According to the research report released by Orient Securities, the Internet industry is the preferred sector for long-term capital entry, and the long-term development logic of the industry is in line with the specific requirements of China’s “high-quality development” and “value-enhancing investment”. In terms of high-quality development of profitability, the overall profitability level and quality of Internet companies have been increasing in recent years based on a sound business model base, maintaining a stable growth trend, and the fundamentals are good. In terms of investment value, Internet companies are gradually paying more attention to the planning of shareholder returns, increasing efforts in repurchasing, dividends, and other areas, aligning with overseas internet and technology companies with high repurchases and dividends, and its stable cash flow and abundant reserves lay a solid foundation for shareholder returns.
Orient Securities' main points are as follows:
From the perspective of performance, the industry's companies are driven by reducing costs and improving efficiency, and fine-grained operations promote the continuous improvement of profitability and quality. Taking the constituent stocks of the Hang Seng Tech Index as an example, the total revenue in 2023/2024E increased by 6%/11% respectively year-on-year, and the attributable net profit increased by 17%/33% respectively YoY, with marginal improvement in growth rate and profit growth rate superior to revenue growth rate. Compared with domestic and overseas Internet companies, the market has raised its expectation for the growth rate of domestic Internet companies before and after the first quarter report. This logic is expected to be sustainable this year.
From the perspective of improving the quality of individual stock profits, it can be summarized as: ① The proportion of high-gross-profit business in revenue has increased, or the gross profit margin of subdivided businesses has increased, such as Tencent, etc.; ②Under the scale effect, operating leverage releases profit increments, such as PDD Holdings, Meituan, Kuaishou, etc.; ③ Focus on core business, narrow losses in non-core businesses, such as Alibaba, Meituan, etc.
From the perspective of shareholder returns, while the steady growth of internet companies' performance, they gradually attach more importance to shareholder returns. Repurchases and dividends have increased. Some domestic Internet companies have invested in shareholder returns comparable to overseas mature internet giants. From the absolute level of repurchases and dividends, Tencent and Alibaba have the highest return efforts among domestic internet companies. In 2023, Tencent used USD 27.2 billion for repurchases and dividends, and in 2024, Alibaba used USD 16.5 billion for repurchases and dividends. From an absolute perspective, they can be compared with overseas companies like Meta.
From the perspective of cash reserves and cash flow, compared with major overseas technology companies, most domestic Internet companies still use less than 50% of their net profits for shareholder returns. There is still room for improvement in future shareholder returns. If favorable measures such as the Hong Kong Stock Connect dividend tax exemption are implemented later, it will help improve market sentiment and further enhance return certainty.
Considering the company's profit growth rate, shareholder return investment, and P/E ratio, domestic Internet companies have higher configuration value and cost-effectiveness compared to overseas ones. Among the companies with positive (repurchases + dividends - SBC expenses)/end-market value in 2023, companies expected to have a net profit growth rate of more than 25% in 2024, Alibaba and Tencent have higher indicators of shareholder return investment and lower P/E ratios than Google and Meta (calculated based on the market value on July 1, 2024 and the expected GAAP net profit for the next fiscal year). For companies with net profit growth rate expected to be lower than 25% in 2024, Netease and JD.com have more advantages in valuation compared to overseas Apple and Microsoft. Among the companies with (repurchases + dividends - SBC expenses)/end-market value not positive in 2023, Meituan and Kuaishou actively repurchased. As of the first half of 2024, the indicator for Meituan has reached 0.91%, and it is expected to continue to increase with the execution of the repurchase in the latter half of the year.
In the context of long-term investment, the Internet sector in China is bullish on its continuous high-quality growth based on its business model and the increasing investment in shareholder returns (which can be aligned with overseas technology giants), which provides strong support for the long-term investment logic. Taking into account the growth rate of performance, investment in shareholder returns, and company valuation, Chinese Internet assets have higher configuration value.
Considering the company's profit growth rate, shareholder return investment, and P/E ratio, domestic Internet companies have higher configuration value and cost-effectiveness compared to overseas ones. Among the companies with positive (repurchases + dividends - SBC expenses)/end-market value in 2023, companies expected to have a net profit growth rate of more than 25% in 2024, Alibaba and Tencent have higher indicators of shareholder return investment and lower P/E ratios than Google and Meta (calculated based on the market value on July 1, 2024 and the expected GAAP net profit for the next fiscal year). For companies with net profit growth rate expected to be lower than 25% in 2024, Netease and JD.com have more advantages in valuation compared to overseas Apple and Microsoft. Among the companies with (repurchases + dividends - SBC expenses)/end-market value not positive in 2023, Meituan and Kuaishou actively repurchased. As of the first half of 2024, the indicator for Meituan has reached 0.91%, and it is expected to continue to increase with the execution of the repurchase in the latter half of the year.
Recommended to pay attention to: Tencent Holdings (00700) and Meituan-W (03690), which have shown upward performance on their respective competition tracks this year; Alibaba-SW (09988), which is at the bottom of the industry this year but has focused on optimizing its platform's users and services to seize market share and compete at a slower pace (this year's obvious trend of low-priced consumption and relatively ending content e-commerce dividends); other recommended stocks to watch: Netease-S (09999), Kuaishou-W (01024), JD.com-SW (09618), Bilibili-W (09626), etc.
Risk warning: risks such as macroeconomic growth falling short of expectations, policy and regulatory risks, and technological innovation and application falling short of expectations.