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China Internet Sector Equities Global Research 29 June 2020 China Internet Sector Equities Who benefits from live streaming e-commerce? China Internet Services Jerry Liu The line between online media and e-commerce platforms is blurring Analyst Our conversations with retailers, e-commerce platforms, talent agencies, etc. indicate [email protected] online media platforms could benefit more from new e-commerce models, where +852-2971 7493 videos and live streams drive purchasing decisions, compared to traditional search-led Curtis Li online shopping. Today, Alibaba's Taobao Live and Kuaishou are leaders in live Analyst streaming e-commerce, which we estimate will be an Rmb2.2trn market by 2022 with [email protected] 71% CAGR from 2019-22. Bytedance's Douyin and Tencent's Weixin/WeChat could +852-2971 5526 become major players over time, while we think traditional e-commerce platforms need Wei Xiong to evolve, or risk getting disintermediated and ultimately lose user and gross Analyst merchandise value (GMV) market share. S1460518100005 [email protected] Live streaming and social driven e-commerce increase our market forecasts +86-21-3866 8883 A year ago we identified social e-commerce as a key reason of e-commerce market Zhijing Liu fragmentation (note) with PDD being the most successful. Since then, we saw live Analyst streaming e-commerce hit an inflection point in 2019, as the two short video platforms S1460515120001 Douyin and Kuaishou push more into live streaming, and another during Covid-19. [email protected] Brands, retailers, etc. shifted resources online this year, and worked with key opinion +86-21-3866 8847 leaders to educate and promote new products and services. We increase our online Navin Killa retail sales forecasts, and see e-commerce reaching Rmb17.8trn by 2022 (33.2% online Analyst penetration), with live streaming and social e-commerce accounting for 12.2% and [email protected] +852-2971 7594 21.0% of GMV. Online media: Kuaishou leads followed by Douyin, but watch for Tencent Kauishou leveraged its strength in live streaming, and we assume it can drive Rmb150bn of live streaming GMV in 2020, or 16% market share. The two other large platforms are Douyin, the largest short video platform with 400mn+ daily active users and 1+ hour of daily time spent, and Tencent, who is focusing on improving Weixin/ WeChat features for retailers and brands, and management has articulated plans to monetization e-commerce over time. Traditional e-commerce: net positive but there are potential risks as well We estimate Taobao Live can generate Rmb438bn in GMV in 2020, or 46% of live streaming e-commerce, but an end to its partnership with Douyin as reported in the media could be a risk. While live streaming was not a focus for Pinduoduo until late 2019, we believe it can leverage its strength in apparel and FMCG/food, and ability to help consumers discover products and encourage impulse purchases. Figure 1: China Internet valuation comparisons Price Target Share P / E PEG P / S Rating (LC) Price (LC) 2020E 2021E 2022E 2021E 2022E 2020E 2021E 2022E E-commerce Alibaba 290.00 222.16 Buy 31.0x 21.1x 16.1x 0.45x 0.52x 6.2x 4.9x 4.1x JD 67.00 60.51 Buy 40.3x 24.2x 17.9x 0.36x 0.51x 0.9x 0.7x 0.6x Pinduoduo 80.00 86.00 Buy N/M 79.8x 40.2x N/A 0.41x 15.5x 9.7x 7.0x Vipshop 18.00 19.71 Neutral 15.0x 11.8x 10.2x 0.44x 0.63x 1.0x 0.8x 0.7x Ecmoho 5.00 2.88 Neutral N/A 13.4x 6.6x N/A 0.06x 0.2x 0.2x 0.1x Online Media Tencent 520.00 490.80 Buy 36.4x 29.0x 23.0x 1.4x 1.1x 9.0x 7.3x 6.0x Bilibili 39.00 44.57 Buy N/A N/A N/A N/A N/A 9.5x 6.8x 5.2x Weibo 45.50 33.90 Neutral 15.2x 12.7x 11.5x N/A 0.7x 4.7x 4.3x 4.0x Source: UBS estimates, Datastream. Note: As of 25 June 2020. BABA is based on CY. www.ubs.com/investmentresearch This report has been prepared by UBS Securities Asia Limited. ANALYST CERTIFICATION AND REQUIRED DISCLOSURES BEGIN ON PAGE 27. