china tech cubs pandas
Fay Ren
0207 036 4128
 

China Tech: From Cubs to Pandas

China’s technology sector, once a discretionary purchase within a regional portfolio, now deserves scrutiny.

China is a place where Google, Facebook and Twitter simply do not exist. Their analogues do. In their place stand Baidu and Tencent. Alibaba is a much more significant concern than Amazon.

The digital economy is thriving. E-commerce penetration has overtaken the US, as has mobile payments, led by Alibaba (AliPay) and Tencent (WeChat Pay), where the value of transactions dwarfs the US by nearly 50 times. The army of Chinese netizens pay for almost everything from goods and services to bills and insurance via one of the two payment systems available on a smartphone.

The internet is one area where foreign brands do not possess any competitive advantage over indigenous brands. China’s netizens have never become accustomed to Google, Facebook, and Twitter. This is in part due to regulation: popular social media sites are often blocked by the “Great Firewall”, and Google left the country some years ago over censorship disputes. The latest to fold has been Uber, which decided to sell its local arm to Didi Chuxing, a Chinese competitor, after burning through billions of its investor money.

Nor is this just a matter of access, ethics or censorship: the Chinese players have proven they can innovate. All of the big players offer a twist. WhatsApp is freely available in the country but WeChat’s offering knocks it into a cocked hat. Alibaba is beating Amazon, fair and square with its inventory free model.

Alibaba is the undisputed leader in Chinese e-commerce, hosting 443 million active buyers on its online marketplace comprising four main platforms: Taobao (general retail), TMall (branded shops), Juhuasuan (group-buy), Alibaba (wholesale/export). The business attracted media attention in 2014 for being the biggest IPO in history, opening on the New York Stock Exchange. At US$529bn Gross Merchandise Value (GMV) in 2016, Alibaba is racking up more than Amazon and eBay combined (US$344bn). It has almost single-handedly shaped the structure of the retail landscape in China, transitioning shoppers from bricks-and-mortar stores to online. The famed annual shopping event – 11.11 Singles’ Day sales in 2016 – saw a staggering CNY121bn (US$17bn) in GMV in a single day, a 32% rise from the previous year.

The company has a much broader offering and deeper penetration compared to its Western peers. Aside from providing a retail platform selling physical goods, Alibaba has extended its reach to gauge in almost every aspect of peoples’ digital life. It’s entertainment portfolio spans music (Xiami – Chinese Spotify & Damai – ticketing), online video (Youku Tudou – Chinese Youtube), film (Alibaba Pictures), travel (Alitrip), selling everything from concert tickets to foreign visas. It also owns the strategically important payment system Alipay (now under the subsidiary Ant Financial), where linkage to its Taobao account facilitates the payment of bills, school fees, transfer money, investment in stocks and funds, order/pay for third party goods and services, all under one account.

This ‘all in one’ approach appeals to users as they no longer need to download multiple apps or register multiple accounts to access these services and ingrains Alipay into people’s payment habit. An estimated 58% of China’s online transactions go through Alipay. Encouraged by an increasing number of Chinese tourists travelling abroad, merchants overseas have also been incentivised to add Alipay to their payment options. The huge network effect from Alibaba’s wide offerings create a deeply entrenched customer base, and the vast amount of intel collected from their spending habits is invaluable in the era of big data analytics (e.g. target advertising & credit scoring – Zhima).

Tencent, the second largest player with a US$245bn in market cap, is best known for gaming (c.50% sales) and social media. It is the largest player in China’s US$24.4bn gaming market, having established a comfortable duopoly with its smaller rival Netease (c.70% market share between them), both investing heavily in original content to satisfy China’s demanding gamers. Whilst not the largest revenue generator, the company’s instant messaging apps QQ and WeChat are two of the largest globally by monthly active users (864mn in 2016, 90% domestic users) the latter, in particular, has exploded in popularity and overtaken the legacy QQ platform. Whilst the idea of WeChat originated from WhatsApp, it has quickly evolved into a full scale social media suite offering a range of in-app services, on top of the usual messaging features. Functions including Moments (Twitter-like postings among friend circles), gaming, and media outlet ‘Official Accounts’ (individuals/companies) for people to follow, where original articles are written and read every day. Advertising from these accounts is increasingly significant to Tencent, accounting for 18% revenues, and represents the highest growth segment for the company at a 5 year CAGR of +37%. WeChat is also the number two player in mobile payments behind Alipay (38% market share), where its own payment system, WeChat Pay, also allows users to access an array of financial services within the app itself, all managed through a smartphone. In contrast, Facebook Messenger and WhatsApp still offer only the basic messaging services to date.

