China Update: Internet stocks present investment opportunities China Update: Internet stocks present investment opportunities China Update: Internet stocks present investment opportunities

China Update: Internet stocks present investment opportunities

Redmond Wong


Summary:  Robust GDP and retail sales figures this week serve to reinforce investor confidence in China's economic resurgence. Notably, the 10.6% surge in retail sales illuminates the reinvigoration of domestic consumption, a favorable development amidst global uncertainties. The impressive expansion in online sales, coupled with Alibaba's recent plan to restructure the conglomerate, augurs well for the potential of valuation multiple upticks in the China internet sector.

China's economy surges past expectations in Q1

China's economy recorded a robust 4.5% YoY growth in Q1 2023, outpacing both the Bloomberg consensus forecast of 4% and the previous quarter's 2.9% (Figure 1). This impressive growth was largely driven by a remarkable rebound in the tertiary sector, predominantly services, which registered a 5.4% Y/Y growth in Q1, a significant jump from the 2.3% Y/Y growth in Q4 2022.

Figure 1. China’s real GDP growth (Y/Y); Source: Bloomberg; Saxo

Amidst the monthly activity data, a standout feature was the rapid acceleration of retail sales, a beacon of hope for the beleaguered economy. In March, retail sales surged 10.6% Y/Y (Figure 2), with the catering industry, in particular, witnessing a remarkable 26.3% Y/Y growth, buoyed by the resumption of in-person dining as mobility restrictions eased. Despite the increased spending on services, retail sales of goods were robust, recording a 9.1% YoY growth in March, considerably higher than the 2.9% growth in January-February.

Figure 2. China’s retail sales growth (Y/Y); Source: Bloomberg; Saxo

Online retail sales grow strongly despite easing mobility restrictions

Even with the relaxation of mobility restrictions and a shift in consumer spending from online to offline channels, particularly in the staples segment, China's online retail sales of goods and services managed to surge, registering a remarkable 10.9% growth in March, outpacing the overall retail sales growth of 10.6% for the same period. This impressive growth was partly attributed to the robust demand for apparel and cosmetics.

Furthermore, over the first three months of 2023, China's online retail sales grew by an impressive 8.6% YoY, surpassing the 5.8% YoY growth in overall retail sales of goods and services. Despite the challenges posed by the adjustment to the reopening and shifting consumer preferences, China's online retail sector continues to demonstrate its resilience and potential for sustained growth.

Emphasis on domestic consumption in growth strategy

As highlighted in the Saxo Q2 Outlook, the global economy is increasingly characterized by fragmentation, and China's growth strategy reflects this changing landscape. While exports continue to play a vital role in the Chinese economy, the country's authorities have adopted a new development pattern since 2020 that places domestic demand at the forefront of their growth strategy. The State Council's 2023 Work Report reinforces this approach and emphasizes the expansion of domestic consumption.

At the Two Sessions meeting held last month, the government reiterated its commitment to prioritizing domestic demand and promoting sustainable growth through increased domestic consumption. In a press conference held on April 19, the National Development and Reform Commission (NDRC) further emphasized this shift by announcing plans to draft new policy initiatives aimed at boosting domestic consumption.

These developments reflect a concerted effort by the Chinese government to create a more self-reliant and resilient economy, less dependent on external factors. The shift in focus towards domestic demand signals a new chapter in China's growth story and presents new opportunities for investors and businesses seeking to tap into the country's enormous consumer market.

A shift in China’s approach to e-commerce and Internet platforms

Over the past two years, the Chinese government has introduced strict regulations on e-commerce and internet platform companies and has cracked down on certain business activities and behaviors. However, signs have emerged that the most drastic actions and changes have already taken place.

At the Central Economic Work Conference in December 2022, President Xi Jinping called for supporting platform companies to lead economic development and create employment, while also emphasizing the importance of supporting private enterprises. This represents a marked departure from the previously repeated principle of preventing the "disorderly expansion of capital."

While it remains possible that this shift in rhetoric is merely a tactical move aimed at stabilizing the faltering economy, it is also plausible that China has entered a more stable and favorable stage in the regulatory policy cycle. This new approach may present opportunities for platform companies and private enterprises seeking to navigate the evolving regulatory landscape in China.

Chinese authorities prompt business empire breakup

The remarkable growth of mega-cap internet companies in China has come under increasing scrutiny from regulatory authorities. In response, Alibaba has announced a restructuring plan that will divide the conglomerate into six independent groups, each specializing in a specific business area. The move aims to prevent any one group from dominating multiple industries and potentially crossing regulatory boundaries. This strategic maneuver may provide the space for each group to grow within their niche markets while staying compliant with the authorities’ evolving regulatory policies.

Reorganization of Chinese tech giants signals the potential for growth and valuation expansion

At the time when the reorganization of Alibaba into six independent groups of companies materialized, the regulatory risks for these tech giants will probably be mitigated to some extent. As a result, each of the six groups is expected to raise capital and invest for growth, while also potentially reducing the usual conglomerate discount. This development may drive valuation multiple expansion in the coming months and lead to the undemanding forward P/E ratios of tech giants such as Alibaba (09988:xhkg) at 11 times and JD.COM (09618:xhkg) at 13 times seeing an uptick.

China's Internet stocks present investment opportunities

Seeking out opportunities in the consumption and technology sphere in China, we anticipate prospects arising from the economic recovery through summer, expanding domestic consumption stimulated by the lifting of pandemic restrictions, credit extension, and governmental policy initiatives. As China's regulatory environment toward Internet companies becomes less stringent, these companies could see a significant boost. Readers may find ideas for such investments through our China consumer and technology equity theme basket accessible on the Saxo platform here.





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