INSIGHTS | China’s tech giants are planning an investment spree

Chinese tech giants like Alibaba and Tencent have long had the reputation of being some of the most active investors in China. They are behind a host of unicorns, from ride-hailing giant Didi to edtech platform Yuanfudao.

Now, they’re looking inwards, pledging to reinvest the money they make into new ventures ranging from supply chain digitization and grocery delivery, even if it means hammering their profits.

Alibaba CEO Daniel Zhang said in an earnings call in May that the company will invest all its incremental profits into core strategic areas. These funds include the difference between the company’s current year profits and those of the previous year. 

Tencent has made a similar pledge, aiming to sharply increase investments this year. Meanwhile, Pinduoduo said it will boost investments in logistics infrastructure and agricultural science.

In some cases, these pledges represent up to 15% of these companies’ annual incomes, according to analysts.

“While we don’t expect to see significant [returns] in the short term, we believe these investments will create sustainable long term profit growth for investors,” Esme Pau, analyst at China Tonghai Securities, told TechNode. 

Bottom line: Chinese tech majors Alibaba, Tencent, and Pinduoduo have all promised to up their investments as their users change behavior in the wake of the pandemic and stricter regulations weigh on tech firms’ businesses.

Tech investment hikes

Alibaba will invest all of its “incremental profits” in 2022, after a hefty $2.8 billion antitrust fine triggered its first quarterly loss in nine years. The company didn’t specify an amount, but Bloomberg has estimated that the total amount could reach RMB 25.8 billion this year, or 15% of the company’s RMB 172 billion non-GAAP net income for 2021 fiscal year.

• Non-GAAP figures usually exclude irregular or non-cash expenses to smooth out high earnings volatility. In Alibaba’s case, this figure excludes the $2.8 billion fine, which is reflected in the company’s RMB 142.3 billion net income for 2021.
• Alibaba has promised that its investments will be “highly targeted and disciplined,” given the potential size of its spending spree.
• The company’s investment priorities include technology innovation, support programs for merchants to lower their operating costs, improving user acquisition and user experience, upgrading merchandising and supply chain capabilities, and new business initiatives, according to CEO Daniel Zhang.

Focused spending: A source with knowledge of the matter told TechNode that livestreaming, Alibaba’s Pinduoduo competitor Taobao Deal, and Cainiao Logistics will be the focus areas of these investments.

• Funding for Alibaba’s livestreaming business will be focused on training livestreamers, helping more merchants use its livestreaming services, and improving livestreaming technology, the source added.
• Livestream is an important segment for the company. Alibaba’s Taobao Live, China’s largest player (in Chinese) in e-commerce livestreaming, recorded a gross merchandise volume of RMB 500 billion in fiscal year 2021.
• Taobao Deal, which offers value-for-money products for price-conscious consumers, is working to integrate suppliers from its wholesale e-commerce platform 1688.com to boost Taobao Deal offerings.
• Investments in Alibaba’s logistics arm Cainiao will be used to improve the company’s cross-border delivery capabilities by building and upgrading its global logistics infrastructure, the source said.

Tencent will plow a larger portion of its incremental profits this year into investments, as China’s internet industry undergoes “a heavy investment phase,” the company said in its first-quarter earnings report. 

• The social media and gaming giant also announced a RMB 50 billion fund that will invest in areas such as basic science, education innovation, carbon neutrality, and food provision, the company said.
• In an earnings call with analysts in April, Tencent President Martin Lau said the company would invest up to 20% of its incremental profits. 
• It’s unclear how much Tencent’s incremental profit will be this year. The company’s profit for 2020 was RMB 127 billion, with an incremental profit of RMB 29.4 billion. That would amount to around RMB 5.9 billion in investment.
• Tencent said it would channel the funds into enterprise services, gaming, and short-form video apps, largely in line with the company’s past investment strategy.
• As of the end of May, gaming made up around 17% of Tencent’s past investments while business services totaled 13.3%, according to Itjuzi (in Chinese), which tracks China’s venture capital market.

Pinduoduo, which claims to have a larger user base than Alibaba, plans to increase spending in areas along the agriculture industrial chain, where typically digitalization remains low. At the same time, the company is narrowing in on logistics, an area requiring massive, long-term investments. 

