Alibaba, Baidu and Tencent signal first steps in bumpy recovery


Eight months ago, the future of China’s biggest internet companies looked grim. Covid-era lockdowns crushed sales and Beijing’s harsh tech regulations had spooked even brave China investors. Shares of Alibaba, Baidu and Tencent fell to some of their lowest levels in several years.

With China’s economy now reopening, the tech giants released earnings reports this week that showed first signs of recovery. But the financial results, the first issued since the end of “zero Covid” restrictions, also reflected the uneven pace of China’s economic rebound and signaled that the companies’ makeovers, while underway, are likely to be rocky will be

Baidu, China’s leading internet search company, and Tencent, owner of the ubiquitous messaging app WeChat, both recorded double-digit revenue growth in the first three months of the year over the same period in 2022, marking the first time in more than a year she had reached that level.

Revenue rose 10 percent at Baidu, which said Tuesday that strong digital ad sales had continued in the current quarter. Tencent on Wednesday attributed its 11 percent revenue climb in part to a rebound in digital payments as Chinese consumers began to spend money again after a long dry period. Tencent, China’s dominant video game company, also benefited last year from easing restrictions on gaming licenses after a nine-month freeze.

On Thursday, Alibaba reported that revenue rose 2 percent from a year earlier, below analyst estimates. The core online e-commerce and cloud computing unit reported sales declines in the single digits, although online shopping began to recover in March, the company said.

The reports followed a turbulent two years for tech companies under Beijing’s tight regulations. After Alibaba founder Jack Ma criticized financial regulators in 2020 for stifling innovation, officials halted the public offering of Ant Group, a financial technology company built by Mr. Ma.

In January, a month after China abruptly rolled back its “zero Covid” restrictions under public pressure, a top official at the Bank of China said the campaign against tech companies was “basically complete.” China’s top leader, Xi Jinping, now hopes the country’s tech industry can provide a lifeline for growth. And emboldened by an escalating technology competition with the United States, China is eager to revive its beleaguered titans.

“The worst time is over for them policy-wise,” said Tian Hou, the founder of TH Data Capital, a data analytics firm in Beijing. “The government now wants to use these Internet companies to create more jobs, innovate and catch up with the United States.”

The initial reaction of investors to the results of the first quarter of the companies was silent. Shares of Baidu and Tencent were roughly flat in Hong Kong this week, although both have rallied since October. Alibaba’s stock fell about 6 percent on Friday, but was up about 2 percent for the week.

The companies’ fortunes will remain tied to China’s economy. Local governments are in debt. The property sector, long a driver of growth, is sputtering. Data released by the National Bureau of Statistics of China for April underwhelmed analysts: Chinese spent more on food, but seemed to avoid items such as cosmetics and cars. Youth unemployment reached a record of 20.4 percent.

“People are going on vacation, but they’re not spending compared to pre-pandemic levels,” said Bruce Pang, chief economist for Greater China at Jones Lang LaSalle, the global real estate and investment advisory firm. “They are cautious because they have low confidence in job prospects and future sources of income.”

Alibaba is in the midst of a dramatic overhaul. It announced a major reorganization in March that split the company into six units. And this week it announced a spin-off of its prized cloud division, which the company said would be completed within 12 months to prepare for a public listing. The e-commerce giant also said it is exploring a public offering for its grocery chain and logistics arm, after a series of regulatory probes put off many promising tech companies from going public.

The split of Alibaba, one of China’s most iconic business empires, shows the level of reassessment that is happening in the tech sector. For years, China’s Internet companies swelled as millions of Chinese went online. Recently, that migration has reached a ceiling, and companies are competing intensely for the same customers.

All three of China’s major internet companies are hoping to tell investors a new story, one linked to artificial intelligence, the new technology underlying services like ChatGPT that promise to uproot old ways of doing business.

Daniel Zhang, the chairman of Alibaba who will also serve as chief executive of Alibaba’s upcoming independent cloud unit, described AI as a technology that will “reshape every aspect of our society.”

The companies hope that investments in artificial intelligence will pay off for their cloud computing units, a technology that underpins AI services. Baidu said its AI cloud division reported its first profit last quarter.

Earlier this year, Baidu and Alibaba unveiled artificial intelligence systems similar to ChatGPT, which was developed by the Silicon Valley research lab OpenAI. Baidu said it had applied for approval for the advance after the Chinese cyberspace watchdog published guidelines for the AI ​​systems in April.

Tencent has made “good progress” on its own AI model, the company said on Wednesday, with teams planning new AI offerings, though it did not elaborate.

The companies are targeting their AI services at businesses as well as businesses — in part because mass-appeal chatbots could disrupt China’s firm grip on information. Alibaba and Baidu each said more than 100,000 companies had lined up to test their artificial intelligence products.

Alibaba, Baidu and Tencent are engaged in makeovers at a difficult time. Beijing’s grip on the economy is tighter than ever. Intensified rivalries with the United States have deprived Chinese companies of access to some modern microchips to develop the most advanced artificial intelligence systems. And analysts say a lucrative pool of domestic customers — China’s state-owned enterprises — are rejecting private cloud-computing providers in favor of government-backed alternatives.

Recently, US officials have called for a review of Chinese cloud providers such as Alibaba on national security grounds. Alibaba said Thursday that its cloud business declined in the latest quarter in part because a major customer withdrew its international service for “non-product reasons.”

Those difficulties, both in China and abroad, are keeping some investors away, knowing that the Internet companies are unlikely to return to the growth rates they had a decade earlier. Others think they deserve a second look.

“I would suggest forgetting the past,” said Kenny Wen, head of investment strategy at asset management firm KGI Asia in Hong Kong. “Now they are coming back and we are slowly seeing improvement. We have to give them a new evaluation standard.”

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