In a nutshell: The competitive landscape for China Internet has permanently changed. We use this opportunity to make a number of changes. We cut our earnings estimates, re-assess our favoured sub-sectors, introduce a regulatory risk premium and incorporate ESG into our models.

Our view: The result is we come to a number of new conclusions. Two common impacts of the regulations on Internet giants are higher costs and lower revenues. Another is we believe regulations could head to short video platforms next. These apps now take up one-third of users’ time on mobile but have yet to be targeted. By contrast, we believe the e-commerce and online games sub-sectors could outperform from here, a result of our new China Internet scorecard, which assesses different segments using key metrics.

Actionable ideas and our two favoured stocks  Tencent: Our top pick across the entire sector due to its diversified revenue streams, which can help it withstand the regulatory crackdown. Overseas investments like Sea Ltd. offer share price support. It also has various growth drivers like overseas games expansion and more monetisation of its services. Our new target price is HKD655 (from HKD700) with 36% upside from the current share price.

 JD: Our top pick in e-commerce. JD’s own logistics infrastructure, strong direct sales franchise and market leadership in electronics and appliances sets it apart from the pack. A recovery in its marketplace for third-party merchants, lower tier city penetration and growth in the supermarket category are also positive. Our new target price is USD100 (from USD83) with 28% upside from the current share price.

Two downgrades to Hold (from Buy)  Bilibili: Increasing protection for minors may impact user growth for this leading video sharing social platform. Increasing content censorship, especially targeting Animation Comics and Games, could be another negative even though we remain constructive on the company’s long-term growth prospects. We apply a regulatory risk premium to our WACC, which lowers our target price by 40% to USD76 (from USD127) with 10% upside from the current share price.

 Kuaishou: We have concerns regarding regulatory uncertainties around short video platforms, which could lead to higher costs. We apply a regulatory risk premium to our WACC, leading to a lower target price of HKD90 (from HKD120) with 9% upside from the current share price.

With this note, Charlene Liu assumes primary coverage of Alibaba, Meituan, JD, Pinduoduo, Vipshop, Baozun, Baidu, NetEase, Tencent, iQiyi, Bili, Kuaishou, and Tencent Music (TME).