China’s Internet Sector Poised for Growth as Government Policies Drive Consumption and Valuation Repair
UOB Kay Hian
09 October 2024
China’s internet sector is set for a significant rebound, driven by stronger-than-expected government policy rollouts aimed at boosting consumption and repairing undervalued market positions. E-commerce, local life services, and online travel agencies (OTAs) are expected to benefit the most from these policies, along with advancing monetization opportunities in the artificial intelligence-generated content (AIGC) and adtech sectors. The sector remains undervalued, offering a ripe opportunity for re-rating as shareholder returns and easing competition further bolster growth prospects.
E-commerce: Stabilization and New Catalysts on the Horizon
China’s e-commerce giants, including Alibaba, JD.com, Pinduoduo, and Kuaishou, are poised for market share stabilization as government policies continue to support consumption. Currently, these companies are trading at undemanding valuations—between 9-11x 2025F PE—far below the global sector average of 14x. The combined market capitalization of these top four e-commerce players is USD 566 billion, compared to Amazon’s USD 2 trillion valuation, highlighting significant growth potential.
The upcoming 11.11 Shopping Festival is expected to act as a catalyst, driving consumption in conjunction with government-supported trade-in programs and consumer vouchers aimed at stimulating sentiment. Alibaba and JD.com, in particular, are well-positioned to regain GMV growth momentum through increased investments and rising take rates, supported by advancements in advertising technology.
Online Travel Agencies (OTAs): Sustained Tourism Recovery
The Golden Week tourism data revealed sustained enthusiasm for travel, with 765 million domestic tourists contributing to a 5.9% year-on-year increase in tourist numbers and a 6.3% increase in tourism revenue. The resurgence of commercial performances as a travel driver was a standout, with ticket revenue up 26% year-on-year and audiences increasing by 13.3%.
OTAs like Trip.com are positioned to benefit from this revival in domestic and outbound travel demand. The strong recovery in travel, coupled with supportive government policies, is expected to continue propelling OTA performance, especially as international travel resumes at even greater levels.
Online Gaming: Promising Outlook with Strong Monetization
China’s mobile gaming sector is experiencing double-digit grossing growth, driven by successful titles from major players like Tencent and NetEase. With stable regulatory conditions, the National Press and Publication Administration (NPPA) continues to approve new games at a steady rate, with 109 Banhao licenses issued for domestic games in September 2024. This consistency in approvals supports the launch of more highly monetized game titles, ensuring sustained profitability in the sector.
Listed Companies Analysis
Tencent (700 HK/BUY/HK$570)
Tencent, one of China’s leading internet giants, is set to benefit from multiple growth drivers, including its strong gaming division and leadership in adtech. Tencent’s ability to leverage AIGC and adtech upgrades will fuel further monetization, while its share buyback program adds a layer of shareholder value. Tencent is currently trading at 14x 2025F PE, and UOB Kay Hian maintains a BUY rating with a target price of HK$570, implying a 30% upside.
Trip.com (9961 HK/BUY/HK$630)
Trip.com is well-positioned to capitalize on the strong rebound in tourism, driven by both domestic and outbound travel. The company continues to outperform, benefiting from increased travel bookings, especially from fourth- and fifth-tier cities. UOB Kay Hian maintains a BUY rating with a target price of HK$630, implying a 30% upside.
Meituan (3690 HK/BUY/HK$235)
Meituan’s in-store consumption services and hotel business are seeing an uptick in demand, driven by the recovery in local life services. The company’s ability to narrow losses from new initiatives through prudent cost control is enhancing its overall profitability. UOB Kay Hian maintains a BUY rating with a target price of HK$235, implying a 30% upside.
Alibaba (9988 HK/BUY/HK$130)
Alibaba, a major e-commerce player, is expected to regain GMV growth momentum as the government’s consumption-boosting policies take effect. The upcoming 11.11 Shopping Festival presents a critical opportunity for Alibaba to capitalize on increasing consumer sentiment. Alibaba is currently trading at 12.7x FY25F PE, 1SD below its historical mean, with UOB Kay Hian maintaining a BUY rating and a target price of HK$130, implying a 24% upside.
JD.com (9618 HK/BUY/HK$190)
JD.com’s efforts to strengthen its supply chain and reduce procurement costs are positioning the company for margin improvement and growth. As consumption rises, JD.com is expected to benefit from increased demand across its platform. The company is trading at 10.8x FY25F PE, 2SD below its historical mean, with UOB Kay Hian maintaining a BUY rating and a target price of HK$190, implying a 17% upside.
Pinduoduo (PDD US/BUY/US$200)
Pinduoduo continues to demonstrate strong growth potential with its global expansion strategy through Temu. Its focus on cost-effective products and high user engagement makes it a key player in China’s e-commerce space. PDD is trading at 11x FY25F PE, and UOB Kay Hian maintains a BUY rating with a target price of US$200, implying a 31% upside.
Conclusion
China’s internet sector is primed for a robust recovery, fueled by government initiatives aimed at boosting consumption and driving valuation repair. Key players like Tencent, Alibaba, JD.com, Pinduoduo, Trip.com, and Meituan are well-positioned to benefit from the favorable market conditions and government-backed policy support. As these companies capitalize on the emerging opportunities, investors can expect strong growth, making the sector a compelling investment in the coming quarters.
