China Internet Plays Adjust to a Post-Growth World

(Bloomberg Opinion) -- A sharp rebound in Chinese internet stocks over the past six weeks would have you believe that companies just turned in another quarter of stellar growth. Instead, what they did was to deliver the spending pragmatism that shows management understands the new era that’s upon us.

Revenue for a basket of Chinese companies – from Alibaba Group Holding Ltd. to Mango Excellent Media Co. – climbed at the slowest rate in at least four years during the second quarter. 

A 13% gain in the CSI Global China Internet Index shows that investors are buying back into the sector because they view this latest earnings season with optimism. Instead of demanding brisk revenue numbers, they’re embracing what amounts to a new low-growth paradigm because companies are showing a tendency to manage costs. 

The most significant swing factor in operating income at Chinese internet companies over the past few years has been sales and marketing expenses. Firms were spending buckets of money to lure users to their platforms, even when it resulted in little extra revenue. At one point, such costs were climbing so fast that operating income was slowing even when sales expansion was strong. That super-growth phase in China is now over. Companies needed to adapt.

I discussed these concerns a month ago, noting that if management would embrace this new normal, shares might enjoy the rewards of fiscal discipline. That appears to be what happened.

Although median revenue growth was 20.6% in the second quarter, median sales and marketing cost expansion fell to 10.9%, the slowest in almost four years. As a result, median operating income growth improved to 14.1%, the highest level of the past four quarters.

It’s not necessary for companies to slice marketing costs to the bone, but merely to ensure they’re getting a bigger bang for their buck amid a broader Chinese macroeconomic slowdown. Results from second-quarter earnings indicate this is the tactic most companies are now employing.

Investors think so, too, and seem happy to reward them accordingly.

This analysis excludes companies that lack data for at least the past five quarters, or which don't provide discrete sales & marketing figures.

To contact the editor responsible for this story: Patrick McDowell at pmcdowell10@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Tim Culpan is a Bloomberg Opinion columnist covering technology. He previously covered technology for Bloomberg News.

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