On May 17, 2022, the CPPCC National Committee held a special consultation on "promoting the sustained and healthy Development of the Digital economy" in Beijing. Vice Premier Liu he said: "the global digital economy is showing new characteristics such as intelligence, quantization and cross-border integration. We should strive to adapt to the omni-directional changes brought about by the digital economy, do a good job in the battle of key core technologies, support the sustained and healthy development of the platform economy and the private economy, and handle the relationship between the government and the market. Support digital enterprises to list in domestic and foreign capital markets, promote competition through opening up, and promote innovation through competition. "at present, our views on the Internet sector are as follows:

Policy review: policy sends positive signals.

Since 2021, the policy regulation of anti-monopoly, data security and personal privacy in the Internet industry in the global market has continued to land, the logic of market investment in Internet companies has changed, and the future focus will return to fundamentals and digital economic innovation.

Since 2022, from the release of "some opinions on promoting the healthy and Sustainable Development of the platform economy", the meeting of the political Bureau of the CPC Central Committee and the relevant expressions of the National Committee of the Chinese people's political Consultative Conference on "promoting the healthy development of the platform economy", policy is sending out more positive signals. We believe that the domestic policy context for the Internet industry is also gradually clear, the current investor expectations for the future policy regulation has been relatively sufficient, it is expected that the marginal impact will gradually fade.

Performance: under the assumption of mitigation of the domestic epidemic, the performance flexibility of Internet companies is expected to appear.

We believe that in 2022, the performance of head Internet companies will be subject to the pressure of economic growth, and the expectations for the first and second quarters are relatively pessimistic. After the disclosure of the quarterly report, there may still be the possibility of a reduction in the consensus forecast for performance growth. Follow-up performance improvement depends on local epidemic relief and macroeconomic changes.

Dynamically, according to Bloomberg's consensus forecast, BABA, Tencent and JD.com 's adjusted profit forecasts for 2022 will be cut by 25%, 20%, 35% and 2%, 16%, 15% respectively in 2021 and 2%, 16%, 15% respectively in 2022. From a static point of view, we can see that the market expectations for the performance of Internet companies have begun to show an obvious inflection point in 2022Q3.

We believe that affected by the epidemic in several major cities in China, e-commerce and other industries will be affected to a certain extent in the first half of 2022. With the local epidemic easing, consumers are expected to repair slowly in the second half of 2022. In the field of advertising, the high base impact of advertisers such as education and training industry and Internet finance is expected to begin to be eliminated in 2022Q3. From the profit point of view, the head Internet companies are expected to gradually eliminate the base impact of antitrust fines and increased strategic investment from 2022Q2, and it is expected that the performance flexibility of Internet companies is expected to show under the domestic epidemic mitigation hypothesis.

Valuation judgment: the current valuation is cost-effective, the innovation advantage of Internet companies is still there, and the second growth curve is expected to bring valuation increment.

China's Internet index has fallen 73 per cent since its peak in 2021, with leading companies such as BABA and Tencent currently at 4 per cent and 2 per cent, respectively, in the past five-year valuation. The relative valuation level has been at a low level in the past five years, and the ratio of cash assets to total market capitalization was 34 per cent at the end of 2021.

We believe that with the easing of the local epidemic and macroeconomic repair, the future 1-2 performance of Internet companies still has a certain degree of certainty, and the profit CAGR of mature companies / businesses in 2021-23 is expected to be about 15%.

Looking to the future, the Internet is still an important participant in the next generation of emerging technologies such as cloud computing, autopilot, meta-universe, and so on. BABA, Tencent and other companies invest nearly 10 billion US dollars in annual R & D fees, and high-quality talent reserves and flexible organizational structure are expected to incubate the second growth curve of Internet companies and provide future valuation increments.

Transaction structure: under the support of continuous repurchase, the stock price occupies the bottom area.

We maintain continuous monitoring of funds in the Internet sector from the three dimensions of short position, company buyback and fund purchase:

1) from the perspective of short selling, take Hong Kong stocks as an example. As of May 13, 2022, the short selling transaction ratio of Tencent / Meituan / Kuaishou Technology was 13%, 13% and 7% respectively, showing a slow downward trend.

2) from the point of view of repurchase, as of April 14, 2022 (no repurchase after the quiet period), Tencent has accumulated nearly HK $7.4 billion in this round, and the daily repurchase amount has also increased from about HK $64 million on August 19 in 2021 to HK $240 million on April 14, 2022. BABA raised his buyback plan from $15 billion to $25 billion in March 2022 and will continue until the end of March 2024, demonstrating the company's optimism about its business development and share price at the current valuation level.

3) from the perspective of ETF funds, as of May 13, 2022, the net values of Internet ETF (513050) and CSI China Internet (KWEB) have retreated by 67% and 75% respectively since their highs in 2021, but their total fund assets have increased by about 532% and 66% respectively compared with the end of 2020.

Risk factors:

Policy regulation leads to further downward valuation of the sector; macroeconomic growth slows, resulting in lower-than-expected growth in 2022Q2 e-commerce, new retail, advertising and other industries; upward interest rates or liquidity tightening lead to the downward shift of the market valuation center; Internet companies' business adjustment is less than expected, resulting in lower-than-expected performance; new business and new market expansion falls short of expectations, or investment losses exceed expectations. The impact of the new regulations on personal privacy and data security on advertising revenue exceeds expectations, resulting in lower-than-expected advertising revenue; the delisting risk of US stocks caused by PCAOB regulation; the risk of core shareholder reduction, etc.

Investment strategy:

We believe that the performance fundamentals of companies in the Internet industry are expected to hit bottom and pick up, the context of industry policy is gradually clear, and market concerns about uncertainty are improving marginally. Strategically, we recommend leading companies with strong industry advantages, steady core business growth, new technologies and new market expansion.