China Internet Sector: Steady 2024 outlook after expectations reset
- We like online travel with c.18% revenue growth and less regulatory concerns
- PDD will continue to benefit from consumption downgrade given its track record of executing low-price strategy
- Expect cautious sentiment towards online games due to uncertain new regulatory measures
- Reiterate BUY on Trip.com (9961 HK) and PDD (PDD US)
We like online travel. Looking into 2024, we continue to like the online travel segment that has clear growth visibility, with c.18% revenue growth, and the lowest level of regulatory concerns. We also prefer the e-commerce sector, as it benefits from the consumption downgrade, while its growth expectations should have been reset to 8% after the disappointing retail sales last year.
Cautious towards online games. Regulatory concerns on the online games segment escalated towards the end of Dec 2023 when the regulator issued a draft version of the “Measures for the Administration of Online Games” for consultation. Despite that regulator has been re-sending more positive signal to the market, we expect cautious near-term sentiment on the online games sector pending the release of the revised draft in March 2024.
Top picks: Trip.com and PDD. We like Trip.com (9961 HK). In addition to domestic travel, outbound travel will grow 27% alongside the recovery of flight capacity in FY24 (vs. 60% in 1H23). We prefer PDD (PDD US) among e-commerce players, as it has a proven track record of executing a “low-price strategy” and accelerated overseas expansion supported by Temu where we expect gross merchandise value to grow at a two-year CAGR of 75% and reach US$49bn in FY25F. We expect Tencent (700 HK)’s stock sentiment to improve upon the release of the revised draft of online game regulations. On the other hand, Alibaba (9988 HK) could re-rate with retail consumption recovery.
