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Analysis

Writing on the wall: What The First Half of 2018 Says About Economic Trends in China

Jul 21, 2018 by Yun Nie
Writing on the wall: What The First Half of 2018 Says About Economic Trends in China

The Chinese Internet triumvirate--Baidu, Alibaba, and Tencent, (jointly known as “BAT”)--have stepped up their efforts to promote technology, medicine, and other business to business (B2B) services in first half of 2018, while a new generation of unicorns are engaging in increasing loyal users and monetizing traffic, reports the Chinese information platform 36kr.com.

TMT industry: Mergers and acquisitions in first half of 2018

The overall Telecommunication, Media, Technology (TMT) market saw steady growth in the first half of 2018.

Meanwhile, link relative ratio of trading volume has risen because of large-scale mergers and acquisitions, like the Alibaba Group buying out Ele.me, an online food delivery platform, Meituan acquiring the station-less bicycle share film mobike, Baidu Finance’s spinoff and so on.

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The class A share of TMT market encountered several restructuring-related events and transactions impelled by a series of restrictive supervision policies and the downsized domestic market.

Issuing shares for consideration other than cash became the foremost payment method for Chinese companies. The percentage of transactions done with cash has dropped to the lowest level.

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Both the number and the value of mergers and acquisitions in cross-nation TMT market decreased in first half of 2018, regardless of link relative ratio and year-on-year comparison.

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Top 20 mergers and acquisitions in first half of 2018 concentrated on entertainment and education sectors.

Here are examples in entertainment sector:

Wanda Film Holdings, a subsidiary of the Chinese conglomerate Dalian Wanda Group, acquired 83.73% equity of Wanda’s film production and distribution unit, Wanda Media (or Wanda Television Media), according to 36kr.com.

In February, Orient Hontai Capital, a Chinese leading private equity company, confirmed acquiring a majority stake in Imagina Media Audiovisual, a segment of Spain’s Mediapro Group, the largest independent TV firms based out of southern Europe. Following the acquisition Orient Hontai Capital will hold 53.5% stake in the company.

During the same time, Momo, one of China's leading mobile-based social and entertainment platforms, announced that it has successfully closed on its acquisition of the social and dating app Tantan, agreeing to acquire 100% fully diluted equity stake.

Examples in education sector:

On April, NetDragon Websoft Holdings Limited, a global leader in building internet communities, announced that it had entered into a definitive agreement to acquire 100% stake in Edmodo, a leading global learning community, for a consideration of USD 137.5 million.

In June, Dalian Sunlight Machinery, the leading plastic piping products manufacturer in China, acquired 100% equity of My Gym (China), a company that focuses on early childhood development programs, for CNY 3.3 billion (USD 493.47 million).

In terms of investment and financing, Chinese Internet mammoths actively engaged in spinoffs, such as Baidu’s global business unit and financial unit, Jindong’s logistics subsidiary, Tencent’s entertainment branch QQ music, and etc. These companies will continue to spinoff their new businesses for more financial returns.

Internet giants target B2B; Technology and medicine are hottest parts

In first half of 2018, B2B has become a new trend in Chinese Internet market.

The push force is that business to consumer (B2C) companies confronted bottleneck when services like social media, videos, games, live streaming, are fully developed and breakthroughs are hard to see.

In contrast, the pull force - rapid development of AI, IoT, big data, cloud computing, and other technology - motivates the ”internetalization” of B2B market and the “intelligentization” of information.

A host of opportunities thus emerge in finance, retail, industry, government and other services where dominant powerhouses have not come into play.

Chinese Internet giants also highlight Software as a service (SaaS), concentrating on problem-solving strategies and cloud computing business.

Buoyed by government support, medical and healthcare services is another focal point for Chinese ventures.

On May 31, China’s new state medical insurance administration was officially set up in Beijing. The administration will be responsible for formulating policies, plans, and standards on healthcare systems, supervising and administering medicare funds and other services.

Hospitals and clinics will now focus on sustainable development through medical informatization and big data analytics, which will be a great opportunity for Chinese tech films.

New unicorns show strong inclinations to evolve based on traffic monetization

Vertical expansion and content community construction have become the new emphasis of newly-emerged unicorns to boost traffic.

As the unicorns saw a difficulty in increasing traffic by previous services, vertical expansion, that of acquiring well-developed mobile apps, will help to diversify products and attract more users.

Constructing content community, differentiated from vertical expansion, functions to improve user loyalty since those online communities provide media content based on individuals’ interests. Chinese users who have the same interest will join in the community and tend to get a sense of unity through the shared interests.

For those startups, the profitable game service is a primary method for traffic monetization.

Revenue from in-game advertisements remains a significant part of the total revenue, according to the data released by 36kr.com.

Embedding advertisements into the entire chain that includes game distributing, consuming, recording and live streaming, instead of just the in-game ad inserts, will promote traffic monetization.

In addition, cooperation with ecommerce platforms is also a successful attempt. Ecommercial platforms boast rich content and social networking resources.

Teaming up with them allows the unicorns to benefit from shared resources and thus optimize traffic monetization.

Yun Nie

Yun Nie is a New York-based tech reporter. She focuses on India-China financial market, global IT giants and technology-centric market trends. She can be reached at Yunnie@thepassage.cc.

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