We expect further growth in Internet finance, cloud computing and new retail.

As the coronavirus swept through China, some of the country’s Internet segments saw explosive growth, including online entertainment, online fast-moving consumer goods (FMCG) and SaaS (Software as a Service). In the medium- to long-term, Internet finance, cloud computing and new retail also look poised to take off, given their role as key drivers of China’s economic growth.


  • We are likely to see new initial public offerings (IPOs) worth as much as US$500 billion from China’s Internet sector over the next three years.1
  • Online entertainment was among the first segments to see a surge due to the coronavirus outbreak, followed by online fast-moving consumer goods (FMCG) and SaaS (Software as a Service).
  • The outbreak might serve as a catalyst to boost further adoption of China’s Internet applications. A wide range of use cases, coupled with a vast market, could help leading companies gain a larger market share.
  • From a medium- to long-term perspective, we believe Internet finance, cloud computing and new retail are key investment themes in China’s Internet sector.
  • Overseas expansion of China’s internet companies, including gaming, new media and technology infrastructure, will likely see substantial growth over the next three years.
  • The current market turmoil is more likely the consequence of a change in sentiment rather than any change in corporate fundamentals. The global market sell off may create attractive buying opportunities.

As the coronavirus spreads so the global market sell off continues. What’s the impact of the crisis on China’s internet sector? How would investors view this sentiment-driven selling and look for the long-term structural opportunities in tech companies? 

Steven Xu, Global Investment Specialist at J.P. Morgan Private Bank, spoke with Alex Yao, Co-head of APAC Technology, Media and Telecom (TMT) Group at J.P. Morgan Investment Bank to address investors’ concerns and discuss both the short-term opportunities and the longer-term potential for investment in China’s Internet sector.

Surging because of the pandemic

In the short-term during the coronavirus outbreak, digital entertainment, especially games and videos, saw growth as people went online for entertainment and social networking after the Chinese New Year helping gaming operators have a strong first quarter in 2020. In the video segment, both long-form and short-form video platforms saw a sharp rise in user traffic.

Online fast-moving consumer goods (FMCG)--a segment that tends to be neglected—also saw growth. With disruption to the restaurant supply chain and food delivery services demand for online FMCG grew dramatically. Retailers accepted orders online and delivered products offline, allowing customers to buy daily necessities without having to leave the house.

And, since early February, more and more people have been working from home, as companies have taken precautionary measures to reduce the spread of the coronavirus. This resulted in a large number of employees downloading and using remote office apps, which has given a strong boost to SaaS (Software as a Service) usage.

In addition to a one-off boost, the coronavirus outbreak might also help increase the penetration of online FMCG among middle-aged and older people, consumers they have been targeting, and push companies to use remote office apps to improve their work efficiencies in the medium- and long-term.

Three themes to focus on

From a long-term and systemic perspective, the Internet sector has been growing at a faster pace than GDP and other sectors in China and around the world. What is the driving force behind this? We think the answer is the penetration rate.

In the medium- and long-term, the key growth drivers and opportunities in China’s Internet sector could come from three areas:

  • Internet finance, or the online distribution of payment and non-payment financial products—While China has a world-leading Internet finance industry, only a small portion of the country’s financial market deals are being conducted online. Consumer behaviour and business scenarios are quickly moving toward digital channels. Internet finance is an important driver for corporate growth.
  • Cloud computing, including IaaS (Infrastructure as a Service) and SaaS (Software as a Service)— China’s cloud computing is lagging behind and the penetration of both IaaS and SaaS has plenty of room to grow. The shift of companies’ IT spending from in-house office systems to a variety of cloud services including computing, storage, bandwidth and software has become an irreversible trend around the world.
  • New retail, a new business model that combines online and offline resources to offer a more effective and convenient shopping experience—In aggregate, new retail is growing at a faster pace in China than in other parts of the world and still has enormous potential to grow. We expect new retail to cover about Rmb2 trillion offline gross merchandise volume (GMV) in China over the next three years, creating plenty of opportunities for traffic generation, payment and “last mile” logistics services.2

