Tencent, Alibaba look like utilities after US$1 tril drubbing

(May 17): For years they were two of the fastest-growing companies worldwide — stock-market darlings worth a combined US$1.7 trillion (about RM7.46 trillion) at their peak.

Now Tencent Holdings Ltd and Alibaba Group Holding Ltd are struggling to keep up with even the most staid utilities as China’s crackdown on Internet giants takes its toll.

Tencent’s results on Wednesday (May 18) are expected to show revenue rose by a mere 4.3% in the March quarter, while growth at Alibaba is projected at 7.1%. Both would be record lows and lagging the 8.6% average growth reported by the 10 largest utilities including Duke Energy Corp and The Southern Co last year.

It’s a remarkable turn of events for two corporate stars that once embodied China’s modern economic miracle before Xi Jinping’s sweeping tech-sector crackdown forced the Internet industry to cut staff and freeze investments into new arenas — even give away billions to social causes. The creator of WeChat, which has shed about US$520 billion of value since its 2021 peak — could be hardest-hit after embracing what second-in-command Martin Lau calls a “new industry paradigm”.

China’s tech giants have made peace with a new era of caution and stricter government oversight. Venture capitalists are hitting the brakes on some of the country’s hottest Internet trends like community buying, sounding the death knell for high-profile start-ups and squeezing valuations of others. TikTok-owner ByteDance Ltd and online exporter Shein could postpone their stock-market debuts. All that has disillusioned investors who can no longer count on China Tech Inc to drive their portfolios.

“There has been a fundamental shift in the growth story of China tech in that the sector will focus on quality and sustainable growth, unlike the unconstrained growth in years past,” said Bloomberg Intelligence analyst Marvin Chen. “This may result in a downshift in revenue and user growth as companies become more conscious about how they go about user acquisition, M&A (mergers and acquisitions), and opening up their platforms to competition.”

Tencent’s latest quarterly print will offer clues about how the once free-wheeling sector is holding up as Covid-19 lockdowns traumatise the world’s No. 2 economy. The market will also strain for hints — whether there will be a let-up in the pace of Beijing’s campaign.

Sentiment towards China’s Internet industry has swung wildly in recent weeks, with companies including Tencent and Alibaba surging on April 29 after China’s top leaders pledged to boost economic stimulus. The country’s top political advisory body plans to host a forum this week with private-sector firms including Baidu Inc to discuss developing the digital economy, Bloomberg News has reported, as the ruling Communist Party makes stability a key priority ahead of its leadership reshuffle later this year.

Tencent has so far largely escaped direct scrutiny from Beijing — but not the fallout from the broader clampdown.

Online advertising sales are forecast to decline about 15% after contracting for the first time in the December quarter — a hit that the management signalled will persist for most of this year. Big marketers of past years including online tutors, insurers and game developers have all fallen victim to separate regulatory actions, while stricter user privacy rules took a toll.

The WeChat operator in the meantime is struggling to keep ByteDance at bay, whose hit app Douyin increasingly draws advertisers from Tencent. In April, Tencent shut down its game streaming platform and hiked fees for its Netflix-style service for the second time in about a year to try and offset the hit. Regulators also banned minors from tipping on livestream platforms, echoing similar policies on online gaming.

As for its bread-and-butter games division — still the world’s biggest publisher — Tencent will need to wait a bit more for a resurgence.