China investment themes: the internet

16/03/2017

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In the second instalment in a series of articles on key Chinese investment themes, Charlie Awdry and May Ling Wee, China equity portfolio managers, discuss how the rapid adoption rate of the internet, supportive demographics and embracing of social media are leading to attractive investment opportunities in internet stocks, particularly in social media advertising and mobile gaming. 

Rising internet penetration

China's internet sector is a key beneficiary of consumers' changing appetites. According to the China Internet Network Information Center (CINIC), in 2016 China's internet users grew at its fastest pace in three years, expanding by 43 million internet users. China boasted a staggering 731 million internet users; putting this into context, the entire population of the US is just under 320 million.

The emergence of affordable, locally-branded smartphones is improving rural access to the internet. Over 90% of China’s internet users access the web via mobile devices. This is set to grow even further as China's national broadband strategy aims to achieve 70% fixed broadband penetration and 85% mobile broadband penetration by 2020.

Supportive demographics

China's millennials and their consumption habits are playing a major role in shaping the country's internet landscape. Like their western counterparts, Chinese millennials have cultivated a desire to explore and share their experiences with anyone who might be willing to listen. Companies looking to sell to this increasingly important segment must effectively tap into that desire in order to succeed.

The number of young Chinese that can be classified as digital natives* is rising. This group of Chinese consumers is the first generation to effectively digitise their leisure time, employing a range of mobile applications and mobile devices to participate in various online activities.

*Digital native: a term coined by US author Mark Prensky in 2001. Broadly refers to the generation which has had exposure to technology in the early years, giving them a greater familiarity and understanding of technology than people who were born before tech was widely adopted.

Strong potential for advertising on social media

The Chinese have taken to social networking in a big way. According to statistics portal, Statista, there were 514 million social network users in China in 2016, with millennials currently comprising almost half of this figure. Not surprisingly, the numbers have not gone unnoticed and the huge online population has been identified as a lucrative market for advertising. Marketing research firm, eMarketer, predicts that digital ad spending will reach $50.5 billion in China this year, up from $31 billion just two years ago.

Sina Corporation is a leading Chinese social media site. The company’s Weibo microblog website has been reinventing itself from a news and social information platform to a key opinion leader (KOL) social outlet. Through KOLs, expert spokespersons can actively promote a product, brand or service to Weibo users. Weibo earns advertising revenue when the KOL promotes their posts or when brands advertise with the KOL.

According to digital consulting company, China Internet Watch, Weibo's monthly active users grew by 33% year-on-year to 313 million in December 2016. Of these, 90% were mobile users.

Buoyed by online advertising revenue, Sina Corporation reported net income attributable to Weibo had increased 122% year-on-year to $32.1 million in the third quarter of 2016.

Today, Sina's Weibo microblog is reaching and engaging more than 300 million users who follow and discuss, among other things, celebrities, social hotspots, sports and business topics. We believe Weibo will capture an increasing share of television as well as online search budgets as the company continues to improve user engagement and delivery of more targeted advertisements rather than broadcast ads.

Game on for mobile gaming

China's mobile gaming sector is another segment being buoyed by millennials' appetites for entertainment on-the-go. According to China Internet Watch, the sector is expected to reach an estimated worth of US$8.3 billion in 2017.

China's second largest mobile game provider, NetEase is capitalising on this trend. The company's Fantasy Westward Journey (FWJ), a highly successful multiplayer online role-playing game (MMORPG), has topped mainland mobile game rankings following its launch in March 2015. In 2016 the company launched Onmyoji, which surpassed FWJ to clinch the top spot on the iOS game rankings.

NetEase is also active in China's PC game segment where it has a partnership with US games company Activision Blizzard to distribute games such as the highly successful World of Warcraft series.

We believe growth in the Chinese mobile gaming market can be sustained with the launch of new game titles, increasing user adoption as well as pricing gains. NetEase is a key holding in our portfolios as it continues to launch successful new games; the gaming business remains highly cash generative and, furthermore, the company's valuation remains attractive.

Summary

Our strategy remains invested in the long-term structural growth story of China's internet sector, which looks set to continue growing on the back of millennials' expanding spending power, increased online engagement, and rising mobile and PC penetration across China. We maintain that a strategy focusing on well managed, cash generative companies in the consumer space is well suited to prospering in China's new economy.


Note: References to any specific company or stocks are for illustrative purposes only and should not constitute or form part of any offer or solicitation to issue, sell, subscribe or purchase the security.

 

These are the views of the author at the time of publication and may differ from the views of other individuals/teams at Janus Henderson Investors. Any securities, funds, sectors and indices mentioned within this article do not constitute or form part of any offer or solicitation to buy or sell them.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested.

The information in this article does not qualify as an investment recommendation.

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Important information

Please read the following important information regarding funds related to this article.

Janus Henderson China Opportunities Fund

Please read all scheme documents before investing. Before entering into an investment agreement in respect of an investment referred to in this document, you should consult your own professional and/or investment adviser.

Past performance is not a guide to future performance. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change.

If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

Any investment application will be made solely on the basis of the information contained in the Prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the prospectus, and where relevant, the key investor information document before investing. Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from Janus Henderson Investors registered office: 201 Bishopsgate, London EC2M 3AE.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier). We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Copies of the Fund’s prospectus are available in English, French, Spanish German and Dutch. Key investor information documents are available in English, Danish, German, Finnish, French, Italian, Norwegian, Spanish, Swedish and Dutch. Articles of incorporation, annual and semi-annual reports are available in English. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street, #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent.

