China’s Alibaba and Tencent focus on cost cuts amid slowing growth

Alibaba has faced growth challenges amid tightening regulation of China’s domestic tech sector and a slowdown in the world’s second-largest economy. But analysts say the e-commerce giant’s growth could accelerate through 2022.

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Chinese Tech Giants Alibaba and Tencent often talk about all of their innovations and new products during earnings calls with investors.

But the second quarter is different. Executives at China’s two biggest tech companies focus on something a little less flashy – reducing costs.

It comes after Alibaba and Tencent released second-quarter results confirming that these once freewheeling and high-flying mega-assets are no longer growing.

China’s largest e-commerce company Alibaba reports flat growth for the first time for the quarter from April to June. On Wednesday, gaming and social media giant Tencent posted decrease in first-quarter quarterly revenue compared to the same period last year.

Alibaba and Tencent have felt the impact of a Economic recession caused by causes in China that’s hitting everything from consumer spending to advertising budgets. The tightening of domestic tech regulations in areas ranging from antitrust to gaming over the past year and a half is also weighing on results.

As revenue remains under pressure, both giants have looked more disciplined in their approach to spending.

“In the second quarter, we actively exited non-core businesses, tightened marketing spending and cut costs,” Tencent CEO Ma Huateng told analysts on Wednesday’s call. work. “This allows us to steadily increase our earnings despite difficult revenue conditions.”

Indeed, Tencent’s profit, excluding some non-cash and the impact of mergers and acquisitions, increased by 10% quarter-on-quarter.

Tencent President Martin Lau said the company has exited non-core business areas such as online education, e-commerce and game streaming. The company also tightened marketing spending and cut back on areas of low investment such as user acquisition. Tencent’s sales and marketing expenses fell 21% year-on-year in the second quarter.

The Shenzhen-based company’s headcount also fell by 5,000 from the first quarter.

James Mitchell, Chief Strategy Officer at Tencent, said that with these initiatives plus investments in new areas, the company can “get the business back to year-on-year earnings growth, right away. even if the macro environment stays the same” and even if revenue growth stays the same.

Meanwhile, Alibaba flagged its cost-cutting effort earlier this year and continues to push it.

“In the coming quarters and the rest of this fiscal year, we will continue to pursue a strategy of cost optimization and cost control,” Toby Xu, Alibaba’s chief financial officer, said during the call. the company’s earnings press conference this month.

Xu said the Chinese e-commerce giant had “narrowed its losses” in some of its strategic businesses.

Where does growth come from?

Alibaba and Tencent had to strike a delicate balancing act to convince investors that while costs were being cut, they were still investing in the future.

“Let them come back [the] income growth path, cost optimization alone is not enough. They need to find new growth drivers,” Winston Ma, an adjunct professor of law at New York University, told CNBC via email.

Alibaba has been focusing on boosting its cloud business, a regional executive and investors believe. the key to making better profits at the company in the future. The cloud was Alibaba’s fastest-growing sector by revenue in the June quarter.

Meanwhile, Tencent talked about the potential ads in its WeChat short video feature to become a “significant” source of revenue in the future. run by Tencent WeChat, China’s largest messaging app with over a billion users.

Alibaba will continue to focus on areas with “long-term potential” such as cloud computing and overseas e-commerce, Chelsey Tam, senior equity analyst at Morningstar, told CNBC. “For unprofitable businesses, it will assess the costs and benefits.”

Ivan Su, senior equity analyst at Morningstar, said that Tencent has “done a really good job of balancing long-term investments and short-term profitability.”

“If you look at the cost initiatives they’ve announced, some of the cuts are permanent, such as migrating to the cloud and closing unprofitable businesses, while the Other activities (retracting marketing budgets and slowing hiring) are more temporary in nature, so there are many levers they can pull to create such a balance,” says Su.

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