Tag: JD.com

Beyond Gaming: Assessing the Ripple Effect of China's Regulatory Actions on BABA and JD

Posted on by The INO.com Team

The Chinese authorities have recently issued a comprehensive draft of rules and regulations to reduce online expenditure and in-game rewards in video games. These impending regulations would prohibit online games from offering incentives to players based on their consecutive logins, first-time purchases, or recurring payments – standard practices typically deployed in online gaming scenarios.

The removal of the incentives could reduce daily active users and in-app revenue. Such a change could ultimately compel publishers to restructure their game design and monetization strategies.

The draft represents the most stringent enforcement to date. It bars games from presenting probability-based draws to underage users and disallows the trading of virtual gaming items. Amid ongoing concerns over user data security, it mandates that game publishers host their servers domestically in China.

The aggressive regulations have slammed the world's largest gaming market. The immediate fallout saw investors retreating in haste, resulting in an approximate loss of $80 billion in market value for China’s two dominant gaming companies, Tencent Holdings and Netease.

Several U.S. and European video game developers saw shares take a hit after Friday’s announcement, but the losses were small when compared with Tencent’s 16% tumble and NetEase’s 25% decline. The regulation news wiped about $54 billion off Tencent’s share value.

The country initiated its major clampdown on the gaming sector in 2021, implementing stringent playtime restrictions for minors and freezing new game approvals for almost eight months, citing increasing concerns over gaming addiction. These regulatory measures led to unprecedented challenges for China's gaming industry in 2021 and 2022, marking the first time the industry witnessed a contraction in total revenues.

While the Chinese authorities resumed approval of new games in the following year, regulators have maintained their focus on managing the duration of gameplay for minors and their overall expenditure within the game.

The recent draft comes as China's domestic game market revenue reached ¥303 billion ($42.6 billion), growing 14% in 2023, reversing a 10% decline from the year before, as per figures from industry association CGIGC. Due to the sheer size and impact of Chinese gaming giants, the global video games market could also be affected in the long run.

The profound impact of China's recent regulations has reverberated beyond the gaming industry and has significantly impacted Chinese tech corporations.

A regulatory storm against big tech firms emerged in late 2020 when Chinese authorities began to express concerns about the extensive influence and growth of the nation's major internet platforms.

This regulatory onslaught against China’s tech giants resulted in the wiping of trillions of dollars in market value, leaving a significant dent in one of the most burgeoning sectors of the world's second-largest economy. This intensified the U.S.-China decoupling, with its effects visibly shrinking those Chinese tech companies that once competed neck-to-neck with their U.S. counterparts.

Alibaba Group Holding Limited (BABA) found itself in the eye of the storm following critical comments made by co-founder Jack Ma against Chinese regulators ahead of the impending IPO of its subsidiary Ant Financial. This fintech affiliate, whose IPO plans in Shanghai and Hong Kong were halted abruptly, created a global tremor among the investment community.

BABA faced a record-breaking fine of $2.8 billion, and Chinese antitrust regulators imposed rigorous restrictions on the company's e-commerce operations. The newly enacted measures – barring BABA from implementing exclusive agreements with merchants, employing loss-leader promotions to attract fresh clientele, and boosting its ecosystem through unauthorized investments – have subsequently weakened BABA's safeguards against market competitors.

Following the censure of BABA, China's regulatory hawks turned their attention toward the online financial service units of 13 other tech titans, including JD.com, Inc. (JD).

It was initially predicted that Chinese policymakers would change their trajectory and prioritize growth stimulation in 2023, with tech firms being key players in this strategy. But with recent gaming regulations eroding consumer faith in tech stocks, it is expected to trigger a domino effect, potentially impacting shares of high-flyers like BABA and JD.

Here, we delve deeper into the ramifications and implications faced by these tech companies.

