Back to listingWealth Insights
December 2020
Turbulence in China’s internet industry
On 10 Nov 2020, China’s State Administration for Market Regulation (SAMR) released a draft soliciting public feedback on anti-trust guidelines against monopolistic practices in the internet industry.
While regulations relating to anti-trust have been rolled out over the years, this is the first time detailed guidelines specifically designed for anti-trust activities in the internet space have been mapped out.
These draft guidelines largely attempt to quantify market dominance and define monopolistic practices. Concerns over the growth trajectory of many of the listed incumbents, coupled with the rotation from growth/momentum names into value/cyclical ones, led to dislocation in the share prices of Chinese internet market leaders.
From a market concentration point of view, while the draft anti-trust regulations now give greater clarity over possible metrics that can be used to consider the level of market dominance for internet platforms (e.g. GMV, click rate), no numeric thresholds appear to be explicitly provided.
The relatively greater concern, from our point of view, is the perspective that the regulator might take on the competitive landscape within the various verticals, and this is where there is probably some differentiation in terms of impact across companies.
From a food delivery point of view, we understand that merchant exclusivity used to be one of the key battlegrounds, though we note that fewer restaurants are opting for exclusivity and tend to list on more than one platform following the pandemic.
For online games, we believe that gaming success is more dependent on game quality, rather than irrational promotions.
In our view, e-commerce is the vertical that bears greater risks arising from the draft regulations. The use of subsidies/discounts may constitute unfair competition, while strict enforcement against forced exclusivity practices, and potential impact on recommendation feeds could pose a potential headwind to e-commerce leaders.
Still, we believe that the draft rules are unlikely to cause a seismic shift in market share across the incumbents for now – merchants select platforms based on a number of considerations, and price discrimination is not prevalent in the e-commerce space, in our view.
The draft regulations are indeed comprehensive, but the key unknown, in our view, is the degree of regulatory enforcement. While a strict implementation of the rules would naturally limit market leaders’ operational flexibility, history leaves questions over how severe enforcement can get.
All considered, we believe that the operational and financial impact on major internet players under our coverage arising from the draft regulations are likely to be limited for now, even though the broader internet sector might experience a near-term share price overhang.
Major platforms are likely to still be preferred by large merchants, given their service quality, comprehensive ecosystem support, and higher user life value.
Overall, we continue to remain constructive on selected companies over the longer-term, although we acknowledge that this latest development could present relatively stiffer near-term headwinds for some players.
The information provided herein is intended for general circulation and/or discussion purposes only. It does not take into account the specific investment objectives, financial situation or particular needs of any particular person. The information in this document is not intended to constitute research analysis or recommendation and should not be treated as such.
Without prejudice to the generality of the foregoing, please seek advice from a financial adviser regarding the suitability of any investment product taking into account your specific investment objectives, financial situation or particular needs before you make a commitment to purchase the investment product. In the event that you choose not to seek advice from a financial adviser, you should consider whether the product in question is suitable for you. This does not constitute an offer or solicitation to buy or sell or subscribe for any security or financial instrument or to enter into a transaction or to participate in any particular trading or investment strategy.
The information provided herein may contain projections or other forward looking statement regarding future events or future performance of countries, assets, markets or companies. Actual events or results may differ materially. Past performance figures are not necessarily indicative of future or likely performance. Any reference to any specific company, financial product or asset class in whatever way is used for illustrative purposes only and does not constitute a recommendation on the same. Investments are subject to investment risks, including the possible loss of the principal amount invested.
The Bank, its related companies, their respective directors and/or employees (collectively “Related Persons”) may or might have in the future interests in the investment products or the issuers mentioned herein. Such interests include effecting transactions in such investment products, and providing broking, investment banking and other financial services to such issuers. The Bank and its Related Persons may also be related to, and receive fees from, providers of such investment products.
No representation or warranty whatsoever (including without limitation any representation or warranty as to accuracy, usefulness, adequacy, timeliness or completeness) in respect of any information (including without limitation any statement, figures, opinion, view or estimate) provided herein is given by OCBC Bank and it should not be relied upon as such. OCBC Bank does not undertake an obligation to update the information or to correct any inaccuracy that may become apparent at a later time. All information presented is subject to change without notice. OCBC Bank shall not be responsible or liable for any loss or damage whatsoever arising directly or indirectly howsoever in connection with or as a result of any person acting on any information provided herein.
The contents hereof may not be reproduced or disseminated in whole or in part without OCBC Bank's written consent. The contents are a summary of the investment ideas and recommendations set out in Bank of Singapore and OCBC Bank reports. Please refer to the respective research report for the interest that the entity might have in the investment products and/or issuers of the securities.
This advertisement has not been reviewed by the Monetary Authority of Singapore.
Cross-Border Marketing Disclaimers
Please click here for OCBC Bank's cross border marketing disclaimers relevant for your country of residence.
