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Alibaba and Tencent reported their 2Q 2024 results last week. Both companies experienced mere single-digit percentage revenue growth, with Tencent clocking in at 8% and Alibaba growing at 4%. However, Tencent’s profit jumped 82%, while Alibaba’s fell by 29%. Looking at the Non-IFRS/adjusted profits, Tencent’s profit still increased by 53%, while Alibaba’s decreased by 15%. was able to eke out growth in all its segments despite facing headwinds, while Alibaba saw revenue declines in one of its key segments. The weakest segment for Tencent was in the Fintech and Business Services segment, which increased by a mere 4% YoY as consumption declined and transactions on Wechat Pay decreased. For Alibaba, the key e-commerce segment declined 1% YoY. Alibaba’s e-commerce segment declined 1% YoY, despite its Customer management revenue subsegment increasing by 1% YoY. This was primarily due to a high single digit percentage YoY growth in online GMV, partly offset by a decline in take rate. The YoY decrease in take rate was primarily due to the increasing proportion of GMV generated from new models that currently have lower monetization rates. Direct sales under China commerce retail business saw a decrease of 9%, primarily attributable to the decline in sales of consumer electronics and appliances, which resulted from Alibaba’s planned reduction of certain direct sales businesses. This was partly offset by the increase in sales of groceries, reflecting weak consumption patterns. Tencent’s fintech subsegment was impacted by further moderation in commercial payment revenue growth, reflecting slow consumption spending. Additionally, revenue in consumer loan services revenue declined due to stronger risk control measures. Fortunately, the Business Services subsegment achieved a growth rate in the teens percentage range, driven by a rise in cloud services revenues, which included improved monetisation of WeCom, as well as higher eCommerce technology service fees within Video Accounts. Looking at the financial summary, it was heartening for Tencent’s investors to see strong growth in its online advertising business, as well as resumption of growth in the domestic games segment. The international games segment also continued on its growth trajectory. Gross profit increased significantly YoY due to increased contribution of higher-margin revenue streams, as well as improved efficiency. Gross margins have improved over the years as Tencent has placed a substantial emphasis on cost control and efficiency. All 3 segments reported higher gross margins YoY, and two of them showed QoQ increases. Tencent also remained in a net cash position of RMB71.8 billion (USD10.1 billion).  This was even after Tencent repurchased approximately 103.7 million shares for a consideration of approximately HKD37.5 billion (USD4.8 billion) in 2Q24. Alibaba’s e-commerce segment continue to be worrying for investors as it recorded a 1% YoY decline. The Cloud segment has is also starting to grow again having been lacklustre for the last 2 years. The growth segments for Alibaba have always been the international e-commerce segment with Alibaba investing substantially in Lazada as well as Cainiao which has stood strong and is even growing faster than some of its competitor’s logistics arm. On an IFRS basis, Tencent’s operating profit was RMB50.7 billion (USD7.1 billion), up 40% YoY. Operating margin increased to 31%, up from 24% last year. Since Tencent’s growth slowed 2-3 years ago, the company has focused on cost-cutting efforts, including divesting its investment portfolio, closing non-core businesses and consolidating operations across segments. Tencent then used its free cash flow to protect its share price by conducting massive share buybacks and at the same time refocused and made much needed investments in its platforms and AI technology to create value. Alibaba’s income from operations decreased 15% YoY, as there was higher share-based compensation this year. Assuming share based payment was the same in both years, Alibaba’s income from operations would have been flat. Adjusted EBITDA as well was Non-GAAP net income were also lower, even after excluding one-offs. Alibaba’s contribution to Ant Group’s profit was also down 10% YoY. Much like Tencent, Alibaba has been investing heavily in artificial intelligence and sells AI products via its cloud unit. Alibaba reported that its AI-related product revenue continued to grow at triple-digits percentages YoY. However, the difference between Tencent and Alibaba is that , whether cash or non cash, both affecting the profit it generates Tencent confirmed that the company is in discussions with Apple about sharing revenue for mini-games that are played directly on Tencent’s super-app WeChat. Many titles can now be played without users having to download them from Apple’s App Store. The bigger windfall for both Tencent and Apple could come from in-app transactions, or sales of digital goods and services purchased within mini-games. For normal apps, Apple would typically take a 30% cut. Tencent currently doesn’t monetise its mini-games on Apple’s operating system via in-app transactions, but the company added that it would be in everyone’s interest to find a way to do so on terms that are both economically sustainable and fair. For Apple, the extra revenue would be welcome. Greater China sales have fallen year-on-year for four consecutive quarters, and the iPhone is ceding market share to local rivals like Huawei and Xiaomi. For Tencent, this agreement would also boost their revenue as Tencent’s revenue growth has fallen to single digit percentages, causing an initial sell off of its stock despite increasing profits. While the outcome may not be known soon, one would expect the outcome to be a amicable and balanced one as both are among the biggest companies in the world and would benefit from having each other in their ecosystem. Michael Burry, the hedge fund manager famous for his 2008 bet against the US housing market, further increased his stake in Alibaba Group Holding Ltd. while slashing his overall equity portfolio by half in the second quarter. He reported an $11.2 million position in Alibaba in the quarter, up from $9 million in the first quarter, after adding 30,000 shares. While he added to Alibaba, he also exited his entire stake in JD.COM. Burry is known for being too early in making prescient trades, and has held Alibaba since 2022. A common theme across both companies is the impact from China’s slowing consumption. China’s consumer price index (CPI), a key gauge of inflation, grew by 0.2% YoY in June, compared to an increase of 0.3% in May. Amid an overall economic slowdown, consumers in China are unwilling to spend due to a prolonged property slump and a tough job market, with the CPI having stagnated around zero since April 2023. In recent years, the Chinese government has continuously assured the market that it would provide stimulus, albeit not overwhelmingly and it has not been seen to be sufficient. Tencent and Alibaba, being two of the biggest consumer companies, are good indicators of the current macroeconomic situation and likely would only start to see substantial growth again only when the Chinese economy stops sputtering and starts accelerating with new growth engines. READ MORE READ MORE