Government Policy Rollout Set to Boost Consumption and Drive Valuation Repair
UOB Kay Hian
09 October 2024
China’s government has initiated a series of strong policy rollouts aimed at boosting consumption and driving valuation repair across several sectors. This strategic move is set to benefit key areas like e-commerce, local life services, and online travel agencies (OTAs), as China continues its efforts to reignite economic growth. These measures come at a time when market valuations remain undemanding, offering significant upside potential for investors.
E-commerce: Positioned for Stabilization and Growth
The e-commerce sector is a central beneficiary of the government’s consumption-boosting policies. As of now, China’s top four e-commerce players (Alibaba, JD.com, Pinduoduo, and Kuaishou) have a combined market cap of USD 566 billion, significantly undervalued when compared to Amazon’s USD 2 trillion valuation.
The upcoming 11.11 Shopping Festival is expected to act as a major catalyst, especially with government support for trade-in programs and consumer vouchers to stimulate spending. As Alibaba and JD ramp up their investments, both companies are likely to regain growth momentum in Gross Merchandise Value (GMV) in the second half of 2024. Both companies are trading at valuation levels 1 standard deviation below their 10-year historical averages, indicating significant upside potential as the market environment stabilizes.
Online Travel Agencies (OTAs): Riding on Tourism Revival
Golden Week data has reflected the robust recovery in domestic travel, with a 5.9% year-on-year growth in tourist numbers and a 6.3% increase in domestic tourism revenue. During the week, 765 million domestic tourists contributed RMB 40.35 billion in revenue.
A key driver for growth within OTAs has been the increasing popularity of “travel with performances,” which saw a 14.5% growth in commercial performances and a 26% increase in ticket revenue. OTAs like Trip.com are well-positioned to benefit from this resurgence in travel demand, further strengthened by strong policy support.
Online Games: Promising Outlook on Monetization and Growth
The online gaming sector has seen double-digit growth in gross revenues, driven by China’s mobile game market. Tencent, NetEase, and other major players have launched blockbuster titles that have resonated well with consumers. The regulatory environment remains stable, with the National Press and Publication Administration (NPPA) approving 109 new domestic games in September 2024. This steady flow of new products, particularly those with monetization potential, should support sustained growth in the sector.
Listed Companies Analysis
Alibaba (9988 HK/BUY/HK$130)
Alibaba, as one of the leading e-commerce platforms, stands to benefit from the government’s focus on boosting consumption. With the 11.11 Shopping Festival on the horizon and continued policy support, Alibaba is expected to regain momentum in GMV growth. Alibaba is trading at 12.7x FY25F PE, which is 1 standard deviation below its historical mean, presenting an attractive valuation. UOB Kay Hian maintains a BUY rating with a target price of HK$130, implying a 24% upside.
JD.com (9618 HK/BUY/HK$190)
JD.com has been actively improving its 1P supply chain by reducing procurement costs and increasing its assortment of 3P merchants and white-label products. As consumption picks up due to government initiatives, JD is well-positioned to see an improvement in margins and growth. JD is currently trading at 10.8x FY25F PE, which is 2 standard deviations below its historical mean. UOB Kay Hian maintains a BUY rating with a target price of HK$190, implying a 17% upside.
Pinduoduo (PDD US/BUY/US$200)
Pinduoduo, known for its cost-effective offerings and strong user engagement, is also set to benefit from China’s government policies aimed at boosting consumption. The platform’s Temu expansion into global markets further strengthens its growth prospects. 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.
Tencent (700 HK/BUY/HK$570)
Tencent’s diverse portfolio of digital services, including its robust gaming segment, positions the company to thrive under the current policy environment. The stable regulatory landscape, combined with the ongoing monetization of new game titles, enhances Tencent’s growth prospects. UOB Kay Hian maintains a BUY rating with a target price of HK$570, representing a 30% upside.
Trip.com (9961 HK/BUY/HK$630)
Trip.com has emerged as a major beneficiary of the Golden Week travel surge. The platform saw a significant increase in both inbound and outbound travel bookings, surpassing 2019 levels. With China’s tourism sector recovering and strong government support for domestic travel, Trip.com is well-positioned for further growth. UOB Kay Hian maintains a BUY rating with a target price of HK$630, implying a 30% upside.
Conclusion
China’s government policy rollout is strategically designed to boost consumption and repair market valuations across key sectors like e-commerce, OTAs, and gaming. These policy-driven tailwinds offer substantial upside potential for investors, particularly in companies like Alibaba, JD, Tencent, and Trip.com, which are set to benefit from the recovery in consumer confidence and spending. The current undemanding valuations across these sectors, coupled with robust government support, present a compelling investment opportunity in the Chinese market.