The smallest of the B-A-Ts is Baidu. It became the largest search engine in China post Google’s high profile departure from China in 2010. It now has over 80% market share in China, and offers a wide range of online services including search, maps, multimedia, encyclopaedia (similar nature to Wikipedia), forums, and cloud-based storage. It also operates a video streaming site iQiyi and owns 24% stake in the popular travel site Ctrip. The main revenue generator for Baidu is online advertising, although compared to the other two, it has the least intimate connection to its users due to the generic nature of its business, although the enormous amount of data generated by its portfolio of web services will boost user targetability if exploited intelligently. The fake advertising scandal in 2016 damaged its reputation, resulting in a slide in market share and slowing of its core advertising business. In recognition, Baidu sought to become one the largest spenders in R&D with a US$3bn investment fund researching Artificial Intelligence, with initiatives including heavy investment into language processing, speech and image recognition, smart homes, and even electric vehicles (just this week, it has made a new investment into China’s electric carmaker NextEV) to diversify its offerings and counter this slowdown. It appears that perhaps the peripheral ventures are the most interesting for the company.

While the core offerings for the three B-A-T companies are very different: Alibaba focuses on e-commerce, Tencent on social media and gaming, and Baidu on search, they are increasingly engaged in fierce competition both in their core as well as peripheral trades. Tencent has added e-commerce features onto its most popular chat app WeChat, it also owns 21% of the second largest online retailer JD.com. Alibaba has also forayed into social media via its 30% stake in China’s most popular microblogging site Sina Weibo and the dating-app Momo (monetising both). Before the merger of Didi and Kuaidi, the two ride-hailing apps backed by the two giants respectively went head to head in a price war, heavily subsiding the rides in attempt to grab market share from the other. Another example sees Alibaba backed group-deals platform Meituan merge with Tencent backed lifestyle site Dianping to create the third largest lifestyle e-commerce platform, while Baidu launched its Nuomi equivalent. In Baidu’s home turf – search – both Alibaba and Tencent have eaten into Baidu’s traffic with the former acquiring UC Browser in 2014 (est.50% market share in mobile search), and the latter acquiring a 36% stake in China’s number three search engine Sougou. Furthermore, both companies have forayed into mapping, challenging Baidu Map’s dominant position, while Baidu obtained a banking licence to create its own Baidu Wallet to combat Alipay and WeChat Pay. Its video streaming site iQiyi also competes directly with Alibaba’s YoukuTudou, though neither have yet achieved dominance. Cloud computing, still a relatively nascent market, is sure to be the next battleground for the three, each armed with their own offering.

Competition at home has not hindered their ambition for international expansion. With China’s economic growth rate beginning to slow, the internet giants are no longer satisfied with being domestic leaders and have begun to look for growth opportunities abroad. Alibaba acquired Lazada, an e-commerce platform in Southeast Asia, tapping a young and highly populous market. It has also invested into India’s mobile payment system PayTM (50% stake), gaining entry into a market with immense growth potential. Investments are not limited to core competencies either, demonstrated by their US$200mn funding in Snapchat back in 2015.

Tencent has also been busy: it invested in Garena, a Singapore based e-commerce business. It has also poured funding into the gaming front; investments include an 84% stake in Finnish mobile games developer Supercell and partnerships with Activision Blizzard amongst others across the US, Korea and Japan.

Baidu has also identified several target markets including Brazil, Indonesia and Thailand to launch a selected replica of it internet services, and made investments into several overseas fintech start-ups using its US$3bn investment fund. A recent Economist article also pointed to this trend, and that it is not limited to larger players, citing ‘micro-multinationals’ that aim for the global market from the outset, something unheard of a decade ago.

China’s technology sector has been hitherto a specialist interest. We now hold the view that it is an essential study for global investors and have re-geared our research activities in response. Whilst there are reasons for and against investing in the individual stocks that are listed today, the greatest consequences will be felt when the door to the secret garden opens and Chinese info-tech companies begin to seek wider domination.

 

 

 

 

 

 

 

 

X

logo

DISCLAIMER

I agree
I disagree

Before accessing this section of CERNO CAPITAL PARTNERS LLP’s (“CERNO CAPITAL”) website and its contents please read these terms and conditions as they constitute a Legal Notice and contain important legal information.

CERNO CAPITAL’s website contains certain information about its approach to providing investment management services but does not provide specific investment advice and is presented for informational purposes only. It does not represent that the services described on the site are suitable for any specific investor. You are advised not to rely on any information contained in this site in the process of making a fully informed investment decision. Instead, you are urged to base investment decisions upon a thorough investigation and to obtain all necessary professional advice.

The information provided on this website is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution, publication or use would be contrary to local law or regulation or in which CERNO CAPITAL does not hold any necessary registration or license. Individuals or legal entities in respect of whom such prohibitions apply, whether on grounds of their nationality, their place of residence or on other grounds, must not access or use this website.

Persons who wish to access this section of the website are required by CERNO CAPITAL to inform themselves of the legal or regulatory restrictions which may affect their eligibility to access the website or subscribe for units in the funds described herein.

