China Internet:Transfer of coverage;latest company updates
Transfer of coverage.
We transfer lead coverage of Alibaba & Tencent from Alan Hellawell to Han JoonKim, and of Baidu & JD.com to Alvin Jiang with immediate effect. All target pricesand recommendations remain unchanged. Due to a change in team structure, weare dropping coverage of VIPS with immediate effect.
As part of the transition, we have recently caught up with some of the abovementionedcompanies and we plan to catch up with others in the coming days.
Below are our latest take-aways.
Alibaba - Healthy progress for September quarter; Cainiao consolidation impact.
Our recent update suggests the September quarter is tracking broadly in linewith our forecasts, with the company showing continued progress in key revenuedrivers. We spent some time discussing the latest increased investment intoCainiao and its implications. With the shareholding growing to 51% (from 47%),we infer from our discussion that the consolidation could make a ~3% incrementalcontribution to revenue in FY18 and result in a ~1.5% erosion to non-GAAP netprofit. If external partner contribution was only slightly more than half of Cainiaoin FY17, merchant adoption seems to be growing at a rapid pace and could be asignificantly larger contributor in FY18, as Cainaio drives a better user experiencefor both merchants and consumers.
Separately, we sensed New Retail could be a focus for the upcoming SinglesDay, and we expect various forms of rebate and subsidy going into the event.
The brand databank tool remains in beta stage testing with a number of brandshaving access to it currently.
For Youku, the company seems to be transitioning its focus from post-mergerintegration to growing its service towards a paid subscription business. Thecompany reiterated its investment commitment of RMB50bn over the next threeyears on content, user acquisition, technology and infrastructure.
Tencent - Tracker picking up strong mobile game performance for 3Q17.
Our mobile game tracker shows as much as a 30% QoQ increase versus ourcurrent modeling of 13% QoQ growth. The growth is largely attributable to afull quarter's contribution by Legacy TLBB, Contra: Return, as well as a numberof other mobile games that have performed well through the quarter. We notethat our tracker has shown better accuracy for NetEase than Tencent, an element we continue to address, but the overall impression is that the game business istracking ahead of our original expectation.
Baidu - Search rebound on track, iQiyi losses may also be narrowing.
The recovery of the search business continues to be on track. The top sectors(including education, local service, ecommerce, healthcare and financials) willcontinue to drive 50% of total search revenue. Meanwhile, with the 100mn+DAU and improving time spend, news feed ads are increasingly getting advertiserattention. Baidu is focused on increasing news feed product time spend byintroducing new functions like short video and updating the recommendationalgorithm. iQiyi launched “The Rap of China” in June, whose total number ofvideo views reached 2.7bn, surpassing, for instance “Sing! China” Season 2 videoviews of 1.4bn. With content cost growing less aggressively than in prior years,the company expects iQiyi loss to continue to narrow.