Recently, the Chinese stock market has been experiencing a remarkable surge, leading many companies to see significant gains. A wave of policy changes at the end of September has dramatically reversed expectations in the secondary market. This change is not limited to the A-shares; even the ten largest Chinese companies listed in the US have seen their stock prices rise by approximately 30% in the last 20 days, with Meituan and JD.com reaching increases exceeding 60%. Such remarkable growth has been almost unprecedented over the past few years.
The market capitalization reflects investors' expectations of a company, and these recent developments are reshaping the competitive landscape of the internet industry. Multiple investors have pointed out that while this wave of increase is partly driven by market sentiment and varies based on capital preferences, it's clear that many Chinese concept stocks have been undervalued in recent years. As a result, we are witnessing massive rebounds, particularly among leading firms with solid fundamentals.
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A closer look at the top ten companies in market capitalization reveals intriguing trends. Tencent remains at the forefront, with a market cap surpassing $500 billion. Among the top three e-commerce companies, Alibaba boasts a market cap exceeding $250 billion, while Pinduoduo approaches $200 billion, making it three times the size of JD.com. When compared to the rankings at the end of the second quarter this year, NetEase has fallen two positions from fifth to seventh, while Ctrip has made a leap from tenth to eighth.
Additionally, some smaller firms in trending sectors, like catering, tea beverages, artificial intelligence (AI), and recruitment, have also garnered sizable stock price increases, with some experiencing rises greater than 80%.
Of course, as the era of rapid growth in the internet industry fades, it won't be easy for these Chinese concept stocks to regain their previous heights. However, companies with resilient fundamentals, in-demand sectors, and stable operations can still open up new growth opportunities.
"The stock market can boost confidence; with confidence, everything will get better. That is the most significant meaning of this stock market rally," one investor commented.
Among the mega internet companies experiencing explosive growth are those in e-commerce, instant retail, and new energy.
In the top ten companies by market capitalization, Meituan and JD.com have recorded the most significant price increases in the last 20 days, with rises exceeding 60%.
Meituan saw its market cap soar to $308.8 billion in 2021 but faced setbacks due to antitrust investigations and the cooling of Chinese concept stocks, leading to a slowdown in 2022.
Investor Chen Lin noted that the market previously questioned Meituan's valuation based on its ability to maintain its position in the local living and instant retail space. Almost all competitors—like Douyin, Ele.me, JD.com, Xiaohongshu, and even WeChat—sought to capture market share. Particularly concerning was Douyin's aggressive approach; however, by this year, after several adjustments in its local services, Meituan has managed to retain market control and regain the initiative.
Moreover, Meituan's remarkable performance this year has bolstered its stock price recovery. Since the beginning of the year, its stock price has surged by 136.52%, reaching a total market cap of $151.9 billion as of October 10, which has doubled since April's $79.4 billion.
This impressive performance is also propelled by structural reforms in the broader dining market. High-end dining revenues have dipped, and the number of practitioners has decreased, while revenues and workforce numbers in budget quick-service and takeout sectors have seen year-on-year increases, highlighting the growing importance of takeout channels.
In particular, Meituan's "core local business" revenue grew by 18.5% year-on-year to ¥60.7 billion, with operating profit increasing by 36.8% to ¥15.2 billion in Q2. In the same period, income from Meituan's commissions, online marketing, and delivery services rose by 20.1%, 19.7%, and 13%, respectively.
Among the e-commerce giants, JD.com emerged as the standout performer, achieving the highest price increase among the top ten companies. In its Q2 financial report, JD.com reported a record net profit of ¥12.6 billion, marking an astounding 92% year-on-year increase. It appears that the more aggressive the price wars become, the more profitable JD.com has grown, as they achieve low prices without relying on subsidies, maintaining stable overall gross margins. Long-standing e-commerce professionals suggest that securing profit is relatively straightforward for a company with trillion yuan revenues. Continuing with a focus on profitability proves a pragmatic approach for JD.com.
Furthermore, JD.com is steadily ramping up its efforts in the instant retail sector. In May of this year, the company's instant retail brands were restructured into JD Seconds, competing directly with Meituan.
In a horizontal comparison, both Pinduoduo and Alibaba have also exhibited robust growth. Despite some industry experts interpreting Pinduoduo's Q2 financial report as a self-deprecating valuation management exercise, its stock price surged by 45.46% over the past 20 days. The company’s ability to monetize has been consistently rising, reporting a net profit of ¥32 billion in Q2, representing a year-on-year increase of 144%. Additionally, Pinduoduo's TEMU is aggressively expanding into overseas markets, indicating further potential for profit enhancement.
