This isn’t your huckster’s Internet. Unlike the infamous Pets.com and other casualties of the tech bust in 2000–outfits that generated more hype than earnings–many of today’s Internet companies have developed profitable business models and are here to stay. But this growth story is far from over, especially in China, the world’s quintessential emerging economy.
The China Internet Network Information Center (CNNIC), the administrative agency responsible for registering web domains and providing other online services, estimates the Mainland’s Internet users at 564 million, or 42.1 percent of the population. Meanwhile, the government’s effort to bring fixed-line broadband access to 70 percent of the population by 2020 (compared to 31 percent in 2012) should drive additional growth.
About 74.5 percent of China’s estimated 564 million Internet users access the web via mobile devices, compared to about 24 percent in 2007–an impressive growth rate. We expect this trend to accelerate through the end of the decade, fueled in part by the government’s aggressive effort to grow mobile-broadband penetration to 85 percent from 21 percent.
Online business accounts for about 8 percent of China’s total retail sales but should move into double digits over the next few years. According to iResearch Consulting, the number of online shoppers in China grew by 14.6 million last year. The China-focused research and consulting firm forecasts that the gross merchandise value of online sales, which hit about US$300 billion last year, will exceed US$500 billion within the next two years.
China’s extensive infrastructure, originally built to facilitate exports, has supported this rapid growth in e-commerce.
We expect the Chinese Internet companies that can deliver the best mobile experience to customers to win out. According to CNNIC, 13.2 percent of China’s roughly 55 million mobile web users shopped online last year–a huge jump from 6.6 percent in 2011. Although mobile traffic is on the rise, these users still contribute only 18 percent of revenue for a representative sample of Chinese Internet companies. Investors should focus on names that are doing the most to monetize this traffic.
Shares of Internet-related Chinese stocks have run up significantly of late, fueled by a raft of bullish research reports. Investors seeking exposure to this long-term growth story should have a stomach for volatility and the discipline to avoid overpaying for growth.
Here are our top three plays this powerful growth trend.