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Here’s what to expect from Chinese tech firms in Q2 as economic recovery continues

US-listed Chinese firms are under more pressure to adhere to US corporate governance standards following regulation introduced by Nasdaq in May.

The US Stock Exchange- Photo by Aditya Vyas on Unsplash The US Stock Exchange- Photo by Aditya Vyas on Unsplash

Many of China’s biggest tech players are set to report their second-quarter earnings in the coming weeks, providing more details on the country’s economic recovery in the wake of the COVID-19 pandemic. During the quarter, many parts of China’s economy began to reopen, which is likely to result in normalization in internet traffic, user behavior, and consumption patterns.

According to official statistics, China’s economy grew by 3.2% from April to June compared to the same period in 2019, representing a stark improvement from a 6.8% year-on-year (YoY) contraction in the first quarter. In terms of government support, China has spent just 2.5% of its GDP on pandemic-related policies, compared to 11% in the US, over 20% in Japan, and 34% in Germany, according to data from the International Monetary Fund (IMF).

However, domestic consumption continues to lag behind the return of production, and the strongest demand recovery is largely concentrated in China’s affluent cities. In June and July, parts of southern China suffered from massive floods which displaced an estimated 3.76 million people with damages projected to reach RMB 144.43 billion (USD 20.66 billion).

Chinese tech firms continue to adapt to a post-pandemic economy. Courtesy of JD.com.

As the recovery continues, certain sectors will begin to gain steam in what has been a relatively dismal year so far, while some Chinese internet players may painstakingly watch the expansion of their user bases decelerate as people are no longer cooped up at home due to the pandemic. Companies with significant exposure in overseas markets, many of which continue to be plagued by the pandemic’s impact, are likely to suffer.

Digital platforms

For China’s internet platforms like Weibo (NASDAQ: WB), iQiyi (NASDAQ: IQ), Bilibili (NASDAQ: BILI), and others, the first quarter of 2020 was defined by surging user traffic coupled with declining advertising revenue. As China progresses towards normalcy, growth in user traffic should slow, while the economic reopening should drive a revival in advertising revenues.

Bilibili grew its revenue by 69% YoY in Q1 on the back of increasing paying users, but will that last? Courtesy of Bilibili.

China’s two leading video game streaming companies, Douyu and Huya, enjoyed significant growth during the first quarter, while a proposed Tencent-orchestrated merger would consolidate the Shenzhen-based tech giant’s dominance across the gaming industry’s value chain.

According to a recent report from Sensor Tower, mobile gaming revenue in the second quarter of 2020 grew by 27% YoY, while the growth of new game downloads grew from 38% YoY in the first quarter to 45.2% YoY in the second quarter.

E-commerce

E-commerce, which was a huge beneficiary of the lockdown period in the first quarter of the year, is likely to encounter slowing growth, as the likes of JD.com (NASDAQ:JD, HKG:9618) and Pinduoduo (NASDAQ: PDD) reported annual revenue growth of 21% and 44% respectively in the first quarter.

This growth was largely attributable to the necessity of e-commerce during the pandemic outbreak but will be difficult to sustain going forward.

However, e-commerce players will be keen to highlight the success of livestreaming e-commerce initiatives, as the digital channel has gained popularity due to the health risks associated with offline stores. With a vast number of rural merchants in the agricultural sector still underserved by digital sales channels, there is plenty of room for the growth of livestreaming e-commerce.

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Read this: The challenges of transitioning China’s rural economy to livestreaming

Services and travel

Companies in the lifestyle, local services, and travel industries continue to suffer the lasting effects of a viral pandemic. Meituan-Dianping (HK: 3690) is likely to continue its negative growth from the fourth quarter, given the decimation of its hotel and travel booking platform.

However, the company’s initiatives to drive deeper digitization in merchants’ supply chain will capitalize on the growing demand for digital supply chains, and coincide with China’s national directive to upgrade the country’s infrastructure.

Trip.com (NASDAQ: TRIP) which had plans to delist from Nasdaq, has been unable to execute a secondary listing in Hong Kong as its business remains decimated by the pandemic. In June, the company launched a VC fund focused on exploring new opportunities in the travel sector.

A 42% YoY plunge in revenues during the first quarter resulted in the firm refocusing on the domestic market. In July, China’s Ministry of Culture and Tourism green-lighted the resumption of domestic cross-provincial tour groups, providing some much-needed relief for China’s travel industry, which has suffered estimated losses of RMB 1 trillion since the pandemic began.

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Consumer tech

Xiaomi (HKG: 1810) largely survived the first quarter as its overseas markets like India and Europe had yet to be impacted by COVID-19. Now, as international markets struggle while China’s economy reopens, Xiaomi faces significant challenges. Unlike Huawei, which doubled down on the Chinese smartphone market in the face of overseas obstacles, Xiaomi’s smartphones have not been performing well domestically, and their over-reliance on India and Europe could now be exposed.

Following a cash injection at the end of June, Shanghai-based electric vehicle (EV) maker Nio (NYSE: NIO) has been enjoying strong sales since April setting a record for monthly deliveries in May of 3,436 and should make a strong recovery following a 50% YoY decline revenue during the first quarter.

More delistings over increased scrutiny

Overall international investor sentiment towards US-listed Chinese firms has been souring in the wake of Luckin Coffee’s fraud scandal, and short attacks on other Chinese firms. This has prompted some Chinese companies to delist from US exchanges, in favor of a domestic IPO in Hong Kong, Shanghai, or Shenzhen.

luckin coffee nasdaq
Luckin’s fraud has left a bitter taste in investors’ mouths. Source: Shutterstock.

Watch this: The rise and fall of Luckin Coffee, once China’s most promising coffee startup

The Hong Kong Stock Exchange issued a round of reforms in May this year to attract more US-listed tech firms, as corporate shareholders, as well as founders and key managers, can now own shares with more voting rights than other shareholders. Previously, such structures were allowed in the US, and at least 38 Chinese companies listed in New York did not qualify for an IPO in Hong Kong.

Now that the flow of delistings and domestic IPOs has begun, US-listed Chinese firms are under even more pressure to adhere to US corporate governance standards, following regulation introduced by Nasdaq in May.