Amid Coronavirus Outbreak, Chinese Internet Firms Could Benefit
We expect e-commerce, online entertainment, education, and business services to see faster adoption rates in the long term.
We think the main long-term beneficiaries of the coronavirus outbreak are Chinese Internet companies with online products and services that are not yet well penetrated, as they could see an increase in users. This includes companies offering online education, fresh food delivery, and office tools, which are likely to see faster adoption rates. Should the users of these services and products like the experience, their habits can be cultivated with relatively low acquisition costs, providing long-term benefits. E-commerce, which is not well penetrated in lower-tier cities and rural areas, should also see faster adoption rates in the long run. For services and products that are already well penetrated, such as online gaming, we expect shorter-term benefits from the surge in demand during the epidemic, without material long-term boosts. We expect the losers to be online advertising and online travel, which are adversely affected by reduced economic activity, with the latter severely hit by trip cancellations and drastically reduced travel demand, although we believe the pain is only short term.
At this stage, we’re not changing our fair value estimates for the Chinese Internet companies we cover, as it’s too early to tell the long-term benefits, and the one-off short-term benefits or headwinds don’t materially change our cash flow estimates in the long term. We think CMGE Technology Group (00302) is an undervalued short-term beneficiary from the epidemic. Tencent (TCEHY)/(00700) and Alibaba (BABA)/(09988) could be net long-term beneficiaries from the outbreak, in our view.
Chelsey Tam does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.