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ALIBABA GROUP HOLDING

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Alibaba, Tencent Post Robust Results

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05/15/2019 | 01:57pm EDT

By Shan Li and Stu Woo

BEIJING -- China's two biggest internet companies are continuing to boom, even as the Chinese economy slows, but Tencent Holdings Ltd. and Alibaba Group Holding Ltd. are looking to new businesses to sustain their staggering growth.

Both Alibaba and Tencent reported robust quarterly earnings on Wednesday, bucking a general economic slowdown, which the trade feud with the U.S. could exacerbate. The internet giants also signaled that as their core businesses mature they would focus on nascent initiatives.

The two companies thrived by winning over hundreds of millions of consumers, with Alibaba dominating e-commerce and Tencent focused on videogames. Now that new customers are getting harder to find, Alibaba is building up its food-delivery and cloud-computing units, for example, while Tencent explores financial services.

"The saturation is obvious for both Tencent and Alibaba," said Steven Zhu, an analyst at Pacific Epoch. "When you have a larger base, naturally your growth will revert to the mean."

On Wednesday, Alibaba posted a 51% increase in sales for both the fourth quarter and for the fiscal year ended March 31, but excluding acquisitions, sales rose 39% over the year. Alibaba forecasts that revenue growth will slip in the coming year to 33%. Alibaba's net income more than tripled to 25.83 billion yuan ($3.85 billion), largely because of acquisitions and other one-time matters during the quarter.

The online retailing giant said it would focus on gaining customers in China's less-developed cities -- known as tier three and below -- as it taps out on expansion in big, wealthy metropolises like Beijing, Shanghai and Shenzhen. Alibaba's core e-commerce business grew 51% to 93.5 billion yuan ($13.93 billion) compared with the same period a year ago.

Alibaba Executive Vice President Joseph Tsai said in a call with analysts that the combined 500 million residents of those lower-tier cities would triple their overall spending to roughly $7 trillion over the next 10 years.

Mr. Zhu, the analyst, said Alibaba may not gain that much for two reasons: Such customers are less affluent, and Alibaba must fend off Pinduoduo Inc., a smaller rival that sells low-cost items.

Likewise, Tencent is dealing with a slowdown in its core videogame business. The Shenzhen-based company was battered most of last year by a regulatory freeze on approving new games. Regulators have started greenlighting titles in recent months; Tencent reported that gaming revenue slipped 1% to 28.51 billion yuan in the first quarter ended March 31.

Tencent said net profit for the period rose to 27.21 billion yuan, beating a forecast of 19.9 billion yuan from analysts polled by FactSet and higher than the 23.29 billion yuan reported a year earlier. Its first-quarter revenue increased 16% to 85.47 billion yuan.

Tencent last year conducted its first major restructuring in six years to put more emphasis on providing services to business clients. On Wednesday, the company for the first time broke out details for a new business segment that covers financial technology and business services, which includes its popular mobile-payment platform on its ubiquitous social-networking app WeChat. Sales in that division, which also includes cloud computing, rose 44% in the quarter compared with the same period a year earlier, to 21.8 billion yuan.

Both companies are pushing aggressively into China's cloud computing business. Alibaba, which controls about 45% of China's cloud market, reported that sales in that division had climbed 76% to 7.73 billion yuan in its fourth quarter. In a Wednesday call with analysts, Tencent President Martin Lau said the company was investing in servers and employees to cater to corporate clients.

Shawn Yang, managing director of Blue Lotus Capital Advisors, said Tencent was investing for the long haul as cloud computing takes years to build up. Tencent currently controls about 10% of the market in China.

"It's very important for their future," Mr. Yang said. "So far the revenue contribution and profit contribution are still limited. It's still early stages."

James Mitchell, Tencent's chief strategy officer, told analysts that China's economic slowdown and global volatility in stock markets had started eating into its advertising business, with online ad revenue growth slowing to 25% to 13.38 billion yuan. The automobile and real-estate sectors notably had curtailed ad spending, he said.

Write to Shan Li at shan.li@wsj.com and Stu Woo at Stu.Woo@wsj.com

Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING -1.11% 175.24 Delayed Quote.27.85%
TENCENT HOLDINGS LTD -0.24% 332.6 End-of-day quote.5.65%
TENCENT HOLDINGS LTD End-of-day quote.
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Financials (CNY)
Sales 2020 510 B
EBIT 2020 94 185 M
Net income 2020 89 118 M
Finance 2020 204 B
Yield 2020 -
P/E ratio 2020 37,8x
P/E ratio 2021 27,9x
EV / Sales2020 5,92x
EV / Sales2021 4,42x
Capitalization 3 222 B
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Number of Analysts 51
Average target price 1 545,66  CNY
Last Close Price 1 237,60  CNY
Spread / Highest target 59,1%
Spread / Average Target 24,9%
Spread / Lowest Target -10,1%
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Managers
NameTitle
Yong Zhang Chief Executive Officer & Director
John Michael Evans President & Director
Yun Ma Executive Chairman
Wei Wu Chief Financial Officer
Jian Feng Zhang Chief Technology Officer
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