Comprehensive Analysis of Internet Companies in China: A Sector Update

Broker: UOB Kay Hian

Date: 12 December 2024

Sector Overview: Internet – China

The Chinese internet sector is poised for a dynamic year ahead, shaped by fiscal stimuli and the ramifications of US tariffs. The first half of 2025 is expected to witness a resurgence in e-commerce, alongside promising developments in online gaming and travel enthusiasm. The report by UOB Kay Hian highlights the potential for growth across several verticals, including e-commerce, online gaming, advertising, and local life services.

Tencent Holdings Limited

Recommendation: BUY

Target Price: HK\$570.00

Tencent remains a cornerstone in the Chinese internet landscape, bolstered by strong contributions from its gaming segment. The company is anticipated to launch new titles such as HoK World and HoK Breaking Dawn in 2025, which could see total monthly revenues soaring between Rmb1.5b-2.5b. Tencent’s share repurchase program, exceeding HK\$100b in 2024, underscores its robust financial health. With a PE ratio trading at 15.2x for 2025F, Tencent presents a compelling investment opportunity, especially given its historical mean of 25.3x.

Meituan

Recommendation: BUY

Target Price: HK\$222.00

Meituan is strategically positioned to capitalize on the evolving consumer landscape in China. The company’s core local commerce (CLC) segment is expected to benefit significantly from fiscal policies and increased online penetration in food delivery and instant shopping. Meituan’s strategic initiatives, such as Shenhuiyuan, are poised to enhance their market presence. The company is trading at a 22.5x 2025F PE, aligning with its growth trajectory and EPS CAGR of 15% from 2025 to 2028.

Trip.com Group Limited

Recommendation: BUY

Target Price: HK\$640.00

Trip.com is on the brink of capturing significant market share in the travel industry, especially with the resurgence of international and outbound travel. The company forecasts a robust 10% yoy growth in international tourism, outpacing industry averages. With substantial investments in its international brand, Trip.com is well-positioned to leverage the growing demand for travel services. Their target price implies a 26.4x 2025F PE, in line with global peers.

Alibaba Group Holding Limited

Recommendation: BUY

Target Price: HK\$130.00

Alibaba is set to regain its momentum in e-commerce, with an expected high single-digit growth in GMV for 2024-2025. The company’s strategic focus on site-wide marketing tools has facilitated significant GMV increases, with more than 300,000 merchants reporting a 60% boost. Alibaba’s focus on enhancing monetization and profitability is expected to yield positive results, especially with ad-tech upgrades driving revenue growth.

JD.com, Inc.

Recommendation: BUY

Target Price: HK\$197.00

JD.com stands out as a primary beneficiary of government stimuli, thanks to its established supply chain and consumer recognition. The company’s strong foothold in the home appliance segment, coupled with its strategic initiatives during major shopping festivals, positions JD.com for continued growth. The company’s projected PE ratios for 2024-2026 indicate a promising valuation, with a focus on maintaining competitive pricing and enhancing consumer trust.

Pinduoduo Inc.

Recommendation: BUY

Target Price: US\$160.00

Pinduoduo is actively working to broaden its market presence through strategic investments aimed at enhancing price competitiveness. Although the company has limited exposure to home appliance trade-in programs, its strategic pivot towards fostering a sustainable ecosystem is noteworthy. Pinduoduo’s focus on reducing costs and expanding its international reach, despite potential tariff risks, aligns with its long-term growth strategy.

Baidu, Inc.

Recommendation: HOLD

Target Price: HK\$90.00

Baidu is navigating through a challenging phase, with a near-term slowdown expected to persist into early 2025. However, the company’s focus on AI-powered search monetization offers a promising outlook. As macroeconomic conditions stabilize, Baidu anticipates a resurgence in advertising demand. The company’s AI Cloud revenue is expected to see high teens growth in 2025, underscoring its commitment to technological advancement.

Conclusion

The Chinese internet sector presents a myriad of opportunities for investors, driven by fiscal stimuli and technological advancements. Companies like Tencent, Meituan, and Trip.com are well-positioned to capitalize on these trends, while others like Alibaba and JD.com continue to innovate and expand their market reach. Despite challenges, the sector’s growth potential remains robust, offering promising prospects for the future.