Tencent and other Chinese tech firms are reporting decent results

THE LAST three months have been hard on China’s most valuable public technology companies. Or, at least, on their share prices. In May Alibaba and Tencent lost more than a tenth of their value in the week after President Donald Trump restricted the export of American technology to Huawei, a privately held Chinese telecoms giant. Investors feared that knock-on effects from the ban might hurt other Chinese tech businesses by, for instance, making it hard for them to source cutting-edge components and software from America.

You would not have guessed, looking at the latest batch of quarterly results. Take Tencent, which owns WeChat, a ubiquitous all-in app, makes mobile games and much cyberstuff besides. On August 14th it reported that a new hit game—which lured users of its most popular title, banned by Chinese censors earlier in the year—propelled its profits to 21.4bn yuan ($3.4bn), from 17.9bn yuan in the same period last year. Revenues rose by 21%, to 88.8bn yuan. Or JD.com, an e-merchant, whose healthy revenues, posted earlier in the week, revived a sagging share price. Analysts expect Alibaba, China’s e-commerce titan, which was due to publish its second-quarter results on August 15th after The Economist went to press, to notch up sales of 111bn yuan and rake in a net profit of 10.3bn yuan, an increase of 35% and 26% year on year, respectively. Xiaomi, a device-maker, and Meituan, a food-delivery firm, which both announce second-quarter earnings next week, are also forecast to report rising revenues. Growthless Baidu, China’s search giant, is an outlier.

Huawei itself shows that even the long and mercurial arm of American law can do little to hobble the stars of Chinese technology. Many of their employees feel energised by the tech tussle, seeing it as both a validation of Chinese prowess and an opportunity to increase the independence of China’s burgeoning technology ecosystem from America’s government. Finally, Chinese have something their American rivals do not: near-total control of their country’s vast domestic market, second in size only to America’s but growing much faster.

Still, Chinese tech is not invulnerable. Tencent’s revenues came in lower than analysts had forecast, in part owing to disappointing advertising sales. In that business it faces new competition from ByteDance, a Beijing-based startup which also makes TikTok, a video-sharing app that, in a first for a Chinese social-media platform, is all the rage among Western teens. ByteDance is also challenging Baidu in search, which explains some of the latter’s underwhelming performance. Alibaba still relies on its e-commerce business for 85% of revenue. A slowing domestic economy may hurt it, as it might JD.com. Alibaba’s foray into designing chips for cloud-computing and the internet of things is at an early stage.

These higher-tech lines of business promise riches in the future. They are also more sensitive to geopolitics than are online marketplaces—and the technological conflict between America and China is not going to end anytime soon. The 90-day reprieve granted to Huawei expires soon. It might not be extended.

Another threat to China’s companies may come from within. It could take the form of (healthy) competition from upstarts like ByteDance or (less healthily) a slowing economy. It could also manifest itself in Chinese tech’s inward turn in response to the trade war. By focusing exclusively on their home market companies might fall into the trap of cutting themselves off from the wider world and the bigger ideas it contains.

For the time being, then, China’s tech companies look well insulated. That virtue could one day come to haunt them.

This post was originally posted at https://www.economist.com/business/2019/08/17/tencent-and-other-chinese-tech-firms-are-reporting-decent-results.

Leave a Reply

Your email address will not be published. Required fields are marked *