Online ad sector sees steady growth
(China Daily)
Updated: 2005-03-29 09:45

Editor's notes: On March 23, we reviewed the 2004 financial results of 13 NASDAQ-listed Chinese dotcom companies focusing on online games and wireless value-added services.

Here we will look at two other Internet sectors: online advertising and e-commerce - important businesses for Sina, Sohu, NetEase, Tom Online, Ctrip, eLong, 51job, and China Finance Online.

By Wen Dao

Although China's online game and wireless value-added service providers all reported steady or rapid growth in the past year, their future is far less certain.

Despite the growth potential offered by winning more support from government agencies, online game operators are finding that the negative public reaction to game addiction affecting many young people continues to be an obstacle to the expansion of the business.

And the future of wireless value-added services remains uncertain, as nobody knows whether the crackdown by government departments and telecom operators against those who cheat subscribers and spread illegal content will ease or intensify.

In contrast to the uncertainties and momentous growth accompanying these two businesses, online advertising displayed the least risks and the steadiest growth in 2004.

Plain sailing

Sina Corp, China's biggest online advertising company, reported a 59 per cent year-on-year rise in its online advertising revenues to US$65.4 million in 2004.

Sina's arch-rival Sohu notched up an even more impressive 89 per cent growth in its online advertising revenue in 2004, hitting US$55.7 million.

NetEase, the other one of China's top three Internet portals, saw its online advertising revenue almost double from 86.18 million yuan (US$10.41 million) in 2003 to 171.05 million yuan (US$20.66 million) last year.

Wallace Cheung, an Internet analyst with DBS Vickers Securities in Hong Kong, said in a research report that, among the three major Internet sectors - wireless value-added services, online games and online advertising, the latter is the smallest and has displayed steady, rather than exponential, growth in recent years.

The steady pace of this growth is thanks to higher advertising rates, increased recognition of the importance of the Internet as a channel for publicity, and a boost from the Athens Olympic Games.

Jim Sun, an analyst with London-headquartered Evolution Securities, predicted that online advertising - including the use of search engines - should become one of the biggest sources of revenue pools for the Internet industry, alongside e-commerce.

While advertising and e-commerce currently only account for about 20 per cent of the Internet's industry's total revenues, that figure will be a massive 80 per cent by 2008.

But intensified competition will have an impact on the advertising business.

According to DBS Vickers' survey of major online advertising companies, most listed companies expressed a great deal of concern about rising content costs and increased competition.

The focus of the market is undergoing a structural adjustment, said Sun from Evolution Securities, pointing out that the market influence of vertical portals is on the up.

"Sina's influence is highly concentrated in its front pages or news channels, while very few people look at its other pages," said Sun.

General portals like Sina, Sohu, and NetEase, and vertical websites like Focus.cn, Soufun.com, and PConline.com.cn, are likely to link up, he predicted.

Although Sina Corp spent millions of dollars to purchase two wireless value-added service operators over the past two years, it mainly relied on organic growth in its portal content and online advertising revenues.

This may put Sina at a disadvantage, as its competitors have invested heavily in the area, Sun believed.

Sohu Chief Executive Officer Charles Zhang said his company has a portal matrix composed of general portal Sohu.com, alumni website Chinaren, game portal 17173 and real estate website Focus.cn, and is well-positioned in the online advertising business.

Sohu had set its sights on becoming China's biggest online media platform with a combined strength in both general and vertical portals, Zhang said last month.

NetEase also teamed up in February with with another major real estate portal, soufun, to develop advertising revenues from the real estate sector, one of the biggest advertising clients in China.

But veteran Internet industry observer Lu Weigang warned that it would be very difficult for companies like Sohu to challenge Sina's market lead, as Sina has a very strong brand among Internet users.

Booming e-commerce

Chinese online human resource service provider 51job.com experienced a veritable roller-coaster ride in the past six months, when the trading of its American depository share started at US$14 on September 29 and rose to US$55.55 on December 13. The price fell to US$15.95 on Friday.

The company also became the target of about 10 law firms in class action law suits.

All this started with the company's profit warning in January that its fourth-quarter results would not meet its previous forecast, as human resources managers' budgets ran out in the second half of December.

Its total revenues in the fourth quarter were US$14.5 million, in the range of its revised forecast of US$14.13 million to US$14.6 million, compared with a previous forecast of US$16.9 million.

While 51job remains mired in legal difficulties, the prospects for e-commerce remain very promising.

According to Sun from Evolution Securities, e-commerce only accounted for 8 per cent of the Chinese Internet market's revenues in 2003, with the ratio increasing to 11 per cent in 2004.

The combination of e-commerce and online advertising will contribute to about 80 per cent of the total revenues of the Internet industry in 2008, he forecast.

Sun believed Shanghai-based Ctrip, the country's biggest Internet travel service company, will enjoy a bright future as more and more people opt to shop online.

Ctrip's revenues almost doubled year-on-year to US$40.3 million in 2004 and its net profits also increased from US$6.5 million to US$16.1 million over the same period.

"Although Ctrip's profit earning (P/E) ratio is already quite high, it is actually safer to invest in high P/E stocks, because they have good potential and less regulatory uncertainties," said Sun.

According to market research house iResearch Co Ltd, the online travel service market will grow from 610 million yuan (US$73.67 million) in 2004 to 2.8 billion yuan (US$338 million) in 2007.

Henry Yang, president of iResearch, also pointed out that the e-commerce business will enjoy rapid growth in the coming years with the increasing number of netizens and an improvement in the online trading environment.

The research house estimates the online shopping market will grow from 4.5 billion yuan (US$543 million) in 2004 to 29.6 billion yuan (US$3.57 billion) in 2007.

The scale of the online job recruitment business will also rise to 1.96 billion yuan (US$237 million) in 2007 from 770 million yuan (US$93 million) last year.

Chinese e-commerce service providers like recruitment firms Chinahr and Zhaopin.com, and business-to-business service provider Alibaba, are all posed to make their initial public offerings in the next few years, trying to catch the tide of e-commerce in the capital market.

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