China’s technology stocks have come under heavy selling pressure throughout 2021 and 2022 as the government has cracked down on monopolistic practices.
Worries over regulation and further potential government action have also seen sentiment remain muted for China’s technology sector.
As there’s talk of China’s economy potentially reopening in 2023, and an easing up of the tough approach to tech companies, it’s worth seeing how the companies in the sector are actually performing.
Luckily, investors got to see how the two biggest Chinese technology stocks – Tencent Holdings Ltd (HKEX: 700) and Alibaba Group Holding Ltd (HKEX: 9988) (NYSE: BABA) – have done.
Both companies reported their latest quarterly earnings earlier this month. Here’s what investors should know about how these two Chinese tech giants fared.
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Tencent – Special Meituan Dividend
For Tencent, which reported its 3Q2022 results on 16 November, the biggest news was that it would return capital back to shareholders in the form of a special dividend.
Instead of cash, though, this special dividend would come in the shape of Meituan Dianping (HKEX: 3690) shares. That’s because Tencent owns a US$22 billion stake in the online food delivery and travel firm.
Tencent shareholders will receive 1 Meituan share for every 10 Tencent shares they hold. At Meituan’s current share price (of HK$136), that equals an effective special dividend per share (DPS) of HK$13.60.
The special dividend will be distributed to shareholders in March 2023 and will mean Tencent will have divested nearly all of its stake in Meituan.
Tencent Business Still Faces Obstacles
On the business front, the picture was less appealing. Revenue fell for the second consecutive quarter, falling 2% year-on-year in the third quarter of 2022 to RMB 140 billion (US$19.5 billion).
Meanwhile, Tencent’s net profit increased by 2% year-on-year to RMB 32.3 billion. Its operating profit of RMB 40.9 billion for Q3 2022 was broadly flat year-on-year while its operating margin of 29% was also stable.
However, its gaming division still faces headwinds as domestic gaming sales dropped 7% year-on-year during the quarter. This was partially offset by its overseas gaming division, which saw sales increase 3% year-on-year.
Tencent has seen only one game approved for domestic launch since the Chinese government resumed approving games in April.
There was a bright spot in its FinTech and Business Services division, which saw revenue grow 4% year-on-year to RMB 44.8 billion.
Overall, it was another challenging quarter for the WeChat and gaming giant. Divesting its stake in Meituan looked to be an attempt to unwind its multiple positions in China’s key tech players while also returning capital to shareholders.
While management hasn’t outlined any timetable for divestments, Tencent owns sizeable stakes in other listed tech companies such as Kuaishou Technology (HKEX: 1024) and Pinduoduo Inc (NASDAQ: PDD).
Tencent may take the decision over the next 12-18 months to divest more of its investment holdings to appease Chinese regulators further and return capital back to shareholders.
Alibaba – Buyback Programme Extended
For e-commerce and cloud computing giant Alibaba, 3Q2022 earnings were worse than expected.
The company did manage to outdo Tencent in that it reported an increase in quarterly revenue, which rose 3% year-on-year to RMB 207 billion. However, this still fell short of expectations.
CEO Daniel Zhang commented that “consumption appetite was weak” during the quarter given that China’s resurgence of Covid has impacted many areas.
He also commented that the famous 11.11 Singles’ Day sales were flat from last year and that from October to early November, around 15% of delivery areas were impacted by abnormal or suspended services because of Covid disruption.
Alibaba’s core e-commerce business is also coming under threat from the likes of Douyin and Kuaishou, who have strongly increased their numbers of buyers during the current 11.11 sales period. Alibaba’s cloud computing division also saw a deceleration as it posted just 4% year-on-year revenue growth to RMB 20.8 billion.
The big positive news came from an extension of its US$25 billion share buyback programme that Alibaba announced back in March of this year.
By mid-November, the company had deployed US$18 billion to repurchase shares. In addition to announcing its quarterly earnings, Alibaba management also said it would be upsizing the current repurchase programme by another US$15 billion.
This would see Alibaba continue repurchasing shares until the end of the fiscal year 2025 (FY2025).
Tencent and Alibaba Returning Capital
Overall, it was another challenging quarter for China’s two most famous technology companies.
The big theme of this most recent earnings result was the fact that both companies are happy to return capital to shareholders.
Both businesses are still cash generative although each faces its own unique business challenges.
While Tencent and Alibaba could benefit a lot if the Chinese economy starts to open slowly to the world over the next year, in the meantime it looks like their management teams are focusing on effectively managing costs, appeasing regulators and returning capital to shareholders.
4 Stocks This Week is not a recommendation from us to buy or sell any of these stocks. For investors who are keen to find out more, you should continue researching about them before making your investment decisions.
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