
“Retail sales were down year-on-year in April and May due to the resurgence of Covid-19 in Shanghai and other major cities and have slowly recovered in June,” said Daniel Zhang, CEO of Alibaba, on the earnings call. of the company this month. .
Alibaba’s logistics networks in China were also affected, and it said some of its cloud computing projects were delayed.
Tencent, the owner of messaging app WeChat and one of the world’s largest gaming firms, also felt the impact of the zero-Covid policy. Its revenue from fintech services grew more slowly than in previous quarters as fewer people went out and used mobile payment service WeChat Pay. The company’s online advertising revenue also fell sharply as companies tightened their budgets.
JD.com did well in the second quarter because it controls a large part of the logistics and inventory supply chain. However, he saw rising costs for fulfillment and logistics in the face of congestion.
Electric car maker XPeng said it expects to deliver between 29,000 and 31,000 vehicles in the third quarter. But that was weaker guidance than the market expected. In addition to the seasonal weakness, XPeng president Brian Gu said “store traffic is less than we’ve seen before due to the post-Covid situation.”
China’s internet giants enjoyed a boom during the pandemic as people turned to online services such as shopping and gaming amid lockdowns. This has made year-to-year comparisons more difficult. Now, the Chinese economy is facing a series of headwinds this year that have made the macroeconomic environment even tougher.
China’s technology sector continues to face a much tighter regulatory environment. Over the past two years, China has introduced a tougher policy in areas from gaming to data protection.
With growth rates declining more than in previous years, investors are cautious about their outlook.
“What I find interesting is how the narrative for big tech companies … has changed: at the beginning of the pandemic, COVID was expected to benefit the big online platforms at the expense of ‘offline’ businesses, as it would most of the economy. You’re stuck at home with little choice but to shop online and entertain yourself,” Tariq Dennison, wealth manager at GFM Asset Management, told CNBC via email.
“The recent decline in revenue and earnings that hit these big tech names reflects zero concerns about COVID in the short term, but it also has many long-term investors, including myself, revising our estimates of long-term growth prospects of these names.”
Dennison said Tencent, Alibaba and JD.com previously had more than 25% annual revenue growth, and a long-term slowdown would be a concern.
“If this quarter is a sign of a permanent slowdown in single-digit growth rates, rather than just a temporary dip, that would certainly have a significant impact on the long-term valuations of these stocks,” Dennison said.