Worst Quarter On Record For Chinese Tech Giants Due To Country’s Zero-Covid Policy

Chinese technology behemoths are coming off their worst quarter of growth in history, as the world’s second-largest economy slows, exacerbated by Beijing’s strict Covid policy.

Alibaba reported its first ever flat year-on-year quarterly revenue growth in the second quarter of the year, while social media and gaming company Tencent reported its first sales decline on record. JD.com, China’s second-largest e-commerce player, reported its slowest revenue growth in history, while Xpeng, a maker of electric vehicles, reported a larger-than-expected loss and weak guidance.

These companies have a combined market capitalization of more than $770 billion.

Covid cases increased in China during the June quarter. China has maintained its so-called “zero-Covid” policy, a stringent set of measures to contain the virus that includes lockdowns and mass testing. For several weeks, major cities, including Shanghai, were shut down.

China’s economy grew by 0.4% in the second quarter, weighing on consumer confidence and corporate spending in areas such as advertising and cloud computing.

These headwinds impacted China’s technology behemoths.

“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,” Daniel Zhang, CEO of Alibaba, said on the company’s earnings call this month.

Alibaba’s logistics networks in China were also impacted, and the company announced that some of its cloud computing projects would be delayed.

Tencent, the owner of the WeChat messaging app and one of the world’s largest gaming companies, was also affected by the zero-Covid policy. Its revenue from fintech services grew more slowly than in previous quarters because fewer people used its WeChat Pay mobile payments service. As businesses cut back on spending, the company’s online advertising revenue fell precipitously.

JD.com performed well in the second quarter due to its control over a large portion of its logistics supply chain and inventory. However, in the face of lockdowns, costs for fulfillment and logistics increased.

XPeng, an electric vehicle manufacturer, said it expects to deliver between 29,000 and 31,000 vehicles in the third quarter. However, the market expected weaker guidance. In addition to seasonal weakness, XPeng president Brian Gu stated that “traffic in the stores is less than what we’ve seen previously due to the (post-COVID) situation.”

During the pandemic, China’s internet behemoths thrived as people turned to online services like shopping and gaming to avoid lockdowns. This has made year-on-year comparisons more difficult. The Chinese economy is currently facing a number of headwinds this year, which has exacerbated the macroeconomic environment.

China’s technology sector is still dealing with a much more stringent regulatory environment. China has implemented stricter policies in areas ranging from gaming to data protection over the last two years.

Investors are cautious about the outlook because growth rates have fallen more sharply than in previous 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,” Tariq Dennison, wealth manager at GFM Asset Management, said via email.

“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.”

Dennison stated that Tencent, Alibaba, and JD.com have previously maintained annual revenue growth rates of more than 25%, and that a long-term slowdown would be a concern.

“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.

(Adapted from CNBC.com)

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