A significant slowdown in the second-largest economy in the world, fueled by Beijing’s stringent Covid policy, is having a negative impact on China’s technological giants, who recently saw their worst quarter of growth in history.
The second quarter of this year saw the first-ever flat year-over-year quarterly revenue increase for e-commerce company Alibaba and the first-ever sales decline for social media and gaming company Tencent. The second-largest e-commerce company in China, JD.com, reported the weakest sales increase in company history, and electric car manufacturer Xpeng reported a larger-than-anticipated loss and bleak guidance.
These businesses are valued at more than $770 billion when taken as a whole.
China experienced a spike in Covid cases during the second quarter. As part of a stringent program that included lockdowns and widespread testing to limit the virus, China has maintained its so-called “zero-Covid” policy. For several weeks, Shanghai and other major cities were under lockdown.
In the second quarter, China’s economy expanded by just 0.4%, which had an effect on both consumer confidence and corporate investment on things like advertising and cloud computing.
China’s tech giants felt the effects of those obstacles.
“Retail sales decreased year-over year in April and May due to the resurgence of Covid-19 in Shanghai and other major cities, and has slowly recovered in June,” during this month’s results call, Alibaba CEO Daniel Zhang made the following statement.
Alibaba reported that some of its cloud computing projects were delayed and that its Chinese logistics networks were also impacted.
One of the largest gaming companies in the world and the owner of the messaging app WeChat, Tencent, also suffered the effects of the zero-Covid regulation. Due to fewer people utilizing its WeChat Pay mobile payments service outside of their homes, its fintech services income rose more slowly than in prior quarters. As businesses cut back on spending, the company’s internet advertising revenue also dropped significantly.
Because it manages a large portion of its logistics supply chain and inventories, JD.com did well in the second quarter. However, because of lockdowns, fulfillment and logistics expenses did increase.
The manufacturer of electric vehicles XPeng stated that it anticipates third-quarter deliveries of 29,000 to 31,000 vehicles. But the market had not anticipated such dismal guidance. Seasonal weakening is only one factor, according to XPeng President Brian Gu, “traffic in the stores are less than what we’ve seen before because (of the) post-COVID situation.”
The pandemic gave China’s internet giants a boost as more people resorted to the internet for lockdown-related activities like shopping and gaming. This has complicated year-over-year comparisons. The macroeconomic environment has become much more challenging as a result of the Chinese economy’s current challenges.
A much harsher regulatory environment continues to be a challenge for China’s technology sector. China has enacted stricter regulations in the last two years, covering everything from gaming to data protection.
Investors are apprehensive about their view due to growth rates that have fallen more dramatically than in past years.
“What I find interesting is how the narrative on the big tech companies … has changed: early on in the pandemic, COVID was expected to benefit the big online platforms at the expense of ‘offline’ businesses, as much of the economy would be stuck at home with little other choice than to shop online and entertain themselves online,” according to Tariq Dennison, a wealth manager at GFM Asset Management, in an email to CNBC.
“The recent revenue and earnings dip hitting these big tech names reflects zero COVID concerns short-term, but also has many long-term investors, including myself, revising our estimates of the long-term growth prospects of these names.”
According to Dennison, a long-term downturn would be of worry because Tencent, Alibaba, and JD.com had historically maintained more than 25% annual revenue growth.
“If this quarter is a sign of a permanent slowdown to single digit growth rates, rather than just a temporary dip, that of course would have a significant impact on long-term valuations of these shares,” Dennison said.