China Internet Software & Services : China Internet Industry A Valentine's Day merger

It was announced on Feb 14 that China’s two leading taxi assistant mobile applications, Tencent’s (700 HK; BUY) Didi Taxi and Alibaba’s (BABA US; NR) Kuaidi Taxi, will merge.

    Our Take

    Win-win for the both parties: According to InfoDesk’s newest research, Didi Taxi and Kuaidi Taxi jointly have 99.8% of the total China taxi assistant mobile application market. We believe the merging of Tencent’s and Alibaba’s apps will offer huge savings by negating previous competition through costly user subsidies. We estimate Tencent and Alibaba have invested over US$350 mn and US$300 mn, respectively, for the taxi assistant application market. Completing the O2O ecosystem; we reiterate BUY on Tencent: Although the exact merger proposal has not yet been disclosed, according to MyDriver, Tencent’s Didi Taxi will have a bigger 55% stake in the new company. We believe Tencent will have more influence in the new company to contribute to completing its O2O ecosystem. Its Tenpay will also be promoted for taxi fee payments, further widening Tenpay’s offline payment scenes. The taxi assistant service will further enrich its monetization strategy for Wechat by cooperating with advertisers. As for Alibaba, its Alipay will also remain in the application for taxi fee payments. Baidu and CAR to see a competitive threat: By merging Didi and Kuaidi, the new company will leverage its leading taxi assistant application to further expand its new transportation service businesses, including hired car and P2P car rental services. Baidu (BIDU US; BUY) recently invested in a stake in Uber’s China car service business; CAR (699 HK; NR) recently announced it invested over RMB2.5 bn to develop its new hired car service business with UCar. The two companies will see a huge competitive threat from the new Didi Kuaidi company. However, we don’t expect the peer competition to significantly drag down Baidu’s earning outlook as we see Baidu as having limited investment exposure in Uber. We maintain our BUY rating for Baidu, with a TP of US$250. As for CAR, the company’s strategic development plan focuses on the new rental car service business, and we expect its share price and earnings may see a potential retreat in the next few quarters. However, as Lenovo (a company also related to Didi Taxi) has a major stake in CAR, we see a re-rating opportunity for CAR as it may be acquired by the new Didi Kuaidi company in the near future.