A strong pipeline of unicorns

China’s emerging Internet segments are largely growing faster than their counterparts in the U.S., as evidenced by the fast rise of a number of promising and valuable unicorns. Considering the value growth of leading unicorns (including smaller vertical leaders) after their last round of financing, it is likely that there will be fresh IPOs worth as much as US$500 billion from China’s Internet sector in the next three years.3

Prior to the recent sell-off in the U.S. stock markets, the total market cap of China's listed Internet firms was approximately US$1T.4 Assuming a conservative CAGR of 10%-15% for the US$1 trillion existing market cap and taking into account the upcoming IPOs estimated at US$500B, the total market cap of China’s Internet sector could reach Rmb2 trillion or a quarter of the current A-share market cap within three years.5 This surge clearly shows the high growth potential and strong profitability of China’s Internet sector.

Gaming firms go global

Overseas consumers are willing and able to spend a large amount of money on games. Interestingly, however, the overseas gaming markets are quite different from that of domestic Chinese. Whereas PC games and console games are the most popular overseas and the market share of mobile games is very small, this is not reflected in China. By contrast, mobile games account for a large share in China’s gaming market, followed by PC games and console games.

Consequently, Chinese mobile games have yet to make a serious dent in the vast overseas market. If Chinese gaming firms and smaller players can successfully develop a mobile gaming market outside China, by changing consumer behaviour and creating a willingness to pay for mobile games, the market potential might at least double the size of the domestic mobile gaming market.

A sell-off driven by fear, not fundamentals

Although the recent U.S. market sell-off reminds investors of the dot-com bubble in 2000 the selling is more likely the consequence of a sentiment turn rather than any change in corporate fundamentals. Based on long-term business value or discounted cash flow (DCF) valuation, the impact of the coronavirus pandemic on companies’ future total cash flow and fundamentals will likely be insignificant.

As a result investors might want to focus on the following factors when comparing the current market turmoil with the dot-com bubble in 2000:

  1. Are valuations overstretched? The valuations of China’s Internet companies are not overly stretched, even before the coronavirus outbreak. By contrast, many U.S. tech companies were trading at hundreds of times their prospective earnings when the bubble burst in 2000.6
  2. Do companies have enough earnings or cash flow to back the valuations they enjoy? As most of the Chinese Internet firms have solid earnings and ample cash flow, the valuation of China’s internet sector as a whole does not look over-inflated.
  3. Are companies going to have any financing or cash flow problems that could trigger a potential bankruptcy? Considering China's recovery from the coronavirus outbreak, we expect the country’s Internet sector to get back on its normal track by 2021 at the latest, with most companies likely to ride out the storm. Therefore, we think there is no need to make significant revisions to the 2021 financial outlook of China’s Internet sector and continue to see opportunities in the sector after the market stabilizes.

Stay calm in the storm 

In time the coronavirus outbreak might serve as a catalyst to boost the future development of China’s Internet sector, especially in the areas of internet finance, cloud computing and new retail. A wide range of use cases, coupled with a vast market, may help leading companies gain a larger market share. While the spread of the coronavirus itself could cast a shadow on global tech companies’ short-term earnings and share prices, the pandemic will pass eventually and tech companies will never stop innovating. Therefore, investors should stay calm in the storm and look for the long-term structural opportunities in tech companies.

This material should not be regarded as research or as a J.P. Morgan research report


1 Source: J.P. Morgan Investment Bank. Data as of March 2020.
2 Source: J.P. Morgan Investment Bank. Data as of March 2020.
3 Source: J.P. Morgan Investment Bank. Data as of March 2020.
4 Source: J.P. Morgan Investment Bank. Data as of March 2020.
5 Source: J.P. Morgan Investment Bank. Data as of March 2020.
6 Source: J.P. Morgan Investment Bank. Data as of March 2020.