Given recent novel coronavirus outbreak, we expect online entertainment sector (game & online video) and cloud business to benefit, with higher MAU & user time spent in CNY than usual and higher exposure. On the other hand, we expect OTA and film segments to be negatively affected, dragged by less transportation and CNY films delay. In the long run, we see high visibility for leaders to gain share and consolidation to continue after the epidemic. Game and online video players are our preferred names in the epidemic, and our top picks are Tencent (700 HK, BUY), Alibaba (BABA US, BUY) and iQiyi (IQ US, NR). We also suggest investors to keep an eye on Momo (MOMO US, BUY) for its price over-reaction on lucky draw suspension.
- Online entertainment to benefit. We expect game comps to see a strong quarter in 1Q20E, with more time spent shift to online leisure & MAU due to the epidemic outbreak, benefiting Tencent, Perfect World (002624 CN, BUY) and Sanqi Interactive (002555 CN, BUY). Mobile games could directly benefit, but not PC games (less operation of internet café). Noted that DAU of <HoK> and <PUBG Mobile> hit record highs in 2020 CNY, and 4-5 games of Tencent entered Top 10 in iOS grossing rank, suggesting eye-catching grossing of Tencent. We estimate HoK’s monthly grossing in Jan 2020 will be over RMB9bn. Apart from games, epidemic would pose positive impact on online video, benefiting iQiyi, Bilibili (BILI US, NR) and Tencent. We expect online video players to see strong subscriber growth in 1Q20E, driven by stronger user engagement and hot titles launched (e.g. Love apartment 5 <爱情公寓5> and Eternal Love: The Pillow Book <三生三世枕上书>).
- Live streaming: focus still on regulation update. 1Q is typically weak season for live streaming, as social activities shift to families &friends from strangers. We expect live streaming platforms to see slight positive impact from the epidemic, with higher MAU & time spent, but financial contribution would be relatively small. Market concern still lies in the regulation update of lucky draw feature suspension, which hit ARPU and paying willingness. We suggest investors to keep an eye on Momo, for its price over-reaction on lucky draw suspension.
- Ecommerce: short-term pressure while long-term intact. We think ecommerce could be slightly suppressed by the epidemic in the short term, mainly on: 1) potential production delay & goods shortage on the supply side for holiday extension; and 2) part of logistics to be disrupted. Players with apparel might also bear inventory pressure. However, the demand would be still intact in our view, especially for FMCG and medical products. We expect ecommerce to see strong recovery after epidemic as offline consumption shift to online, and long-term benefit from user expansion and stronger engagement in CNY. We view Alibaba as our top pick, backed by solid earnings growth, reasonable valuation and multiple catalysts (e.g. stock connect, potential listing of its subsidiaries).
- OTA to suffer direct hit. Given a flood of booking cancellation and travel limitation, OTA industry could be negatively suffered from the epidemic. According to the Chinese Ministry of transportation, China’s overall travelers declined 24% YoY during CNY (10 Jan – 1 Feb 2020), posing obvious pressure on traffic & hotel growth. By segment, we expect international business to suffer more than domestic travel, for its expenses on book cancellation. For instance, both Ctrip and Tongcheng-eLong launched refund security fund (RMB200mn) <2亿保障金活动> for international cancellation in CNY. Railway could be relatively resilient as return demand just delayed two weeks. On the expense side, OTA players will strategically cut its S&M efforts and subsidies, to alleviate its margin pressure.
- Ads recovery to bear pressure. Given the macro slowdown due to the epidemic, we expect ads industry to bear 3-6 months pressure from the demand side, and its recovery might potentially be delayed. Based on our cross check, most advertisers plan to cut their ads budget to control cost in 1Q20E, while online game and online education players seem to put heavier marketing efforts in CNY to acquire users.
- Cloud business to benefit, with higher exposure. We expect the epidemic to stimulate cloud business with one-stop services (e.g. telecommuting, big data analysis, etc.), including AliCloud, Tencent Cloud, etc. Cloud/SaaS business might see rising adaption and deeper penetration into SMEs after high exposure in this epidemic, benefiting Alibaba, Tencent, Kingsoft (3888 HK, NR), and Weimob (2013 HK, NR).
