In this week's issue of Chinese Internet Weekly (CQQQ)(FXI), my coverage will focus on the strange bedfellowship of the BAT trio - Baidu Inc. (BIDU), Alibaba Group (BABA), and Tencent Holdings (OTCPK:TCEHY) (OTCPK:TCTZF). The trio is ostensibly united, thanks in part due to their common foe ByteDance, Didi (DIDI), and their founders' beliefs towards long working hours.
As explained in a past issue of the Chinese Internet Weekly, I find the top constituents of the KraneShares CSI China Internet ETF (KWEB) to be more relevant to the sector. Hence, allow me to provide an overview of the week's share price movements of the top few holdings of KWEB as compared with the ETF itself for an overview and convenient reference in the subsequent sections.
Clearly, Tencent was the top performer last week in terms of share price percentage gain, while Baidu did not fare well. Following the rare new approvals granted to the foreign gaming titles of NetEase Inc. (NTES) and Tencent two weeks ago, the latter managed to secure another local game approval last week. This is, of course, providing another boost to its share price. Baidu, on the other hand, lost favor on Wall Street, with Oppenheimer downgrading Baidu from Outperform to Perform.
Among the second-tier stocks, Huya Inc. (HUYA), the spin-off unit of YY Inc. (YY) focusing on eSports video streaming, fell further last week following its announcement of a follow-on offering of ADSs.
The BAT Trio - Strange Bedfellows United By Common Foes - ByteDance
Two issues ago, this column published an article discussing the apparent altercations between Tencent and ByteDance. Tencent disallowed contents from its two most popular games, Honor of Kings and PUBG: Battlefield to be made available on ByteDance's TikTok streaming platform. Douyin, the local name for TikTok, complained that new users were unable to register for accounts via their WeChat app. These issues appear to be no coincidence. Duoshan, another ByteDance app was banned by WeChat, following "hazardous content complaints from users".
The popularity of ByteDance's apps has ostensibly raised some eyebrows at Tencent. The former is going one step further, encroaching into the latter's core revenue driver - gaming. Caixin reported that ByteDance acquired Shanghai-based gaming startup Mokun Technology via its subsidiary Jinri Toutiao, with Zhang Xudong, the senior vice president of the subsidiary now the legal representative of Mokun. This is ByteDance's second foray into gaming. Douyin launched its first in-app game "Music Jumping Ball" in February. That could explain why Tencent is taking defensive measures, including engaging in distractions. Tencent sued ByteDance and an affiliated company for defamation, seeking only a token compensation of one yuan (around 15 US cents).
Now, it turns out that ByteDance has a petty fight with Baidu as well, with ByteDance Vice-President Li Liang revealing a court decision in his favor via a post on his Jinri Toutiao account. Jinri Toutiao is a news aggregator and information content platform, a core product of ByteDance. The dominant Chinese search engine was ordered to compensate and apologize to Li for defamation in a suit brought about by the latter.
Technode reported that Li sued Baidu for publishing "at least one slanderous article" targeting him on its platforms. Besides having to delete the offending articles, Baidu has to place a conspicuous statement of apology to Li on baidu.com, the main page of the Chinese search engine. In addition, Baidu has to pay Li RMB50,000 (~US$7,440) in damages. Unlike Tencent's lawsuit which specifically asked for one yuan in compensation, it was not known if the RMB50,000 awarded was an amount as requested by ByteDance. Otherwise, either the court deemed the issue is trivial, Baidu's reach is limited, or Li's reputation is not worth much.
The BAT Trio - Strange Bedfellows United By Common Foes - Didi
On ride-hailing, Tencent, Alibaba, and other partners are teaming up for a decent chance to snatch some market share from Didi, the indisputable leader after Uber pulled out of the Chinese market years ago in exchange for an equity stake in Didi. In a deal touted to be worth 9.76 billion yuan ($1.46 billion), the partnership will create a ride-hailing and new-energy vehicle joint venture led by state-owned automakers Chongqing Changan Automobile Co. Ltd., China FAW Group Corp. and Dongfeng Motor Corp. (OTCPK:DNFGF)(OTCPK:DNFGY).
Interestingly, electronics retailer Suning.com Co. Ltd. will be the largest shareholder, with a 19 percent stake. Suning is the second biggest listed retailer after JD.com (JD) in China, based on net revenue, and had collaborated with Tencent and JD.com previously to acquire significant commercial properties.
Source: JD.com 2018 Q4 earnings call slides
Didi is backed by SoftBank (OTCPK:SFTBF)(OTCPK:SFTBY) which has proven to be a dependable financier. Its Southeast Asian counterpart Grab has received several rounds of financing from SoftBank. Hence, to ensure a fighting chance, it made sense for the consortium to involve so many different parties.