Alibaba has experienced a nearly 30% surge in its stock price over the past 20 days. On August 30, after completing a three-year rectification, the market anticipates Alibaba will significantly expand its e-commerce operations while retaining its stronghold. A notable expectation revolves around Jiang Fan's leadership in international business and the deeply integrated logistics arm, Cainiao. In Q2, international business witnessed the fastest revenue growth, and Cainiao turned a profit of ¥618 million.
As we enter Q4, Alibaba, JD.com, and Pinduoduo prepare for the upcoming Double Eleven (Singles' Day) shopping festival. This year, the entire e-commerce industry is attempting to recalibrate its strategies, with many no longer emphasizing the absolute lowest prices, while simultaneously rolling out policies to alleviate burdens on merchants. This shift presents a promising outlook for the long-term healthy development of the e-commerce sector, encouraging further stock price growth among the sector's big three.
Additionally, companies like Li Auto and Ctrip have also seen stock price increases exceeding 30% in the last 20 days, serving as representatives of the booming industries. In the new energy vehicle sector, favorable policies have been prevalent, and companies are now entering stages of scalability and globalization, with market shares quickly consolidating around the industry leaders.
Over the past three months, Li Auto has maintained the highest monthly sales among new energy vehicle companies, achieving record deliveries in September surpassing 50,000 units. With a net profit of ¥1.1 billion in Q2, even as differences grow among competitors, all major players—including Xiaopeng Motors and NIO—have seen stock price increases over recent weeks, such as Xiaopeng achieving a 53% increase on the Hong Kong stock market.
Ctrip's stock price boom is also easily understood. As the leader in the online travel sector, Ctrip has made rapid recoveries post-pandemic. Over the last few years, cities around China have focused on cultural tourism, leading to a surge in popular destinations while smaller players exited the market, allowing larger OTAs to reclaim market share. Ctrip's performance in 2023 already exceeds 2019 levels, and net profits continue to grow by 501.9% year-on-year in Q2 2024.
The successes of these giants can be attributed to their ability to uncover new growth points, maintain profitability, or leverage favorable industry trends.
On the other hand, three companies—Tencent, Baidu, and NetEase—have exhibited a more controlled, slower increase among the top ten giants, with Tencent and NetEase witnessing respective increases of 19.05% and 14.44% over the last 20 days. Meanwhile, Baidu's stock has lagged behind the others and has slipped to the ninth position.
Experts suggest that Tencent's immense size limits its ability to experience significant jumps in stock price; NetEase has seen little volatility and lacks significant growth potential. Baidu, currently navigating a transition phase, must yet prove its capacity for sustainable growth.
Among these three, Tencent and NetEase primarily rely on their gaming divisions, which represent one of the most resilient revenue streams in the internet sector with high-profit margins. Many investors consider Tencent the "king of stocks," with its price peaking above HKD 700 per share and a market cap surpassing $900 billion at one point. However, due to factors such as internet regulations, sluggish growth in its core businesses, and significant shareholder divestments, Tencent's market cap fell to just over $380 billion at one point over the past three years.
In this current rally, Tencent's stock surged to heights not seen in nearly two years, hitting HKD 438.8 per share, marking a recovery above the $500 billion mark. This valuation exceeds the combined market caps of Alibaba and Pinduoduo by approximately $68.5 billion.
While Tencent's recent increase of 19.05% may be modest, its cumulative stock price growth this year stands at a noteworthy 50.75%, a considerable feat given the company's size. Some investors feel that Tencent may have limited upward potential going forward.
The remarkable Q2 financial report has prompted investors to reevaluate Tencent’s valuation, revealing revenues of ¥161.1 billion—an 8% year-on-year increase—and a net profit of ¥47.6 billion—up 82% from the previous year. This stellar performance was driven primarily by revenues from gaming and advertising.
Notably, Tencent's gaming segment, contributing to 30.09% of revenues in Q2, reached a quarterly high with ¥48.5 billion—recording 9% year-on-year growth in both domestic and international markets, successfully reversing previous downturns in its gaming revenue.
Additionally, 19% of Tencent's revenue came from its online advertising segment, which has rapidly grown by nearly 20%, thanks to income generated from video accounts and long-form content. According to predictions from Guohai Securities, the active user count for video accounts reached 450 million in 2023—outpacing Kuaishou and rapidly approaching Douyin. As the flagship for Tencent's prospects, video accounts represent significant potential for revenue streams, especially in e-commerce and advertising.
"However, video accounts must prove their capabilities in e-commerce to maintain stock price stability," remarked one investor.
While NetEase may not match the scale of Tencent and the other top companies, it exhibits robust profitability. CEO Ding Lei exemplifies a businessman focused on profit margins, with NetEase's net profits averaging around ¥20 billion over the last five years. Following the release of its 2023 financial report in February, NetEase's market cap reached $72.4 billion, earning it the fourth position among Chinese internet companies in terms of market valuation. Over the last couple of years, NetEase has transitioned from a period of limited product supply to a harvesting phase, finding success with hit games like "Party Animals" and "Nirvana in Fire." Upcoming titles such as "The 16 Sounds of Yanyun" and "Nongfu Shanquan" are set for release this fall.
