Goldman Discusses Battle in Chinese Internet Space: Upgrades Baidu, Downgrades Youku, Sohu

On Monday, Goldman Sachs released a relatively optimistic note on the Chinese internet sector. Related to the sectorwide note, the firm's Piyush Mubayi upgraded Baidu BIDU while at the same time downgrading shares of both Youku Tudou YOKU and Sohu SOHU. Mubayi focused on the online-to-offline (O2O) segment that is experiencing rapid growth. Growth in this segment will be enabled by “the proliferation of smartphone devices, combined with 4G networks,” said the Goldman analyst. There are three steps to the O2O transaction flow:

1. advertising;
2. transaction; and,
3. payment.

Baidu BIDU, the leader in Chinese mobile user traffic at 54 percent share, stands to benefit significantly “from the rising O2O advertising demand, considering its large base of SME advertisers, and the strong map service,” said Mubayi. The Goldman analyst believes Ctrip CTRP and Qunar QUNR will benefit in the transaction variety of the O2O segment. Mubayi sees these companies focusing on in-app purchases and having “comprehensive vertical websites that add significant value to customers' travel planning,” for example. Alibaba's Alipay and Tencent's Weixin Pay are well positioned to benefit in the infrastructure variety of online-to-offline business models, according to Mubayi. The analyst noted a potential way to play Alibaba's Alipay is through Sina SINA, a company which “announced a strategic cooperation on mobile payment” on January 7th. “The partnership integrates Alipay and Sina Weibo accounts, and enables users to make purchases within Weibo's social media platform," Mubayi said.