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China Internet Industry Report Summary

Core Content

This report provides an analysis of the China Internet industry, focusing on the growth of mobile video usage, the competitive landscape between major players, and the monetization potential of short-form video content. It also includes financial data and performance metrics for key companies in the sector.

Main Points

1. Growth in Mobile Video Time Spent

• Mobile video time spent share in China rose from 13% in March 2016 to 22% in March 2018, an increase of +9 percentage points.
• This growth came at the expense of social networking, which fell from 60% to 47% (-13 percentage points).
• Short-form video platforms have experienced rapid growth, with MAU exceeding 400 million (42% penetration rate) and daily time spent per user increasing six-fold YoY to over 300 million hours in 2018.

2. Monetization Potential of Short-Form Video

• Short-form video has significant monetization potential through advertising, eCommerce, and subscriptions/compliments.
• In 2017, advertisers spent 32% of their ad budgets on internet ads versus 24% on TV ads.
• The sector is expected to benefit from increased user engagement and time spent.

3. Key Players and Their Strategies

• Tencent is reinforcing its short-form video platforms such as QQ Kandian and WeShi (with a RMB 3 billion subsidy).
• Douyin (Toutiao's short-form video app) has become a major competitor, with over 100 million DAU (+78x YoY), 57% retention rate, and 52 mins of daily time spent per user in April 2018.
• Tencent and Douyin are engaged in a legal battle over content rights, with both seeking compensation and an apology.

4. Tencent's Pan-Entertainment Ecosystem

• Tencent is strengthening its short-form video capabilities to counter the threat from Douyin.
• It maintains a diversified investment in long-form video, music, literature, and games.
• The report reiterates a positive outlook on Tencent, with a BUY rating and a target price of HK$557.

5. Competition and Collaboration

• The competition between Tencent and Toutiao/Douyin is expected to intensify.
• Toutiao and Alibaba may collaborate further.
• Tencent remains a strong player in the online gaming and social network sectors.

Key Companies and Financial Highlights

Other Notable Companies

• Huya (HUYA US): Key beneficiary of video growth, with NR rating.
• iQiyi (IQ US): Also a key beneficiary, with NR rating.
• Momo (MOMO US): Key beneficiary, with NR rating.
• Bilibili (BILI US): NR rating, with notable user engagement.
• Alphabet (GOOGL US) and Facebook (FB US): Global tech giants with high market caps and varying performance metrics.

Sector Performance

• Absolute return over 1 month: 9.5%, 6 months: 18.9%, 12 months: 33.5%.
• Relative return over 1 month: 3.2%, 6 months: 5.3%, 12 months: 1.7%.

Conclusion

The China Internet industry is experiencing a shift in user engagement from social networking to short-form video content. Tencent is actively reinforcing its short-form video offerings to protect its social network dominance, while Douyin poses a significant threat. The monetization potential of short-form video is substantial, with growth in advertising and eCommerce. The report maintains a positive outlook on Tencent, highlighting its strong market position and diversified ecosystem.