Alibaba, Baidu and Tencent Signal First Steps in Bumpy Recovery

Eight months ago, the future of China’s largest internet company looked bleak. Covid-era lockdowns have sapped sales, and the Chinese government’s strict technology regulations have terrified even bold Chinese investors. Shares of Alibaba, Baidu and Tencent have fallen to their lowest levels in years.

Tech giants released earnings reports this week that showed early signs of recovery as China’s economy reopened. However, the financial results announced for the first time after the end of “zero corona” restrictions also reflect the uneven pace of recovery in the Chinese economy, and although corporate restructuring is underway, it is likely to be extremely difficult. It suggests.

China’s leading internet search business Baidu and Tencent, which operates the ubiquitous messaging app WeChat, both saw double-digit growth in the first three months of the year compared to the same period in 2022. sales growth, marking the first sales growth in over a year. had reached that level.

Baidu posted a 10% increase in sales, and on Tuesday said its strong digital ad sales continued into the quarter. Tencent said Wednesday that its sales grew 11%, partly due to a rebound in digital payments as Chinese consumers started spending money again after a long drought. Tencent, China’s leading video game company, also benefited last year from the easing of restrictions on game licenses after a nine-month freeze on them.

Alibaba reported Thursday that its revenue grew 2% year-on-year, below analyst expectations. The company said sales in its core online e-commerce and cloud computing divisions fell by single digits, but online shopping began to recover in March.

The report tracks two tumultuous years for tech companies under heavy Chinese government regulation. After Alibaba founder Jack Ma criticized financial regulators for stifling innovation in 2020, regulators canceled the public offering of Ant Group, the financial technology company founded by Ma.

In January, a month after China abruptly withdrew its “zero-corona” restrictions under public pressure, a senior People’s Bank of China official said the campaign against tech companies was “basically doneChina’s supreme leader, Xi Jinping, now expects the country’s high-tech industry to become the lifeblood of growth. And spurred by an intensifying technological race with the United States, China is eager to revive its beleaguered power.

“The worst policy time for them is over,” said Tian Hou, founder of Beijing-based data analytics firm TH Data Capital. “The government now wants to use these internet companies to create more jobs, innovate and catch up with the United States.”

Initial investor reaction to the companies’ first-quarter results was lukewarm. Shares of Baidu and Tencent were broadly flat in Hong Kong this week, but both have risen since October. Alibaba shares fell about 6% on Friday, but fell about 2% for the week.

The fate of companies will continue to depend on the Chinese economy. Local governments are in debt. The real estate sector, which has long stimulated growth, has faltered. April data from China’s National Bureau of Statistics disappointed analysts, with Chinese spending more on food but appearing to avoid items like cosmetics and cars. Youth unemployment reached a record 20.4 percent.

“People are out on vacation, but spending less than pre-pandemic levels,” said Bruce Pang, chief economist for Greater China at global real estate and investment advisory firm Jones Lang LaSalle. . “They are cautious because they are not confident about their employment prospects or future income streams.”

Alibaba is in the middle of a dramatic overhaul. The company announced a large-scale reorganization in March, splitting the company into six divisions. And this week, the company announced a spin-off of its prized cloud division, which it said would be completed within 12 months in preparation for a public listing. The company also said it was considering going public in its grocery chain and logistics division after a series of regulatory investigations prevented many promising technology companies from listing.

The dismantling of Alibaba, one of China’s most iconic corporate empires, shows the level of reassessment taking place in the tech sector. Over the years, Chinese internet companies have grown as millions of Chinese have access to the internet. Recently, that migration has reached a plateau, with companies competing fiercely for the same customers.

All three of China’s internet giants want to tell investors new stories tied to artificial intelligence, the new technology underlying services like ChatGPT that promise to disrupt old ways of doing business. thinking.

Daniel Zhang, chairman of Alibaba and chief executive of the soon-to-be independent Alibaba cloud division, described AI as a technology that will “reshape every aspect of society.”

The companies hope their investment in artificial intelligence will pay off in cloud computing units, the technology that underpins AI services. Baidu said its AI cloud division reported its first profit last quarter.

Earlier this year, Baidu and Alibaba unveiled an artificial intelligence system similar to ChatGPT, developed by Silicon Valley lab OpenAI. Baidu said it sought approval after China’s cyberspace watchdog released guidelines on AI systems in April.

Tencent said Wednesday it was making “good progress” with its AI model and that the team was planning a new AI product, but did not provide further details.

Both companies are centralizing their AI services to businesses and corporations, in part because mass-market chatbots could undermine China’s strong hold on information. Alibaba and Baidu each said more than 100,000 companies had lined up to try out their artificial intelligence products.

Alibaba, Baidu and Tencent are transforming during difficult times. The Chinese government’s grip on the economy is tighter than ever. Rising competition from the U.S. has deprived Chinese companies of access to some of the most advanced microchips needed to develop cutting-edge artificial intelligence systems. And analysts say lucrative domestic customers such as China’s state-owned enterprises are driving out private cloud-computing providers in favor of government-backed alternatives.

Recently, U.S. officials have called for an overhaul of Chinese cloud providers such as Alibaba on national security grounds. Alibaba said on Thursday that its cloud business declined in the last quarter in part because its major customers pulled out of international services for “non-product reasons.”

These difficulties, both in China and abroad, are alienating some investors, knowing that Internet companies are unlikely to return to the growth rates of a decade ago. Others think they deserve a second look.

“I recommend forgetting the past,” said Kenny Wen, head of investment strategy at Hong Kong wealth manager KGI Asia. “Now they’re back and we’re seeing gradual improvement. We need to give them a new benchmark.”

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