Alibaba Group Holding Limited (BABA)

BABA, previously regarded as China's best contender for becoming a trillion-dollar entity, currently stands near its lowest trading value of the year, a significant reduction from its 2020 peak. The company is navigating through turbulence on multiple fronts. Weakened economic recovery and burgeoning rivals threaten BABA's once primarily dominant position in the online retail sector.

BABA recently aborted plans to float its cloud division due to uncertainties stirred by the United States' export restrictions on advanced computing chips. The tech giant now looks forward to formulating a robust growth model centered around the increasing demand for networked and highly scalable cloud computing services underpinned by AI. However, it's worth noting that U.S. bans on high-end chip exports to China may hinder China's technological ambitions.

In an endeavor to revive profits, BABA is refocusing on e-commerce, leveraging content creators and competitive pricing to remain relevant amid stiff competition. The e-commerce behemoth is looking at slashing prices and is projected to continue heavy investment in curating content encompassing shopping, consumption, and everyday life.

Stricter regulations enforced in recent years have purportedly placed pressure on Chinese tech firms like BABA. This year, BABA has also witnessed a contraction in its workforce. BABA's stock prices dropped following China's announcement to regulate the online gaming industry with tough measures aimed at reducing excessive spending and controlling online game content.

Alibaba Cloud offers custom solutions for the gaming industry, providing dependable support for game development and distribution, ensuring an excellent experience for players and users. Globally, it remains a top choice for gaming businesses intending to streamline their digital transition journey with flexible game development, secure and swift global distribution, and economical operations.

BABA owns several renowned gaming platforms in China, including Youku Games, Epic Games China, and Perfect World. These platforms boast millions of gamers and generate billions of dollars in revenue each year.

Nonetheless, these platforms will also have to conform to new rules that curtail online gaming time for minors and limit game content featuring violence, gambling, or inappropriate language. These newly imposed rules mandate BABA to modify its game development strategy and content to meet the novel standards and evade potential penalties.

Additionally, it might require extensive resources and effort to supervise and moderate its gaming platforms to maintain regulatory compliance, potentially risking the loss of consumers. Such changes could then detrimentally affect BABA's revenue and profitability derived from the online games that the tech behemoth develops and distributes.

However, analysts expect BABA’s revenue for the fiscal third quarter ending December 2023 to increase 4.9% year-over-year to $37.65 billion. Its EPS is expected to come at $2.79 for the same quarter.

JD.com, Inc. (JD)

JD, China’s leading e-commerce platform, has extended its realm of operations to include online gaming under the name of JD Gaming.

What JD is doing in gaming?

The retail giant's gaming venture has several elements to its approach. Firstly, it harnesses the insights of its extensive consumer base, who contribute an abundance of product feedback collected through the platform's transactions. This data is shared with industry partners to inform and enhance their product development.

One key instance is JD's engagement with influential partners like Lenovo, a noted Chinese PC manufacturer, and the gaming behemoth Tencent. The collaboration resulted in the creation of mobile gaming optimized smartphones. Through this strategy, JD not only participates in product development but also acts as a distributor for these devices, directly catering to its gaming clientele via its shopping app.

Secondly, a significant component of JD's gaming strategy involves its stake in e-sports or competitive video gaming. In 2017, JD unveiled its professional e-sports team, JD Gaming, expanding it later by launching JD Esports, a dedicated mobile gaming team, in 2020.

Considering that global esports revenue is projected to surge to $3.8 billion by 2023, the potential for profit is vast. JD intends to ensure that a part of this profitable domain is its.

However, recent changes in gaming regulation affecting youth in China might cause a shift in consumer preferences and gaming habits. Consequently, online games, accompanying accessories, game consoles, and in-game purchases may see a decrease in demand. These developments have the potential to impact JD's e-commerce operation in ways worth close observation.

Analysts expect JD’s revenue and EPS for the fiscal fourth quarter ending December 2023 to decline 1.1% and 3.8% year-over-year to $41.97 billion and $0.66, respectively.

