China / Hong Kong Industry Focus China Internet Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 December 2014
The makings of an empire HSI: 23,654
• Leading internet players are actively positioning on NASDAQ: 4,756 mobile internet to enhance growth prospects
Riding on its vast user base, Tencent could • cooperate with strategic partners including JD.com ANALYST to strengthen its presence especially in the e- Mark LI, CFA +852 2971 1935 commerce value chain [email protected] Initiate coverage on Tencent with BUY, HK$148 TP • Recommendation & valuation (on 0.9x PEG, or 32x 12-month rolling core PE); initiate coverage on JD.com with BUY, US$30.8 TP Target 15F 15F (on 1.5x 12-month rolling P/Sales ratio) Company Price Price Upside Recom PE P/Sales Local$ Local$ % x x China’s internet Mobile transformation underway. Tencent*^ sector has benefited from rising penetration of mobile HKD 119.6 148 23 Buy 26.0 9.0 devices, and robust mobile revenue contribution has (700 HK) JD.Com*^ become the main growth driver. As such, leading players USD 23.91 30.8 29 Buy n.a. 1.2 especially the BAT (Baidu, Alibaba Group and Tencent) (J D US) Alibaba# are striving to enhance their mobile presence via both USD 109.9 n.a. n.a. NR 36.2 15.7 organic growth and strategic cooperation. (BABA US) Baidu USD 234.7 n.a. n.a. NR 27.5 5.8 In (BIDU US) “Tencent Family” rides on its platform value. particular, Tencent has been actively cooperating with strategic partners such as JD.com, Dianping.com, Didi # 2015: FY3/16 Taxi and LY.com. Building on Tencent’s large user base ^ Core PE especially for Weixin and Mobile QQ, its integration with partners’ e-commerce, search, travel and O2O services Note: We expect JD.com to turn profitable in 2016F. could help to establish ecosystems around Tencent’s key Source: Thomson Reuters, *DBS Vickers platforms.
Buy the winners. Within the internet sector, we believe e-commerce has the best monetization potential, thanks to its transaction-based business model. The strategic cooperation between Tencent and JD.com could enhance their control on the e-commerce value chain, and improve user experience especially in product quality, payment methods and delivery speeds. Besides, more synergies could emerge in other key segments such as online games and online ads. We initiate coverage on Tencent with BUY rating and TP of HK$148 (based on 0.9x PEG, or 32x 12-month rolling core PE). We also initiate coverage on JD.com with BUY call and TP of US$30.8 (based on 1.5x 12-month P/Sales ratio).
www.dbsvickers.com ed-JS & TH / sa- MH
Industry Focus China Internet Sector
Table of Contents
Investment summary 3 Going mobile 4 Consolidations taking place 6 (A) Horizontal expansion – Synergies emerging 10 (B) Vertical integration – Riding on e-commerce value chain 13 Valuations & recommendations 16 Stock Profiles 20 Tencent 20 JD.com 38 Appendix 58
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Industry Focus China Internet Sector
Investment summary Horizontal expansion creates synergies. Cooperating closely with its partners, Tencent has incorporated functions like e- The internet sector is embracing the mobile age. Thanks to commerce, online taxi bookings, restaurant rating and travel rising penetration of smart devices, the number of mobile services into its Weixin and Mobile QQ apps (applications). We netizens has grown rapidly and exceeded 40% of total expect such cooperation to generate good user traffic and population in China. Mobile internet users are likely to stay consumption for Tencent’s partners, and increase users’ time online for >10 hours per day, which we believe is 5-10x the spent on Weixin and Mobile QQ. Thanks to synergies that arise amount of time users spend on PCs. According to iResearch, from such cooperation, Weixin and Mobile QQ could become mobile revenue contributed 22% of China’s internet sector the “Super Apps” that users would go to whenever they surf revenue in 2Q14, and could trend up further. In addition, the mobile internet. mobile internet could breed new customer demand such as Vertical expansion along e-commerce value chain. Thanks to its online taxi bookings. Hence, there is immense potential for the transaction-based model, we believe e-commerce is best- winners in mobile internet, in our view. positioned to achieve monetization (i.e. generating revenues Leaders strive to strengthen mobile presence. Seeing solid and profits). As such, Tencent has formed strategic cooperation growth and bright prospects in mobile internet, leading with JD.com, with the aim of enhancing their control on the e- internet players including the BAT (Baidu, Alibaba Group and commerce value chain. In the partnership, JD.com would ride Tencent) have invested heavily in mobile transformation, on its expertise in supplier management, online platform especially in their core businesses such as mobile search, online development and in-house fulfilment operations, and