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China’s cash rich internet giants may spawn wave of acquisitions

PUBLISHED : Tuesday, 28 April, 2015, 12:44pm
UPDATED : Tuesday, 28 April, 2015, 12:58pm

China’s booming internet industry is already showing signs of being a place where the winner takes all, making it increasingly difficult – yet even more vital – for investors to pick the right stock.

Major internet players in China have begun to aggressively expand their businesses by acquiring or investing in niche market players, with many swimming in cash on their balance sheets following a rally which hoisted markets in Hong Kong and Shanghai to 7-year peaks.

“A winner-takes-all scenario is very likely to happen in each category,” said Credit Suisse analysts Evan Zhou and Dick Wei. For money managers, the tough call is to tell who have bought the right firm.

The internet has transformed the physical-goods retail sector in the past 10 years has cultivated a batch of top internet companies in China, such as Alibaba and JD.com.

But a new wave is already emerging and they are in the O2O (Online to Offline) business which will likely change drastically service sectors such as transportation, catering, home services, and ticketing among others, said Credit Suisse.

It estimated that in the next three to five years, those new industry leaders will revolutionise China’s service sector, creating an additional 100 billion yuan in revenue growth.

‘The new model bypasses the traditional intermediary agencies, and directly connects consumers and service providers. The elimination of the agency layer would scale up business at the national level, optimise cost structure and provide more competitive pricing,” it said.

Tech giants have already begun their merger & acquisition ventures, looking for the next potential winner in each O2O category.

The number of transactions and total investments in the China internet space were at a historical high in 2014. Credit Suisse research showed that 21 per cent of the major investments made by listed companies in China in the internet space last year were O2O-related transactions.

The top three companies together spent US$15 billion in the past 12 months, which is 90 per cent of the total investments. Alibaba and Tencent contributed 87 per cent of the capital, according to Credit Suisse.

Among the high-profile deals, Alibaba bought AutoNavi, a company that offers digital map content and navigation for US$1.3 billion last year. Both Tencent and Alibaba are shareholders of China’s top taxi-hailing app company Didi-Kuaidi.

For Baidu, its investments include several online education platforms and Uber, which allows people to get a ride in a private car or even a helicopter by placing orders in their mobile phone.

“Investment in Uber also provides Baidu a proxy to the O2O auto service market while Alibaba and Tencent have already aggressively invested in the taxi booking market. We estimate Baidu will make an investment of around US$200 million into Uber,” the bank said.

Yongche, backed by US-listed Ctrip.com, could stand out in the car rental market, while Eleme, backed by Tencent and JD.com, will lead the market in providing users with convenient food delivery services, according to Credit Suisse.