Wednesday, March 30, 2011

10 Predictions for China’s Internet in 2011

10 predictions for China’s Internet from Dick Wei of JP Morgan. Although published in January, all the predictions still look pretty much valid up until now.

(1) eCommerce to see wider adoption, driven by convenience, lower-price alternatives to traditional retail, and improved trust & safety. Gross merchandise volume (GMV) is expected to reach Rmb723B in 2011, or less than 4% of retail sales.

(2) Social commerce. Expect social sites to be an emerging and important traffic generator for eCommerce companies. Synergistic relationship between social networks and commerce merchants will fuel growth for both segments.

(3) Gaming segment likely to see re-rating with good game titles launch. Highly anticipated games in 2011 include Duke of Mountain Deer, World of Warcraft Cataclysm, etc., which could generate greater player interest and, as such, sector rerating.

(4) Video advertising to prompt ad dollar shift from TV to internet. With the recent IPO of Youku, a broader range of online video content, growing online video user base, and a familiar ad format, TV advertisers are likely to accelerate the ad budget shift from offline to online.

(5) Mobile Internet to see increased competition. We expect Internet leaders like Baidu and Tencent to formally launch middle-ware products that could include third party application distribution platforms; compete with existing players UCWeb other mobile game platforms.

(6) Search continues to see solid growth, with wider market adoption. Baidu still maintains dominance, other players such as Soso and Sogou still unlikely to gain meaningful market share.

(7) Solid consumer spending trend supports good advertising segment growth. Expect continued good macro environment to support consumer spending. We believe the sector growth story remains intact: Internet usage growth, particularly in lower-tier cities, to drive ad budgets online.

(8) Expect transition from time-base pricing to CPM-base pricing to accelerate in 2011, but remain gradual, driven by user-segregation and better online adserving/tracking technology. Yet, leading portals will still benefit from their own brand influence.

(9) 2011 Rmb appreciation to improve sector profitability. Expect sector margins to have very slight improvements from Rmb appreciation, as only a small portion of costs are in US dollars (game licensing fee, overseas video/sports content fee, and some servers, etc.). Benefits to come from translation gains from Rmb-denominated EPS to US$-denominated EPS.

(10) More IPOs likely in 2011. We expect investors will likely continue to look for growth investment opportunities in 2011. We think China’s internet segment offers good secular growth, as well as a number of sizable private companies. We believe more new listings are likely.

Feel free to add any predictions on top of the 10 listed above.

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