Tencent maps, mobile e-commerce and mobile games. As a result, BAT would provide support on user traffic and key processes such has recorded robust mobile revenue growth, and their mobile as payment channels. In this way, Tencent and JD.com could revenue contributions have outperformed the market. In strengthen their e-commerce presence, and compete head-to- addition to organic growth, we believe these leaders are willing head with leaders such as Alibaba Group. to acquire quality players, to enhance their ecosystems in mobile internet. Valuations and recommendations. We like Tencent’s leadership in online games, emerging presence in online ads, and large The “Tencent Family” stands out on its platforms with user active user base riding on its QQ and Weixin platforms. We traffic advantage. In our view, social network operators have also think highly of JD.com’s self-operated model that ensures advantages in the mobile era, given keen user demand for easy product quality as well as delivery speeds. More synergies could communication. Tencent has leveraged on its large user base emerge from their strategic cooperation, to enhance their of >550m MAU (monthly active users) for its Mobile QQ and competitiveness especially in e-commerce. We initiate coverage Weixin platforms, to cooperate with strategic partners on Tencent with BUY rating and TP of HK$148 (based on 0.9x including JD.com, Dianping.com, Didi Taxi and LY.com. PEG, or 32x 12-month rolling core PE). We also initiate Together with these players, the “Tencent Family” is well- coverage on JD.com with a BUY and TP of US$30.8 (pegged to poised to establish ecosystems spanning multiple segments, 1.5x 12-month rolling P/Sales ratio). such as online gaming, online ads, e-commerce, search, travel, Risks and concerns. Key risks to Tencent could include O2O and logistics services. slowdown in mobile game revenue, unsuccessful monetization efforts on Weixin and Mobile QQ, and rising content costs in videos and online games. Key risks related to JD.com could include intensifying competition with e-commerce leaders especially Alibaba Group.
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Industry Focus China Internet Sector
Going mobile Revenue breakdown for China internet sector (2013) Decent growth in the internet sector. More and more people in China are embracing the internet, to enjoy its various advantages such as convenience, transparency and cost savings. Online ads Online As of June 2014, the netizen population in China stood at 21% payment 632m (14m higher than Dec 2013), and internet penetration Online games 3% rate reached 47% (source: CNNIC). Driven by rising netizen 15% numbers and higher online spending, internet operators have registered decent revenue growth. According to market research firm iResearch, total revenue for the China internet Others 6% sector could record 47% CAGR for 2011-2014F to reach RMB826bn, and is projected to grow at 28% CAGR for 2014F- E-commerce 55% 2017F to RMB1,723bn. The pie is large and growing, and all players are striving to get a share.
China internet sector – Total revenue size Source: iResearch RMB bn CAGR= 28% % 2,000 60% Mobile contribution trending up. The promotion of mobile 52% 51% 1,723 1,800 devices (e.g. smart phones and tablets) and development of 1,600 50% mobile internet in China have offered huge opportunities for 38% internet operators. Thanks to the convenience of mobile 1,400 40% 1,200 devices, users could access mobile internet for >10 hours per 1,000 826 30% day, which could be 5-10x the time users spent on internet in the PC era (according to Mr. Huateng Ma, founder and 800 600 20% Chairman of Tencent). 600 398 400 262 10% According to iResearch, mobile revenue contributions have 200 increased steadily, and accounted for 22% of total revenue in 0 0% 2011 2012 2013 2014F 2017F 2Q14. This ratio could trend up further, in our view. In the initial phase, we believe growth could mainly come from users’ Market size (LHS) Growth y-o-y (RHS) experimental consumption on the apps (applications). As the
apps become more user-friendly, and user habits on mobile Source: iResearch internet are established, we believe mobile revenue could achieve explosive growth, and make significant revenue E-commerce, ads and games are major contributors. Breaking contributions for internet operators. down the internet revenue for 2013, e-commerce accounted for 55% of total revenue, and online ads (21%) as well as online games (15%) were the other major contributors. Online payment’s share was 3%, with good potential to grow. Aided by its transaction-based model, we believe e-commerce is best- positioned to achieve monetization (i.e. generate revenues and profits). Online ads and online games could also ride on customers’ migration to mobile devices to fuel growth. Online payment could likely contribute to the sector’s longer-term growth, as payment infrastructure and regulations improve.
