CITIC SEC: Rate cuts drive liquidity improvement. It is recommended to focus on undervalued internet companies with sustained profit improvement.

CITIC SEC released a research report stating that looking ahead to 24H2, it is expected that the Chinese internet sector will revolve around consumption recovery, changes in competitive landscape, shareholder returns, and interest rate environment. With the backdrop of the Fed rate cut, liquidity in the Hong Kong stock market is expected to improve, while the consumption turnaround still needs to be observed. In this context, the market may prefer targets with stable industry landscape, strong barriers to competition, solid cash flow, and high shareholder returns. Additionally, it is recommended to focus on targets that continue to increase market share and monetization rate, and have strong second growth curve with structural incremental growth. Furthermore, it is suggested to pay attention to undervalued internet companies with continued profit improvement. Key points from CITIC SEC: 24Q2 review: Revenue mostly meets expectations, profits continue to grow. In 24Q2, the revenue of major domestic internet companies basically met expectations, achieving a cumulative year-on-year growth of 9.6%. Companies such as Pinduoduo, Full Truck Alliance, BOSS Zhipin, and Meituan achieved fast growth due to increasing market share, the effectiveness of diversified business layouts, and strong growth in overseas markets. On the profit side, benefiting from the light asset business model of internet platforms and improved operating efficiency, the cumulative non-GAAP net profit of major domestic internet platforms in 24Q2 increased by 37.8% year-on-year, with a non-GAAP net profit margin of 17.8% (up by 3.6 percentage points year-on-year). Trading perspective: Rate cuts drive liquidity improvement, internet stocks demonstrate cost-effectiveness. The Federal Reserve's 50 basis point rate cut in September 2024 exceeded market expectations. With the rate cut backdrop, Hong Kong stocks are expected to benefit from improved liquidity. From a valuation perspective, as of September 13, the Hang Seng TECH Index's NTM PE ratio was 12.6x, historically low, while the index's 2024 EPS growth rate was 25.8%, demonstrating cost-effectiveness. Development outlook: Preference for certainty may increase, focus on structural increment paths. With the slowdown in social consumption, most internet companies are cautious about future performance expectations. Profitability is expected to outpace revenue growth. According to Visible Alpha's consensus forecast, major domestic internet companies are expected to achieve a year-on-year revenue growth of 9.9%/9.3% in 24Q3/Q4, and a year-on-year non-GAAP net profit growth of 18.9%/14.9% in 24Q3/Q4. Under the backdrop of consumption uncertainty, stable industry landscape, strong barriers to competition, solid cash flow, and high shareholder returns are likely to be favored by the market. Additionally, it is recommended to focus on targets that continue to increase market share and monetization rate, and have a strong second growth curve with structural increment. Shareholder returns: Many companies continue to increase dividends and repurchases, boosting market confidence. In the face of external pressure, major internet companies have strengthened their buyback and dividend distributions to enhance shareholder returns. As of September 19, Tencent had repurchased 76.9 billion RMB since the beginning of 2024, with their daily repurchase amount in 24Q2 accounting for 7.7% of the daily turnover. Alibaba repurchased $10.9 billion and $12.5 billion in fiscal year 2023/24, having repurchased $5.8 billion in 24Q2. The research believes that the light asset business model of internet companies and robust cash flow provide a foundation for a more aggressive and sustainable shareholder return plan, demonstrating confidence in the company's long-term development and boosting market confidence. Risk factors: Slowdown in macroeconomic growth leading to lower-than-expected growth in e-commerce, gaming, advertising, etc.; inadequate liquidity easing leading to downward shift in market valuation center; underperformance in cost reduction and efficiency improvement by internet companies leading to slower-than-expected performance recovery; underperformance in new business and market expansion, or investment losses exceeding expectations; risk of core shareholders reducing holdings, etc.