As recently as a month ago, investors in China’s Internet stocks were clutching on to the belief that these companies would sail through the coronavirus epidemic unscathed. Alibaba Group Holding Ltd, for example, was trading near historic highs despite the e-commerce giant’s chief financial officer admitting days before that its biggest business would decline as a result of the squeeze on consumer spending. By the time Baidu Inc reported two weeks later, shares of the search-engine provider had lost 11.7%, while those of Alibaba were down 6.4% and social media powerhouse Tencent Holdings Ltd had slipped 6.2%.
Just as investors should have known in mid-February that there was trouble ahead, they’d be well-advised to look at the reality that’s presented to them now and be just as circumspect. China may have gotten past the worst of Covid-19, but the world is just starting to grapple with it and a major economic shock is looming.
Now, as we digest Tencent’s fourth-quarter numbers and muddy outlook, these stocks have continued to drop. As have group-buying outfit Pinduoduo Inc and Internet companies Sina Corp. and Weibo Corp. Yet despite declines of a third or more in market value, some of China’s Internet darlings are trading at levels seen as recently as three months ago. Tencent, for example, is back where it was Dec 5. This indicates that investors aren’t pricing in a big economic jolt, but merely a minor bump on the highway of fast growth and climbing profits.
In its investor conference call late March 18, Tencent didn’t give explicit details on what to expect this quarter. The company did note that the payments business, now one of its fastest-growing units, will post a drop in revenue, offset by a reduction in marketing costs. By comparison, Baidu, Weibo, and Sina all gave specific sales guidance – each predicted declines of 15% to 20% from a year earlier.
It’s clearly going to be a tough first quarter, but executives spent much time on their conference calls talking up their future prospects in the belief that this is a minor blip. Robin Li, Baidu’s chairman and chief executive, defended his optimism by claiming that expenditure will merely be delayed: "If you plan to get married, you are still going to marry. If you're trying to buy a car, you are still buying a car.”
I can’t help wondering if these business leaders are looking too closely at China’s Covid-19 case count, and correlating a decline in new patients to an immediate rebound in revenue. Certainly, the mood on the ground has brightened and workers are returning to their posts.
However, they may not sufficiently be taking on board that the disease has gone global. The disparate attempts in Europe and the Americas to bring it under control mean that any resolution won’t come quickly. It may be the case that with their revenue coming almost exclusively from domestic consumers, they believe a wider meltdown won’t cause much pain. That may be a little naive. Exports account for an important portion of China’s gross domestic product and occupy a significant part of its labour force. Foxconn Technology Group, for example, is the largest private employer in China and gets more than half its revenue from Apple Inc. If orders at these businesses dry up, Chinese consumers will need to reduce expenditure.
Last year, I noted that what may save Chinese Internet companies is their shift to a post-growth era by trimming costs such as marketing, which some pragmatic executives have done. They’re going to need to adapt again, this time to reflect a world that truly is connected, and where an external shock could quickly become a local problem.
Chinese tech companies may think they’ve got through the worst of the storm. They’d better brace themselves for the fact that there is nowhere to hide. – Bloomberg