• The company has not specified the amount it intends to invest.
• Nevertheless, Pinduoduo plans to boost spending on logistics infrastructure ranging from cold-chain transport to warehousing and delivery. 
• For a company like Pinduoduo, logistics is even more critical given its increasing focus on perishable agricultural products. 
• While continuing to fund its grocery pick-up business Duo Duo Maicai, Pinduoduo will “invest heavily” in logistics infrastructure technology, said Tony Ma, vice president of finance and the company’s de facto chief financial officer. 
• Pinduoduo recorded RMB 2.9 billion in net losses during the March quarter. The company had RMB 83.4 billion in cash, cash equivalents, and short-term investments as of March.

What about the others?

We haven’t seen the other tech majors making such a fuss about investment, but here’s what we know.

Meituan: In March, Meituan warned about losses due to heavy investment in its community group buy service Meituan Select, which CEO Wang Xing called the company’s “best opportunity in five years.” 

• Retail, especially the community group buy business, continued to be Meituan’s largest investment area, the company said after reporting a RMB 3.9 billion net loss in the first quarter of this year.

JD: The company didn’t say much in its recent filings or in response to TechNode’s queries. JD continues to invest in new opportunities in cooperation with suppliers and brands, Chief Financial Officer Sidney Huang said in the company’s first-quarter earnings call. 

The effects

Hit to profits: Huge investment promises will mean less short-term profits.

• After Alibaba announced its investment plan on May 13, Bloomberg revised its estimate for Alibaba’s non-GAAP net income growth rate to 15% from 19% year on year for the 2022 fiscal. 
• Alibaba’s Chief Financial officer Maggie Wu said it would be “stupid” to promise short-term profit to long-term investors because “there are so many competitors who are investing large amounts to gain a foothold in the market.”

Long-term vision: The investments imply that these tech giants see big post-pandemic opportunities.

“This focus on reinvestment comes as China’s leading internet companies double down on capital-intensive growth opportunities,” said Michael Norris, senior analyst at AgencyChina. 

“Whether it’s reimagining retail, facilitating same-day or next-day delivery, or building out cloud computing infrastructure, it’s not cheap,” he added.

Tightened regulation is also likely a factor, as companies align their businesses with current government priorities, such as basic science, rural revitalization, food/energy/water provision, carbon neutrality, and technology for senior citizens.

READ MORE: INSIGHTS | Tech in the five-year plan

“Tightened regulation is likely to create a healthier ecosystem and a more competitive market, which might reduce the moat of these giants and slow down their growth,” said Pau from China Tonghai Securities.

These investments reflect a change in how digital giants see their role in the economy, Norris said.

“When they first burst onto the scene, China’s digital giants tended to be a thin, interfacing layer between consumers, products, services, and attention. Now, as China’s digital giants work on digitally transforming entire industries, that layer becomes thicker and more capital intensive,” he added.

Subject to crackdowns? Tech firms’ vast investment plans may meet with regulatory roadblocks as Beijing tightens antitrust grips on their anti-competitive practices, especially with unreported mergers and acquisitions (M&A) coming under scrutiny.

• While tech majors’ investments may be focused internally, venture capital investment and acquisitions are also likely to be part of the plan.
• Before the State Administration for Market Regulation (SAMR) fined Alibaba a record RMB 18.2 billion in April, most antitrust fines imposed on tech companies were related to a clause in China’s antitrust law that requires firms to report M&A deals that could create a monopoly.
• An overhaul of the law, which is expected to take effect this year, will allow regulators to issue fines up to 10% of the company’s annual revenue over unreported deals.
• The changing regulatory climate means tech giants now have to report their investment deals that could create “dominant players” in a market to the authorities. Antitrust regulators like the powerful SAMR would have a say in those deals.

China is also cracking down on the so-called disorderly expansion of capital, vowing to prevent firms from growing their businesses into every sector of the economy and forming monopolies. 

For those tech giants seeking to grow even bigger via investment, this could be a warning sign.

READ MORE: INSIGHTS | Antitrust push in China tech