China tech sell-off mounts amid earnings worries

HONG KONG • Chinese technology stocks slumped yesterday as weak corporate earnings coupled with a dimming global growth outlook intensified selling.

The Hang Seng Tech Index was down about 3.8 per cent yesterday, with Tencent Holdings and Alibaba Group Holding weighing the most. Tencent tumbled 6.5 per cent after the tech behemoth reported its slowest revenue gain since going public in 2004.

Xiaomi Corp also fell ahead of its earnings release later in the day.

Yesterday's rout tracks a global sell-off, sparked by disappointing earnings from United States consumer stalwarts that suggested an economic downturn may be on its way.

For China tech, top officials' repeated commitments to support the battered sector - the latest from Premier Li Keqiang on Wednesday - have lacked the firepower to lift shares.

Tencent executives said it will take time for Beijing's promises to translate into action.

"Tencent's results suggest growth will be slower for longer, so the read through to the rest of China's consumer facing technology companies is negative from a fundamental perspective," said Mr Vey-Sern Ling, a senior analyst with Union Bancaire Privee.

"However, there are reasons to be more optimistic in the second half, given the increasing supportive signals from senior levels of the government."

Weighing broadly on Chinese stocks are new lockdowns following fresh Covid-19 outbreaks in key cities.

Policymakers have shown little signs of letting up on a zero-Covid-19 policy, even as the damage to economic growth and businesses becomes more evident.

Tencent's disappointing numbers and downbeat assessment on Wednesday bode ill for an industry struggling to come to grips with a new era of cautious expansion, after Beijing's year-long clampdown.

"We can clearly see that from the most senior level, there's a pretty clear signal of support released. But for this to translate into real impact on our business, there is going to be a time lag," Tencent president Martin Lau told analysts on a conference call.

"It would take the specific regulators and ministries to translate this direction into real action."

Bernstein analyst Robin Zhu called Tencent's results "the one where almost nothing went right" in a post-earnings report.

"Given the lack of new game launches and headwinds in advertising, and the impacts of various regulatory changes over the past year, Tencent's Q1 earnings were widely expected to look weak," he noted. "That said, a quarter where almost every line fell below consensus and our estimates still felt like a kick in the shins."

Tencent posted its slowest revenue gain since going public in 2004. Sales rose 0.1 per cent to 135.5 billion yuan (S$28 billion) for the three months ended March, missing the average forecast.

Net income slid 51 per cent to 23.4 billion yuan, lagging behind estimates despite a big gain from the sale of stock in Singapore's Sea.

Tencent has so far largely escaped direct scrutiny from Beijing, but not fallout from the broader clampdown and economic malaise. It has shed roughly US$500 million (S$694 million) of market value since its 2021 peak, even as the company studiously endorses Beijing's efforts to curb excesses in its once free-wheeling Internet sector.

Online advertising sales slid a worse-than-expected 18 per cent after contracting for the first time in the December quarter.

The business has been battered by China's weakening economy and competition against TikTok-owner ByteDance, while big marketers of past years including online tutors and insurers tightened budgets after falling victim to separate regulatory crackdowns.

Tencent's bread-and-butter gaming division - the world's largest - also barely expanded revenue.

It is still on the wait-list for new monetisation licences, after regulators last month approved the first batch of domestic releases since July.

The company, expecting fewer gaming approvals in coming years, has already recalibrated its pipeline to focus on quality over quantity, strategy chief James Mitchell said.

Given the new realities, executives said in March that international games, cloud software and WeChat's video accounts will be their major strategic foci.

But overseas gaming sales expanded just 8 per cent in constant currency terms, trailing the double-digit growth of previous periods, in part because of a tough comparison from a year earlier when the world was largely locked down.

Tencent's fintech and cloud division has become its No. 1 revenue driver. But its 10 per cent growth was also worse than expected after Covid-19 lockdowns in cities like Shanghai and Shenzhen.

BLOOMBERG