Chinese internet companies have produced stellar earnings expansion on the back of consumption-led growth in China in the last few years. With increasing wealth, consumers have been quick to adopt mobile internet applications, and companies willing to innovate in online services, such as social media, gaming and e-commerce, have become dominant players.
Good examples are the Chinese internet giants Tencent and Alibaba, which together dominate China's online consumer market. These businesses achieved revenue growth of more than 50% last year.
In particular, Tencent's communication app, WeChat, offers access to 1 billion Chinese consumers, affording the company extensive potential to sell products and services such as gaming and advertising.
We have notable exposure to Chinese internet companies because, in our view, the market is too sceptical about their ability to maintain strong growth.
However, there is a trend towards increasing regulatory scrutiny over internet companies- from Facebook and Google in the West to Tencent and Alibaba in China.
The urge to regulate in the West is driven by a desire to prevent excessive monopolistic behaviour and to guard the data privacy of individuals. In China, on the other hand, the reason behind recent regulatory announcements is so far unclear.
The government is probably not concerned about the emergence of monopolies or about data privacy; we believe it is keen to see national champions emerge in the internet sector and wants these companies to succeed not only in China but also internationally. Hence, we think the current concerns in the stockmarket about internet regulation in China may be overblown.
Perhaps a bigger concern for us is the risk the introduction of new technologies could transform the industry landscape, leading to new winners and losers within a short time frame.
In light of this risk, Chinese internet companies tend to invest significantly in R&D, M&A, and in incubating new ventures through a loss-making period.
When analysing these companies, we tend to look several years ahead to a time when much of this investment has subsided and loss-making new ventures have matured into profitability. The risk is this transition to profitability may take longer than we are assuming.
Will Lam is manager of the Invesco Perpetual Asian fund
• Chinese internet companies are growing fast
• Share prices have been relatively weak over the last few months
• Chinese government is starting to regulate companies more strictly
• Companies threatened by new companies or business models