20211108-招银国际-China_Internet_Sector__Embracing_a_new_normal_of_regulation_15页_924kb

CMB International Securities | Equity Research | Sector Update Summary

Core Content Overview

The China Internet sector is entering a new normal of regulation, with most of the regulatory headwinds already priced in. The market has corrected by 45% from its February peak due to tightened regulations, increased competition, and normalization of traffic. However, the sector's fundamentals and valuation (19x FY22E P/E) are now considered attractive, with a favorable risk-reward profile.

Main Points and Key Insights

Sector Outlook

• Regulation Overhang: After nearly one year of regulation, the market has largely factored in the impact, and the new regulatory environment is now accepted.
• Valuation Floor: The fundamental valuation floor has been built, with the sector trading near a 5-year historical trough (18x FY22E P/E).
• Re-rating Potential: The sector is expected to see re-rating in FY22E due to regulatory easing and strong growth outlook.
• Earnings Growth: The industrial earnings growth is forecasted at a 26% CAGR in FY21-23E.

Investment Strategy

• Timing: 4Q21 is suggested as a good time to accumulate key names due to potential sentiment boost from:
  • Ecommerce bottoming out in 3Q21E
  • Game license resumption
  • Strong seasonality for consumer internet
• Pecking Order:
  • Consumer Internet: Meituan > PDD > BABA > Kuaishou > Zhihu
  • Entertainment: Tencent > NetEase > Bilibili > Zhihu
• Top Pick: Meituan is highlighted as the top recommendation.

Key Sector Drivers

Game Sector

• License Resumption: Expected to boost 4Q21E game momentum.
• New Titles:
  • Tencent: LoLM (launched in Oct 2021) and DnFM (2022E) are expected to drive revenue growth.
  • NetEase: Harry Potter: Magic Awaken (launched in Sep 2021), Diablo: Immortal (2022E), and others are key titles.
• International Expansion: NetEase aims for 50% international contribution in the long run, leveraging global IPs.
• Performance Outlook:
  • Tencent: 3Q21E revenue growth in-line, with strong 4Q21E momentum.
  • NetEase: 3Q21E growth is mild, but 4Q21E is expected to see a 25% YoY increase in mobile game revenue.

Short/Middle Video Platforms

• User Growth: Kuaishou, Bilibili, and Zhihu are expected to see MAU growth of 12%, 32%, and 39% in 3Q21E respectively.
• Monetization: Revenue growth for Kuaishou, Bilibili, and Zhihu is forecasted at 30%, 62%, and 112% YoY in 3Q21E.
• Long-Term Outlook: These platforms are expected to breakeven by FY25/27/23E, with continued user expansion and monetization diversification.

Ecommerce & CGP

• Seasonality: Ecommerce is expected to bottom out in 3Q21E and recover in 4Q21E, particularly around "11.11".
• CGP Momentum: Continued growth in CGP, with Meituan Select and DDMC expected to dominate the market, accounting for 50%-60% market share in 2025E.
• User Experience: Improving user experience and fulfillment are key to sustaining growth, more so than subsidies.

Risk Factors

• Regulatory Impact: Ongoing focus on data security, minors protection, and content regulation.
• Competition: Intensified competition and regulatory tightening may limit core internet margins.
• Macro Factors: Potential softening of consumer demand due to macroeconomic moderation and the impact of the pandemic.

Conclusion

The China Internet sector is transitioning into a new regulatory normal, with the market now pricing in most of the worst-case scenarios. With a favorable valuation and solid growth outlook, the sector is poised for re-rating in FY22E. Key names such as Meituan, Tencent, and NetEase are recommended for investment, particularly as the market moves into 4Q21E, where seasonality and regulatory easing are expected to drive sentiment. The focus should be on consumer internet and entertainment platforms with strong fundamentals and growth potential.