Chinese tech giants had their worst quarterly growth on record, thanks to Beijing’s zero-Covid policy – CNBC

Chinese technology giants including Alibaba have seen slower-to-no-growth as China's economy faces weakness as a result of Beijing's zero-Covid policy.

Qilai Shen | Bloomberg | Getty Images

Chinese technology giants are coming off the back of their worst quarter of growth in history as a big slowdown in the world's second-largest economy, stoked by Beijing's strict Covid policy, takes its toll.

In the second quarter of the year, e-commerce firm Alibaba posted its first ever flat year-on-year quarterly revenue growth and social media and gaming company Tencent reported its first sales decline on record. JD.com, China's second-largest e-commerce player, posted its slowest revenue growth in history, while electric vehicle maker Xpeng posted a wider-than-expected loss as well as weak guidance.

Combined, these companies have a market capitalization of more than $770 billion.

In the June quarter, China saw a resurgence of Covid cases. China has stuck to its so-called "zero-Covid" policy, a strict set of measures including lockdowns and mass testing to contain the virus. Major cities, including Shanghai, were locked down for several weeks.

China's economy grew just 0.4% in the second quarter, and that impacted the strength of the consumer as well as spending from companies in areas like advertising and cloud computing.

Those headwinds fed through to China's technology giants.

"Retail sales decreased year-over year in April and May due to the resurgence of Covid-19 in Shanghai and other major cities, and has slowly recovered in June," Daniel Zhang, CEO of Alibaba, said on the company's earnings call this month.

Alibaba's logistics networks in China were also affected, and it said some of its cloud computing projects were delayed.

Tencent, the owner of the WeChat messaging app and one of the world's biggest gaming firms, also felt the impact of the zero-Covid policy. Its fintech services revenue grew more slowly than in previous quarters as fewer people were going out and using its WeChat Pay mobile payments service. The company's online advertising revenue also fell sharply as companies tightened their budgets.

JD.com fared well in the second quarter because it controls a lot of its logistics supply chain and inventory. However, it did see costs rise for fulfilment and logistics in the face of lockdowns.

Electric carmaker XPeng said it expects to deliver between 29,000 and 31,000 vehicles in the third quarter. But that was weaker guidance than the market expected. As well as seasonal weakness, XPeng president Brian Gu said that "traffic in the stores are less than what we've seen before because (of the) post-COVID situation."

China's internet giants enjoyed a boom during the pandemic as people turned to online services such as shopping and gaming amid lockdowns. That has made year-on-year comparisons harder. Now, the Chinese economy is facing a number of headwinds this year that has made the macroeconomic environment even tougher.

China's technology sector continues to contend with a much stricter regulatory environment. Over the past two years, China has introduced tougher policy in areas from gaming to data protection.

With growth rates falling more sharply than in previous years, investors are cautious on their outlook.

"What I find interesting is how the narrative on the big tech companies ... has changed: early on in the pandemic, COVID was expected to benefit the big online platforms at the expense of 'offline' businesses, as much of the economy would be stuck at home with little other choice than to shop online and entertain themselves online," Tariq Dennison, wealth manager at GFM Asset Management, told CNBC via email.

"The recent revenue and earnings dip hitting these big tech names reflects zero COVID concerns short-term, but also has many long-term investors, including myself, revising our estimates of the long-term growth prospects of these names."

Dennison said that Tencent, Alibaba and JD.com previously sustained more than 25% annual revenue growth and a long-term slowdown would be a concern.

"If this quarter is a sign of a permanent slowdown to single digit growth rates, rather than just a temporary dip, that of course would have a significant impact on long-term valuations of these shares," Dennison said.

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Chinese tech giants had their worst quarterly growth on record, thanks to Beijing's zero-Covid policy - CNBC