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Chinese internet firms may prove immune to coronavirus

Chelsey Tam  |  20 Feb 2020Text size  Decrease  Increase  |  
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We think the main long-term beneficiaries of the coronavirus outbreak are Chinese internet firms with online products and services that are not yet well penetrated, as they could see an increase in users.

This includes companies offering online education, fresh food delivery, and office tools, and so on, which are likely to see faster adoption rates. Should the users of these services and products like the experience, their habits can be cultivated with relatively low acquisition costs, providing long-term benefits.

E-commerce, which is not well-penetrated in lower-tier cities and rural areas, should also see faster adoption rates in the long run. For services and products that are already well penetrated, such as online gaming, we expect shorter-term benefits from the surge in demand during the epidemic, without material long-term boosts.

We expect the losers to be online advertising and online travel, which are adversely affected by reduced economic activity, with the latter severely hit by trip cancellations and drastically reduced travel demand, although we believe the pain is only short term.

Chinese online stocks

Source: Morningstar. All prices USD except *HKD

At this stage, our fair value estimates are unchanged, as it's too early to tell the long-term benefits, and the one-off short-term benefits or headwinds don’t materially change our cash flow estimates in the long term.

No-moat CMGE Technology Group (HKG: 00302) (0.85 price/fair value) is an undervalued short-term beneficiary from the epidemic, in our view. The price/fair value for wide-moat Tencent and wide-moat Alibaba, which could be net long-term beneficiaries from the outbreak, are 0.89 and 0.93, respectively.

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We think the net impact on Tencent (HKG: 00700), Alibaba (NYS: BABA), NetEase (NAS: NTES), JD.com (NAS: JD), and CMGE Technology should be positive. Companies with major online gaming operations like Tencent, Netease, and CMGE Technology stand to benefit in the near term. Drags on overall consumer confidence are short term and are likely to be offset by increased use of online services in the long term for Alibaba and JD.com.

Gaming companies Tencent and Netease and e-commerce giant Alibaba should see benefits outside of their bread-and-butter businesses because of faster adoption of other businesses. Baidu (NAS: BIDU) and Weibo (NAS: WB) are likely to lose out because of their large advertising exposure, which is likely to be sensitive to overall economic weakness, with Trip.com (NAS: TCOM) the biggest loser.

However, these are only short-term pains. In the near term, we expect the whole sector will incur some loss of productivity because the extension of the Chinese New Year holiday may have disrupted production and services. We also expect to see additional expenses related to being good corporate citizens due to increased donations and volunteer services.

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is an equity analyst for Morningstar in Hong Kong.

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