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. China Internet Sector P2 UBS Research THESIS MAP MOST FAVOURED LEAST FAVOURED Alibaba, Tencent PIVOTAL QUESTIONS Q: Can live streaming and social networks drive meaningful online retail sales growth? Yes. Post Covid-19, short video, live streaming and social related shopping are even more important. Merchants are more reliant on online distribution, and consumers are less willing to go offline. We forecast 71% CAGR for live streaming e-commerce GMV over 2019-22E, and 41.5% CAGR for social e-commerce, reaching 12.2% and 21.0% of total e-commerce GMV in 2022. more Q: Who benefits from live streaming e-commerce? Content platforms may benefit more than e-commerce platforms. Monetizing live streaming through e-commerce is an incremental opportunity for online media platforms, and their significant user base and time spent make them formidable competitors. We see increasing risk online media could disintermediate traditional e-commerce platforms to some extent vs. working together in the past. Alibaba and Kuaishou are market leaders today in terms of GMV share, and Bytedance's Douyin and Tencent's Weixin/WeChat are also investing in the space. more WHAT'S PRICED IN? The strong growth in live streaming e-commerce since 2019 has taken most by surprise. We believe investors have not fully priced in this opportunity as some question whether it can last. Many also wonder who will be the eventual beneficiaries, especially as current partnerships between Bytedance and Alibaba or between Kuaishou and JD and Pinduoduo may not last, and competition will increase as the line between online media and e-commerce blurs. UBS VIEW We see live streaming and social driven e-commerce as sustainable secular trends, which are driving e-commerce fragmentation if we look at the broader market beyond the three major traditional e- commerce platforms: Alibaba, JD and Pinduoduo. This creates new opportunities and threats. We believe several online media and e-commerce platforms will ultimately benefit. Alibaba and Kuaishou are the market leaders in live streaming e-commerce today, and Pinduoduo, Bytedance and Tencent are platforms are investing into the space. EVIDENCE We increase our forecast for e-commerce GMV to Rmb17.8trn in 2022, representing 33.2% online penetration vs. 28.1% previously, based on third party data and conversations with a variety of industry participants. The higher e-commerce forecast is driven by strong live streaming and social e- commerce adoption in 2019 and YTD. Source: UBS China Internet Sector 29 June 2020 2 China Internet Sector UBS Research P3 OUR0B THESIS IN PICTURES return 30,000 40% 33% 30% 35% 26% 30% 20,000 23% 17,750 25% 20% 14,957 17% 20% 14% 12,134 13% 10,163 15% China online retail GMV to reach Rmb18bn by 2022E 10,000 8,045 6,340 10% 3,807 4,740 5% - 0% 2015 2016 2017 2018 2019 2020E 2021E 2022E Online Shopping GMV (Rmb bn) % Online Penetration 21% 4500 19% 22% 17% 3728 20% 18% 13% 2865 16% 3000 14% 2067 12% 8% 10% Social-driven purchase value to contribute 21% of total 1317 1500 8% e-commerce by 2022E 6% 3% 627 4% 23 176 2% 5 0 0% 2015 2016 2017 2018 2019E 2020E 2021E 2022E Group Purchase Membership Community Purchase % of e-commerce 3000 12% 14% 10% 12% 2500 2171 10% 2000 8% 1545 8% 1500 4% 961 6% Live streaming-driven purchase value to contribute 12% 1000 4% of total e-commerce by 2022E 2% 434 500 2% 20 133 0 0% 2017 2018 2019 2020E 2021E 2022E Alibaba Kuaishou Bytedance Others % of e-commerce Taobao Douyin Little Red Book Total take rate (%) 20-25 20-25 10 Live steaming e-commerce take rates for select platforms Platform (%) 6-7 6-7 2 KOL & MCN (%) 14-18 14-18 8 Source: Company data, iResearch, iiMedia, UBS estimates China Internet Sector 29 June 2020 3 China Internet Sector UBS Research P3 OUR0B THESIS IN PICTURES return Weixin JD PDD VIPS Taobao Kuaishou Douyin 2019 GMV 800 2,085 1,007 148 3,387 35 20 (Rmb bn) MAU Online media platforms could gain e-commerce GMV 1,203 387 487 69 846 400+ 500+ (mn) share if they can convert their significant users and time Mini- spent into consumption Program 746 92 124 29 N/A N/A N/A MAU (mn) 1,200 8.7% 10% 9% 7.4% 886 8% 900 5.9% 7% 656 6% 600 3.8% 5% 438 4% Taobao Live to contribute 8.7% of Alibaba's China GMV by 2022E 3% 300 1.8% 250 2% 0.2% 0.4% 100 8 20 1% 0 0% 2016 2017 2018 2019 2020E 2021E 2022E Taobao Live GMV (Rmb bn) % of Alibaba GMV 600 25% 21% 19% 500 460 20% 16% 400 300 15% 300 8% 10% Kuaishou Live GMV could reach Rmb460bn by 2022E or 7% 200 150 21% share of total live streaming e-commerce 5% 100 35 0 9 0 0% 2017 2018 2019 2020E 2021E 2022E GMV (Rmb bn) % of Live stream GMV 500 18% 20% 16% 400 400 12% 15% 300 240 10% 200 5% 5% 120 5% Douyin Live GMV could reach Rmb400bn by 2022E or 100 18% share of total live streaming e-commerce 7 20 0 0% 2017 2018 2019 2020E 2021E 2022E GMV (Rmb bn) % of Live Stream GMV Note: We do not cover Douyin and Kuaishou and are not making investment recommendations on them.
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