China Internet - Downside Risk for 2H16 Driven by Tightened Regulations on Online Payment and News

Independent TMT Analyst

Edison Lee, CFA

Equity Bottom-Up

Alibaba Group Holding  / Equity Bottom-Up

<ul><li>BABA, Baidu, Tencent, Sina and Weibo together accounted for 71% of China's digital advertising spending in 2015. Their combined share will likely hit 74% to 75% this year.</li><li>Among these top five media of advertising, Baidu's share has fallen more than 10 ppts since 1Q14 while Tencent's share has tripled, amid from a low base. Baidu's position is the weakest given the need to clean up its P4P platform yet it has the largest dependence on advertising as a revenue source (92%).</li><li>Over the next one to three years, we expect Tencent to have the strongest advertising revenue growth potential owing to its powerful social media platforms of QQ and Weixin/WeChat. It is currently generating advertising revenue of only Rmb2.42 per month per user.</li><li>However, in 2H16, Alibaba is the best positioned as far as growth potential and regulatory risks are concerned. Its share of advertising revenue among the top five has risen by 5 ppts since 1Q14 but advertising contributed only 56% of total revenue in 2Q16. It will likely be least vulnerable to the new government rules on Internet advertising, because its users are naturally looking for advertising on its online marketplaces. </li></ul>

BABA, Baidu, Tencent, Sina and Weibo together accounted for 71% of China's digital advertising spending in 2015. Their combined share will likely hit 74% to 75% this year.Among these top five media of advertising, Baidu's share has fallen more than 10 ppts since 1Q14 while Tencent's share has tripled, amid from a low base. Baidu's position is the weakest given the need to clean up its P4P platform yet it has the largest dependence on advertising as a revenue source (92%).Over the next one to three years, we expect Tencent to have the strongest advertising revenue growth potential owing to its powerful social media platforms of QQ and Weixin/WeChat. It is currently generating advertising revenue of only Rmb2.42 per month per user.However, in 2H16, Alibaba is the best positioned as far as growth potential and regulatory risks are concerned. Its share of advertising revenue among the top five has risen by 5 ppts since 1Q14 but advertising contributed only 56% of total revenue in 2Q16. It will likely be least vulnerable to the new government rules on Internet advertising, because its users are naturally looking for advertising on its online marketplaces. 

China's Ad Market Post 2Q Results - BABA Best Positioned; Least Vulnerable to Regulatory Risks