The quarterly reports of Tencent and Ali have pieced together a new prologue on the Internet

damask

2024-05-17 08:24Posted on the official account of Beijing Brocade Research Institute

This article is based on publicly available information and is for information purposes only and does not constitute any investment advice

The quarterly reports of Tencent and Ali have pieced together a new prologue on the Internet

Over the past decade, China's internet has experienced a surge, but it has also left behind a number of inefficient assets. The disposal of low-performing assets and the optimization of existing traffic pools may be the key points of interest in the next 5-year mid-cycle.

Tencent and Alibaba's quarterly reports pieced together such a prologue.

01 Tencent's wall is higher, and Ali's pit is deeper

Tencent and Alibaba, the former has an absolute market share in the domestic social application field, and the latter is the largest e-commerce platform in China. In the first quarter of 2024, the year-on-year growth rate of the operating income of the two giants was basically the same, of which Tencent increased by 6.34% year-on-year to 159.501 billion yuan, and Alibaba increased by 6.57% year-on-year to 221.874 billion yuan.

In absolute terms of revenue, Tencent's operating income is 71.89% of Alibaba's.

However, the difference in business ecology and the difference in the depth of the moat have made the gap in income quality between the two have diverged greatly in the past year under the background of peak traffic dividend and strong supervision:

(1) Tencent's gross profit was 83.87 billion yuan, Yoy +23.01%; Achieved a gross profit of 73.776 billion yuan and Yoy +6.34% of Alibaba, which was 1.14 times that of Alibaba. Tencent's gross profit margin increased by 7.12 percentage points year-on-year to 52.58%, while Ali's gross profit margin was basically flat at more than 33%;

(2) The power difference of operating leverage has further amplified the profit gap between the two giants, and Tencent's net profit reached 50.265 billion yuan, Yoy +54.48%, which is 2.06 times that of Alibaba - 24.418 billion yuan, Yoy - 10.8%.

The growth of gross profit margin boosted Tencent's net profit margin by 9.82 percentage points year-on-year to 31.51%; Alibaba's net profit margin decreased by 2.14 percentage points year-on-year to 11.01% due to increased expenses.

From the perspective of the composition of operating income:

(1) In addition to "value-added services" affected by game deferred revenue, Tencent's "online advertising" and "fintech and enterprise services" both recorded year-on-year growth, and the gross profit margin of each sub-business increased.

Among them, "online advertising" benefited from the "price and volume increase" driven by Channels: revenue increased by 26.44% year-on-year, and gross profit margin increased by 13 percentage points to 55%.

(2) Except for "Dawen Entertainment", which was affected by Youku, Alibaba's other businesses basically achieved growth, of which "Taotian Group" only increased by 3.7% under the premise of double-digit GMV growth; "Cloud intelligence" began to exchange price for volume; "AIDC" continued to make efforts, AliExpress Choice and geographical expansion to achieve rapid growth; "Cainiao" has also recorded a growth of nearly 30% in improving its cross-border logistics coverage in collaboration with AliExpress. "Local Life" increased by 18.54% year-on-year, driven by Ele.me and AutoNavi.

In terms of operating profit margin, the core "Taotian" decreased by 2.13 percentage points to 41.3%, and the scale effect of "cloud intelligence" increased by 2.4 percentage points to 5.59%;

Except for the "AIDC", which was expanded by continuous investment, the rest of the sectors basically narrowed their losses.

Under the same time and space background, the financial data of Tencent and Alibaba show a certain curve divergence, and the reasons for this are at least two levels:

1. Alibaba's deeper pit is also the contraction of the front, and Tencent's inefficient assets are lighter, so the adjustment flexibility is greater - such as cloud services, live entertainment content, etc. Comparatively speaking, the assets of Alibaba's offline retail business are heavier, and in the current environment, the impairment margin is large, and it is more difficult to divest off the balance sheet.

2. Tencent's walls are higher

As we all know, Tencent's business logic lies in the realization of super traffic pools brought by social software - with games, payments, etc. as the core. Even in 2024, in the context of the global economic cycle downturn, such a wall still plays a key role as a value center stabilizer.

Strong user stickiness and high conversion cost make WeChat almost a rigid infrastructure, and its application scenarios have not yet seen competing products.

