While disruption by the technology sector has of course been a global phenomenon, Fidelity China Special Situations PLC portfolio manager Dale Nicholls highlights how China stands apart due to the sheer size and speed of this shift.
The last decade has seen large swathes of the traditional economy disrupted by innovative new companies. The technology sector has been at the centre of this change and has played a key role in enabling changes in consumption behaviour and creating new business models.
While this has of course been a global phenomenon, China stands apart due to the sheer size and speed of this shift. Over recent years we have observed the rapid adoption of smartphones to the point where China now has more than 1bn mobile internet users who all speak the same language and live in an identical social system.
This has completely changed how Chinese people spend both their time and money. We have seen huge growth in mobile payments, for example, with total mobile payment transaction value in China doubling from US$286 bn in 2017 to an estimated US$581 bn this year. This trend is not just limited to large cities like Shanghai and Beijing - in fact, it is equally apparent in China's lower tier cities as the pace of economic development over recent years means that traditional bricks and mortar stores simply don't exist in many of these areas.
The rise of China's mobile internet
Source: Statista, Sep 2019
Against this backdrop, much like the FAANGs (Facebook, Amazon, Apple, Netflix and Google) in the US, China's BATs (Baidu, Alibaba and Tencent) have emerged as the bellwethers for innovation and the vanguard of seismic structural changes in the way companies and consumers operate in the modern marketplace.
Alibaba's marketplace currently has 730m annual active consumers and management is targeting growing this to over 1bn in the next five years. It also plans to achieve substantial growth in its annual gross merchandise volume from 5.7tn yuan in fiscal 2019 to over 10tn yuan by 2024*.
Alibaba's user base creates a huge set of data which the company can use to target relevant products and offers at specific customers and further improve its monetisation rate. Notably, its ecosystem is also continuing to expand into areas beyond its core commerce business which have the potential to generate significant value for the company in the future.
In latest developments, Alibaba just received approval for restructuring its fintech company Ant Financial, which has its origins in Alibaba's payment systems Alipay, now offers wealth management, micro financing, insurance, as well as digital payments**. Alipay and its e-wallet partners currently have a base of 1.2bn users worldwide. Ant also owns Yu'e Bao, the world's largest money market fund, and Sesame Credit, a credit-rating system. Ant Financial's initial public offering (IPO) has long been in the making and this will unlock considerable value from the Alibaba ecosystem.
Alibaba's cloud unit AliCloud is a market leader in China with a 43% market share, with regional expansion underway in Malaysia, Indonesia, Hong Kong, and Macau. AliCloud is also targeting global companies that want to enter the Chinese market.
Another element of the Alibaba ecosystem is its presence in the home delivery segment, where it merged Ele.me and Koubei into Alibaba Local Services Company in late 2018. Ele.me is known for its Hummingbird delivery service and it has been providing distribution and delivery services for more than one thousand supermarkets in China. Alibaba aims to lean on Ele.me to enhance the speed of deliveries from Alibaba's e-commerce platforms Taobao and Tmall to same-day delivery.
Changing of the BATs?
China's digital economy does not stand still and, in the spirit of disruption, there are signs that a new "B" is starting to challenge the status quo of China's BATs. In terms of time spent on mobile internet by Chinese users - a key metric with huge implications for revenue - Baidu, China's biggest search engine operator, has been overtaken by a private company called ByteDance.
So, who or what is ByteDance? Ask any teenager in the West and they will happily tell you about TikTok, a hugely popular social media platform for sharing short videos that their parent's will likely deem a waste of time. TikTok is ByteDance's killer app for developed markets, with over 350m monthly active users, and is unique in that it is a Chinese company behind a Western ‘best seller'.
However, ByteDance has more strings to its bow, especially within China where its Toutiao and Douyin apps are seeing 285m/135m and 520m/280m monthly/daily active users respectively.
To put this in to context, Uber which listed in the US earlier this year, boasts only around 75m users globally (albeit with better monetisation). For ByteDance, the key drivers for monetisation continue to be selling advertising on its China apps, with expectations for further opportunities from its overseas ventures from 2020. There are also developments around e-commerce and search in the pipeline, with the later expected to be a revenue generator this year.
Contrast ByteDance's emergence with the situation confronting the incumbent, Baidu, which is suffering as corporate marketing and advertising budgets increasingly migrate to platforms with greater mobile timeshare. Notably, digital now accounts for over 60% of total advertising in China and this figure is expected to grow to 71% by 2020. This compares to just 33% five years ago.
ByteDance growing advertising revenue share
Source: Newrank & Youzan 2018 WeChat Social Commerce Report, QuestMobile.
In China, Alibaba and Tencent are so entrenched in the ecommerce and social media ecosystem of people's daily lives that they continue to get the dragon's share of this spending. Meanwhile, Baidu's core online search business has been in a structural decline as people opt to perform more search queries in apps.
Against this backdrop, time share gains of ByteDance's apps have not gone unnoticed. It has been on our radar for a couple of years now and I took the opportunity to buy in to the company as an unlisted holding in 2018. There are no clear plans for an IPO, although some news reports have suggested a 2020 overseas listing could be possible. Irrespective, Byte Dance is now a serious contender in the internet space both in China and abroad - its recent ascendance highlights the rapid pace of change in the tech sector and the need to be on-the-ground to fully understand and capitalise on these opportunities as they emerge.
*Source: Barons.com, Sep 2019; **Source of Alipay's userbase: FT.com, ‘Alibaba restructuring paves way for Ant Financial IPO', 24 Sep 2019
Further information
This feature comes from a new series of Asia focused thought-leadership from Fidelity. You can view more content covering a broad range of investment ideas from across the region from the links below.
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