The information on this website is only intended to be viewed by persons who fall outside the scope of laws that seek to regulate financial promotions in their country of residence. Examples of such persons may be governmental agencies, persons sufficiently experienced in investment business to appreciate the risks associated with investment services promoted on this site, large corporations and trusts and high net worth individuals. These examples are not country specific, may not be relevant to your country of residence and are provided for illustration purposes only. If you are uncertain about your position under the laws of your country of residence then you should seek clarification by obtaining legal advice from a lawyer practising in your country of residence before accessing our site.

In particular, CERNO CAPITAL is not registered as an investment adviser with the Securities and Exchange Commission and therefore this website is neither directed at nor intended for use by any person or entity in the United States.

Any past performance data contained on this website is no indication of future performance and nothing on this website should be interpreted to state or imply otherwise. The value of investments may fall as well as rise and investors may not get back the full amount invested. In addition, the information and materials herein shall not constitute an offer or solicitation, or an offer to sell, shares of any of the funds or any advisory or management service in any jurisdiction.

Additionally, the information on this website is provided “as is” and “as available”. CERNO CAPITAL is under no obligation to update the information to reflect changes after the publication date. It is presented without warranty of any kind, either express or implied, including without limitation of any warranties concerning the availability, reliability, accuracy, completeness, timeliness or sequencing of the site or the content, products or services available on or via the website. Also, the information offered does not carry a guarantee of accuracy, completeness or timeliness for any particular purpose and neither expressly or impliedly carries warranties or implied warranties regarding its merchantability and fitness for a particular purpose.

CERNO CAPITAL reserves the right to change the information displayed on the website or this legal notice at any time. They will not be responsible for any loss or damage that could result from interception by third parties of any information available on this website. In no event shall CERNO CAPITAL be liable for any indirect, incidental, special, punitive or consequential damages (including, without limitation, damages for loss of data, business or profits) arising out of or in connection with this legal notice, the website, the inability to use the site or any products, services or content purchased, obtained or stored in or from the site, whether based on contract, tort, strict liability or otherwise, even if CERNO CAPITAL has been advised of the possibility of such damages, and notwithstanding the failure of the essential purpose of any remedy without limiting the foregoing provisions of this paragraph, these limitations also apply to any third party claims against you.

This Legal Notice is governed by English Law and the English courts shall have exclusive jurisdiction over any matter arising out of this Legal Notice or from your accessing of the website. It is your responsibility to be aware of and to observe all applicable laws and regulations of any relevant jurisdiction.

The information contained herein does not constitute an offer to sell or the solicitation of any offer to buy or sell securities and or any derivatives and may not be reproduced, further distributed or published by any recipient without prior permission from CERNO CAPITAL.

By accessing and using the CERNO CAPITAL’s website you acknowledge that you have reviewed this Legal Notice and understand and agree to the terms and conditions contained herein.
This website has been published by CERNO CAPITAL which is authorised and regulated in the UK by the Financial Conduct Authority.

CERNO CAPITAL is a registered limited liability partnership in England and Wales (Incorporation Number OC326579), registered office: 34 Sackville Street, London, W1S 3ED.
By clicking on the “Submit” button you are stating that you are eligible to access this site and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this website.

X

logo DISCLAIMER

The Endowment Fund (hereafter “the Fund”) is an Unregulated Collective Investment Scheme (“UCIS”) for the purposes of the Financial Services and Markets Act 2000 of the United Kingdom (the ‘Act’) and as a consequence its promotion in the UK is restricted by law.

Interests in the Fund will be offered for sale only pursuant to the prospectus (offering memorandum) of the Fund and investment into the Fund may be made solely on the basis of the information contained therein.

Access to information about the Fund is intended solely for distribution to professional clients, eligible counterparties and those persons to whom the promotion of UCIS is permitted under the Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001 and COBS 4.12 of the Financial Conduct Authority’s Handbook. Investors may not have the benefit of the Financial Services Compensation Scheme and other protections afforded by the Act or any of the rules and regulations made there under. If you are unsure on whether you are eligible to access this section of the website, please contact our compliance officer.

There is not an active secondary market for shares in the fund. As such the only method of obtaining a return of capital may be via redemption. There may be notice periods, redemption penalties or other impediments to liquidity. In addition, some of the underlying investments contain gate clauses that prevent more than a certain percentage of investors redeeming at any one time.

By submitting your email address below you are stating that you are eligible to access this website and that you agree to be bound by all terms and conditions set out above, and you acknowledge that all the above information has been brought to your attention. The information contained in this website is offered to you conditional on your acceptance without modification of the terms, conditions and notices contained herein. If you do not agree with these, please do not access this web site.

Submit Email
I disagree

logo DISCLAIMER

Thank you for requesting access to our Funds pages.

We will shortly mail you a password to the email address you supplied. Should this not reach your inbox within the next 5 minutes (be sure to check your junkmail) please contact us for further assistance via our contact page.感谢您请求访问我们的基金网页。

我们会尽快将密码发送至您提供的电子邮件地址。如果 在此5 分钟后仍未收到我们的邮件(请一定要检查您的 垃圾邮件),请通过联系方式的页面联系我们并寻求进 一步帮助。