From the perspective of the expansion of C-end traffic, Tencent has basically achieved full coverage in China, while it is difficult to make a breakthrough in the short and medium term overseas due to regulatory (especially in the United States), so Tencent's development focus is not to get more C-end traffic, but to give full play to the economic benefits of the cash cow of "WeChat" under the mentality of "contentment", and improve the revenue generation capacity and revenue quality of the B-end by enriching empowerment means and empowerment scenarios.

In essence, Tencent and Alibaba, like many other Internet manufacturers, are platforms that act as "connectors", relying on traffic or 2C or 2B, and basically revolving around the model of "(C-side) free + (B-side) charged"; However, the two giants, which also have the first-mover advantage, seek a new growth curve after domestic traffic tends to peak (the Internet beta dividend is no longer there), and there is an essential difference in the growth curve.

Alibaba, on the other hand, has long dominated domestic e-commerce platforms, but its "optional" nature is destined to face competitive pressure and growth momentum that are very different from Tencent's.

In a nutshell, this is the difference between "unique" and "first".

But even so, we still have to note that in the downward economic cycle, Alibaba's business model is under greater pressure, but the main business fundamentals, Taotian, still maintain relative resilience. Although the growth rate is no longer sexy, the solid cash flow is still to the greatest extent, providing a patient foundation and operating space for the strategic shift of the entire group - "time for space" and "keeping integrity and surprising (AI)".

02 Take Ali as a mirror to see the future trend of large manufacturers

However, Tencent is the only existence after all, which means that the reference is relatively weak. The current situation of Ali and the logic contained in it can better reflect the future trend of Internet giants.

The basic fact is that the traffic differentiation of optional Internet platforms is extremely serious, and Alibaba, as a traditional e-commerce, not only faces strong competition from Pinduoduo, but also bears the comprehensive impact of new forces such as content e-commerce dominated by Douyin.

However, whether it is traditional e-commerce (Alibaba, Pinduoduo, JD.com, etc.) or emerging platforms (Douyin, Kuaishou, etc.), the focus of competition in China is still the C-end.

Therefore, after consumers have more and more choices, they will in turn ask the platform to make profits, and the underlying logic of "free + charged" will lead to platform companies, which may continue to strengthen the following trends:

(1) Compress the premium space of the B-side, but the B-side also has the right to choose, as Ali said in the performance call, merchants attach great importance to ROI, and without a huge amount of compensation for the price difference, it will only lead to the loss of merchant groups;

(2) Increase investment to enhance the value of B-end empowerment, or improve efficiency to reduce "redundant" costs, such as rookies continue to improve the scale of the supply chain and strengthen synergies with e-commerce business - the most intuitive is that the remaining 1 yuan of transportation fees can make the C-end pay 1 yuan less.

In addition, to develop new business on the premise of stabilizing the established business, the trend may be:

(1) For the platform-based economy, the reuse of the precipitated traffic pool is extremely convenient, and when the core business is under pressure, it is necessary to create a new growth curve through new businesses, such as Alibaba Development Cloud, Douyin into takeaway, and Meituan into taxi;

(2) If the domestic competition is too sufficient, then develop international business and copy the operating experience overseas to open up a new battlefield, but it is much more hands-on than the initial operation, but the consistency of the industry will not greatly reduce the development cost: for example, Pinduoduo's Temu, like Ali Lazada, also started its overseas journey through huge losses.

In addition, Alibaba's 88VIP membership (double-digit year-on-year growth) exceeded 35 million, and on April 22 this year, it announced that it would upgrade from "6 5 yuan return coupons per month" to "unlimited times and up to 25 yuan postage per return", which is based on a "user-centric" strategy is debatable, and even invisibly digging a hole for itself.

Because the underlying logic of revenue generation of platform-based enterprises is basically "free + charged", and the e-commerce platform charges C-end customers (such as Taobao and Jingdong's membership system) in the short term through "more cost-effective" impact on consumers' minds, which can not only bring VIP income, but also use consumers' psychological accounts and sunk cost thinking for "impulse" (unlimited, why not buy more and try more, anyway, if it is not suitable, it will be returned, and there are subsidies), and the economic benefits are not yet known.

But in the long run, "reaching out" to the C-end or narrowing the scope of the customer base, or attracting new platforms to burn money and grab food - isn't this how Pinduoduo rises? The huge scale effect generated by traffic will always give rise to a new model of "completely free" in the future.

To conclude, we would like to conclude by quoting the core points of the previous report, The Age of Balance Sheet Reduction:

All the things you are reluctant to give up are obsessions that must be let go. This is true of Tencent and Alibaba, and the same is true of the theme of the new prologue of China's Internet.

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