Bottom Line

The sweeping restrictions unveiled before Christmas elicited reminders of the unceremoniously harsh crackdown on the tech sector in 2021. During that year, Chinese regulatory bodies spontaneously initiated limitations spanning various areas from e-commerce to entertainment, effectively destroying the online education industry through the outlawing of profits.

Some believe that there are traces of a governmental aspiration for an enhanced and diverse gaming environment marked by creativity and exceptional quality. The authorities lean toward a marketplace where publishers gain profits via ethical practices and innovative offerings instead of aggressive monetization tactics or endorsing "pay-to-win" games.

In a surprising turn of events, Chinese officialdom has moderated newly formulated online gaming regulations soon after the proposed constraints resulted in major technology firms losing billions of dollars. They sanctioned 105 domestic games, indicating the Chinese authorities' approval for the evolution of online gaming. This could potentially bolster investor sentiment.

However, analysts remain cautious when considering China's e-commerce titans, like BABA and JD. As it stands, the Chinese consumer is progressively tightening discretionary spending amid a frail economic climate. Additionally, the looming threat of intensified sector rivalry might influence company profitability.

Last week saw Chinese stocks taking a downturn, induced by apprehension over a potential surge in COVID-19 contagions, endangering progress in the world's second-most prosperous economy. This puts the decision to open the country post-lockdown under scrutiny, especially considering the resultant economic deceleration witnessed last year.

Given this backdrop, it could be wise to wait for better entry points in the featured stocks

4 China Tech Stocks to Get into BEFORE Mid-August Hits

Posted on by The INO.com Team

President Joe Biden plans to sign an executive order to curb critical U.S. technology investments in China by mid-August, according to people familiar with the internal deliberations. The order primarily focuses on semiconductors, artificial intelligence (AI), and quantum computing. It won’t affect any existing investments and will only prohibit certain new transactions.

These so-called outbound investment controls are part of a broader White House effort to limit China’s capabilities to develop next-generation technologies to dominate military and economic security. This includes steps to control the sales of advanced chips and the tools to build them.
The timing of the executive order has slipped multiple times before, and there is no assurance that it won’t be delayed again. However, internal discussions have already shifted from the substance of the measures to rolling out the order and accompanying rule, stated the people familiar who spoke anonymously.

The effort can complicate the Biden administration’s already troubled relations with China, which sees these restrictions as an effort to contain and isolate the nation. Earlier this month, China’s envoy in Washington said that Beijing would retaliate if the U.S. imposed new restrictions on tech or capital flows.

Meanwhile, Treasury Secretary Janet Yellen has tried to calm Chinese anger over the limitations, stating they wouldn’t considerably damage the ability to attract U.S. investment and were narrowly tailored.

“These would not be broad controls that would affect US investment broadly in China, or in my opinion, have a fundamental impact on affecting the investment climate for China,” Janet Yellen commented in an interview with Bloomberg Television.

4 China Tech Stocks to Buy Before Mid-August

JD.com, Inc. (JD) is a leading supply chain-based technology and service provider in the People’s Republic of China. It provides computers, communication, consumer electronics, home appliances, and general merchandise products.

The company provides online marketplace services for third-party merchants, marketing services, and omnichannel solutions to customers and offline retailers. Also, it offers integrated data, technology, business, and user management industry solutions to support the digitization of enterprises.

On July 21, JD Logistics (JDL) and Geopost entered a strategic partnership to strengthen their global logistics capabilities. By leveraging JDL’s solid warehousing network and Geopost’s logistics delivery capabilities, the collaboration would enhance international express services between China and Europe. This partnership should bode well for both companies.

Also, the same day, JD announced a partnership with French luxury group SMCP to launch Sandro, Maje, and Claudie Pierlot flagship stores. This launch should offer JD.com’s nearly 600 customers access to more than 4,000 high-end products from these top-tier brands. Beyond providing products, the partnership with SMCP extends into operations, marketing, and supply chain support.

