China Internet:Future of social commerce and live broadcasting

Event.

We hosted NDR with iResearch to discuss the latest stats and trends inChina’s internet space from the data vendor perspective. According toiResearch, China’s online ad market will grow 34% in 2016 with mobilesurpassing PC for the first time. Meanwhile, this market becomes increasinglyconsolidated with BAT taking over 2/3 of China’s internet ad market. Alibabais at the beginning of this social transformation and monetisation of socialcontent, with significant upside in both ad load and ad inventory increase.

Interestingly, live broadcasting products growth has cooled a little in July andAugust after the exponential growth in 1H16.

Impact.

Advertising: mobile to surpass PC in 2016 with higher consolidation.

iResearch estimates online ad market in China to grow 34% to RMB280B in2016, of which 55% will be on mobile. Search is still the largest spendingcategory and will account for 34% of total online ad budget, followed by ecommerce’s28% and portal’s 14%. BAT together accounted for 66% of onlinead market and the ratio is poised to further go up to 80% in the long term.

Alibaba’s current ad load level is way lower compared to Baidu. Social ads willgrow faster than the overall market, up from RMB13.8B in 2015 to RMB40B in2018. In-feed ad products are increasingly being adopted by many tool appsas a way to monetize large user traffic since 2016 as users have developedhabits to keep scrolling down and reading feed news.

Different momentum and business models of four live broadcastingplatforms. General-purpose live broadcasting apps (Inke, Hua Jiao etc.) grewthe fastest among the four major types of live broadcasting platforms (sports,showroom, and gaming) during 1H16. Inke MAU grew 300% YTD to 22M andsurpassed YY in June; but Inke’s MAU stayed flat in July and August. YY PCtraffic remained stable but mobile traffic declined 10% YTD. Daily time spenton sports broadcasting is much longer than others and game broadcastingplatforms have reached bottleneck in terms of user growth and time spent.

Virtual item and tipping is still the main monetization model so far while adand ecommerce are becoming more prevalent.

Tmall Supermarket narrowing gap with JD FMCG in tier1/2 cities.

iResearch says the addressable market of FMCG and grocery market is RMB5-6 trillion in China, 3x the size of apparel. Online penetration rate of FMCG isyet low at 7% vs. 35% for apparel in 2015. In 2015, Tmall supermarket GMVwas only Rmb14bn, vs. Rmb50bn for JD and Rmb23bn for YHD. Withaggressive subsidy and Cainiao logistic network built out, Tmall Supermakrettargets GMV to reach RMB30B in CY2016.

Outlook.

Ctrip and 58.com as our top picks among the verticals; Tencent and Neteaseare the safe havens. We upgraded BABA two months ago and expect furtherupside on the stock driven by the social commerce transformation and fundinflow as a result of MSCI Index rebalancing.