Tencent Q1 2023 & China Tech – Doldrums

Tepid resumption of consumption

• Tencent reported a return to YoY growth in Q1 in a sign that some consumer activity is coming back in China, but the shares did not budge as investors remain unwilling to invest in China given the less-than-spectacular economy and geopolitical events.
• Q1 2023 revenues / EPS were RMB150bn (up 11% YoY) / RMB2.63 (up 9% YoY) broadly in line with estimates but the market remains uninterested in very little that comes from China at the moment.
• Games revenues improved by 25% YoY while advertising was up 17% YoY which was offset by weaker revenue growth at social networks (6% YoY) and other revenue which more than halved although it is very small relative to the other businesses.
• Engagement and user numbers grew slightly, but the main story of these results is that Chinese users are out and about once again and have resumed some of the spending that was hammered by Covid Zero.
• The big question on everyone’s lips at the moment is whether there will be a Covid-related economic bounce in the Chinese economy this year.
• President Xi badly needs a recovery to regain some standing with the Chinese population after the problematic Covid policies, but he has, so far, declined to cut interest rates or make similar interventions.
• This is surprising as the economic data released in 2023 has not been particularly encouraging, especially as the official numbers often overstate how well the economy is functioning.
• Furthermore, none of the suppliers into China have seen any sign of an increase in demand meaning that there is a possibility that, in reality, China may not see any meaningful recovery this year.
• Tencent’s results are concrete evidence of a recovery in consumer spending, but it is clearly far from universal meaning that it is premature to assume that a rising tide at Tencent will float all boats.
• Alibaba reports its calendar Q1 (fiscal Q4) later today where I expect the numbers will echo what is being seen at Tencent and fall short of signalling a strong recovery.
• A tepid resumption of consumption is also not enough to get international investors off the fence and to reinvest in China.
• The increasing geopolitical tension and the regulatory scouring of the technology sector have made investors very nervous and it will take more than a sputtering recovery to overcome their fears.
• That being said, the risk of investing in Chinese Technology is probably now lower than it has been for a while as the regulatory crackdown is over, the VIE structure now has official recognition and the valuations remain extremely cheap.
• Despite its obvious attractions, Chinese technology remains a highly contrarian trade meaning that those who are in it (like me) may have to wait for a while before ownership of these stocks begins to normalise.
• China is committed to its technological independence in order not to repeat the problems it has in semiconductors and win a position as a global world power.
• However, in order to achieve this, it needs a thriving technology sector but what it has at the moment is a group of brow-beaten companies which are struggling to recover.
• This is why, if they do not recover on their own, I would expect some form of intervention such as lower regulation and oversight to bring them back to some semblance of their former glory.
• This is when we might see the market get off the fence and reinvest in the sector once again, but we might be waiting for a while.
• With valuations this low, one can be patient.