China Internet Sector 9 October 2018China Internet sector
P2
UBS Research THESIS MAP a guide to our thinking and what's where in this report
MOST FAVOREDLEAST FAVORED
Alibaba, QutoutiaoNA
PIVOTAL QUESTIONS Q: Will China online ads be able to sustain double-digit growth over 2018-20
Yes. However, the growth rate is likely to slow from 30% in 2018 to 20% in 2020. Macro headwinds
are likely to slow China's online ad market growth as there is a high historical correlation between
GDP and, in particular, online advertising growth.more
Q: Can China's news feed ad market size reach Rmb100bn by 2020E
Yes. Feed ads in general is a bright spot in a slowing online advertising market, and we are positive
on news feed ads specifically. Thanks to product innovation and technology development over the
past few years, especially by the leading practitioner, Bytedance, we see ad monetization improving
significantly.more
Q: Who will gain online ad market share over 2018-20
Alibaba is best positioned. Tencent and Qutoutiao could see more upside if they execute. We expect
the online ad market to consolidate, and for leading internet platforms, leveraging their extensive
user data and technologies, to continue to gain ad budget from offline and smaller companies.
Baidu should also benefit from news feeds but slower search ads may offset growth there.more
UBS VIEW China's online ad market growth will likely disappoint compared with third-party market estimates
and sell-side consensus company estimates due to the macro situation and regulatory concerns, and
compounded by significant share gains by Bytedance. We like Alibaba due to its strong positioning
in ecommerce, and recommendation feed ads should be a new accretive growth driver. Qutoutiao is
our pick of the small caps as it focusses purely on feed ad growth in lower-tier cities. We are
increasingly positive on Tencent, as it makes progress following its reorganization, and Baidu, as the
Google overhang dissipates over time.
EVIDENCE Online ads, already 60% of the market, have high correlation with GDP growth—about 69% over
the past 10 years. We expect online ad growth to slow from 31% in 2018 to 20% in 2020
(compared with iResearch’s 25% forecast). However, we still expect feed ads to grow about 50% in
the next couple of years to Rmb275bn by 2020 (iResearch), and within that for mobile news feed
ads to grow 30%-plus to reach Rmb100bn by 2020 (Analysys). This is likely to be driven mostly by
Bytedance, which could triple its revenues this year to almost 10% of the online ad market.
WHAT'S PRICED IN We believe that investors are indiscriminately pricing in significant macro and regulatory headwinds
across the board for ad platforms, and that they are not giving enough credit to companies that can
benefit from growth in ecommerce and news feed ads.
Revenues for the major Chinese ad platforms (Rmb bn)
Source: Company data, iResearch, UBS estimates
55%
65%
75%
85%100
200
300
400
500
600
700
201320142015201620172018E2019E2020E
Bytedance
Weibo
Alibaba
Tencent
Baidu
Combined market share
of China online ad
market
China Internet Sector 9 October 2018China Internet Sector UBS Research
Sector Q1
PIVOTAL QUESTIONS return
Q: Will China online ads be able to sustain double-
digit growth over 2018-20
UBS VIEW
Yes. However, the growth rate is likely to slow from 30% in 2018 to 20% in
2020. Macro headwinds are likely to slow China's online ad market growth as
there is a high historical correlation between GDP and, in particular, online
advertising growth. While we still believe China's online ad market will fare
better than the offline ad market, with 60% online penetration, even online
growth is likely to slow, especially with slower growth in mobile internet users
and online time spent per user. Within online, we do see several bright spots,
mainly ecommerce, in feed and social ads.
EVIDENCE
The UBS Economics team has lowered its 2019 China GDP forecast from 6.2%
to 6.0%. The weakened macro situation will put pressure on online ad market
growth as there is a 69% correlation between the two growth rates from
2006-17. Offsetting the macro situation, CVSV-TNS Worldpanel Research
(CTR) data show that online ads are still gaining share from traditional media
formats, and Ad Master survey results indicate that about 70% of advertisers
intend to increase their digital marketing budget in 2018. iResearch expects
China's online ad market to grow at a 27.8% CAGR from 2017-20, already
less than the 35.7% CAGR from 2013-17.
WHAT'S PRICED IN
Investors are concerned about potential macro headwinds. Digital ads already
have a higher penetration in China than in the US, which gives investors
further pause about the upside in China compared to that in the US.
High correlation between online advertising and
GDP growth
Advertising market size has stabilized at just under 1% of GDP. The growth
of China's total ad market has slowed to the high single digits since 2015 and,
except for a short rebound in 2011-2012, has declined materially from peak
growth in the early 1990s, according to the data from the State Administration for
Industry and Commerce. Advertising has remained stable, at about 0.8-0.9% of
GDP, since the early 2010s after having shown strong growth from the early 1990s
until the early 2000s. In fact, the ratio declined slightly in 2017.
China Internet Sector 9 October 2018Figure 2: China ad market size (in Rmb bn) and as a percentage of GDP ratio
Source:State Administration for Industry and Commerce, Wind
Correlation between GDP and advertising growth has declined but it is still
high between GDP and online ad growth. From 1987 to 2000, there was a 69%
correlation between GDP and advertising growth but the correlation has decreased
to -1% from 2001 to 2017, as advertising growth has been more volatile while GDP
growth has decelerated gradually. Instead, the correlation, at 69%, between GDP
and online advertising has been much higher over the past 10 years.
Figure 3: Real GDP growth vs China ad market growth
Source:State Administration for Industry and Commerce, Wind
0.0%
0.1%
0.2%
0.3%
0.4%
0.5%
0.6%
0.7%
0.8%
0.9%
1.0%100
200
300
400
500
600
700
8008788899091929394959697989900010203040506070809
2020202020202020Ad market size (in Rmb bn)As % of real GDP
0%
10%
20%
30%
40%
50%
60%
70%
80%
0%
2%
4%
6%
8%
10%
12%
14%
16%
18%
20%8788899091929394959697989900010203040506070809
2020202020202020Real GDP growthAd market growth(RHS)
2001-2017: -1% correlation 1987-2000: 69% correlation。