CITIC SEC: North American retail data exceeds expectations, optimistic about the US stock internet sector.

GMTEight Source, CITIC SEC released a research report stating that US retail sales data for July showed a month-on-month growth of 0.7% and a year-on-year growth of 3.2%. Among them, the Nonstore retailer, mainly composed of e-commerce, grew by 10.3% year-on-year, exceeding market expectations. At the micro level, retailers such as Walmart raised their full-year performance guidance after announcing their financial results. The strong sales data demonstrates the resilience of the US macroeconomy, which is expected to significantly benefit the online advertising and e-commerce sectors in the US. The high resilience of US consumer spending also contributes to the relatively high certainty of performance for internet companies. Currently, the overall valuation of US internet companies is still below the median of the past five years. Considering the recovery in revenue and the improvement in profitability brought by operating leverage, the investment value of the US internet sector is expected to continue to be positive. CITIC SEC's main points are as follows: Retail data: July retail data exceeded expectations, with double-digit growth in e-commerce. According to data from the US Department of Commerce, overall retail sales in July in the US grew by 0.7% month-on-month and 3.2% year-on-year. Excluding automotive parts and energy, the year-on-year growth was 5.3%, exceeding market expectations. In specific sectors, the Nonstore retailer sector, dominated by e-commerce, grew by 10.3% year-on-year. Personal care and food services performed well, with year-on-year growth of 8% and 12% respectively. The retail data indicates the high resilience of the North American economy and the steady increase in the overall penetration rate of e-commerce. According to data from the US Department of Commerce, as of 1Q23, the e-commerce penetration rate in North America was 15.1%, and it continues to maintain a good growth trend. E-commerce sector: Major retailers raised performance guidance, with continuous improvement in profitability. Among the US retail companies that have disclosed their performance, it can be seen that the high resilience of the macroeconomy has driven accelerated improvement in revenue. For example, Amazon's North American business grew by 11% year-on-year in the second quarter, and Walmart's revenue grew by 6% year-on-year. Both retail giants achieved significant improvements in profitability as well. For the third quarter and the whole year, Amazon gave revenue guidance of $138-$143 billion (corresponding to a growth rate of 9%-13%), and Walmart expects FY2024 total revenue to grow by 4%-4.5% year-on-year (compared to the previous quarter's guidance of 3.5%). Both retail giants have pointed out that personal care and food are the areas with faster revenue growth. Amazon achieved stable market share growth through significantly improving fulfillment efficiency and its layout in the healthcare sector (such as cooperation with Blue Shield of California), and the slowing down of capital expenditure also brought about profit improvement. Online advertising: Expected to benefit from the high prosperity of the retail industry. In addition to e-commerce, the North American online advertising industry will also benefit. E-commerce and retail are the largest advertisers for Meta and Google, and the high prosperity of the North American retail industry will gradually increase demand for advertising. It is expected that the North American online advertising market will achieve double-digit growth in the second half of 2023, mainly driven by the online transformation of the consumer industry, which will significantly drive the growth of advertising revenue for Amazon, Meta, Google, and others. In addition to the e-commerce business, the transformation of short videos led by Meta is progressing smoothly. The daily playback volume in the second quarter exceeded 200 billion times, with an annualized advertising scale of $10 billion. The integration of AI and e-commerce, such as Meta's Advantage+shopping, Amazon's Titan model, and Google's Performance Max, will also drive an increase in ad pricing. Future outlook: Revenue recovery combined with profit release from operating leverage makes the US internet sector the preferred choice in the short term among US tech sectors. The previous rapid rise in stock prices, relatively high market expectations, and relatively flat second-quarter reports in software and semiconductor sectors, combined with the rise in US Treasury yields, have contributed to the recent poor performance of the US tech sector. However, for the internet sector, performance growth has bottomed out since Q1 and is expected to steadily improve quarter by quarter in the short term. Subsequently, with the progress of cost reduction and efficiency improvement, operating leverage is expected to accelerate the release of profits. From a valuation perspective, the current valuations of the three major internet companies are still below the median of the past five years. Overall, they have both offensive and defensive attributes and are an ideal short-term investment direction. Investment strategy: The better-than-expected US retail sales data in July demonstrates the high resilience of the US economy and provides good support for the fundamentals of the US internet sector. In the current volatile market environment, US internet giants with business models mainly focused on e-commerce and advertising are expected to continue to benefit from the improved macroeconomic expectations and the continued decline in inflation data. In addition, the continuous integration of technologies such as generative AI will bring about sustained improvements in production efficiency. It is expected that the performance of US internet giants will continue to improve, with reasonable valuations and both offensive and defensive attributes, making them an ideal short-term investment direction. Risk factors: Risks of resurging inflation data; risks of US economy entering into recession; liquidity risks in the US bond market; risks of geopolitical conflicts leading to a comprehensive weakening of the European economy; continuous tightening of policy regulations on tech giants; risks of slower progress in the AI field than expected; risks of IT spending by European and American companies falling short of expectations due to macroeconomic fluctuations, among others.