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China’s Alibaba and Tencent give attention to cost cuts amid slowing growth

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

Kuang Da | Jiemian News | VCG | Getty Images

Chinese tech giants Alibaba and Tencent often speak about all of their innovations and latest products during earnings calls with investors.

However the second quarter was different. Executives at China’s two largest tech firms focused on something just a little less flashy — keeping costs down.

It comes after Alibaba and Tencent posted a set of second-quarter results that confirmed these once free-wheeling and high-flying behemoths should not growing anymore.

China’s biggest e-commerce player Alibaba reported flat growth for the primary time ever for its April to June quarter. On Wednesday, gaming and social media giant Tencent posted its first-ever quarterly year-on-year revenue decline.

Alibaba and Tencent have felt the consequences of a Covid-induced economic slowdown in China that’s hitting the whole lot from consumer spending to promoting budgets. The tightening of domestic technology regulation in areas from antitrust to gaming over the past yr and a half can also be weighing on results.

As revenue stays under pressure, each giants have seemed to be more disciplined of their approach to spending.

“In the course of 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 Wednesday. “This enabled us to sequentially increase our earnings despite difficult revenue conditions.”

Indeed, Tencent’s profit, when excluding certain non-cash items and impact of merger and acquisition transactions, rose 10% from the previous quarter.

Tencent President Martin Lau said the corporate exited non-core businesses equivalent to online education, e-commerce, and game live streaming. The corporate also tightened marketing spend and cut down low areas of investment equivalent to user acquisition. Tencent’s selling and marketing expenses fell 21% year-on-year within the second quarter.

The Shenzhen-headquartered company’s headcount was also down by 5,000 versus the primary quarter.

James Mitchell, chief strategy officer at Tencent, said that with these initiatives plus investments in latest areas, the corporate can “return the business to year-on-year earnings growth, even when the macro environment stays because it is today” and even when revenue growth stays flat.

Alibaba meanwhile flagged its cost cutting drive earlier this yr and continues to push forward with it.

“In the approaching quarters and the rest of this fiscal yr, we are going to proceed to pursue the strategy of cost optimization and price control,” Toby Xu, chief financial officer at Alibaba, said in the course of the company’s earnings call this month.

Xu said the Chinese e-commerce giant has “narrowed losses” in a few of its strategic businesses.

Where’s the expansion coming from?

Alibaba and Tencent have needed to play a fragile balancing act to persuade investors that while costs are being cut, they’re still investing in the longer term.

“For them to return to [the] earnings growth path, cost optimization only will not be enough. They need to seek out latest growth drivers,” Winston Ma, adjunct professor of law at Recent York University, told CNBC via email.

Alibaba has been specializing in boosting its cloud computing business, an area executives and investors consider is key to raised profitability at the corporate in the longer term. Cloud was Alibaba’s fastest-growing area by revenue within the June quarter.

Meanwhile, Tencent talked up the potential for ads in its WeChat short-video feature to grow to be a “substantial” revenue source in the longer term. Tencent runs WeChat, China’s largest messaging app with over one billion users.

Alibaba will proceed to give attention to areas with “long-term potential” equivalent to cloud computing and overseas e-commerce, Chelsey Tam, senior equity analyst at Morningstar, told CNBC. “For the unprofitable businesses it can evaluate the price and advantages.”

Ivan Su, senior equity analyst at Morningstar, said that Tencent has “done a very good job balancing long-term investments and near-term profitability.”

“If you happen to take a look at the price initiatives they announced, among the reductions are everlasting, equivalent to cloud migration and shutdowns of unprofitable noncore businesses, while others (marketing budget pullback and hiring slowdown) are more temporary in nature. So there’re multiple levers they will pull to create such balance,” Su said.

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