You Thought China’s Technological Recession Was Bad

You Thought China’s Technological Recession Was Bad – Two of China’s major technology businesses reported a fall in revenue for the first time in history, as the country confronts tremendous development obstacles and an unclear future. But 2,000 kilometers away, one of Southeast Asia’s largest corporations faces even greater obstacles.

Sea Ltd., a provider of online games and e-commerce platforms, recorded a growth rate of 29%, its lowest pace in almost five years. We tend to see revenue growth as preferable to revenue decrease, but Singapore-based Sea’s e-commerce division is losing money on every dollar it brings in. At least Tencent Holdings Ltd. and Alibaba Group Holding Ltd. have maintained profitability despite declining revenue.

In May, Sea lowered its full-year revenue prediction for e-commerce, which represents for around 52% of the company’s overall sales, by $400 million, to a range of $8.5 billion to $9.0 billion, due to rising global prices and shaky economic development. This month, it discarded that advice totally.

In an attempt to adjust to increased macroeconomic uncertainty, we are altering our tactics to place a greater emphasis on efficiency and optimization for the long-term success and profitability of our e-commerce company. The management appears to have understood that purchasing unprofitable income is not a viable business model, but their refusal to act makes it almost hard to forecast the future.

In certain online industries, such as e-commerce and delivery, corporations have the ability to meet top-line goals by increasing marketing and offering customers incentives and subsidies to spend money. In the early days of ride-hailing and food delivery, when providers gave spending coupons and discounts to entice clients to utilize their platforms, even if each additional transaction lost money, investors should consider this “fake growth.” In contrast, “real growth” would have each purchase generate a profit for the supplier, even if structural expenses, such as administrative employees, result in a net loss for the business.

While spectacular, Sea’s e-commerce growth over the last five years has been mainly unsustainable. The company’s digital entertainment division, which accounts for 44% of sales, declined by 12% during the second quarter as Covid-driven at-home spending slowed. In many aspects, Sea is a hybrid of Alibaba and Tencent, the largest e-commerce and gaming enterprises in China, respectively.

China’s GDP projection is hampered by continued lockdowns, a crackdown on internet enterprises, increasing inflation, a looming mortgage crisis, and heightened geopolitical tensions. While the government’s growth objective for this year is 5.5%, analysts surveyed by Bloomberg predict a result of 3.8%. Goldman Sachs Group Inc. and Nomura Holdings Inc. are the most recent firms to reduce their projections.

Tencent announced a revenue decrease of 3%, which was worse than anticipated, and laid off around 5% of its workers as a result of record-low advertising income. Earlier in the month, Alibaba also reported a sales decline. Both firms’ net income decreased, but they remained profitable.

You Thought China's Technological Recession Was Bad
You Thought China’s Technological Recession Was Bad

 

The sight towards the sea is hazy. According to the firm, Shopee is the most popular e-commerce app in Indonesia, Taiwan, and Southeast Asia as a whole; nonetheless, the economic fortunes of its primary regions remain unpredictable. Indonesia, the biggest economy in Southeast Asia, is seeing robust development fuelled by rising exports and commodity prices. However, inflation leaves open the possibility of rising interest rates, which might hinder consumer spending.

Singapore reduced its GDP prediction by one percentage point earlier this month, while Taiwan, Asia’s sixth-largest economy, has reduced its growth expectation twice this year due to a decline in demand for consumer electronics and private spending. The Asian Development Bank has similarly cut its GDP growth projections for Thailand and Malaysia for 2022 and 2023.

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With little hope that the economy as a whole will recover and rising pressure on consumer spending, Sea’s prospects of achieving quick sales growth and ultimately being profitable are becoming more remote. This has forced management to make difficult decisions, and development will be sacrificed as a consequence. It is the kind of budgetary restraint investors should applaud, but they must first accept a slower revenue growth rate.

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