Chinese tech giants including Alibaba have seen slower to no growth as China’s economy faces weakness due to Beijing’s zero Covid policy.
Qilai Shen | Bloomberg | Getty Images
China’s tech giants are emerging from their worst growth quarter in history as a major slowdown in the world’s second-largest economy, fueled by Beijing’s tough Covid policy, takes its toll.
In the second quarter of the year, e-commerce company Alibaba reported its first-ever flat quarterly year-over-year revenue growth and social media and gaming company Tencent reported its first-ever sales decline. recorded. JD.com, China’s second-largest e-commerce player, posted the slowest revenue growth in its history, while electric vehicle maker Xpeng posted a bigger-than-expected loss and weak forecast.
Together, these companies have a market capitalization of over $770 billion.
During the June quarter, China saw a resurgence in Covid cases. China is sticking to its so-called “zero-Covid” policy, a strict set of measures including lockdowns and mass testing to contain the virus. Major cities, including Shanghai, were closed for several weeks.
China’s economy grew just 0.4% in the second quarter, impacting consumer strength as well as business spending in areas such as advertising and cloud computing.
These headwinds have trickled down to the Chinese tech giants.
“Retail sales declined year-on-year in April and May due to the resurgence of Covid-19 in Shanghai and other major cities, and slowly recovered in June,” Daniel said. Zhang, CEO of Alibaba, during the company’s earnings call this month. .
Alibaba’s logistics networks in China have also been affected and some of its cloud computing projects have been delayed.
Tencent, the owner of messaging app WeChat and one of the world’s biggest gaming companies, has also felt the impact of the zero-Covid policy. Its fintech services revenue grew more slowly than in previous quarters as fewer people went out and used its WeChat Pay mobile payment service. The company’s online ad revenue also fell sharply as companies tightened budgets.
JD.com did well in the second quarter as it controls much of its logistics supply chain and inventory. However, he has seen costs rise for execution and logistics in the face of blockages.
Electric carmaker XPeng said it expects to deliver between 29,000 and 31,000 vehicles in the third quarter. But these were weaker guidance than the market expected. Adding to the seasonal weakness, XPeng President Brian Gu said “store traffic is lower than what we’ve seen before due to (the) post-COVID situation.”
China’s internet giants have boomed during the pandemic as people have turned to online services such as shopping and gaming amid shutdowns. This made year-over-year comparisons more difficult. Now, the Chinese economy is facing a number of headwinds this year that have made the macroeconomic environment even more challenging.
The Chinese technology sector continues to face a much stricter regulatory environment. Over the past two years, China has introduced a stricter policy in areas ranging from games to data protection.
With growth rates falling sharper than in previous years, investors are cautious about their outlook.
“What I find interesting is how the narrative about big tech companies…has changed: at the start of the pandemic, it was expected that COVID would benefit big online platforms at the expense of corporations. “offline” because much of the economy would have him stuck at home with little choice but to shop online and entertain himself online,” said Tariq Dennison, wealth manager at GFM Asset Management, to CNBC via email.
“The recent drop in revenue and earnings for these big tech names reflects the absence of near-term COVID-related concerns, but has also caused many long-term investors, including myself, to revise our estimates of the long-term growth prospects for these names.”
Dennison said Tencent, Alibaba and JD.com had previously seen annual revenue growth of more than 25% and a long-term slowdown would be of concern.
“If this quarter is a sign of a permanent slowdown in single-digit growth rates, rather than just a temporary dip, that would of course have a significant impact on the long-term valuations of these stocks,” Dennison said.