You thought China’s tech slowdown was bad

0

Comment

For the first time in history, China’s two biggest tech companies saw revenue declines as the country faces unprecedented growth hurdles and an uncertain outlook. But 3,000 kilometers away, even greater challenges await one of Southeast Asia’s largest companies.

Sea Ltd., which operates online games and e-commerce portals, grew 29%, the slowest in nearly five years. We tend to think that increased revenue is better than decreased, but in the case of Singapore-based Sea, every dollar brought in through its e-commerce business is wasting money. At least Tencent Holdings Ltd. and Alibaba Group Holding Ltd. have continued to generate profits even when turnover declines.

Rising global inflation and shaky economic growth prompted Sea in May to cut its full-year revenue forecast for e-commerce, which accounts for about 52% of the company’s total sales, from $400 million. dollars to reach a range of 8.5 to 9.1 billion dollars. This month, he rejected those guidelines entirely.

In our efforts to adapt to growing macroeconomic uncertainties, we are proactively shifting our strategies to focus more on efficiency and maximizing the long-term strength and profitability of the e-commerce business.

Management seems to have realized that buying unprofitable revenue is not a sustainable business model, but choosing not to do so makes forecasting the future nearly impossible.

In some online businesses, such as e-commerce and deliveries, companies have some power to achieve prime objectives by boosting marketing, using incentives and subsidies to entice consumers to spend money . Investors should view this as “false growth,” and we saw it in the early days of ridesharing and food delivery when providers offered expense vouchers and discounts to entice customers to use their platforms even when every additional transaction was losing money. In contrast, “real growth” would ensure that every purchase brings a profit to the supplier even if structural costs such as administrative staff mean that the business loses money overall.

Sea’s e-commerce expansion over the past few years, while impressive, has largely been false growth. Meanwhile, its digital entertainment business, which accounts for 44% of revenue, fell 12% in the second quarter as Covid-induced home spending fell.

In many ways, Sea is a cross between Alibaba and Tencent, which are China’s largest e-commerce and gaming companies respectively.

Continued lockdowns, a crackdown on internet companies, rising inflation, a looming mortgage crisis and heightened geopolitical tensions are all weighing on China’s gross domestic product outlook. While the government is aiming for 5.5% growth this year, the consensus in a Bloomberg survey of economists is for a figure of 3.8%. Goldman Sachs Group Inc. and Nomura Holdings Inc. are the latest to revise their forecasts downward.

Tencent this week announced a 3% drop in revenue, more than expected, and cut about 5% of its workforce after advertising fell by a record. Earlier in the month, Alibaba also posted a drop in sales. Both companies’ net income fell, but at least they remained profitable.

The outlook from the sea is less clear. According to the company, its Shopee service is the top-ranked e-commerce app in Indonesia, Taiwan and Southeast Asia, but the economic situation in its major markets remains unstable. Indonesia, Southeast Asia’s largest economy, is experiencing strong growth spurred by an export expansion fueled by rising commodity prices. Yet inflation leaves open the prospect of interest rate hikes that could dampen consumer spending.

Earlier this month, Singapore slashed its GDP forecast by one percentage point while Taiwan, Asia’s sixth-largest economy, cut its growth outlook twice this year due to slowing demand for oil. consumer electronics and the decline in private consumption. The Asian Development Bank has also lowered its GDP growth forecasts for 2022 and 2023 for Thailand and Malaysia.

With little prospect for the economy as a whole to improve and pressure on consumer spending to mount, Sea’s chances of posting rapid revenue growth and eventually becoming profitable look increasingly out of hand. of range. This forces management to make tough choices, and growth would have to be sacrificed. This is the kind of fiscal discipline that investors should encourage, but first they will have to accept a more moderate pace of income.

More from this writer and others on Bloomberg Opinion:

• Singapore’s next big challenge is already here: Daniel Moss

• In China Tech Earnings, numbers don’t matter anymore: Tim Culpan

• What is most important? Covid zero or three red lines: Shuli Ren

This column does not necessarily reflect the opinion of the Editorial Board or of Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology in Asia. Previously, he was a technology reporter for Bloomberg News.

More stories like this are available at bloomberg.com/opinion

Share.

About Author

Comments are closed.