As Chinese internet companies report their interim results, a series of impressive data has been eagerly shared. Citigroup expressed optimism towards Chinese internet enterprises.
Data shows that the profit performance of Chinese internet companies in the second quarter is generally better than the revenue performance. Among the 41 internet companies covered by Citigroup, 16 companies exceeded revenue expectations in the second quarter, while 30 companies reported earnings that exceeded expectations. Overall, the percentage of companies that achieved higher-than-expected profits in the past six quarters is higher than the percentage of companies with excess revenue.
Citigroup believes that one of the reasons for the lower-than-expected revenue this quarter is that companies have actively reduced subsidies and focused on improving the quality of investment returns, which in turn supports more companies in achieving stronger profits.
On September 2nd, Citigroup analysts Alicia Yap, Brian Gong, Vicky Wei, and Nelson Cheung released a report stating that they expect this trend to continue into the second half of the year. Although revenue growth may slightly slow down, the profit outlook may further improve.
In addition, many companies have increased their share buyback efforts in the second quarter, enhancing market confidence in their future prospects.
Tencent is the preferred choice, and Meituan and Ctrip are bullish.
Looking ahead to the second half of the year, Citigroup pointed out that consumer spending may continue to shift towards services rather than physical goods. Therefore, it recommends companies that can still achieve stable revenue growth, double-digit profit growth, and reasonable valuations.
Specifically, Citigroup stated: " $TENCENT (00700.HK)$ Still our top choice.
Currently, as most investors already hold a considerable proportion of Tencent stocks, Citi believes that any widespread market sell-off is an opportunity to increase holdings of Tencent for those investors who still have insufficient positions or room to increase holdings.
Citi rates Tencent as "buy" with a target price of HKD 527.
In addition, in order to seize the more resilient market opportunities brought about by the shift in consumer spending structure, Citigroup expressed bullishness on the service sector. $MEITUAN-W (03690.HK)$ and $Trip.com (TCOM.US)$
"We believe Meituan's solid management execution will enable it to achieve double-digit revenue growth this year, and even faster profit growth. We believe this trend may continue until 2025. More importantly, despite the excellent stock performance since the beginning of the year, Meituan's valuation is still reasonable due to improved profit prospects.
Although short-term investors may be concerned about Ctrip's high base effect, we believe that the relatively stable high-end consumer market, as well as the growth in market share in outbound and international business, combined with efficient cost management, will support Ctrip's continued growth at a pace faster than the industry average, and achieve sustainable profit margins."
Citi rates Meituan and Ctrip as "buy" with target prices of HKD 155 and USD 66 respectively.
Furthermore, Citi is also bullish on$Full Truck Alliance (YMM.US)$In the long term, the company "has great growth potential".$Tencent Music (TME.US)$It is bullish on A shares and maintains a "buy" rating and A shares as the preferred stock for games, with a target price of 6.5 yuan.$Zhejiang Century Huatong Group (002602.SZ)$The intense competitive situation in the e-commerce sector may continue.
Citi believes that the intense competitive situation in the e-commerce sector may continue until the second half of 2024.
Financial reports show that some companies have increased their share buyback efforts in the second quarter. Among the three e-commerce companies,
The financial report shows that some companies have increased their share buyback efforts in the second quarter. Among the three e-commerce companies, $BABA-W (09988.HK)$ and $JD-SW (09618.HK)$ Both companies have conducted large-scale share buyback activities. Among them, JD.com actively repurchased stocks worth more than $2 billion and approved a new plan of $5 billion.
Citi believes that the stock prices of these two companies will receive valuation support.
In addition, Citi also predicts that:
Jd.com will benefit to a greater extent than other e-commerce companies from the implementation of the household appliances trade-in program.$PDD Holdings (PDD.US)$The growth of its commodity trade volume and marketing services revenue is expected to be faster than its peers; from the perspective of fund flows and technology, with the official launch of the Shanghai-Hong Kong Stock Connect program, Alibaba's stock may see greater upward support and may attract more mainland investors.
It is worth noting that Tencent and PDD Holdings mentioned earlier also conducted large-scale share buybacks in the second quarter, with Tencent repurchasing stocks worth $4.8 billion and PDD Holdings repurchasing stocks worth $1.36 billion, which enhanced market confidence in the company's development prospects.
Competing to optimize subsidies.
From the second quarter of the Internet company's performance conference call, it can be found that the willingness of various companies to subsidize has decreased.
Citi believes that this may be due to the cautious attitude of management. Therefore, more and more companies have decided strategically to reduce subsidies to 'low-quality' users and focus on improving service quality for high-quality users.
Ly.com has announced that it has decided to reduce subsidies to low-quality users and hopes to achieve a balance between revenue growth and profitability.
Tencent Music's management stated this quarter that it will pursue high-quality user growth and ARPPU growth. Tencent Music will focus on user retention, which is crucial for sustainable business growth.
Citi predicts that this trend will continue into the second half of the year. Although revenue growth may slow slightly, the profit outlook may further improve.
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