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MarketScreener Homepage  >  Equities  >  Stock Exchange of Hong Kong  >  Tencent Holdings Ltd    0700   KYG875721634

TENCENT HOLDINGS LTD

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Chinese tech firms' search for growth seen boosting costs in March quarter

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05/09/2019 | 02:55am EDT
Sign of Baidu is seen on a glass at its booth during the Digital China exhibition in Fuzhou, Fujian

BENGALURU (Reuters) - Three of China's biggest tech companies are expected to report that they ramped up or broadly maintained their pace of quarterly spending to develop new technology and push into relatively new markets, as current growth drivers stall.

Used to rapid growth rates until recently, Chinese tech giants including Tencent and Baidu are seeking new revenue streams. But that has not come cheap as they shell out more to hire the best in a competitive job market and keep spending to attract customers in a slowing economy.

Social media and gaming company Tencent, search engine provider Baidu and e-commerce firm JD.com are expected to report an average 42 percent jump in operating expenses in the March quarter compared with a year earlier, against a 19 percent rise in revenue, according to analysts estimates from Refinitiv.

The exception - for the latest quarter at least - is Alibaba, China's largest listed company, which is expected to cut operating expenses for the first time in its history as it tries to shore up its bottom line after a sharp drop in profitability in the year-ago period.

>(For graphic on top Chinese tech companies sales, profit and costs, click
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"Competition is more intense and customer acquisition costs are increasing," said Jerry Liu, who heads the China Internet research team at UBS.

"High quality users are more expensive to acquire than before, and newer users tend to spend less initially."

Tencent, for instance, is looking for new sources of revenue in its nascent cloud services as it attempts to diversify from its core Chinese gaming business, which has been beset by regulatory problems.

But such diversification helped push up its operating costs 46 percent last year, outpacing revenue growth of 32.5 percent. For the March quarter, the social media and gaming giant is likely to keep up the same pace of spending, pushing down net income by 14 percent.

Revenue growth is expected to have slipped to 20 percent, the slowest in 15 quarters.

Martin Bao, an analyst at ICBC International, said that while revenue could be unlocked in relatively untapped markets such as the older generation in top-tier cities and people in rural areas, returns from such investments would take time.

"The user conversion price is much higher, but the profits will come slower ... the purchasing power of these users is much lower than existing users," he said.

U.S. counterparts are spending as well, but at a calmer pace. The big five - Apple, Facebook, Alphabet, Amazon and Microsoft - reported a 13 percent rise in operating costs on average in the March quarter as revenue rose nearly 10 percent.

WAGE PRESSURE

With rising wages lifting costs, some companies have responded by restructuring workforces - not just by cutting jobs but also by promoting younger staff to boost productivity.

"Wages for tech workers in big centres like Beijing, Shanghai and Shenzhen are increasing," said Taipei-based technology analyst Sam Reynolds. "The jolt in wage increases has been substantial over the past five years and is creeping upwards."

JD.com CEO Richard Liu recently berated "slackers" in his firm amid reports that the company, China's second-largest e-commerce firm, has cut many jobs.

It is scheduled to announce its March quarter earnings on Friday and analysts expect revenue growth of 20 percent, the slowest to date at a company that is yet to post an annual profit. It has aggressively clamped down on the pace at which its costs are rising and is expected to eke out a 9.3 percent rise in quarterly income.

Baidu - which is trying to rebrand itself as a developer of artificial intelligence used in applications including self-driving cars - is expected to post an 82 surge in operating costs and a more than three-quarter slump in profit.

Bucking the trend is Alibaba, which is estimated to have nearly halved costs in its fourth quarter ended March 31, helping it post an estimated 13.4 percent rise in net profit. The company is expected to boost spending again, starting in the September quarter.

Alibaba and Tencent are due to report earnings on May 15 and Baidu on May 17.

(Reporting by Gaurav Dogra and Patturaja Murugaboopathy in Bengaluru; Additional reporting by Josh Horwitz in Shanghai; Writing by Sayantani Ghosh; Editing by Stephen Coates)

By Gaurav Dogra and Patturaja Murugaboopathy

Stocks mentioned in the article
ChangeLast1st jan.
ALIBABA GROUP HOLDING 3.50% 165.51 Delayed Quote.16.66%
BAIDU 2.29% 116.95 Delayed Quote.-27.91%
JD.COM 3.40% 28.26 Delayed Quote.30.58%
TENCENT HOLDINGS LTD 1.58% 334.2 End-of-day quote.6.16%
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Sales 2019 397 B
EBIT 2019 120 B
Net income 2019 93 703 M
Finance 2019 72 679 M
Yield 2019 0,35%
P/E ratio 2019 29,77
P/E ratio 2020 24,33
EV / Sales 2019 6,79x
EV / Sales 2020 5,19x
Capitalization 2 771 B
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