Safa Rashtchy, who covers internet for USBankcorp, recently went to China and came back with a good report. His homepage is here but you have to be a client to get the reports, I get his emails as a journalist, and I’ll post the summar in the “more” area…
ey Takeaways From Chinese Internet Field Trip. China has a booming Internet economy with a growing number of sizeable Internet companies, including the three public companies under our coverage, Sina, Sohu, and Netease. We visited about 23 Internet companies and other entities in a one-week tour that included Honk Kong, Guangzhou, Beijing, and Shanghai. Below is a brief summary of our notes from this field trip and the key findings that were different from our previous expectations:
The Internet Economy in China is vibrant and fast growing. Many companies we visited believe that the figures by the official center CNNIC are too conservative and the real Internet population is above the current estimate of 68 million.
Online Advertising – Still in very early stages with less than 1% of the total ad spending directed to online. Most companies and advertisers expect at least 50% growth in 2004.
Near-Term Picture Is Clear. SARS and SMS-related carrier issues that have been in various media reports over the past month are either all behind us (happened in Q2) or were already accounted for in the guidance. We did not see any development in Q3 that would negatively impact revenue or earnings growth. We believe all three portals are poised to meet or beat our estimates and we believe Netease has the biggest upside potential for Q3.
Long-Term Opportunity Is Real And Big. Below the three portals, there is a vibrant and fast growing Internet economy that is reminiscent of the early days of Internet in Silicon Valley with two glaring differences: all the companies we visited are profitable, including the smallest players, and all have viable business models, thanks to the lessons learned from U.S. and the unique Chinese economy and culture. We didn’t encounter any company that made us scratch our head and think if this can be a real business — some may never become big businesses, but they are profitable and real, and their growth will depend on the market growth patterns. We didn’t see any Webvans or Pets.com or their equivalents. Although we do expect that a number of these smaller companies will not make it at the end (mostly due to market and competitive forces), nearly all have a plausible business models.
Usage Pattern. Internet Cafes are booming but at home usage is growing even faster and the majority of Internet users access the web from home. Broadband is reaching nearly 10% of the Internet population and is growing fast, with major move by China Telecom. By the end of this year, broadband households could reach 10 million, nearly half of that of the U.S.
The SMS risks are less than previously thought. Our conversations with various industry people lead us to believe that the mobile carriers are unlikely to either increase the revenues share or enter the content-based SMS market.
The online gaming market is highly competitive. The Online game market is highly competitive and much more developed than we had expected. This will make it more difficult for Sina and Sohu to easily break into this market (we are not modeling for any online games revenues for either of these two companies) and gives Netease a key advantage, in our opinion.
Search is a bigger potential. The paid search market is bigger and with more potential than we had expected. The three portals, especially Sohu, will be big beneficiary of this market, as would a number of smaller private search companies.
Positioning Of The Key Players. We believe Sina is considered to have the top position in Chinese Internet economy, especially with regard to advertising. Sohu is aggressively closing in on this gap, with a differentiated positioning towards younger audience. Netease, the third player in online advertising, is a solidly run company with an enviable position in the online games market and a very strong SMS base. The emerging fourth portal, Tom.com, is also making progress, especially in the SMS area.
Conference Call. We will be holding a tele-conference on September 24, 2003 to discuss our finding in more details, including a Web-based slide presentation. Please contact your U.S Bancorp Piper Jaffray Account Executive for details.