In charts: The rise and rise of China’s tech trinity
Profits of Alibaba, Tencent and Baidu keep surging but they are vulnerable
China’s tech titans have blown earnings forecasts out of the water in the latest quarter, propelling their shares higher.
Baidu, Alibaba and Tencent, collectively known as BAT — along with ecommerce group JD.com, microblogging-turned-livestreaming platform Weibo, and online gaming group NetEase — are riding a wave of Chinese online consumption: shopping, gaming and watching videos on their phones. Here are five charts putting the numbers into context.
Last quarter Tencent and Alibaba elbowed their way into the world’s 10 biggest companies by market capitalisation. With shares still on a tear, each up more than 70 per cent in the year to date, the two now rank seven and eight. Of course, being in the upper echelons means playing with the really big boys: even combined, Alibaba and Tencent are worth less than Apple.
And watch those coming up on their heels. Shares in JD.com are also up more than 70 per cent in the year to date and are now worth $62bn. Baidu, an early star of China’s tech trinity, has stumbled on the back of scandals at its core search engine and a failure to spot the shift to mobile. But investors appear to like its ambitions in artificial intelligence and have pushed its value to $78bn. Shares are surging sharply ahead of earnings, and valuations are heady.
Profits with Chinese characteristics
Costs are rising. The battle for content is inflating prices; competition for users has unleashed a bounty of subsidies and expensive areas of investment, such as AI, are a long way from making money. For some, operating margins are slipping and several business units are bleeding cash.
The likes of Alibaba and Tencent shrug this off. Payments, says Tencent president Martin Lau, is about supporting the ecosystem and other businesses. “It’s not the target to make a profit.” For Joe Tsai, vice-chairman of Alibaba, “shareholder value will follow when we create value for our customers”. “Reinvesting” in Chinese tech speak often translates into subsidies, or buying market share.
Advertising, what advertising?
Ad revenues drive earnings for most of the tech world, but not in China. Tencent, with 963m monthly active users (MAU) on its Weixin and WeChat accounts, is approaching half Facebook’s 2bn users. But its digital ad revenues this year are forecast to clock in at under $7bn, compared to the US social media group’s $36bn-plus, according to eMarketer.
This can be viewed in two ways: a missed opportunity or plenty of scope to grow. Forecasts see the levels rising, but slowly. That chimes with the prognosis for Tencent from Mr Lau: he wants to improve the quality rather than quantity of ads and is thus “erring on the very conservative side in terms of releasing our [ad] inventories . . . Right now we see no urgency to put a lot of inventories out.”
Evolving to stay in the game
Sina Weibo was a minnow compared with Twitter when it burst on to the stock market in April 2014, raising a paltry $285m, and lossmaking to boot. Fast forward three and a bit years and it has its US peer in the shade. It has done so by staying in step with its — mostly young — subscribers, moving into livestreaming and making its platform mandatory for key opinion leaders, celebrities and other trend setters to woo and entertain their legions of fans.
Weibo may have started out like Twitter but it has morphed into an amalgam of Twitter, YouTube and Facebook. As importantly, it has made its additions work: another difference with the US microbloggng site that killed off its short video Vine mobile app.
They are vulnerable
The days of assuming Beijing’s policy is “domestic company good, foreign company bad” are long over when it comes to tech players in China. Sure, the locals are not blocked at home — unlike Google’s search function or Facebook. But as China’s Great Firewall tightens, so too local players are being caught up in the backlash, spooking investors.
Tencent bears the scars. On July 4 it shed $15.1bn in market value after it started limiting the time children spend on its top-selling Honour of Kings game after authorities criticised the game’s ”addictive” nature. Tencent duly described its new rules in a post on Tencent’s official social media account as the “most serious anti-addiction measures in history”.
Last week it was more broadly rounded upon, along with Baidu and Sina Weibo, for spreading material that “harms the social order”. Next came the turn of Alibaba, thanks to now-banned VPN tokens being sold on its Taobao shopping platform. Livestreaming and gossip sites also come under the clampdown.
Beyond content, Beijing appears to be waking up to the private companies’ massive reach and taking steps to bring the lumbering state-owned enterprises back into the picture. Earlier this month the central bank ordered online payments groups to operate through a centralised clearing house, forcing Tencent and Alibaba’s payments units to share valuable transaction data with competitors.
And the BAT were all corralled into stumping up cash for telecoms SOE China Unicom — a sort of national service, or tax, to at least slightly redistribute the spoils.
Additional reporting by Alice Woodhouse