UOB Kay Hian analyst Julia Pan has maintained her “overweight” recommendation on the Chinese internet sector as she expects an accelerated digital transformation post Covid-19.
She noted that the Covid-19 outbreak has boosted the development in digitalisation in enterprises in multiple industries, such as retail market public services, finance, healthcare, with many others increasingly recognising the importance of digitalisation.
The nationwide lockdowns have boosted the faster adoption of cloud services in digital business operation and remote communication tools. More enterprises are also starting to adopt cloud solutions to improve operation resilience and reduce operational costs.
Online communication and collaboration platforms, including DingTalk, Weixin Corp version, facilitated remote working needs of over 250 million employees, and hosted online courses for 130 million students nationwide.
As such, she expects remote working/learning and online healthcare to become the new norm. Demand for public cloud services from internet companies is robust, despite normalised online user spend after the lifting lockdown measures.
The top two players in the Chinese cloud market – AliCloud and Tencent Cloud – account for over 50% of China’s infrastructure as a service (IaaS) and platform as a service (PaaS) market.
In 1H20, Tencent Cloud revenue achieved 45% y-o-y growth, compared with Alibaba’s 58%. AliCloud’s last twelve months’ revenue grew 60% y-o-y to RMB44.5 billion ($8.90 billion), compared with 58% y-o-y in 1H20, driven by increased consumption of video content and remote working/education adoption.
On April 20, AliCloud’s management announced a 3-year RMB200 billion investment plan in its cloud business which will focus on BABA’s cloud operating system, servers, and chips. Management expects these investments to help speed up the development of cloud-based solutions and to help businesses accelerate their adoption of digitalisation amid the COVID-19 crisis. The companies expect faster revenue growth in 2H20.
Pan expects the Chinese cloud service to see “tremendous growth” in the next few years as cloud adoption from digitalised enterprises in China remains relatively low at around 50% in 2018, compared with 70% in EU and over 80% in the US.
China will continue to invest in a digitalised economy with projected spending of US$200 billion ($273.49 billion) on IT in 2020 and another US$210 billion in 2021.
According to Gartner, China’s public cloud market is expected to grow at a compounded annual growth rate of 33% (vs 19% in the US) for the next five years to reach a size of US$38 billion by 2024, contributing about 14% of the overall enterprise IT spending, up from 5% in 2019.
This is supported by sustained business growth at internet companies and accelerated digital transformation at traditional enterprises, as well as favourable government policies to support investments in “new infrastructure”, which involves key fields such as cloud computing, IoT industrial internet, block chain, etc.
Pan’s picks for the Chinese Internet sector is Alibaba, with a “buy” rating and a target price of US$311. As at 3.17pm, Alibaba currently trades at US$267.55 per share.
Additionally, Tencent was also rated at a “buy” with a target price of HKD$606, and currently trades at HKD$515.50 as at 3.17pm.
