The valuations of US tech giants have skyrocketed since the end of 2016 and investors are starting to get wary.
Thus, investors are now turning their focus to the other tech giants across the globe, specifically the Chinese tech giants.
The recent financial quarter reminds us of the compelling reasons to own the two of the three largest tech giants in the Chinese market: Alibaba and Tencent.
1. Alibaba Group Holding Limited
Management guidance surprised the market
Alibaba surprised the market during its recent investor day when the management guided for a stronger-than-expected revenue growth for FY18.
The revenue growth guidance of 45% to 49% year-on-year was much higher than the consensus estimates of 35%. Converting the percentage into absolute revenue figures, the growth will add another RMB 10 billion to Alibaba’s operating profit.
UOBKH Research believes that part of this will be further “reinvested into user acquisition, content investment and the B2C market”.
Uni-marketing: leveraging on Alibaba’s data
Alibaba also launched its new innovative product Uni-Marketing. It is a powerful suite of marketing services that leverages on data that has been collected from the 450 million active users on Alibaba’s e-Commerce platforms.
That will allow sellers to deliver more specific and targeted ads to consumers. UOBKH Research believes that Alibaba’s core commerce will continue to drive revenue growth with the launch of Uni-Marketing.
Expanding its international commerce
With its recent increase in stake in Lazada, Alibaba will be leveraging on its strong position in the Chinese and Southeast Asian (SEA) market to drive international commerce.
It will be supported by Alibaba’s two other pillars: AliExpress and Tmall Global. UOBKH Research forecasts a 54% (FY18) and 43% (FY19) year-on-year revenue growth in the international commerce space.
Potential revenue driver: cloud business
Another potential revenue driver for Alibaba is its cloud business, which is expected to break even in FY18. One only has to look at how successful Amazon has been doing with its Amazon Web Services (AWS) to project the potential of cloud computing for Alibaba.
Based on UOBKH Research’s estimates, Alibaba’s revenue will grow by 41% (FY18) and 28% (FY19) year-on-year, backed by the strong online advertising and the cloud business.
In terms of valuation, Alibaba is currently trading at 24.2x FY18F PE, which is still lower than its e-commerce peers.
UOBKH Research: Alibaba Group Holding Limited (NYSE: BABA) – BUY; Target Price US$173
Online gaming revenue growing exponentially
Having leveraged on its strong distribution capacity and strategic corporation with Kingsoft (3888 HK) and Changyou (CYOU US), Tencent managed to increase its influence in the mobile gaming segment. Tencent gained five positions in AppAnnie’s top 10 rankings in mobile games in June 2017.
UOBKH Research foresees Tencent’s online gaming revenue to grow 28% year-on-year in 2017, driven by a 65% year-on-year growth in mobile gaming.
Apart from its mobile gaming segment, UOBKH Research also estimates an 11% growth in PC game revenue growth, driven by new PC games and eSports.
Advertising revenue riding on WeChat’s positioning
Tencent’s advertising revenue will also continue to grow significantly (estimated by UOBKH Research to be 49 percent year-on-year) in 2017.
UOBKH Research believes that Tencent’s envious position in the advertising market with WeChat will help Tencent to capture advertising needs through Moment ads and outpace the average growth of its Chinese Internet peers.
In addition, UOBKH Research is expecting a 123% year-on-year growth in payment and cloud segments, “driven by increasing withdrawal fees, customer conversion, and expanding offline payment scenarios through WeChat Mini Programmes”.
Emerging revenue driver: cloud business
Moving forward, the cloud business will emerge as the fastest growth among Tencent’s businesses in the next few years.
Investors can expect the operating margin for the cloud business to dwindle into the negative single-digit region by end-2017.
UOBKH Research: Tencent Holdings Limited (HKG: 0700) – BUY; Target Price HK$312