On July 13, JD introduced ChatRhino large language model (LLM) on its 2023 JDDiscovery tech summit. Combining 70% generalized data with 30% native intelligent supply chain data, the company’s latest AI model provides targeted solutions for real industry challenges across sectors, including retail, logistics, finance, and health. JD’s ChatRhino also sets a new benchmark as a 100-billion-parameter model.

The company’s large language model evolution aligns with its relentless pursuit of technology, encircling the pillars of efficiency, user experience, cost-effectiveness, inclusiveness, and groundbreaking progress.

For the first quarter that ended March 31, 2023, JD’s net revenues were $35.40 billion, up 1.4% from the same period in 2022. Its net service revenues increased 34.5% from the year-ago value to $6.90 billion. The company’s non-GAAP income from operations was $1.10 billion, an increase of 68.1% year-over-year.

Furthermore, non-GAAP net income attributable to the company’s ordinary shareholders for the first quarter was $2.20 billion or $0.69 per ADS, up 90% and 88.1% year-over-year, respectively.

After witnessing strong growth in profitability in the first quarter of fiscal 2023, JD expects to continue its business momentum in the upcoming quarters.

“In the quarters ahead, we will further enhance our business structure in order to drive the expansion of our user base throughout China. JD.com has built China’s most trusted brand in retail, and is uniquely positioned to provide our loyal user base with the superior quality, value, speed and selection they have come to expect, while maintaining the flexibility to seize upon multiple growth opportunities across our businesses,” said Lei Xu, JD’s CEO.

Analysts expect JD’s revenue and EPS for the fiscal year (ending December 2023) to increase 2.9% and 18.4% year-over-year to $154.54 billion and $3.02, respectively. The consensus revenue and EPS estimates of $170.25 billion and $3.55 for the fiscal year 2024 indicate a growth of 10.2% and 17.9% year-over-year, respectively.

The second tech stock investors should consider buying is Baidu, Inc. (BIDU). The company provides internet search services in China. BIDU operates through Baidu Core and iQIYI segments. Its offerings include Baidu App, Baidu Search, Baidu Feed, Baidu Health, Haokan, Baidu Wiki, Baidu Experience, and Baidu Drive. Also, the company offers online marketing services.

On June 16, BIDU obtained licensing for the commercial operation of its fully driverless ride-hailing service in Shenzhen. With this new license, Baidu’s Apollo Go robotaxis would be allowed to operate across 188 square kilometers in Shenzhen from 7 a.m. to 10 p.m. daily. This expansion broadens the scope of BIDU’s commercial, fully driverless ride-hailing service operations nationwide.

On May 4, BIDU Research developed a groundbreaking AI algorithm that significantly drives the stability and antibody response of Covid-19 mRNA vaccines. Such algorithm designs could enhance BIDU’s AI capabilities and provide a competitive edge, boosting the company’s revenue through licensing or commercializing the technology.

Also, on March 16, BIDU launched ERNIE Bot, a next-generation large language model with impressive capabilities in Chinese language and culture comprehension, literary and business writing, mathematical calculations, and multi-modal content creation. By leveraging cutting-edge technology to enhance its products and services, BIDU positions itself for long-term, sustainable growth.

BIDU’s revenues increased 9.6% year-over-year to $4.54 billion during the first quarter that ended March 31, 2023. Its non-GAAP operating income rose 60.9% from the prior-year quarter to $936 million. The company’s adjusted EBITDA grew 48.1% from the year-ago value to $1.19 billion.

In addition, non-GAAP net income to BIDU increased 47.6% year-over-year to $834 million, and its non-GAAP earnings per ADS were $2.34, up 43.5% year-over-year.

According to Rong Luo, CFO of BIDU, “Generative AI represents a new paradigm shift in AI, and Baidu is poised to take advantage of this massive market opportunity. Baidu will continue to invest unwaveringly in this area in the coming quarters.”

