China’s tech giants have seen their worst growth since Covid-19

China’s tech giants are reeling from their worst growth in history as a major slowdown in the world’s second-largest economy, triggered by Beijing’s strict covid policies.

In the second quarter of the year, e-commerce giant Alibaba reported its first quarterly revenue growth and social media and gaming company Tencent reported its first sales decline. JD.com, China’s second-largest e-commerce player, posted its slowest revenue growth on record, while electric vehicle maker Xpeng posted a bigger-than-expected loss and weaker guidance.

Together, these companies have a market capitalization of more than $770 billion.

In the June quarter, China saw a resurgence of Covid cases. China has stuck to its so-called “zero-Covid” policy, including lockdowns and mass testing to contain the virus. Major cities, including Shanghai, were shut down for several weeks.

China’s economy grew just 0.4% in the second quarter, and that weighed on consumer strength and spending by companies in areas such as advertising and cloud computing.

Those headwinds have come in for China’s tech giants.

“Retail sales fell year-over-year in April and May due to the easing of Covid-19 in Shanghai and other major cities, and slowly recovered in June,” Alibaba CEO Daniel Zhang said on the company’s earnings call this month. .

Alibaba’s logistics network in China has also been affected, and some of its cloud computing projects have been delayed, he said.

Tencent, the owner of WeChat messaging app and one of the world’s largest gaming companies, has felt the impact of the zero-covid policy. Fintech services revenue grew more slowly than in previous quarters as fewer people went out and used WeChat Pay’s mobile payment service. As companies tighten their budgets, the company’s online advertising revenue has fallen sharply.

JD.com performed well in the second quarter as it controls more of its logistics supply chain and inventory. However, it has seen increased fulfillment and logistics costs in the face of lockdowns.

Electric car maker Xpeng said it expects to deliver 29,000 to 31,000 vehicles in the third quarter. But this was weaker guidance than the market expected. As well as the current weakness, Xpeng president Brian Gu said, “Traffic in stores is lower than we’ve seen before in the post-Covid situation (because).

Chinese internet giants have cheered as the outbreak worsens as people turn to online services such as shopping and gaming during lockdown. This made year-on-year comparisons even more difficult. Now, China’s economy has faced several headwinds this year, making the macroeconomic environment even more difficult.

China’s tech sector continues to contend with a highly regulated environment. Over the past two years, China has introduced stricter policies on everything from gaming to data protection.

Investors are cautious in their outlook as growth rates slow faster than in previous years.

What I find interesting is how the narrative on big tech companies has changed: at the beginning of the pandemic, it was expected that much of the economy would benefit from COVID at the expense of large online platforms at the expense of ‘offline’ businesses. They stay at home with little choice but to shop online and entertain themselves online,” Tariq Dennison, wealth manager at GFM Asset Management, told CNBC in an email.

“The recent revenue and earnings hit by these big tech names reflects zero of the short-term issues of COVID, but it has many investors, including myself, revising our estimates of these names’ long-term growth prospects.”

Dennison said that Tencent, Alibaba and JD.com have previously maintained annual revenue growth of more than 25% and a long-term slowdown will be a concern.

“If this quarter is not just a temporary blip, but a sign of a sustained slowdown into the single digits, that will certainly have a significant impact on the long-term valuations of these stocks,” Dennison said.