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China Internet- Sell in May, and buy back in September

作者: Leo LIU,Matt MA,Calvin NG
时间: 2019年09月11日
重要性: 一般报告
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摘要: Report title:China Internet- Sell in May, and buy back in September
Analyst:Leo LIU,Matt MA,Calvin NG
Report type:Industry
Date:20190911
[Summary]

■ 2Q19 results generally beat consensus and our estimates
■ Universal restraint on exp and low ad price led to margin improvement
■ Prefer Tencent, BABA, JD and BILI
Game sector should further warm up in 2H
The game sector was relatively quiet in 1H with a few new blockbuster games kicking off since 2Q. However industry leaders Tencent (700 HK; BUY; TP HK$392) and NetEase (NTES US; BUY; TP US$295) were able to come through relying on existing key games’ stable performances. Although Tencent’s Peacekeepr Elite has already achieved outstanding performance in 2Q thanks to its inheritance of PUBG and season pass system, it’s still expected to contribute greater increments in 2H given deferred rev impact and season pass’ gradual ramp-up feature. On the other hand, smaller game producers are prone to bigger hit-or-miss risk. For example, Kingsoft’s (3888 HK; BUY; HK$19) highly anticipated JX3M didn’t perform well as expected, thus causing Co.’s gaming rev to decline in 2Q. On the contrary, Bilibili (BILI US; BUY; US$21) received exclusive joint operation right to hit Nijigen game Arknights’ Android version. The successful launch proved Co.’s top-notch operating ability in this niche market, and should help Co. to further level up game segment performance in 2H. Given fewer new games and lower ad price, game Co.s’ S&M expenses were generally lower, leading to better than expected margins. In 2H, we believe the sector should further warm up with favourable seasonality, ramp-up contribution from 2Q blockbusters and more new releases.
eC: effects from supportive policies should continue to kick in in 2H
For eC and life style services space, Alibaba (BABA US; BUY; US$218), JD (JD US; BUY; US$39) and Meituan Dianping (MTDP; 3690 HK; BUY; HK$74) all achieved stellar 2Q results. eC leaders’ strong performances were mainly driven by their successful low tier market expansions and strong results during 618 promotion campaign, which led to Tmall/JD’s physical goods GMV to grow 34% YoY/ 23% YoY respectively in 2Q (FY1Q20 for BABA), surpassed online retail sales of goods’ 22%. Given industry players’ continuous efforts to: 1) further expand user coverage by offering various consumption scenarios and products in lower tier markets; and 2) exploit more incremental user values through refined operations and category expansion, we believe the sector should maintain 20%-25% growth in 2019E. The effects from supportive policies including tax and fee reductions should also continue to kick in in 2H to induce more consumption. On the other hand, MTDP achieved stellar 2Q margins in its food delivery business, attributable to favourable weather condition, and improved delivery efficiency. We expect Co.’s food delivery biz will continue to lead the market while taking more market shares, but should face stronger competition in low tier markets during 2H.
Our top picks are Tencent, BABA and JD
Going forward, our top picks are still Tencent, Alibaba, and JD. We prefer Tencent for its well-rounded biz structure, and believe game rev could receive upside surprise in 2H19. For BABA, we estimate Tmall GMV to maintain 25%~30% YoY growth in FY20, and believe new retail and DME biz’ profitability would improve. On JD, its profitability should also improve due to operating leverages on fulfillment. Meanwhile, we also like BILI for its solid position among young generation and attractive risk return at current level.

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