China tech could take a hit from ad sales

A cascade effect of weaker consumer sentiment, slower e-commerce traffic and reduced confidence of advertisers could put pressure on margins in the sector

Andrew Willis 29 April, 2019 | 2:00PM
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Note: This article is part of Morningstar Canada's Emerging Markets Week Special Report

Andrew Willis: We recently talked about how developments in Chinese technology driven by an army of app-enabled online shoppers and highly integrated internet-based consumption habits are surpassing other sector developments in the country. But now, we learned that certain micro and macro issues might be putting a damper on these developments and sentiment is decidedly more bearish than a few months ago.

The trade war between the U.S. and China, more stringent regulations over certain internet sectors including those that are major advertisers and weaker macroeconomics have put pressure on the internet assets covered at Morningstar China. This has led to recent downgrades in the Morningstar fair value estimates which tell investors what the long-term intrinsic value of a stock is and to help them see beyond the present market price.

One local element we are closely tracking is advertising spends in the Chinese tech sector. Weaker consumer sentiment can lead to slower e-commerce traffic which in turn leads to reduced confidence among advertisers. This could put pressure on corporate advertising budgets, especially brand advertising, as the return on investment is more difficult to justify. Our analysts believe performance-based advertising will be less affected, but lower advertising budgets will lower the growth rate of names such as Baidu, Tencent, Weibo, Sina, and to a lesser extent, NetEase and JD.

Also, given that travelling is more discretionary in nature, our analysts also expect to see reduced travelling budgets and therefore lower growth at online travel agencies such as Ctrip. With China tech taking off at the beginning of this year, it's worth watching to see if advertising revenues slow this otherwise fast-moving and still promising sector.

For Morningstar, I'm Andrew Willis.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Baidu Inc ADR100.28 USD-1.13Rating Inc ADR30.27 USD-2.98Rating
NetEase Inc ADR90.48 USD-4.50Rating
Tencent Holdings Ltd ADR48.46 USD0.33Rating Group Ltd ADR52.75 USD1.52Rating
Weibo Corp ADR8.77 USD-0.23

About Author

Andrew Willis

Andrew Willis  is Senior Editor at Morningstar Canada. He previously produced content for Fidelity Investments and finance industry events for Euromoney Institutional Investor and has written in the past for Thomson Reuters and CNN. Follow him on Twitter @Andrew_M_Willis.

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