The BAT Trio - Strange Bedfellows United By Common Foes - Bloated Workforce
The Information revealed that Tencent-backed JD.com could be initiating large-scale layoffs for the first time. Some team sizes would be halved, resulting in a company-wide workforce reduction by around 8 percent. Based on the last staff count at 178,000, that would mean more than 14,000 jobs. The cuts are expected to come from various departments, including warehouse and delivery staff. Even the headquarter will not be spared.
After the completion of the exercise, JD.com would still end up with more employees than the BAT trio. Nevertheless, it is interesting to note that Amazon (AMZN) has a higher staff strength than all four Chinese internet companies combined. In fact, in the past five years, despite already starting off with a larger base, Amazon continued to expand its workforce at a faster pace than any of the four Chinese internet companies.
Yet, having a bulkier US counterpart is no comfort for JD.com founder, Richard Liu, who lamented that the number of "slackers" in his firm who are not his "brothers" have grown as the revenue expanded. Although Richard emphasized that JD did not compel its staff to work the "996" or even a "995" overtime schedule - working from 9AM to 9PM, five or six days a week - he said that every employee "must have the desire to push oneself to the limit!"
As if to lend his support to Richard, Alibaba Group founder Jack Ma broached the topic during a speech to his company's employees on Thursday, April 11, 2019, calling (content in Chinese) the opportunity to work such punishing hours was a "blessing". He further expressed that one would not feel working for 12 hours a day as "long" if one is passionate about his work. Conversely, if an employee is unable to find happiness with a job requiring only eight hours of work, it is meaningless and unpleasant. He implored that "only with great sacrifice, would you be rewarded one day".
Without a surprise, Jack's comments invited plenty of criticism such that he had to issue a clarification (content in Chinese) over the weekend which provided further justification of his stand. Interesting, instead of being defensive, he apparently became more provocative, citing additional examples to prove his point. For instance, he listed occupations such as craftsmen, scientists, athletes, government officials, and politicians who would, in fact, go beyond the 996 regime and closer to 007 (midnight-to-midnight, seven days a week). Nevertheless, he did qualify that companies who compel employees to work the 996 regime would simply drive them away given the tens of millions of enterprises operating in China.
The debate has become such a hot topic that the local television channels also weighed in, reminding viewers that "996" is actually illegal based on the labor law in China.
Source: Author's screen-grab from TV
Huya's Secondary Offering Exacerbated Its Share Price Decline
It seems like Huya has been a disappointing investment with its market capitalization losing one-fifth its value since the beginning of April. Its share price was already falling before the company announced a follow-on offering of ADSs. In addition to new shares, a selling shareholder of the leading game live streaming platform in China is looking to sell 4.8 million ADSs, with an option to increase the 720,000 additional ADSs.
Looking at the year-to-date share price performance, however, Huya is not doing too badly even with the 21.5 percent slump it suffered in April thus far. Its 48.6 percentage gain is better than its major shareholder, YY Inc. (YY), while Huya has a greater appreciation than Momo (MOMO) for most of the time year to date. The strong volatility has turned many investors away from these video-streaming platforms.
To Luxury Brands, Alibaba and JD.com Are Not China's Amazon
The Wall Street Journal reported that the Luxury Pavilion section of the Tmall website operated by Alibaba has attracted brands, including Valentino, Bottega Veneta, and Burberry. Even as the luxury brands have snubbed Amazon to avoid associating their image with "less glamorous goods", they are embracing Alibaba and JD.com to grow their businesses in a high potential, low familiarity market.
Indeed, the advantages of tapping on the duo to access the Chinese consumer market is not limited to their highly visited and attractive online platforms but also the extensive logistic network that they have established, providing them with the competitive edge. In addition, the luxury brands would also be able to access consumer insights enabled by the vast user databases of Alibaba and JD.com. The two e-commerce giants have such entrenched positions in China that it is unfathomable that some skeptics continue to question whether they are truly massive.
Sure, there are numerous instances of fraudulent businesses purportedly having highly inflated revenues which did not match the scale of the actual operations. However, the sheer scale of the innovations brought about by the Chinese internet companies discussed frequently in this column meant that investors should not easily dismiss the stocks as uninvestible. Perhaps, if one is serious in seeking the elusive alpha in the Chinese internet stocks, he should make the trip to China itself and get involved in as many of the BAT products and services as possible for a first-hand experience.
Disclosure: I am/we are long BABA, JD, NTES, TCEHY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.