2022 Outlook: No more regulatory shocks

• Steadier regulatory environment based on takeaways from Central Economic Work Conference
• Expect e-commerce and online advertising to recover in 2022, but back-end loaded
• Sub-segment preference: Food delivery and ecommerce
• Our top picks are JD and Meituan due to lower regulatory risk exposure

Manageable regulatory risk in 2022. Our study on the Chinese government’s annual Central Economic Work Conference concluded that the key focus in 2022 should be shifting from regulatory enforcement to stabilising economy growth. “Real surprise” is unlikely. Overall risk should be more manageable with more frequent dialogue between internet companies and regulators.

E-commerce growth back-end loaded. Macro slow down started dragging e-commerce and online advertising in 3Q21. We expect gradual recovery in 2022, and the growth will be likely back-end loaded. E-commerce growth will be supported by lower-tier city penetration and new business models or initiatives such as community group buy (CGB). We expect the investment loss to be narrowed this year.

Sub-segment preference: Food delivery and e-commerce. Both segments’ regulatory risks have been mostly priced in. Food delivery growth remains solid in 2022, driven by “everything to home”. E- commerce’s growth will be more resilient than online ads, amid macro slow down. Online games segment faces higher uncertainty at least in 1Q22 before resumption of games approval process.

Top picks: JD (9618 HK) and Meituan (3690 HK). We prefer stocks with resilient growth despite macro slowdown and have lower exposure to regulatory risks. We like JD most, as it is a beneficiary of new antitrust rule, and it will deliver stronger e-commerce growth than the market. We also favour Meituan, as its core delivery and new CGB business are riding on penetration into lower-tier cities and lower income groups.