Summary

In relation to handset demand trends, Ellen noted that despite the near-term headwinds from emerging markets, June saw demand recover in developed countries and 5G phone launches accelerating in China. There were 48 5G phones launched in 2Q compared to 24 in 1Q, accounting for 46% of total domestic phone shipments in May. Qualcomm, MediaTek, Skyworks and Qorvo are experiencing strong demand for their 5G products - expects upward revisions to earnings. China Mobile grew its 5G subscribers from 32MM in March to 55MM in May which is suggestive of beating their year-end target of 100MM 5G subscribers. China Telecom is less well placed and behind target - 17MM subscribers in March to 22MM in April with a year-end target of 60-80MM. In general, the 5G infrastructure build-up is largely on track. Within eCommerce, Ellen commented that Alibaba, JD.Com, Pinduoduo and Vipshop likely performed better than expected in terms of revenue due to pent-up demand, aggressive 6.18 promotions and government consumption coupons. She recommends accumulating these names on weakness as they are executing well and will benefit in the long run from consumer and business shifts to online. April and May China online retail sales and express postal delivery recovered strongly from the trough in January and February, growing YoY 16% and 41% respectively. Whilst GMV growth in top categories remained solid, the recovery in large appliance’s is especially benefitting Alibaba, JD.Com and Pinduoduo due to “home appliances going rural” local government subsidy programmes, stimulative government policies on new building construction and favourable mortgage rates. Alibaba saw advertising prices rise QoQ in 2Q. Some merchants continued to increase feed ad spending during the big promotional periods this year and noted that their ROIs from these ads have risen as the algorithms were improving. Larger merchants often observed ROIs reaching beyond 5 for their large promotions, compared to the average of 3. Some noted that their feed ROIs can often perform better than search ROIs. JD.Com, where 60% of net product revenue is from home appliances, had a solid 2Q which Ellen expects to continue this year driven by improving industry dynamics in the appliances / 3C fields and further expansion into lower-tier cities and rural areas. The company will likely deliver better than expected 2Q results. PDD also likely beat 2Q expectations and is executing well for long term growth. Around 64% of its 2019 revenue was derived from FMCG, food and affordable apparel, all of which can perform well even in a recessionary environment. Low- to mid-income consumers are rapidly embracing the platform and become increasingly sticky to PDD given good value for money. Many mid- to large-merchants are still looking into establishing a presence or expanding sales on PDD. Most existing merchant clients are growing their ad spending as a percentage of GMV gradually, while enjoying the platform’s low commissions. Ellen is not as optimistic re. China’s digital advertising market with no signs of a broad-based ad spending recovery yet as large advertisers are very cautious and given weak SME advertiser spending.

Topics