Learn To Invest
Stocks Special Reports LICs Credit Funds ETFs Tools SMSFs
Video Archive Article Archive
News Stocks Special Reports Funds ETFs Features SMSFs Learn
About

News

Chinese internet firms may prove immune to coronavirus

Chelsey Tam  |  20 Feb 2020Text size  Decrease  Increase  |  
Email to Friend

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.

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.

For tips on how to buy global equities see Prem Icon Morningstar Guide to International Investing

is an equity analyst for Morningstar in Hong Kong.

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

Email To Friend