China Technology - Favour E-commerce Companies with Cloud-driven Growth and High Asia/LatAm Exposure
2Q24 earnings mostly ahead of expectations despite weak economy. The latest quarterly earnings of China internet companies were above expectations and this is largely due to operating efficiency gain...
Chief Investment Office - Hong Kong version4 Oct 2024
  • China Technology to experience massive re-rating amid revival of interest in China equities
  • China internet players’ earnings largely above consensus forecasts in 2Q24
  • Competition heating up amongst e-commerce players as the latter set sights on market share gains
  • Benign competition in local life services, food delivery, and online travel is positive for earnings outlook
  • Preference for: (1) Companies that benefit from cloud-driven growth, and (2) diversified global e-commerce business with exposure to Asia and Latin America
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2Q24 earnings mostly ahead of expectations despite weak economy. The latest quarterly earnings of China internet companies were above expectations and this is largely due to operating efficiency gains. Margin improvement and benign competitive backdrop more than offset adverse revenue impact from end demand weakness. Notably, e-commerce industry leaders signalled their intent for market share gains that will inevitably translate to margin headwinds.

Huge focus on monetisation and revival in cloud growth. We see benign competition across local consumer services, food delivery, and online travel industries. This stands in stark contrast to last year’s aggressive posture from Douyin – a company grappling with severe cash burn. Douyin doubled the take rate in hotel booking services, dining verticals, and various offline to online services. Rising competition in these areas led to higher cash burn and this explains the need for Douyin to re-focus on monetisation.

Updates on the competitive environment in other segments:

  • Food Delivery: Competition in the food delivery segment remains rational. Market leader, Meituan, is able to group multiple customers in real-time to reduce the unit cost of delivery, making it more affordable for budget-conscious customers.
  • Cloud Services: Revenue is expected to accelerate in the second half of 2024, led by higher demand for Gen-AI. Chinese regulators recently commented in August that market leader, Alibaba, has completed three years of "rectification" following a fine levied in 2021 for monopolistic behaviour. That said, competition in the e-commerce space is expected to remain intense as Alibaba plans to maintain its market share.

Focus on market leaders in local-life services, food delivery, cloud, and online travel industries; preference for select diversified e-commerce players. Local life services and food delivery offer higher growth potential as competition is limited to only two main players. We also favour online travel players amid staff-cost reduction with the implementation of AI at their contact centres.

Focus on market leaders in local-life services, food delivery, cloud, and online travel industries; preference for select diversified e-commerce players. Local life services and food delivery offer higher growth potential as competition is limited to only two main players. We also favour online travel players amid staff-cost reduction with the implementation of AI at their contact centres.

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