Information on this document is on Henderson's best endeavours.

Specific risks

  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
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  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
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  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Securities within the Fund could become hard to value or to sell at a desired time and price, especially in extreme market conditions when asset prices may be falling, increasing the risk of investment losses.
  • The Fund may incur a higher level of transaction costs as a result of investing in less developed markets compared to a fund that invests in more developed markets. These transaction costs are in addition to the Fund's Ongoing Charges.

Risk rating

Janus Henderson Horizon China Fund

The Janus Henderson Horizon Fund (the “Fund”) is a Luxembourg SICAV incorporated on 30 May 1985, managed by Henderson Management S.A. Any investment application will be made solely on the basis of the information contained in the Fund’s prospectus (including all relevant covering documents), which will contain investment restrictions. This document is intended as a summary only and potential investors must read the Fund’s prospectus and key investor information document before investing. A copy of the Fund’s prospectus and key investor information document can be obtained from Henderson Global Investors Limited in its capacity as Investment Manager and Distributor.

Issued by Janus Henderson Investors. Janus Henderson Investors is the name under which investment products and services are provided by Janus Capital International Limited (reg no. 3594615), Henderson Global Investors Limited (reg. no. 906355), Henderson Investment Funds Limited (reg. no. 2678531), AlphaGen Capital Limited (reg. no. 962757), Henderson Equity Partners Limited (reg. no.2606646), (each registered in England and Wales at 201 Bishopsgate, London EC2M 3AE and regulated by the Financial Conduct Authority) and Henderson Management S.A. (reg no. B22848 at 2 Rue de Bitbourg, L-1273, Luxembourg and regulated by the Commission de Surveillance du Secteur Financier).

We may record telephone calls for our mutual protection, to improve customer service and for regulatory record keeping purposes.

Past performance is not a guide to future performance. The performance data does not take into account the commissions and costs incurred on the issue and redemption of units. The value of an investment and the income from it can fall as well as rise and you may not get back the amount originally invested. Tax assumptions and reliefs depend upon an investor’s particular circumstances and may change if those circumstances or the law change. If you invest through a third party provider you are advised to consult them directly as charges, performance and terms and conditions may differ materially.

Nothing in this document is intended to or should be construed as advice. This document is not a recommendation to sell or purchase any investment. It does not form part of any contract for the sale or purchase of any investment.

The Fund is a recognised collective investment scheme for the purpose of promotion into the United Kingdom. Potential investors in the United Kingdom are advised that all, or most, of the protections afforded by the United Kingdom regulatory system will not apply to an investment in the Fund and that compensation will not be available under the United Kingdom Financial Services Compensation Scheme.

Copies of the Fund’s prospectus and key investor information document are available in English, French, German, and Italian. Articles of incorporation, annual and semi-annual reports are available in English. Key Investor document is also available in Spanish. All of these documents can be obtained free of cost from the local offices of Janus Henderson Investors: 201 Bishopsgate, London, EC2M 3AE for UK, Swedish and Scandinavian investors; Via Dante 14, 20121 Milan, Italy, for Italian investors and Roemer Visscherstraat 43-45, 1054 EW Amsterdam, the Netherlands. for Dutch investors; and the Fund’s: Austrian Paying Agent Raiffeisen Bank International AG, Am Stadtpark 9, A-1030 Vienna; French Paying Agent BNP Paribas Securities Services, 3, rue d’Antin, F-75002 Paris; German Information Agent Marcard, Stein & Co, Ballindamm 36, 20095 Hamburg; Belgian Financial Service Provider CACEIS Belgium S.A., Avenue du Port 86 C b320, B-1000 Brussels; Spanish Representative Allfunds Bank S.A. Estafeta, 6 Complejo Plaza de la Fuente, La Moraleja, Alcobendas 28109 Madrid; Singapore Representative Janus Henderson Investors (Singapore) Limited, 138 Market Street #34-03/04 CapitaGreen, Singapore 048946; or Swiss Representative BNP Paribas Securities Services, Paris, succursale de Zurich, Selnaustrasse 16, 8002 Zurich who are also the Swiss Paying Agent. RBC Investor Services Trust Hong Kong Limited, a subsidiary of the joint venture UK holding company RBC Investor Services Limited, 51/F Central Plaza, 18 Harbour Road, Wanchai, Hong Kong, Tel: +852 2978 5656 is the Fund’s Representative in Hong Kong.

Information on this document is on Janus Henderson Investors' best endeavours.

Specific risks

  • Shares can lose value rapidly, and typically involve higher risks than bonds or money market instruments. The value of your investment may fall as a result.
  • This fund is designed to be used only as one component in several in a diversified investment portfolio. Investors should consider carefully the proportion of their portfolio invested into this fund.
  • The Fund could lose money if a counterparty with which it trades becomes unwilling or unable to meet its obligations to the Fund.
  • Emerging markets are less established and more prone to political events than developed markets. This can mean both higher volatility and a greater risk of loss to the Fund than investing in more developed markets.
  • Changes in currency exchange rates may cause the value of your investment and any income from it to rise or fall.
  • If the Fund or a specific share class of the Fund seeks to reduce risks (such as exchange rate movements), the measures designed to do so may be ineffective, unavailable or detrimental.
  • Any security could become hard to value or to sell at a desired time and price, increasing the risk of investment losses.

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