CHINESE INTERNET COMPANIES: 2Q16 EARNINGS REVIEW
In the second quarter of 2016, all seven of the Chinese Internet companies we track reported results that beat consensus earnings estimates. On an aggregate basis, cumulative revenue growth for the seven companies was 46% year over year in the quarter, versus the consensus estimate of 41%. Revenue growth for all of the companies except JD.com and Baidu exceeded estimates.
As a group, the companies have seen meaningful year-over-year increases in metrics such as gross merchandise volume (GMV), monetization and user base, except for Baidu (which has seen a negative impact from policy changes) and Ctrip (whose merger with Qunar has affected results).
LOOKING FORWARD: ONGOING STRENGTH IN CROSS-BORDER E-COMMERCE AND GAMING
Among the seven Chinese Internet companies we cover, Alibaba, JD.com and NetEase will continue to see strength in cross-border e-commerce, while Tencent and NetEase will see continued strength in mobile gaming. The Internet of Things, VR, cloud computing and Internet finance will also be notable areas of opportunity for these companies throughout the rest of 2016 and into 2017.
The secular growth of China’s online retail industry will continue to drive GMV sequentially higher. A combination of increasing traffic and more personalized advertising will drive up take rate and improve monetization. Overall, a high proportion of orders will be made on mobile devices (roughly 70%, we expect).
2. Cross-Border E-Commerce
Cross-border e-commerce is poised to grow in China, allowing domestic consumers to shop online from overseas merchants while enjoying tax savings and better consumer protection. A number of Chinese Internet companies are well positioned to capitalize on this opportunity, despite lingering concerns about government regulations.
3. VR/AR in Gaming, Entertainment and Online Retail
China’s gaming market will remain focused on mobile gaming, and companies will pursue growth via diversification into more genres. Online retailers are developing VR technology with a view of integrating it into the shopping experience.
4. Live Broadcasting
The live broadcasting sector in China has increased in popularity and has become a means of advertising and generating revenue for platforms and online celebrities.
SECTOR COMMENTARY AND OUTLOOK
We think all Internet verticals have a positive outlook in China, but particularly e-commerce and gaming. We are cautious about the search vertical because companies operating in the space face near-term regulatory headwinds.
3Q16 GUIDANCE AND FUTURE OUTLOOK
Except for Baidu and Alibaba, all of the Chinese Internet companies we cover have guided for an increase in revenue in the third quarter. Guidance ranges from 34%–75% year-over-year growth.
REVIEW OF LATEST AVAILABLE DATA FOR CHINESE INTERNET INDUSTRY
In the following section, we review the latest available data for the Chinese Internet industry, broken out by vertical: e-commerce, gaming, mobile payments and social media, search and online travel.
China’s online retail sales increased by 39.6% year over year, to ¥651.94 billion, in the second quarter of 2016, largely due to increased sales of apparel and electronic appliances.
The Chinese online games market reached ¥41.5 billion in the first quarter of 2016 (latest available), up 1.3% year over year and 30.2% quarter over quarter. Mobile games accounted for more than half of the online games market in the first quarter, up 6.7% from the previous quarter.
Mobile Payments and Social Media
China’s third-party mobile payment GMV was ¥6.2 trillion in the first quarter of 2016, up 202.6% year over year and 33.4% quarter over quarter.
In the second quarter of 2016, the Chinese online search market was valued at ¥21 billion, up 17.8% year over year and 9.3% quarter over quarter. Excluding channel revenue, Baidu had the highest market share in the quarter, at 81.2%, followed by Google China with 9.6%, Sogou with 5.8% and others with 3.4%.
China’s online travel market reached ¥130.12 billion in the first quarter of 2016 (latest data available), an increase of 35% year over year.