Alibaba, Tencent, Meituan! Have the leading Hong Kong Internet companies hit bottom and is spring coming back?

According to CITIC Securities, recent investments in the internet sector still revolve around macro logic. Influenced by factors such as expectations of overseas interest rate hikes and capital outflows, the Chinese internet sector has experienced short-term volatility. The sector's valuation has returned to historical lows, with the Hang Seng Technology Index's NTM PE ratio at 20x as of September 11, which is at the 6th percentile since its listing.

In terms of performance, the revenue and profits of major companies in Q2 2023 have exceeded expectations, with the median surprise rates at 2% and 40% respectively. Cost reduction and efficiency improvement have been important highlights for these companies. With the macroeconomic outlook improving and companies taking more proactive operational measures, the market has raised its revenue and profit expectations for the internet sector in H2 2023 by 1% and 2% respectively.

CITIC Securities believes that, given the continued uncertainty in the pace of macroeconomic recovery, the sector will still exhibit a range-trading style. It is recommended to focus on top internet companies with low valuations, stable cash flow, and high shareholder returns. In the context of a clear macroeconomic recovery, attention should be given to high-growth companies in cyclical industries. Additionally, it is advised to pay attention to the potential catalysts brought about by the commercialization progress of large AI models.

Performance Review and Outlook

Benefiting from the low base effect of the same period last year and the recovery of consumer demand, the cumulative YoY revenue growth of major internet companies in Q2 2023 reached approximately 15.1%. The cumulative non-GAAP net profit margin was 14.5% (YoY +3.5pcts, QoQ +2.8pcts), indicating a sustained improvement in profitability.

Looking ahead, CITIC Securities believes that the trend of improving revenue for internet companies will continue under the backdrop of macroeconomic recovery and the recovery of consumer demand. According to Visible Alpha's consensus estimates, the cumulative YoY revenue growth for major domestic internet companies in Q3/Q4 2023 is expected to be 11.2% and 12.8% respectively, while the cumulative YoY growth in non-GAAP net profit is expected to be 18.3% and 20.7% respectively.

• E-commerce: Moderate recovery of the market, focusing on user mindset and monetization efficiency.

In April-May 2023, the offline retail sector experienced rapid recovery due to the low base effect of the same period last year. The recovery rate slowed down in June-July, but showed signs of improvement in August. According to the National Bureau of Statistics, from April to August 2023, the total retail sales of consumer goods in China increased by 18.4%, 12.7%, 3.1%, 2.5%, and 4.6% YoY, while the online retail sales of physical goods increased by 20.8%, 16.9%, 7.1%, 5.0%, and 6.1% YoY.

Against the backdrop of a moderate recovery in consumer demand, e-commerce platforms have adopted price competition strategies to retain users. The overall trend in the e-commerce market is characterized by increasing sales volume and decreasing prices. However, due to the growth in traffic, increased willingness of merchants to invest, and improved efficiency of advertising products, both Alibaba and Pinduoduo have seen an increase in their take rates. This has driven revenue growth to outpace GMV growth in the e-commerce sector.

Looking ahead, CITIC Securities believes that with the recovery of consumer demand and the improvement in platform monetization efficiency, the growth of GMV and revenue in the e-commerce sector is expected to continue to improve. According to Visible Alpha's consensus estimates, the cumulative YoY revenue growth for major e-commerce platforms in Q3/Q4 2023 is expected to reach 9.8% and 11.5% respectively.

• Advertising: Good recovery trend expected to continue.

In 2023H1, the advertising market has shown a good recovery trend. According to CTR, in July 2023, China's advertising market spending increased by 8.7% compared to the same period last year. According to QuestMobile, in Q2 2023, China's internet advertising market reached a scale of 159.34 billion yuan, an increase of 8.1% compared to the same period last year. In terms of industries, benefiting from increased supply, offline activities recovery, and consumption rebound, the gaming, culture and entertainment, and comprehensive e-commerce industries became the top three industries for mobile advertising in 2023H1.

Looking ahead, with the continuous economic recovery and the continuous improvement of major online advertising platforms in terms of advertising structure, algorithm capabilities, and traffic distribution, we believe that the trend of advertising platform revenue recovery is expected to continue. According to Visible Alpha's consensus expectations, the cumulative advertising revenue of major online platforms in China is expected to increase by 15.2% and 16.4% year-on-year in Q3 and Q4 2023, respectively.

• AI: Focus on model iteration and application landing as large models are registered.

On September 1, 2023, the Cyberspace Administration of China released the second batch of domestic deep synthesis service algorithm registration information. Baidu's Wenxin large model, Douyin's Yunque large model, Tencent's Hunyuan Assistant large model, and 110 other deep synthesis service algorithms have been registered. On September 7, Tencent released its self-developed Hunyuan large model, officially joining the competition of domestic large models. Domestic large models are gradually opening up to the public, which is expected to accelerate the product landing process, model iteration, and drive the commercialization of AI.

• Online recruitment: Recovery pace relatively lagging, focus on recovery of autumn recruitment demand.

In August 2023, the urban unemployment rate in China was 5.2%. The youth unemployment rate and other age-specific urban survey unemployment rates have not been released since July, and the weak recruitment demand of enterprises is still the main reason for the pressure on the unemployment rate. In terms of the recovery pace, small and medium-sized enterprises have shown signs of recovery first based on more flexible recruitment rhythms, while large enterprises usually require longer decision-making processes and more cautious decision-making attitudes, resulting in a relatively slow overall recovery, which has also led to differentiated performance of online recruitment platforms.

In Q2 2023, BOSS Zhipin achieved operating/cash revenue of 1.49/1.62 billion yuan (YoY +34%/+65%); Liepin achieved revenue of 590 million yuan (YoY -18%), and the group's recruitment business received payments decreased by a low single-digit percentage compared to the same period last year. However, according to Datayes, as of September 10, the domestic recruitment index was 87.1, showing a significant rebound compared to the previous period. It is recommended to pay attention to the catalysis of macroeconomic recovery in 2023H2 and the recovery of recruitment demand in the peak autumn recruitment season on the recruitment industry.

• Online freight: Continued deepening of online penetration, industry leaders expected to benefit.

Since the beginning of this year, with the normalization of offline production and life, China's road freight industry has continued to recover. In July, China's road freight volume reached 3.54 billion tons (YoY +8.0%, MoM +1.9%); in August, China's road logistics price index was 102.5 (YoY -0.5%, MoM unchanged). Among them, the online delivery method that combines cost-effectiveness and efficiency has driven the increase in the online freight rate, and Full Truck Alliance, as a leading online freight company, continues to benefit. In Q2 2023, the average monthly active users (MAU) of cargo owners reached 2 million (YoY +31%), and the number of fulfilled orders reached 40.2 million (YoY +45%). , with an average fulfillment rate of 30% (YoY+10pcts), setting a new historical high for a single quarter.

CITIC Securities believes that Full Truck Alliance's focus on improving product and service capabilities is expected to continuously strengthen key operational indicators such as direct customer and shipper engagement, fulfillment rate, and order volume. At the same time, online transaction services are steadily advancing, with revenue growth and profit improvement having a high level of certainty.