The country's financial tech (fintech) and virtual/augmented reality (VR/AR) fields will become two major growth areas for China's Internet sector, although it will continue to be dominated by tech giants such as Alibaba, Tencent and Baidu, according to Alex Yao, JP Morgan's head of Internet and new media equity research in Asia Pacific.
CNBC reported that the rise in online financial activities fueled the development of Internet finance industry in the country. McKinsey, a global consulting firm, said that the industry's dominant sector is payments as companies compete in the new battlefield of online-to-offline mobile payments.
Meanwhile, HIS said that consumer spending in virtual reality headsets and entertainment is expected to reach more than $11 billion over the next few years.
"Most likely a lot of the opportunities will be grabbed by the larger incumbents--Baidu, Tencent (and) Alibaba--but there are vertical opportunities for a lot of start-ups as well," Yao said.
The report said that the China's tech giants have been making huge investments into the two sectors to expand their services and make potential investments.
Ant Financial, Alibaba's affiliate, has been making acquisitions and investments into fintech companies to expand its global presence. The company, which runs Alipay mobile wallet, has more than 450 million users worldwide. Ant Financial is preparing to make an initial public offering this year, which is greatly anticipated by investors, analysts said.
Meanwhile, China's search engine Baidu has made its investments in a company involved in developing holographic technology for AR and VR.
Yao said in a research note on Feb. 13 that the sector may benefit from the positive investor outlook following the U.S. election and the optimistic prospects for the fourth-quarter earnings season.
According to Yao, investors should look out for two important things about Chinese Internet companies. One is their ability to monetize such as in Baidu's in-feed ads and Weibo's live broadcasting feature. The other is the investment plans of the companies and their effect on the margins.
The continued decline in home transactions, however, may likely make it difficult for real estate service providers such as Fang and Leju, to have better gains, Yao said.
Yao said in the note that Chinese Internet companies under the investment bank's coverage gained an average of 14 percent year-to-date return, compared to 9 percent from MSCI China index and 7 percent from the Hang Seng index.
The JP Morgan analyst further said that the returns may last depending on the stock performances based on the fundamental growth of the companies and other factors such as U.S. policies, yuan depreciation and asset allocation.
He said that although companies may remain strong in the growth stage, "from a macro level, there are some uncertainties over the next couple of quarters."