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China's Masses Are Moving to Mobile

1 August 2014 in Trading Ideas

As if you didn’t already know it, 632 million Internet users in China have confirmed it: the future of growth on the web is in mobile.

Last week, the nonprofit group China Internet Information Center said that for the first time more citizens of the Far East nation were accessing the Web via their smartphones than by PC. The total number of mobile users reached 527 million, for a penetration rate of 83.4%.1

By comparison, China has 511 million PC users.

User growth for the entire Internet was no slouch, either. The current total of 632 million users as of June 30, represent an increase of 14.4 million users at the end of 2013.

 

Nearly 47% of China’s population is now connected to the Internet.

Mobile payment, mobile e-commerce, and mobile travel services are showing the fastest growth, the according to the CHIC. The penetration rate for mobile payment has reached 38.9%, up from 25.1% at the end of last year. Fast growth in mobile payment also led to development in mobile e-commerce and travel services. The penetration rates for the two are now 38.9% and 14.3%, up from 28.9% and 9.1% at the end of last year.

Mobile gaming is another bright spot. Mobile game penetration rate increased to 47.8% from 43.1% at the end of 2013.

Nowhere was the power of mobile more evident than in the recent earnings report from Chinese search engine provider Baidu, which according to a follow-up take from Deutsche Bank, has “established leadership in mobile search.”2

Baidu said last week that second-quarter revenue grew 59% from a year earlier, at the high end of its prediction of 56%-60% growth. The company also posted a profit of $1.73 a share, beating expectations of $1.40 a share.

Perhaps most importantly, however, was the revelation that, for the first time, mobile constituted more than 30% of the company’s overall revenue.

That impressed Deutsche Bank’s analysts, who believe that mobile search has more earnings potential since it said mobile traffic should surpass PC traffic by this year’s fourth quarter and mobile has larger markets such as local services – the analysts noted that local business services account for one-third of all mobile search queries).

The news helped lift shares of Baidu, which are up more than 21% in the past month, and have helped maintain the rally in Chinese Internet stocks, which have rallied since a significant selloff earlier this spring.

The China Internet motif, where Baidu shares are 20.1% of the weighting, has risen 8% in the past month. In that same time, the S&P 500 has gained 0.6%.

So far this year, the motif is up 18.8%; the S&P 500 has increased 7.8%.

The sector has shown a propensity for volatility that risk averse investors should take note of, but it appears that the winners of the mobile space may have a chance of keeping shareholders content.

1Shuli Ren, “Mobile Rises, Microblogging Falls,” barrons.com, July 22, 2014.

2Shuli Ren, “Baidu: Made It In Mobile, Cost Down; Analysts Raise TP,” barrons.com, July 25, 2014.

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