Street expects BIDU’s revenue to increase 8.5% year-over-year to $4.65 billion for the second quarter ended June 2023. Likewise, the consensus EPS estimate of $2.39 for the same period indicates a 4.5% year-over-year rise. Also, the company surpassed the consensus revenue and EPS estimates in all four trailing quarters, which is impressive.

Furthermore, BIDU’s revenue and EPS for the current fiscal year 2023 are expected to grow 6.4% and 12.6% from the previous year to $19.10 billion and $9.63, respectively.

Another prominent Chinese tech stock, NIO Inc. (NIO), should be added to one’s portfolio before mid-August hits. The company is a pioneer and a leading company in the premium smart EV market. It provides five and six-seater electric SUVs and smart electric sedans. Also, NIO offers power solutions such as Power Home, Power Swap, Power Charger, Power Mobile, and Power Map.

On July 12, NIO closed the $738.50 million strategic equity investment from CYVN Investments RSC Ltd, an affiliate of CYVN Holdings L.L.C., an investment vehicle majority owned by the Abu Dhabi Government with a strategic focus on advanced and smart mobility.

After the Investment Transaction and the Secondary Share Transfer, CYVN Investments RSC Ltd owns nearly 7% of the company’s total issued and outstanding shares. NIO and CYVN Entities will work jointly to pursue strategic collaborations in international business and technology cooperation.

On July 1, the company announced its June and second quarter 2023 delivery results. NIO delivered 10,707 vehicles in June. The deliveries comprised 6,383 premium smart electric SUVs and 4,324 premium smart electric sedans. It delivered 23,520 vehicles in the second quarter of 2023. As of June 30, 2023, cumulative deliveries of NIO vehicles reached 344,117.

On June 15, NIO launched the ET5 Touring, a smart electric tourer, and started its deliveries the following day. Designed for family users, the ET5 Touring is crafted with versatile space and inherits the exquisite and dynamic design, high-performance genes, and advanced intelligent features of its sedan variant ET5.

Also, the company commenced delivery ramp-up of the All-New ES8, a smart electric flagship SUV, on June 28, 2023.

During the first quarter of 2023, NIO’s revenues were $1.55 billion, an increase of 7.7% from the first quarter of 2022. The company’s other sales increased 117.8% from the previous year’s quarter to $211.40 million. The increase in other sales was mainly due to the increase in sales of accessories, provision of power solutions, provision of auto financing services, and sales of used cars.

For the fiscal year (ending December 2023), NIO’s revenue is estimated to increase 28.2% year-over-year to $9.20 billion. In addition, analysts expect the company’s revenue for the fiscal year 2024 to grow 48.9% year-over-year to $13.69 billion.

Tech stock Bilibili Inc. (BILI)could also be an ideal buy before the Biden government signs the executive order. BILI provides online entertainment services for the young generations. The company’s platform offers a wide range of content, including video services, mobile games and value-added services, and ACG-related comic and audio content.

For the first quarter that ended March 31, 2023, BILI’s net revenues were $738.20 million, a marginal increase from the same period of 2022. Its revenues from value-added services (VAS) grew 5% from the year-ago value to $314 million, and revenues from advertising were $185.20 million, up 22% year-over-year, primarily attributable to the company’s improved advertising product offering and enhanced advertising efficiency.

BILI’s gross profit for the first quarter increased 37% year-over-year to $160 million, mainly due to reduced revenue-sharing and server and bandwidth costs. As of March 31, 2023, the company had cash and cash equivalents, time deposits, and short-term investments of $2.80 billion.

As indicated by its latest financial results, the company started the first quarter of fiscal 2023 on a positive note, with a notable improvement in its gross profit. Furthermore, BILI will continue prioritizing profitability while fostering a vibrant and highly engaged community for its users and creators in the upcoming quarters.

Analysts expect BILI’s revenue for the third and fourth quarters of 2023 to increase 12.3% and 10.8% year-over-year to $908.37 million and $984.70 million, respectively. Also, the company’s revenue for the fiscal year 2024 is expected to grow 16.8% from the prior year to $3.95 billion.