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China fears threaten the bullish case for Tencent and Alibaba

By Editing NAI
06/18/2017 5:24 a.m.

Shares in Tencent, China’s largest internet company, have not escaped the jitters that afflicted global technology stocks this week.

This week, however, provides a sharp contrast to the performance of China’s technology sector so far this year. Led by Tencent’s roughly 45 per cent advance, the sector has been the single biggest driver of the strong showing of the Hang Seng index, Hong Kong’s main benchmark. Moreover, Tencent and its arch rival Alibaba, which is listed in New York, have cracked the top ten companies globally measured by market capitalisation.

To their numerous champions in China, the appearance of the giants on the top ten list was inevitable long before they actually had the requisite market cap last summer. Many expect they will soon scale the $500bn mark.

That optimism over their outlook invites an interesting question: should Tencent and Alibaba be at the top of the global list and ahead of their American counterparts such as Facebook.

The argument that they should has some merit given how large the Chinese market is versus the US market; the dominance the two companies already have and the different competitive and regulatory landscape there.

Tencent and its popular WeChat draws frequent comparisons with Facebook and WhatsApp. But as one Hong Kong-based venture investor notes, you need to acknowledge that Facebbok chief executive Mark Zuckerberg has to compete in different ways with Netflix, Amazon and Hollywood. By contrast, Tencent owns a major movie, music streaming and online payment platform. It also does not hurt Tencent that Beijing generally makes life a lot tougher for foreign competitors in the local market.

Still, to even pose the question of whether Tencent and Alibaba can eclipse US rivals is a measure of just how quickly the Chinese tech sector is evolving. It also underlines some of the risks that the high-flying sector faces. The biggest strengths for Tencent and Alibaba — the scale of their domestic Chinese market and their monopoly — could turn into a weakness.

There are a number of potential threats at play. Many investors believe that there is huge regulatory and political risk facing the US tech companies as their power and reach grows. The same threat hangs over the Chinese pair. They command more influence over the news flow in China through WeChat and blogging site Weibo than official media does.

And while both Tencent and Alibaba are careful not to arouse the ire of Beijing’s censors, it is always conceivable that authorities will decide that they are too powerful and curb their power.

Rumours the authorities will do just that periodically sweep through the venture community on both sides of the Chinese border. A few months ago, for example, there was talk that President Xi Jinping had summoned Tencent founder Ma Huateng and Alibaba’s Jack Ma to Beijing to remind them who calls the shots on the mainland.

A bigger issue to consider is the structure and lack of constraints upon Chinese companies that could well snap back to hurt them and their shareholders. Tech companies on both sides of the Pacific are young, and most are still dominated by their founders, rather than a second generation of professionals.However, legal and cultural constraints on founders are far stronger in the US than in China.

The situation at car-booking service Uber, for example, where a senior executive left and the founder decided to take a period of leave after a report recommended changes to the coprorate culture at the car-booking service, would not be replicated at a major Chinese tech company.

In the US, “every company tries to focus,” says one banker to tech firms. “But that isn’t the case in China. If Tesla was in China, it would not just try to pioneer electric cars. It would offer everything from car insurance and consumer finance to sound systems and social networks. No focus!”

Beyond a notable lack of corporate governance in Chinese tech companies, there are also few constraints on engaging in either predatory behaviour or violating other firms’ intellectual property rights. This means that Alibaba and Tencent can potentially inflict lethal wounds on each other and their investee companies’ share prices.

This isn’t the first time Chinese companies have made the top ten list. It is worth remembering that two years ago, PetroChina and ICBC were on the list before they were deemed old economy and fell out of favour. Staying in the list is not easy.

Source: Financial Times



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