China crackdown risk roars back in probe of Jack Ma-led Ant Group
From Alibaba to Tencent, China’s largest companies are once again at the center of a market storm, spurred by speculation that Beijing is readying another assault on the world’s biggest internet arena.
From Alibaba to Tencent, China's largest companies are once again at the center of a market storm, spurred by speculation that Beijing is readying another assault on the world's biggest internet arena. Three of China's most valuable businesses -- Alibaba Group Holding Ltd., Tencent Holdings Ltd. and Meituan -- have shed more than $100 billion in the span of three turbulent days. It's a remarkable reversal from just a week ago, as investors like Charlie Munger spotted bargains among China Tech Inc. after a $1.5 trillion selloff in 2021. Macquarie issued a report this month headlined “peak crackdown.”
Now, investors are frantically attempting to parse a series of events that suggest Beijing is once more preparing to rein in its giant private sector. When Alibaba reports earnings Thursday, its executives will again face questions about Beijing's intentions for a sector subjected last year to unprecedented regulatory curbs and punishments, after Xi Jinping's administration launched a “common prosperity” campaign to curb tech-sector excesses and force them to share the wealth.
The bloodletting began Friday, when the top state economic planner demanded Meituan and its peers lower the fees they charge restaurants in pandemic-hit regions. On Monday, a pair of unverified online posts that went viral suggested Tencent -- which weathered 2021's onslaught better than most -- was facing a major regulatory crackdown, forcing its public relations chief into an unusually aggressive denial.
Later that day, Bloomberg reported that Beijing had ordered state-run firms to report their exposure to Jack Ma led Ant Group Co. -- the hardest-hit firm in a year-long government campaign against “disorderly capital.”
“The events of the past 48 hours are a wake-up call that regulation isn't finished,” said Michael Norris, an analyst with Shanghai-based consultancy AgencyChina. “We are going to be in a situation where the regulation and the slowdown in China's economy happen side by side. It's going to be challenging for businesses that rely on consumers and merchant advertising to be able to make this year's numbers.”
Shares in Alibaba and Tencent were up less than 1% in early Hong Kong trading Wednesday.
While many investors were counting on an end to the relentless regulatory pressure, fundamental questions remained about the ability of China's tech giants to resume the growth they had enjoyed during a decade of near-unfettered expansion. Alibaba and Tencent had already been expected to record their slowest pace of quarterly revenue rises since listing.
The shell-shocked industry had been expected to tread more cautiously this year than ever before -- curtailing the hiring and acquisition sprees of years past, for one. Didi Global Inc. is preparing to reduce headcount by as much as 20% ahead of its Hong Kong IPO, Bloomberg News reported last week. Twitter-like Weibo Inc. has started to readjust its businesses since the start of the year, allocating some staff to new roles before letting them go, the company said in a statement last week, in response to online posts alleging the firm is firing a wave of people.
“The golden period of Chinese internet is probably already behind us,” said Jessica Tea of BNP Paribas Asset Management. “That said, we believe the peak of the regulatory intensity is probably behind us in this cycle, as we move from policy normalization to growth normalization.”
Now, the latest demands placed on Meituan and food delivery peers like Alibaba's Ele.me suggest they're also getting pressed into national service, with uncertain longer-term implications. The move to cut food delivery fees shows Beijing will enlist wealthy private firms to relieve the burden of smaller businesses hard-hit by China's economic slowdown and its Covid-Zero strategy, Goldman Sachs analysts led by Ronald Keung wrote this week.
It's intended “to help companies in affected industries overcome the impact of COVID-related challenges by lowering their costs,” they said. While it may impact short-term profitability for Meituan and Alibaba's loss-making Ele.me, the analysts “see no long-term impact on Meituan's business.”
The risks to growth are especially prominent at Alibaba, which last year swallowed a record $2.8 billion fine after regulators forced it to end certain merchant exclusivity practices that allegedly helped it one-up rivals. The regulatory assault has cut the company's market value from $858 billion in October of 2020 to roughly $310 billion.
Its outlook is already challenging. Analysts forecast that revenue rose just 11% in the December quarter, by far the slowest rate of growth since it went public in 2014. Alibaba's operating margin has slipped from 30.4% in 2017 to 10.7% in the twelve months ended September, pressured by new competitors and softening economic growth. The firm has seen video-streaming platforms Douyin -- the domestic sibling to ByteDance Ltd.'s TikTok -- and Kuaishou Technology draw business away from its Taobao and Tmall marketplaces. To make matters worse, its top online influencer-merchant, Viya, got caught up in a tax evasion scandal.
What Bloomberg Intelligence Says
The dimming macroeconomic picture and overall challenging environment for global equities remain headwinds to Tencent and China internet peers seeking a rebound from 2021's rout, but trends could brighten as 2H22 approaches. Chinese economic stimulus, along with easing year-ago comparables, could be enough to stir a pickup after June.
-- Matthew Kanterman and Tiffany Tam, BI analysts
In 2020, Alibaba hired more people than Silicon Valley giants Alphabet Inc., Meta Platforms Inc., Microsoft Corp., Netflix Inc. and Tesla Inc. combined. It more than doubled its number of employees in the year ending March 2021 to 251,462, a total boosted in part by the takeover of the nationwide chain Sun Art Retail Group in October 2020. But it then added only another 7,000 in the following six months. Tencent's most recent report in June also showed its hiring pace slowing.
The waning fortunes of China's internet giants coincide with a re-assessment now underway in Silicon Valley, as the pandemic fades and takes the Covid-driven surge of internet activity with it. Facebook's parent posted its first-ever decline in user numbers, while Shopify Inc. is warning of a slowdown.
At Tencent, revenue is expected to grow 9% for the fourth quarter, the slowest pace since its 2004 listing. That's after appetite for ads was dented by stricter privacy rules and a suspension of new game approvals that has dragged on for more than six months. The company's margins are already under pressure as the WeChat operator is now counting on overseas markets to spur gaming growth while devoting more resources into arenas like the cloud and fintech.
“Bottom line, this policy pivot is real,” said Wai Ho Leong, strategist at Modular Asset Management in Singapore, “and unlikely to soften anytime soon.”
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