China's Alibaba and Tencent focus on cutting costs amid slowing growth

Alibaba has faced growth challenges amid regulatory tightening on China’s domestic technology sector and a slowdown in the world’s second-largest economy. But analysts believe the e-commerce giant’s growth could pick up through the rest of 2022.

Quang Da | Jiemian News | VCG | Getty Images

Chinese tech giants Ali Baba And the Tencent They often talk about all their innovations and new products during earnings calls with investors.

But the second quarter was different. Executives at China’s two largest tech companies have focused on something less flashy – cutting costs.

This comes after Alibaba and Tencent published a set of second-quarter results that confirmed that these once-free and high-flying giants aren’t growing anymore.

Reported the largest e-commerce company in China, Alibaba Steady growth for the first time ever In the quarter from April to June. On Wednesday, gaming and social media giant Tencent published a file First quarterly decline in revenue year over year.

Alibaba and Tencent felt the effects of a Economic slowdown caused by Covid in China This hits everything from consumer spending to advertising budgets. The tightening of domestic technology regulation in areas from antitrust to gaming over the past year and a half is also affecting results.

With revenue still under pressure, both giants appeared to be more disciplined in their approach to spending.

“During the second quarter, we actively exited non-core businesses, tightened our marketing spending, and trimmed operating expenses,” Tencent CEO Ma Huateng told analysts during a call on Wednesday. “This has enabled us to sequentially increase our profits despite challenging revenue conditions.”

In fact, Tencent’s earnings, when excluding certain non-cash items and the impact of mergers and acquisitions, were up 10% from the prior quarter.

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

The company’s headquartered in Shenzhen also decreased by 5,000 compared to the first quarter.

James Mitchell, Tencent’s chief strategist, said that with these initiatives as well as investments in new areas, the company can “return business to year-over-year earnings growth, even if the overall environment remains the same as today” and even if revenue growth remains flat.

Meanwhile, Alibaba announced its cost-cutting campaign earlier this year and continues to move forward with it.

“For the coming quarters and the remainder of the current fiscal year, we will continue to pursue our cost optimization and cost control strategy,” said Toby Xu, Alibaba’s chief financial officer, during the company’s earnings call this month.

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

Where does growth come from?

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

“They have to go back to him [the] Profit growth path, cost improvement alone is not enough. “They need to find new drivers of growth,” Winston Ma, assistant professor of law at New York University, told CNBC via email.

Alibaba is focused on boosting its cloud computing business, which is what executives and investors in the region believe Key to better profitability in the company in the future. Cloud was Alibaba’s fastest growing region in terms of revenue in the June quarter.

Meanwhile, Tencent talked about the potential of Ads in WeChat short video feature To become a “big” source of income in the future. Tencent runs WeChat, the largest messaging app in China with over 1 billion users.

Chelsea Tam, chief equity analyst at Morningstar, told CNBC that Alibaba will continue to focus on areas with “long-term potential” such as cloud computing and offshore e-commerce. “For unprofitable companies you will assess the cost and benefits.”

Evan Su, Senior Equity Analyst at Morningstar, said Tencent “has done a really good job of balancing long-term investments with near-term profitability.”

“If you look at the cost initiatives that have been announced, some of the cuts are permanent, like cloud migration and shutdowns of non-profitable non-core businesses, while others (declining marketing budget and hiring slowdown) are temporary in nature. So there are many cuts,” said Sue. The levers they can pull to create such a balance.