Online search giant Baidu Inc is set to lose its top spot in the nation's booming digital advertising market this year to its rival Alibaba Group Holding Ltd, according to a report from London-based market research firm eMarketer.

E-commerce heavyweight Alibaba has so far notched up a 28.9 percent share of China's digital ad market, equating to $12.05 billion, said eMarketer, which researches digital marketing, media and commerce.

In previous forecasts eMarketer had predicted that Baidu, which uses search result listings to generate income from advertisers, would stay out in front. Last year, Baidu earned 28 percent of China's digital advertising revenue, compared to Alibaba's 24.8 percent.

But eMarketer has downgraded its outlook for Baidu this year as it has witnessed challenges in the past few months due to tighter government controls on search result advertising. Baidu's digital ad revenue is expected to see sluggish growth this year of just 0.3 percent to $8.87 billion. Meanwhile, Alibaba and Tencent Holdings Ltd will continue to surge ahead and report increases of 54 percent and 68 percent, respectively.

Baidu, Alibaba and Tencent, the top three firms in China's internet industry are estimated to take a total of 60 percent in the country's digital ad revenue of $41.66 billion in 2016.

But the government's tightened controls on online advertising are only part of the reason for Baidu's slowing ad revenue. Analysts said that the Beijing-based Baidu's lack of strong mobile products is another factor affecting its ability to attract advertisers.

Shelleen Shum, an analyst from eMarketer, said the tighter regulation of internet advertising is expected to weigh heavily on Baidu's search revenues in the near term.

"Although also affected by the new regulations, Alibaba's ad revenue, particularly from the mobile sector, shows no sign of abating thanks to the robust growth of its e-commerce retail business," she said.

Baidu's net income for the quarter ending June 30 was 2.4 billion yuan ($359 million), down 34.1 percent year-on-year, as the company dealt with the impact of tougher controls on internet advertising and in the healthcare sector.

"Huge traffic is the bedrock of online advertising business. But unlike Alibaba and Tencent, which have numerous successful mobile products that can attract traffic from users. Baidu still lacks a new cutting-edge to help jumpstart its slowing traditional search business," said Lyu Ronghui, an analyst with internet consultancy iResearch Consulting Group.

Apart from e-commerce, Alibaba's cloud computing business is growing rapidly to help turn enterprises user into advertisers while Tencent has been gearing up to monetize its popular app WeChat and has a thriving gaming business which can also make money on advertisement.

WeChat allows targeted ads to be sent to nearby consumers

China's internet giant Tencent Holdings Ltd is allowing brick-and-mortar businesses, such as bakeries and hair salons, to send out more accurate advertisements, which add positioning and navigation functions, to nearby potential consumers via its popular app WeChat.

The digital fliers could help the brick-and-mortar stores establish relationships with targeted users within service areas, and lead online WeChat users to consume at offline stores.

The advertisement provides the name, address and phone numbers of the brick-and-mortar stores. Moreover, the navigation and dialing functions could help users reach the store quickly, according to Tencent.

Furthermore, enterprises could define the time period to disseminate the ad. For instance, catering merchants could deliver the ad before or after dinner, while real estate firms could choose a release time to avoid times when their customer service staff members take their breaks.

The sophisticated orientation function means the advertisement will be exposed to users more effectively, and it is beneficial for the stores to grasp nearby potential consumers and reduce the waste of advertising resources.

Lu Zhenwang, chief executive officer of the Shanghai-based Wanqing Consultancy, said: "The businesses don't just show their products on WeChat's friends circle. It is a deeper exploration as the accurate advertising makes users directly place an order and consume at stores."