China's Internet Market Facing Solid Growth but Narrowing Margins
"Internet financial guru, Safa Rashtchy, senior analyst, Piper Jaffray & Co. says the China Internet and technology market is facing a year of solid growth but competition will play into the scenerio as well while costs increase and margins narrow.
Internet companies in particular are seeing the increasing cost of success: margins are declining as expenses increase due to competition. At the same time, core market demands remain healthy."
"The good news is that, unlike what the U.S. Internet market went through in 1998-2000, Piper Jaffray believes this trend is gradual and will not result in increasing losses; rather, it will simply cut back some of the profit margins. The Chinese companies, unlike the Web 1.0 companies in U.S., are generating significant profit from each customer they acquire. In fact, they have been generating too much profit and may have not focused enough on expanding their share at the cost of lowering some of these profits. Now the competition will force most of them to be more concerned about market share gains."
"The dual increase in cost of labor and marketing will make the operating margins much more realistic and sustainable, in the 15%-40% range rather than over 50% that was common in China early on," Rashtchy said. "A key beneficiary of this trend will be ad-based companies. Both offline players like Focus Media, as well as online portals like Sina, Sohu, and Netease will stand to benefit from their key assets: inventories of ads."
Piper Jaffray will be holding its Third Annual China Internet and Technology Conference in Beijing on February 28 to March 2. Where the core theme of this year's conference will be growth and opportunities. See www.pjc.com/china