Your Quarterly E-Zine
Edition 11 • December 2019

This website contains the latest edition of Forsyth Barr Focus, a quarterly on-line magazine written by senior members of Forsyth Barr's investment team.

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Chinese Giants

Global online leaders Alphabet (Google), Facebook and Amazon have been substantially re-rated over the past year, and collectively have helped to revive interest in global equities following a lethargic 2016. We feel the time is right to introduce their dominant Chinese peers into portfolios.

Baidu (search), Tencent (social media) and Alibaba (e-tailing).  These Chinese leaders are highly profitable, have attractive long term growth prospects and are the leading innovators in their segments.  In our view the combinations of Amazon + Alibaba , Alphabet + Baidu, and Facebook + Tencent provide investors with enduring, above-average, long-term growth prospects.

Amazon vs. Alibaba: Apples vs. oranges

Alibaba is the world’s largest online and mobile commerce company. Its various websites reportedly host around 80% of the e-commerce market in China, compared to Amazon’s 30% in the US. It provides the dominant online marketplaces through which sellers and buyers transact, sells advertising on these websites, and contracts with third-party logistics providers to arrange deliveries.

Compared to Amazon, Alibaba’s asset-light business model requires less capital investment for continued growth. Alibaba looks on track to achieve strong earnings growth, driven by growth in sales volumes, higher-value services for advertisers, and growth in new businesses such as cloud computing.

A similar story in online search-based advertising: Alphabet vs Baidu

Baidu is a leading Chinese language search engine provider and one of the largest internet companies in the world. We believe the recent setback in Baidu’s stock price provides an opportunity to gain exposure to this Chinese growth stock while its earnings are near a temporary low point.

Alphabet and Baidu have grown their sales at similar double-digit rates over the last three years. But Baidu’s earnings have fallen as the company increased spending on new “non-core” businesses, including in content for online video platform iQiyi and in artificial intelligence.

Facebook vs Tencent: The sky’s the limit

Tencent (QQ IM and Weixin/WeChat) and Facebook (Facebook Workplace, Messenger, WhatsApp and Instagram), are poised to continue to dominate their respective markets in social media communications.  The key point of difference for both Tencent and Facebook is in their ability to commercialise their insight into customers in a way that is relevant and desirable for both advertisers and users. If these companies maintain the “relevance” factor then we see ongoing earnings growth for many years.

By Rob Mercer
Head of Private Wealth Research