2022-01-10-瑞士信贷集团-中国互联网行业2022年展望_在充满挑战的时代找到一线希望_184页_2mb

China Internet Sector 2022 Outlook Summary

Core Content Overview

This report outlines the outlook for the China Internet sector in 2022, highlighting the challenges faced in 2021 and identifying potential opportunities in the new year. The sector experienced a significant correction of 39% in 2021 due to regulatory scrutiny and a weak macroeconomic environment, which impacted returns and earnings. However, the report suggests that the sector may begin to show improvement in 2022, with a focus on operational efficiency, regulatory implementation, and ecosystem development.

Main Points

1. Sector Correction and Outlook

• The China Internet sector corrected by 39% in 2021, significantly weaker than the NASDAQ's +69% and the Hang Seng Index's -15%.
• Regulatory scrutiny, particularly in areas such as anti-monopoly, data security, and labor protection, contributed to the structural changes in the industry.
• The weak macroeconomic environment in the second half of 2021 further dampened growth expectations.
• Despite the challenges, the report anticipates opportunities emerging in 2022, with the potential for upside surprises due to low investor expectations and depressed valuations.

2. 6 Key Themes for 2022

• Growth: Internet companies are shifting focus from user growth to operational efficiency and leveraging existing traffic for value creation.
• Regulation: The focus is on implementation of existing regulatory frameworks, including new advertising rules, game approval resumption, and the status of ADRs.
• Ecosystem: Inter-connectivity is expected to continue, with platforms working to resolve issues such as platform security and mutual benefits as they move away from walled gardens.
• Competition: Anti-trust efforts have led to a more balanced competitive landscape, creating opportunities for smaller players.
• Investment Focus: Companies are prioritizing hard technology and overseas markets, while also exploring shareholder value unlock through buybacks and spin-offs.
• Earnings: The report believes that earnings forecasts have not fully factored in the potential upside from margin improvements and the downside from macroeconomic and investment pressures.

3. Sub-sector Outlook

• Online Games: Remains a preferred pick due to resilience to macro weakness and potential for overseas growth. The resumption of game approvals and reduction in app store fees could be catalysts.
• E-commerce: Cautious in the first half of 2022 due to slowing consumption and increased competition, but opportunities may arise in the second half with government stimulus and reduced short-video market share growth.
• Advertising: Expected to remain weak in the first half of 2022 due to macroeconomic pressures and regulatory overhang. The report highlights the need for selectivity in ad spending.
• Local Services: Monetization potential is high, but the macro slowdown and ongoing pandemic are limiting offline activities. Rider cost pressures and labor shortages may affect short-term performance.
• Education: The vocational education sector is favored due to its attractive valuations and policy support.
• Travel: The eventual recovery is expected, with OTA platforms like Trip.com being seen as prime beneficiaries of the reopening.
• Online Entertainment: Remains cautious due to increased competition and content investment, which may drag margins and constrain monetization.

Key Stock Picks

The following companies are highlighted as key picks based on their exposure to the 6 themes and valuation attractiveness:

• Tencent: Strong inter-connectivity benefits and stable user base. Target price at 615.0, with a 43% upside.
• NetEase: Strong content development and potential for game monetization resumption. Target price at 145.0, with a 52% upside.
• Kuaishou: Operational improvements and reduced competition could lead to stronger earnings and user growth. Target price at 160.0, with a 137% upside.
• PDD: Strong earnings upside potential, with a target price at 86.0, offering a 77% upside.
• JOYY: Trading at a depressed price, offering a deep-value opportunity. Target price at 78.0, with a 69% upside.
• Trip.com: A prime beneficiary of the eventual travel recovery. Target price at 33.0, with a 32% upside.

Sub-sector Ranking by Preference

9 Key Takeaways

1. Online Games: The reduction of app store fees is expected to boost operating margins. The court case between Epic and Apple is a key watch.
2. Food Delivery: Meituan faces challenges due to rider shortages and increased costs, with slow unit economic improvement.
3. Livestreaming E-commerce: Platforms are shifting focus to self-operated merchants and reducing reliance on KOLs, which could improve take rates and merchant profitability.
4. Levelling the Playing Field: Kuaishou benefits from Douyin's reduced user acquisition efforts and its own operational improvements.
5. Investment Focus: Companies are prioritizing hard technology and overseas markets, with a focus on shareholder value unlock.
6. Earnings Forecasts: The report holds different views from the market on BABA and Meituan (downside) and PDD (upside).
7. Capital Action Opportunities: JOYY and Huya are trading below cash value, suggesting potential for value unlock.
8. Advertising: The report provides a comprehensive outlook on key internet verticals and their ad drivers and challenges.
9. Regulation: A detailed wrap-up of key regulations in 2021 and their implications for each sub-sector.

Valuation Summary

Conclusion

The report suggests that while the China Internet sector faced significant challenges in 2021, there are opportunities emerging in 2022. The focus is on operational efficiency, regulatory implementation, and the potential for recovery in travel and e-commerce. Companies like Tencent, PDD, and Kuaishou are highlighted as key investment opportunities, with strong potential for earnings upside and valuation improvement. The report also emphasizes the importance of monitoring the regulatory landscape and the evolving competitive dynamics in the sector.