The stability of NetEase's business model, characterized by high reliability and low risk, naturally leads to steady increases in market cap. Yet, its positioning as the second player in the industry remains unchanged, lacking standout new business ventures, which caps its growth potential.
“Ding Lei may have chosen this trajectory intentionally, caring less about price jumps while prioritizing stability, letting others take center stage in the limelight while he quietly counts the profits,” Chen Lin noted.
As for Baidu, it once dominated the search engine traffic distribution landscape, relying heavily on advertising that contributed 90% of its income. However, with the rise of various short-video platforms vying for Baidu's business, it has become increasingly challenging for Baidu to maintain its profit margins.
In recent years, Baidu has heavily promoted its AI initiatives, investing substantial time and resources, but these projects have not yet reached a phase of large-scale monetization. Furthermore, the core search business is in need of transformation. "Baidu's ability to regain its throne largely depends on how effectively AI models can impact its performance," Chen Lin commented.
In addition to these top internet firms, other sectors have also benefitted from this stock market surge, prominently including catering, AI, and recruitment.
The growth patterns of catering companies closely mirror Meituan's trajectory. According to the "2024 Beijing Catering Industry Observation Report," cost-effective "snack foods" have become the mainstream consumer choice. Notably, categories such as quick-service restaurants, beverages, and hotpot establishments dominate the landscape of Beijing's food and beverage locale.
Companies experiencing sharp stock price increases, such as Jiu Mao Jiu (84.14%), Helen's (76.23%), and Xiaobubu (52.44%), fall within the affordable dining category, offering high value for money.
Data is as of the close of trading on October 10, 2024.
These dining brands leverage years of accumulated expertise in supply chain management, store operations, and cost control to swiftly align with current trends in affordable dining and have rapidly rolled out a range of "self-rescue" activities. For instance, Jiu Mao Jiu's takeout revenue in the first half of this year surged by 14.4% year-on-year to ¥510 million, primarily due to the implementation of a satellite kitchen model to ease the pressure of opening new locations, thus increasing the number of restaurants providing takeout service.
Moreover, Cha Bai Dao has also seen impressive growth with a 55.29% price increase over the last 20 days. Investors focused on the bubble tea industry suggest this round of appreciation reflects the market's enthusiasm for investing in current players. Brands like Gu Ming, Ba Wang Cha Ji, and Mi Xue Bing Cheng are aggressively planning IPOs this year, hinting at a highly competitive and vibrant bubble tea market ahead.
Companies involved in AI have equally been beneficiaries of this market phenomenon, with firms like SenseTime, Cloudwalk, Cambricon, Kunlun Wanwei, and iFlytek experiencing stock price surges, with SenseTime achieving a record 58.72% increase in the Hong Kong stock market.
In the first half of this year, SenseTime reported revenues of ¥1.74 billion, marking a 21% year-on-year increase. The extraordinary growth of their generative AI business surged by 256%, contributing nearly ¥1.1 billion to their total income, which comprises 60% of revenue.
Currently, SenseTime generates revenue from providing clients with API interfaces and services, while also launching a series of generative AI applications—targeting businesses—based on its dynamically updated large model framework, creating income streams from both foundational models and industry applications.
The online recruitment sector has also seen significant stock price increases, with platforms benefitting significantly from heightened demand. The challenges of job seeking and employee recruitment have positioned platforms like BOSS Zhipin as lucrative players in a muted market. In the first half of this year, BOSS Zhipin demonstrated a 30.9% year-on-year revenue growth and a staggering 92.5% profit increase, outperforming numerous competitors. While BOSS Zhipin was losing money from 2019 to 2021, its current value stands at HKD 57.7 billion, with a 20-day stock increase of 34.52%; meanwhile, its smaller rival, Tongdao Liepin, with a market cap of 1.343 billion HKD, achieved a surge of 57.23% due to its lower base.
However, BOSS Zhipin's Q2 figures revealed a net addition of just 200,000 paying corporate clients, the lowest in over a year. An HR professional analyzed this might stem from job seekers lowering their requirements, improving the match rate between job seekers and employers, consequently decreasing employers' willingness to pay for the service. If this trend persists, it could potentially impact the company's stock price.
Overall, despite the tremendous uptick in the stock market and the meteoric rise in many companies' valuations, the hierarchy of large Internet companies remains relatively stable. The era of easy profits has come to an end, and the opportunities across various segments have largely been tapped. Unless groundbreaking technological innovations emerge, it’s unlikely that we will see explosive growth again.
Nevertheless, this stock market frenzy has instilled a sense of hope in the market. As the giants return to the forefront, raising public interest, the emergence of the next industry leader may be closer than it seems.