20180907-中国银河国际证券-TMT_INDUSTRY_UPDATE_–_China_TMT_non-hardware_industry_Q2_2018_results_review_4页_496kb

China TMT Non-Hardware Industry Q2 2018 Summary

Core Content Overview

The Q2 2018 results of the China TMT (Technology, Media, and Telecommunications) non-hardware industry were mixed, with only a few sub-segments showing strong performance. The overall industry faced challenges due to regulatory pressures and the slowdown in traffic growth. However, companies with clear development strategies and a focus on the toB/toG segments are expected to benefit from continued IT investment and favorable policy environments.

Main Points and Key Insights

1. Online Game Sector

• Regulatory Impact: The sector is under pressure due to regulatory uncertainties.
• Tencent: Revenue from smartphone games dropped by 19% QoQ to RMB17.6bn, mainly due to the non-monetization of popular games like PUBG. Concerns about deferred revenue affected Q3 2018 outlook.
• IGG: Reported higher-than-average growth with a 42% YoY revenue increase, driven by a better geographical mix and the success of "Lords Mobile."
• Kingsoft: Online game revenue decreased by 28% YoY and 8% QoQ due to reduced contributions from existing titles like JX Online III. The company is expected to benefit from the potential spin-off of its WPS and cloud business.

2. Online Video Sector

• Regulatory Impact: Government regulations on the film industry are more impactful on the offline market than online platforms.
• Tax Reforms: The new tax rate for celebrities (42%) is expected to negatively affect movie box office receipts, but online platforms like iQiyi, Tencent Video, and Youku-Tudou may benefit from the popularity of homemade online dramas.
• Actor Fee Caps: The cap on acting fees (40% of project budget, 70% for individual actors) is seen as a positive for the industry by making production costs more rational.

3. Online Advertising Sector

• Market Trends: Online advertising is becoming a major growth driver for internet companies.
• Segment Growth:
  • E-commerce advertising grew to become the largest segment, increasing from 23% in 2012 to 32% in 2017.
  • Social media advertising increased from 4% to 11% in the same period.
  • Search engine marketing (SEM) fell from 33% to 24%.
  • Online video-related advertising (video and display ads) increased from 9% to 11%.
• IPO Activity: Several online advertising-related companies, such as Weimob Inc. and Mobvista Inc., have filed IPO prospectuses, indicating market confidence.

4. IT Services Sector

• Performance: Companies focusing on the toB/toG segments performed relatively well.
• Key Players:
  • Inspur [0596.HK]: Best performer with a 40.2% YoY revenue increase in 1H 2018.
  • Kingdee [268.HK]: Second with a 21% YoY revenue increase.
  • Sinosoft [1297.HK]: Third with about a 20% YoY revenue increase.
• Recommendation: IT services companies with a strong toB/toG focus are expected to continue gaining market attention and delivering strong growth.

5. E-Commerce Sector

• Regulatory Environment: New e-commerce law passed on 31 August 2018 aims to create a healthier market environment.
• Key Impacts:
  • Prevents unreasonable use of consumer data.
  • Ensures fair competition by prohibiting dominant platforms from restricting smaller ones.
  • Requires e-commerce sellers to pay taxes, which may negatively affect C2C but benefit B2C platforms.
• O2O Growth: Offline opportunities are a new initiative for major e-commerce platforms.
• HC Group [2280.HK]: Expected to enter a new growth phase due to its core business transition.

Key Companies Mentioned

• Tencent [0700.HK]: Facing short-term share price weakness but investing in long-term growth.
• Kingsoft [3888.HK]: Its negative impact has been partly priced in, with potential spin-off of WPS and cloud business as a catalyst.
• Inspur [0596.HK]: Recommended for investors seeking lower-valuation IT services companies.
• Sinosoft [1297.HK]: Also recommended for lower-valuation options.
• HC Group [2280.HK]: Expected to attract market attention after transformation.
• IGG [799.HK]: Showed strong growth in the online games sector.
• Weimob Inc., Wanka Online, Mobvista Inc., and Duiba Group: Emerging companies in the online advertising space.

Summary of Outlook

• The TMT non-hardware industry in Q2 2018 was affected by regulatory headwinds and slowing traffic growth.
• Leading companies in sub-sectors like online games and online video are expected to be long-term winners with clear strategies.
• The IT services sector, especially toB/toG companies, is seen as a promising area due to continuous IT investment and favorable policies.
• Online advertising is expected to remain a key growth driver, with e-commerce and social media advertising showing significant growth.
• The new e-commerce law is expected to promote a healthier environment and drive O2O growth.
• Investors are advised to consider companies like Inspur and Sinosoft for lower valuations and Kingdee for management IT services.