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Industry Focus China Internet Sector
Mobile penetration rate Ecosystem is the key. In spite of the bright prospects for mobile internet, it could be difficult for the players to achieve 25% monetization, unless an ecosystem is established. For example, 21.8% mobile e-commerce could be much more effective if customers 20.1% have access to convenient online payment methods, and goods 20% 18.0% are delivered via efficient logistics systems. Hence, we expect 14.9% leading internet players to invest on both horizontal expansion 15% (across segments) and vertical integration (along value chains) 11.7% to create ecosystems in the mobile era.
10% Winner takes it all. Mainly due to screen size, mobile devices could display limited content compared to PCs. Thus, users’ 5% attention could be concentrated on a few apps. According to a recent survey by iiMedia, >75% of smart phone users in China would frequently use 6-15 apps, and less than 20% would use 0% >15 apps frequently. As such, we believe the mobile internet 2011 2012 2013 1Q14 2Q14 market could consolidate over the longer-term, with a few Note: Penetration = mobile revenue / total revenue for China internet leaders enjoying majority of the market share. sector. Consolidations ahead. Given mobile internet’s immense Source: iResearch potential, emerging new services, and market concentration down the road, we believe leading internet players especially Leaders are on the move. Seeing strong growth and immense the BAT could be interested to strengthen their positions potential in mobile internet, leading internet players especially through M&As and strategic partnerships. Besides, since they the BAT (Baidu, Alibaba Group and Tencent) have placed much are listed companies, these leaders could ride on their strong attention on growing their mobile arms. Baidu has penetrated financial positions to acquire quality players in other segments mobile internet users with its strengths in mobile search, online or along the value chains, in our view. maps and appstores; Alibaba has focused on mobile e- commerce such as “Mobile Taobao (手機淘寶)”; Tencent aims to strengthen its positions in mobile games and social networks Net cash level for BAT (e.g. Weixin, Mobile QQ and Mobile Qzone). Alibaba and Tencent have also offered subsidies to customers, to encourage RMB m the use of their mobile payment solutions (e.g. Alipay, Weixin 41,000 38,070 Payment and Mobile QQ Wallet). 36,000 31,000 26,526 Overall, mobile revenue growth for BAT has been robust, and 26,000 23,271 they have led the industry in mobile revenue contributions. 21,000 18,547 Looking ahead, we believe BAT aim to further accelerate their 16,000 mobile transformations, via both organic growth and 9,748 11,000 7,495 cooperating with strategic partners in their non-core segments. 4,858 6,000 2,287 1,000 Mobile revenue contributions for BAT (4,000) (3,109) 1Q2014 2Q2014 3Q2014 2011 2012 2013 Baidu >25% 33% 36% Baidu Alibaba Group * Tencent Alibaba Group * 27% 33% 36% Tencent ** 17% 27% 23% * Alibaba Group: 2011: FY3/12; 2012: FY3/13; 2013: FY3/14. Alibaba raised c.US8bn / c.RMB50bn from its IPO in Sep 2014. Note: Mobile revenue as percentage of total revenue. Based on calendar year. Source: Companies, DBS Vickers * Alibaba Group: Based on GMV (gross merchandise value). ** Tencent: For online games only. Its mobile game revenue saw temporary disruption in 3Q14, due to delayed launches of upgrades on Weixin and Mobile QQ apps. Source: Companies
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Industry Focus China Internet Sector
Consolidations taking place Social networking is crucial in the mobile era. Social networking has been the major beneficiary of mobile internet, Taking a shortcut. In the mobile era, internet players have thanks to its portability and convenience. Users of instant increasingly adopted the M&A approach to strengthen their messaging apps could communicate on a real-time basis with industry positions. Total value of M&As in China internet sector friends, at literally no cost. A recent survey by Enfodesk shows posted 116% CAGR during 2009-2013 to US$14.3bn, and that 91% of mobile netizens have used social networking apps could grow by 60% this year to US$23bn. As the mobile such as Tencent’s Weixin (微信), Mobile QQ (手機 QQ) and internet market consolidates, M&As and strategic cooperation Qzone (QQ 空間). Being the dominant leader in social could be the preferred solutions for leaders to further increase networking, Tencent has accumulated a large user base of their market shares. >550m monthly active users (MAU) for its apps including Mobile QQ and Weixin. With the advantage in mobile users, Tencent is well-positioned to penetrate into other segments of China internet sector – Total M&A size mobile internet.
