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China Online Advertising
Sector
SECTOR REVIEW
Freeway driving on a rainy day
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We estimate China’s advertising market will grow by 5% YoY in 2009
and 15% YoY in 2010, driven by the 60th anniversary of the PRC’s
establishment in 2009, and the Expo in Shanghai and Asian Games in
Guangzhou in 2010. We expect China’s online brand advertising to
grow 20% YoY in 2009 because of its rising Internet user base,
increasing budget allocation from more traditional to online mediums
and rising online media rate cards. Risk factors to the ad market in
2009 are: potential new regulations, a potential write-off of accounts
receivable and potential advertising budget cuts in the middle of 2009.
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In the 2008 Credit Suisse China Consumer survey, Sina was voted the
most frequently visited portal (30%), followed by Sohu (15%) and Baidu
(13%). From 2005-08, Baidu’s popularity rose from 2% to 13%. The
growing popularity of Baidu is a potential threat to all portals in China.
But we believe China portals will continue to generate significant
amounts of traffic from Internet users directly, due to: 1) substantial
amounts of self-generated content, 2) a strong brand media name and
3) multiple services, e.g. blogs, to strengthen community stickiness.
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The China online brand advertising market is fragmented, according to
iResearch. The top-five brand ad spending industry groups from
January to November 2008 were: 1) automobiles – 16% of total
spending, 2) IT – 14%, 3) Internet services – 14%, 4) real estate – 12%
and 5) finance – 5.3%. We project brand ad market growth in 2009 of
20% YoY with telecoms and handsets, food and beverages and
personal care to grow at above 50% YoY). This contrasts with the auto
brand ad budget rising 10% YoY and real estate budget falling 5% YoY.
Among all the listed portals, we reiterate our OUTPERFORM on
NetEase, our top pick in the sector, and maintain our OUTPERFORM
rating on Tencent. Baidu is rated NEUTRAL.
Freeway driving on a rainy day
Secular growth, with near-term risk
We estimate China’s advertising market size was Rmb139 bn (or US$20 bn), or 0.52% of
China’s nominal GDP in 2008, but lower than the US’s 1.3%. In the long run, we expect
China’s advertising market (as a % of nominal GDP) to close the gap with that of the US.
We estimate China’s advertising market will grow 5% YoY in 2009 and 15% YoY in 2010.
The key national event in 2009 will be the 60th anniversary of the PRC’s establishment. In
2010, the Expo in Shanghai (from 1 May to 31 October) and Asian Games in Guangzhou
(12-27 November) should be key catalysts, although their positive impact should be less
than that of the Olympics.
China’s online media is an important media format in the China market. We expect online
brand advertising to grow 20% YoY in 2009 because: 1) Internet user numbers should
grow to 388 mn in 2009, up 29% YoY; 2) most youth and middle to high-income groups
spend more time online, so higher ad budgets should be allocated from traditional to
online mediums; 3) online rate cards are expected to be raised after CCTV’s auction; and
4) the economic slowdown is likely to encourage people to spend more time at home and,
thus, both the Internet and TV should benefit. However, key risk factors for the advertising
market in 2009 include potential new regulations, the potential write-off of accounts
receivable and potential advertising budget reductions in the middle of the year.
China Internet portal survey
In the 2008 Credit Suisse China Consumer survey, Sina was voted the most frequently
visited portal (30%), followed by Sohu (15%), Baidu (13%), NetEase (6%), Yahoo (4%),
and QQ.com (4%). From 2005-08, Baidu’s popularity was up from 2% to 13%. We believe
Baidu’s rising popularity is due to: 1) Internet users’ higher reliance on Baidu for
information, instead of portals and 2) Baidu’s provision of self-generated content. The
growing popularity of Baidu is a potential threat to all portals in China. But, we believe
China portals should continue to generate significant amounts of traffic from Internet users
directly, due to: 1) substantial amounts of self-generated content; 2) its strong brand media
name and 3) multiple services, e.g. blogs in order to strengthen community stickiness.
163 (NetEase) has replaced Sina as the leading blog service provider, with 24% citing it as
their favourite blog site, due to its improved service and strong promotion. Sina ranked
no. 2 with its popularity declining from 23% in 2007 to 19% in 2008. Sohu gained
popularity, rising to third place. Although Baidu was voted the no. 3 portal, Baidu space
(blog service) was ranked only no. 7 and its popularity was down in 2008 likely due to:
1) its less advanced technology, 2) weak cross-selling ability between search engine and
other services and 3) it having a less sticky community than portals.
Identifying growth drivers in 2009
According to iResearch, the China brand advertising market is fragmented. No single
industry group contributed more than 20% of the market. The top-five brand ad spending
industry groups from January to November 2008 were: 1) automobiles – 16% of total
spending, 2) IT – 14%, 3) Internet services – 14%, 4) real estate – 12% and 5) finance –
5.3%. The top-five industries contributed 61% of total spending, whereas for the top-nine
groups it was 77%. As we projected brand ad market growth in 2009 of 20% YoY, in terms of
industry group performance, we expect telecoms and handsets, food and beverages, and
personal care will be the three fastest growing industries (above 50% YoY), whereas we
expect the auto brand ad budget to rise 10% YoY and real estate budget to fall 5% YoY.
Among all the listed portals, we reiterate our OUTPERFORM on NetEase, our top pick,
and maintain our OUTPERFORM rating on Tencent. Baidu is rated NEUTRAL.
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