Can Chinese Internet Stocks Still Win from Online Advertising? By Isabella Zhong
Online advertising dollars have been one of the most exciting growth drivers for Chinese Internet companies like Tencent (700.HK) and Weibo (WB) in recent years.
But how much room is left for China’s online advertising market to grow further?
The good news: China’s total ad spending as a percentage of GDP still lags well behind that of the U.S. (0.6% versus 1%).
Jefferies analyst Karen Chan argues the gap should narrow as China transitions to a more consumption and service-driven economy.
The not-so-good news:
The ad spending share for mobile is quickly approaching its time spent share. Mobile has been a key battleground for Chinese Internet companies as it continues to capture a greater share of attention spans from PC despite slowing growth in the overall amount of time spent online by Chinese netizens.
But Chan argues mobile time spent share isn’t necessarily a cap to mobile ad spending share given ad effectiveness can be better measured and enhanced through mobile-only targeting.
Mobile ad spending share has already or is expected to surpass its corresponding time spent share in markets including U.S. and UK.
We estimate
80% of China’s total media ad dollars will be spent on digital by 2020, among which
mobile will account for 80%.Chan expects mobile in-feed advertising such as the
Moments ads in Tencent’s WeChat messaging app to be the fastest-growing ad format.
According to iResearch, China’s mobile in-feed ad is expected to reach RMB46.1bn in 2017, +72.6% YoY, representing 13% of total online ad and 20% by 2020.
Going forward, we expect mobile in-feed ad to be more integrated with multimedia formats or click-to-action buttons, and in most cases, both.
Mobile short video is also poised to be a bright spot. Chan expects mobile short video to take a higher share of video-based ad dollars as eyeballs shift from TV to online.
With
online representing almost 1/3 of video-based attention but only 1/4 of video ad spending, we believe declining TV time spent share will be reflected in advertiser behavior.
Product placement and program sponsorship should become alternative ad revenue sources for long-form online video platforms as increasing mix of pay-to-view online video content cannibalizes ad slots.
At the other end, high-frequency content consumption of mobile short video on social platforms such as Weibo and Momo should attract increasing ad dollars.
Importantly, eyeballs aren’t the only driver of advertising dollars: monetization efficiency – or how well eyeballs are converted into ad dollars – also play a key role.
Although China’s major social apps are catching up with global peers in MAU base, their monetization efficiency is still at a nascent stage. Ad revenue/MAU of Tencent and Weibo is at a 70%+ discount to Facebook and Twitter in 2016.
Meanwhile, we expect BAT to continue dominating China’s online ad market with close to 60% aggregate market share.
Chan’s top picks among Chinese Internet stocks outside of e-commerce are
Tencent, Weibo and Momo (MOMO). The analyst has a buy rating on all three and sees upside of between 17% and 34% for the stocks.
Source: Barron's Asia
http://blogs.barrons.com/asiastocks/201 ... vertising/
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