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Alibaba, Tencent to show how China is handling the trade war

May 14 2019 21:37
Lulu Yilun Chen, Bloomberg

Alibaba Group and Tencent, China's most valuable corporations, will offer glimpses into the world's second-largest economy when they unveil earnings this week.

Their enormous sprawl will likely help investors take the temperature of everything from the United States-China trade war and consumer spending to global technology investment. Here are a few things to be on the lookout for when the pair take the lid off quarterly results in May.

An ebbing tide lowers all boats

China's economy is slowing - or at least growing in fits and starts.

That's sapping growth for all of China, even as Alibaba and Tencent tap new veins of revenue beyond their main businesses, e-commerce and gaming, respectively.

While they have managed to sustain a break-neck pace of expansion over the years, that changed in 2018 when the deceleration grew more pronounced (Tencent also had specific issues around a gaming crackdown).

China's vaunted tech industry is now undergoing a period of unprecedented pain as companies from Tencent to lay off executives and tighten their belts, while startup investment fizzles out.

Investors may glean clues to the health of both the industry and the economy from key numbers such as e-commerce revenue.

Whither new business?

Alibaba and Tencent have - more or less - a lock on their main businesses at home. But in a quest for growth, the two are increasingly butting heads in markets from cloud computing services and entertainment to online finance.

Upstarts like Bytedance and Meituan Dianping are also giving them a run for their money in areas as diverse as food delivery and travel.

That means intensifying competition as both companies expand into peripheral businesses, and likely more pressure on profit margins. Investors will want to know in particular how Alibaba is progressing in cloud computing, and how Tencent is faring on social media advertising.

Pitching users and brands

Speaking of advertising, both companies have rapidly become players to be reckoned with in a field dominated by American firms such as Alphabet's Google and Facebook.

But Tencent remains under-represented despite a social media footprint that rivals just about any other competitor's. That's because its honchos remain ultra-sensitive about how a surfeit of ads could tar the all-important user experience.

Advertising remains pivotal to Alibaba's bottom-line, because they get the bulk of their revenue helping merchants reach consumers.

In Tencent's case, punters will be interested in how far Tencent can pull that lever to juice growth - particularly as gaming revenue expansion tapers off.

Yet, it's all about the money

Ultimately, for investors, it's about the share-price trajectory. Both companies - which tend to move in lock-step given they're bellwethers for the domestic tech industry - got walloped in 2018.

That's when concerns mounted around the Chinese economy, a backlash against Tech Inc. globally, and how escalating tensions with the U.S. would affect consumption and investment flows.

Hopes for a resolution on trade as well as growing confidence in Alibaba and Tencent's ability to weather the storm have anchored a bounce-back in 2019, but the market remains very sensitive to global macroeconomic and political headwinds and will pick apart their comments on the outlook Wednesday.

alibaba  |  tencent  |  china  |  trade war


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