Alibaba, Tencent and Baidu to dominate fintech and VR in China but opportunities abound for start-ups

Fintech and virtual/augmented (VR/AR) reality will likely be two key growth areas for China's internet sector and large, established names are set to dominate, according to Alex Yao, JPMorgan's head of internet and new media equity research in Asia Pacific.

Online censorship has escalated in the run-up to this autumn's Communist Party Congress
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China's internet finance industry has burgeoned in recent years, with more financial activities moving online. Payments has emerged as a dominant sector, with online-to-offline mobile payments becoming a new battlefield for companies, according to global consulting firm McKinsey.

Elsewhere, spending in virtual reality headsets and entertainment is expected to be more than $11 billion over the next few years, according to IHS.

Yao told CNBC on Tuesday, "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."

The big tech names in China have been pouring their resources into the two sectors, expanding their proprietary services and making strategic investments.

Alibaba-affiliate Ant Financial, valued at about $60 billion, is aggressively expanding its global footprint through acquisitions and investments into fintech companies. Ant Financial runs the massive Alipay mobile wallet in China and has more than 450 million users worldwide. Analysts have said Ant Financial is one of the key companies to watch this year as it prepares for an initial public offering.

Elsewhere, Baidu, frequently dubbed the Google of China, recently invested in a company that develops holographic technology for AR and VR.

The broader sector is set to benefit from a recovery in investment sentiment, following the U.S. election, and from positive expectations going into the fourth-quarter earnings season, Yao said previously in a research note dated Feb. 13.

Chinese internet stocks to watch

Yao pointed out two key things to watch about Chinese internet companies going forward: first, their ability to successfully monetize initiatives like Baidu's in-feed ads and Weibo's live broadcasting feature. The second thing to watch are the investment plans of these companies and how it will affect their margins.

Real estate service providers such as Fang and Leju, however, could expect to struggle due to continued weakness in home transactions, Yao said.

Chinese internet companies under the investment bank's coverage on average achieved a 14 percent year-to-date return, compared to 9 percent from MSCI China index and 7 percent from the , according to the note.

When asked if the returns will last, Yao told CNBC the stock performances were dependent on two things — fundamental development of the companies and on macro factors such as U.S. policies, depreciation and asset allocation.

While the companies remain in a healthy growth stage, Yao said, "from a macro level, there are some uncertainties over the next couple of quarters."