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

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.