China Internet Sector_Our updated thoughts into 2025

Summary of China Internet Sector Conference Call Industry Overview - The China Internet sector outperformed in 2024, with KWEB rising 8% compared to HSI's 18% increase, driven by government stimulus hopes [1] - Key observations include: - Strong performance from companies like Trip.com, Meituan, Tencent, and Bilibili compared to Pinduoduo and Vipshop [1] - Valuations supported at 5-6x PE for companies with stable earnings, while upside is capped at 20x for leaders like Trip.com [1] - KWEB's one-year forward PE decreased from 14x to 12x by the end of 2024, with e-commerce stocks experiencing the most significant de-rating [1] Key Themes to Monitor 1. Rational Competition: Easing competition in local services, travel, and online games is benefiting margins, although e-commerce remains competitive with platforms focusing on ROI rather than low prices [2] 2. Margin Improvement: Slower margin improvements expected as platforms reinvest gains to strengthen ecosystems, with merchant profitability limiting take-rate upside [2] 3. Stimulus Expectations: The market anticipates 10% revenue and 12% EPS growth for the sector, similar to 2024 [2] 4. Geopolitical Risks: New US presidential policies may impact cross-border e-commerce and investments in Chinese tech [2] 5. AI Applications: More AI applications are expected, but monetization will be gradual due to macroeconomic impacts on budgets and consumer spending [2] 6. Buybacks: A slowdown in buybacks is anticipated in 2025 after aggressive repurchases in 2024 [2] Subsector Preferences - Online Games: Favorable competition and growth opportunities [3] - Travel: Continued growth in outbound/international business [3] - E-commerce: Selective investment due to macro stimulus benefits [3] - Education: Favorable supply-demand dynamics [3] - Local Services: High growth potential with stable competition [3] - Advertising: Diverging performance with new ad inventory gaining share [3] - Entertainment: Preference for short videos [3] Investment Positioning - The sector's performance in 2025 will depend on macro stimuli, with a focus on stocks with clear bottom-up drivers and low expectations [4] - Recommended stocks include: - NetEase: Low expectations with a strong pipeline [4] - Tencent: Visible growth from gaming and Weixin Mini Shops [4] - Trip.com: Market leader benefiting from travel industry tailwinds [4] - EDU: Visible growth with potential earnings surprises [4] - JD: Beneficiary of consumption stimulus [4] Financial Projections - Consensus estimates for 2025 indicate a 10% revenue and 12% adjusted net profit growth for the sector [12] - Specific company projections include: - Pinduoduo: Revenue growth of 23% [12] - Meituan: Revenue growth of 16.1% [12] - Trip.com: Revenue growth of 15.5% [12] - Alibaba: Revenue growth of 9% [12] Share Buyback Summary - Companies like Hello Group, JD, and Alibaba have significant share repurchase plans, with Alibaba planning a $16 billion buyback [15] Conclusion - The China Internet sector is poised for growth in 2025, driven by macroeconomic factors and company-specific strategies. Investors should focus on companies with strong fundamentals and clear growth trajectories while being mindful of competitive dynamics and geopolitical risks.