Tech investors unfazed by China crackdown

September 20, 2013 2:27 pm

Tech investors unfazed by China crackdown

By Sarah Mishkin in Hong Kong and Jamil Anderlini in Beijing

Investing in China’s social media appears to be less risky than blogging on it. One day after a popular blogger – 12m followers and counting – was paraded on state television in handcuffs, the market capitalisation of Hong Kong-listed social site operator Tencent hit $100bn, overtaking Goldman Sachs and McDonald’s. The disconnect between government action and investors’ response is not restricted to the online world. Chinese property prices continue to spiral higher despite government measures to cool the real estate market.But this crackdown has been particularly heavy. Charles Xue, the blogger, was this week put on state TV to praise a new law that in effect criminalises online dissent. This was just the latest move as authorities crack down on the nation’s social networks, whose freewheeling discussions they see as a threat to their own hold on power.

Investors’ euphoria despite Beijing’s effort to limit online dissent illustrates the limits of government action, say analysts and academics. Beijing can crack down on social media sites, but that has not had a material impact on the revenues from advertising or online games that has made the sites prosper.

“After a while you just kind of get used to it,” said Jin Yoon, an internet analyst at Nomura, about investors’ attitude towards the government’s recent actions.

Shares in both Tencent and Sina, which operates the popular microblog on which Mr Xue wrote before his arrest, are up about 65 per cent year to date. That, analysts and investors say, is because of growing excitement that the companies can make money from the fast growth of their respective mobile services. Sina’s revenues last quarter increased ore than 20 per cent year on year to $152m, while Tencent’s were up 36.6 per cent to Rmb14.38bn ($2.3bn).

These services have always been tightly censored, Mr Yoon points out. Last year, Sina was forced partially to suspend operations for three days after rumours spread on it of a coup d’état in Beijing. Those limits on free speech, analysts say, have not stopped these groups from expanding their numbers of users or their ability to profit from them.

Sharper limits could drive away some bloggers, particularly its most high-profile and outspoken commentators, but analysts and investors say they are not yet overly concerned.

The companies employ legions of censors to delete sensitive posts and have had years to perfect “the ability to know where the line is . . . and how to be responsive to the consumers without the government shutting them down”, says Bernard Chan, who has worked in advertising for Yahoo in China.

The rising importance of mobile messaging apps, such as Tencent’s WeChat and a similar platform now being developed by Sina, could further insulate the companies, analysts say. These services offer one-to-one or small group messaging – rather that public publishing – and thus are less likely to catch authorities’ attention.

Beijing political watchers and academics are slightly more worried, however, about how far the current crackdown could extend.

The latest curbs on the sector are from a new law that allows the prosecution of bloggers for defamation if they write critical and widely shared posts. The law is one part of a push by China’s new president, Xi Jinping, to assert more control over new media.

Although Mr Xue was arrested on charges of hiring prostitutes, many other bloggers see his detention as a warning to other so-called Big Vs – users popular enough to have had their identities formally verified by Sina.

“New platforms and new media really are the majority of people’s main channels for getting information, so the effort to control them is logical,” said one prominent academic in Beijing. “The crackdown’s aim is to effectively curb all major internet platforms. The attack on Weibo is a sign that the next one will probably be WeChat.”

Deal activity in the industry in China rose to a record high this year, according to data from Dealogic, as companies are seizing the growth of mobile internet as a chance to expand their products and grab market share. This week, Tencent took a near $450m stake in a popular web browser. In April, ecommerce group Alibaba bought an 18 per cent stake in Sina for $586m.

“At the end of the day, they crack down on these microblogs, but Lenovo [and other companies] will still advertise,” said Billy Leung, an analyst at RHB Research. “Cracking down doesn’t mean they’re not allowed to . . . do any monetisation.”

Market watchers also argue that those authorities have an interest in keeping the internet sector growing, as it creates skilled jobs and high-value services to export. Most notably, WeChat has grown quickly outside of China, a relatively unusual success for a Chinese consumer product.

Government officials themselves, use the services to follow what is being discussed, according to Catherine Yeung, Asia equities director for fund manager Fidelity.

Plus, she adds, the social networks already have hundreds of millions of users. “They can’t really stop it, can they?”