The tech group suffers from competitive pressure. But that’s just one of several factors that weigh on it.
(Photo: AP)
When Tencent was recently no longer the most valuable Chinese company on the stock exchange, but had to give up this position to the alcohol manufacturer Kweichow Moutai for a short time, some analysts spoke of entry prices at the largest tech group in the People’s Republic.
After a year and nine months, the stock price of the group, which operates the Wechat app, which is omnipresent in China and offers international computer games such as League of Legends, must come to an end. The company is healthy.
The stock’s valuation is low, with a price-to-earnings ratio of about half that of Alphabet. Tencent’s risk of being delisted has dropped drastically after the United States and China reached an agreement over the audit of US-listed Chinese stocks.
True, but there are four more weighty negative factors — and they should continue to weigh on Chinese tech stocks going forward. This was most recently demonstrated when a week-long demonstration of power by state and party leader Xi Jinping drove investors to sell – especially tech stocks.
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Stress factor one is Chinese politics. The interpretation of the events at the party congress is consistent among China experts: the regulatory interventions of the Communist Party are by no means decreasing. And even if parts of the tech regulation have so far had a substantive justification, the advances often came unexpectedly and were not just justified in terms of content. They overshot the target and were a communicative disaster for both companies and investors.
With the economy at home, the tech companies are also weakening
It is not for nothing that Chinese tech stocks started falling with a regulatory push in February and March 2021. The Nasdaq Golden Dragon Index has since lost seven years of gains.
In the weekly column we take turns writing about innovation and economic trends in Asia.
(Photo: Klawe Rzeczy)
Chinese tech companies are now aligning their strategy with regulation. Tencent, for example, is saying goodbye to areas such as online education and game streaming. This may be called flexible alignment of the business strategy with the environment, but in fact it is remote control by the KP. It remains to be seen how providers like the video platform Bilibili will succeed in the new regulatory environment that puts entertainment technology on the back burner.
The second negative factor is the weaker growth of the Chinese economy. Tech stocks are not the most consumption-dependent stocks, but the slump is affecting companies like Tencent or Alibaba via lower online advertising revenues or online sales.
The growth of 3.9 percent in the third quarter corresponds to a strong recovery compared to the 0.4 percent in the previous quarter. But many negative factors such as a decline in the working population and the serious problems in the real estate sector continue to weigh on the economy.
>> Read also: Over-indebtedness, accidents, suicide: Asia’s tech companies have a dark side
Contrary to what some analysts had hoped, there is no foreseeable end to the zero-Covid policy anytime soon. First of all, the KP is likely to want to have a large part of the population vaccinated with the mRNA vaccine developed in China. But this is not even approved.
Asia Technonomics
In Germany, there is still much broader and more detailed reporting on economic and innovation trends from the USA than from Asia. Wrong, we think. In our weekly Asia Techonomics column, we therefore want to bring you closer to the most exciting innovation and economic trends from the most dynamic region in the world.
According to the International Monetary Fund (IMF), the entire Asian region lost 1.6 percent of its economic output last year – far less than the USA or Europe. This decline will be far more than compensated for in the current year with expected growth of 7.3 percent. Asia is thus consolidating its economic importance for the world.
As Europe slips into the third Covid wave, infection and death numbers have been far better in Asia since the pandemic broke out. Last but not least, the corona crisis has shown that it is worth taking a closer look at Asia in order to learn for your own country.
We see that our readers are interested in exactly these topics. That’s why we want Asia Techonomics to take a look every week from now on at new technology ideas from Japan or China, billion-euro corporations that are stirring up the stock market in South Korea or Indonesia, tech investments in the Indian market, tests from cuddly robots to laboratory meat restaurants. Nicole Bastian wishes you a lot of fun!
China expert Kerry Brown from King’s College in London said this week that he could not imagine where an imminent sustained improvement in economic development should come from. The world’s second largest economy is entering a new period of lower growth.
And it’s not just the economy that’s more mature, the business models of many Chinese tech companies are too – the third stress factor. Sales at Tencent are stagnating, and even fell for the first time in the second quarter. Among other things, the competition in the games division has become much tougher. Cutting costs is the order of the day.
Finally, the fourth pressure factor is in the USA. With the recent export restrictions for semiconductors to China, the government of US President Joe Biden has shown what powerful levers it has to curb China’s technological development. And that containment remains a goal in Washington. However, China continues to be heavily dependent on international cooperation, particularly in the field of innovation.
The mid-week rally in tech stocks is therefore likely to be little more than a short-sighted technical reaction.
In the Asia Techonomics column, Nicole Bastian, Sabine Gusbeth, Dana Heide, Martin Kölling and Mathias Peer take turns commenting on innovation and economic trends in the world’s most dynamic region.
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