A Chinese man uses Baidu's food delivery online-to-offline app, Baidu Waimai, on his smartphone. View Enlarged Image
A weakened Chinese economy might not slow the bold ambitions of China's largest Internet companies heading into 2016, despite the stock market's freefall to start the year.
Alibaba (NYSE: BABA), Baidu(NASDAQ: BIDU), JD.com(NASDAQ: JD) and Tencent Holdings (OTCPK: TCEHY) all invested heavily during 2015 in fields that include entertainment, ride sharing, retail, logistics and online banking. While each dominates its core markets, all four took steps that encroached on one another's turf.
Still, there is room for all four companies to grow. China has the largest number of Internet and smartphone users worldwide, and only roughly half of the population is as yet online.
"Especially in this difficult China economy, more and more transactions will migrate online, and that benefits these companies," said Henry Guo, an analyst at Summit Research. "Chinese consumers are going online to find the best deals, so I don't think the slowing China economy is as much of a concern for them."
Guo says that the upheaval in the China stock market the first week of the year is a result of Chinese government actions related to stock market activity rather than a direct response to economic conditions.
"There is no substantial evidence showing the China economy continuing to go south," Guo told IBD. "The government does not have enough experience dealing with financial market instability."
An Outperform Amid Tumult
Analyst Colin Sebastian at Baird Equity Research holds a similar view. On Thursday, as stocks crumbled, he initiated coverage on Alibaba with an outperform rating, saying the China e-commerce giant is poised for significant growth.
"Despite concerns around the Chinese economy, we note the Internet market is still developing in the region along with an ever-increasing consumer class," he wrote in a research report. "We expect the secular growth of e-commerce to continue at a relatively healthy pace."
Of the four largest Internet companies in China, Alibaba has been investing the most money in growth. The No. 1 provider of e-commerce services in China, Alibaba last year invested about $11 billion in acquisitions. This includes $4.63 billion for a 20% stake in Suning, one of the largest consumer-electronics retail chains in China.
The investment in Suning is part of a plan, also embraced by Baidu, JD and Tencent, to ramp up their online-to-offline, or O2O, retailing. O2O is expected to figure heavily in the future of retailing and consumption in China. It's seen as a better way for China's consumers to research and buy goods and receive them quickly, with smartphones playing a key role.
Baidu, China's Internet search engine leader, has pledged to invest $3.2 billion in O2O retail services over the next three years.
Tencent, which leads in mobile games, social networking and instant messaging, has also made O2O forays. Tencent and Baidu have teamed with Dalian Wanda, one of China's largest property and entertainment conglomerates, to create O2O platforms.
"All these investments in O2O are very early stage," said Guo. "Nobody is really sure how all this will play out. But if your competitor is moving into the business, you also have to be there.
"How they will make money from it long term, I don't think anyone has an idea at this moment."
'Ride' Battle Hits Overdrive
Another battle for the Chinese consumer is playing out in ride sharing. In a rare show of cooperation, Alibaba and Tencent in early 2015 merged their respective ride-hailing services to form Didi Kuaidi, which now leads its field in China. The move was partly seen as an effort to thwart San Francisco-based Uber Technologies. Baidu has invested in Uber.
The business is much more than just taking a cut of ride payments. It's about creating a deeper connection with consumers, such as getting them to use a company's payment app, upselling them other services and getting them to view more ads. Building out a driver network also provides the ability to possibly offer other delivery services, such as delivering packages, medications or flowers. This is why the China Internet leaders also are investing in food delivery services, as they build distribution infrastructure.
A fierce battle is taking place between Alibaba and JD.com in e-commerce, though the companies use different strategies. JD has a business model similar to Amazon.com's(NASDAQ: AMZN). JD manages its own inventory and delivery logistics.
Alibaba serves as an intermediary between buyers and sellers, who themselves manage the delivery. Alibaba gets a cut from the sale of goods on its platforms, known as its monetization rate, of about 2.4% of gross merchandise sold.
"In the shorter term, JD's strategy is a lot easier to execute," said Bill Whyman, an analyst at Evercore ISI. "Longer term, if Alibaba can pull together all of its ambitions in the digital economy — and that's a big if — that's not just a home run but a grand slam."
While expanding its dominance in e-commerce for both consumers and businesses, Alibaba is also expanding into multiple facets of a digital economy. It's engaged in financial services, cloud computing, Big Data analytics and entertainment, in addition to O2O, ride hailing and food delivery services.
But analysts say that it's not clear whether Alibaba's ambitious goals will tie together or unravel.
Alibaba Must Show 'Vision'
"One thing they could do to give investor some confidence is to show how the longer-term vision will succeed, to provide some good, successful examples," Whyman said.
Tencent, on the other hand, gets a lot of credit for navigating the complicated Internet dynamics very well, says Whyman. As the leader in mobile messaging and gaming, "They've ridden the mobile wave beautifully," he said, "and they've had a lot of success incorporating their WeChat messaging services into corporate accounts. That's not easy stuff."
In a research report, analyst Vey-Sern Ling at BNP Paribas rated Tencent as his top pick in 2016 among the China Internet leaders. Traded on the Hong Kong exchange, Tencent is traded over the counter in the U.S.
"We believe Tencent's integral role as a provider of online user traffic and mobile payment services, as well as its wide-ranging partnerships with leading O2O players, makes it the best positioned among large-cap Internet companies to capture offline business opportunities," he wrote.
Ling has buy ratings on Tencent, Alibaba and Baidu. (He doesn't follow JD.com.)
"We believe Alibaba's aggressive acquisitions and expansion into synergistic businesses such as content, entertainment, O2O and software could provide significant longer-term monetization potential, as long as the integration of such businesses is well executed," Ling wrote.
By Brian Deagon
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