USD m % 25,000 164% 22,955 180% Mobile internet – Penetration by category (1H14) 160% 100% 20,000 140% 91% 114% 108% 14,349 120% 15,000 80% 86% 100% 80% 56% 55% 10,000 60% 60% 53% 60% 5,425 36% 40% 40% 35% 31% 5,000 2,602 654 1,401 20% 20% 0 0% 2009 2010 2011 2012 2013 2014F 0% Total size (LHS) Growth y-o-y (RHS)
News Video Music Games
Source: PEdata.cn, ChinaVenture, DBS Vickers Readers E-commerce
Horizontal and vertical expansions. In our view, M&As and network Social strategic partnerships could happen in two dimensions – Note: Penetration is defined by number of users that have used the horizontal and vertical. Horizontal expansions enable internet relevant app, divided by mobile internet user population in China. players to quickly establish presence in new segments that are Source: EnfoDesk crucial to the ecosystem, creating synergies with their core businesses. At the same time, internet players could leverage on vertical expansions to enhance their management of the value chains, and ultimately improve service quality to the customers.
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Industry Focus China Internet Sector
Based on our analysis, Tencent has concluded >30 major M&As Tencent: An active acquirer. Building on its strengths in user since 2012, mainly in online games, O2O (online-to-offline) traffic and solid net cash position, Tencent has become the and e-commerce services. We believe this is in line with the most active acquirer among BAT. The company has accelerated company’s strategy to enhance its competitive advantage in its pace of M&As and strategic cooperation since 2010, and online gaming, expand horizontally into new segments to form has launched the “Tencent Industry Win-Win Fund ( 騰訊產業 the ecosystem, and strengthen its vertical control on the e- )”in 2011, focusing on both acquisitions and strategic 共贏基金 commerce value chain. investments.
Brief list: Major M&As by Tencent (since 2012)
Date Deal Category Investment size
2014: J un 2014 24% stake in 58.com (58同城; NYSE: WUBA) LBS >US$830m May 2014 11% stake in NavInfo (四維圖新; 002405.CH) LBS RMB1.2bn May 2014 c.18% stake in J D.com E-commerce n.a. Mar 2014 15% stake in Leju LBS US$180m Mar 2014 28% stake in CJ Games Games KRW533bn Feb 2014 20% stake in Dianping.com (大眾點評網 ) LBS c.US$400m Feb 2014 Increased its stake in LY.com (同程網) to c.20% Travel n.a. J an 2014 c.12% stake in China South City (華南城; 1668.HK) Logistics c.HK$2.3bn J an 2014 Increased its stake in Didi Taxi (滴滴打車) LBS Tencent invested a total of US$45m 2013: Sep 2013 c.37% stake in Sogou (搜狗) Search RMB3.2bn J ul 2013 c.6% stake in Activision Blizzard (NASDAQ: ATV I) Games US$1.4bn J un 2013 Raised stake in Cheetah Mobile (NYSE: CMCM) by 8ppts to 18% Mobile software RMB290m 2012: Nov 2012 Invested in Meilishuo E-commerce n.a. J un 2012 48% stake in Epic Games Games RMB2.1bn May 2012 Acquired Yixun.com (易迅網 ) E-commerce c.RMB500m Apr 2012 Acquired 14% stake in Kakao Corp (now Daum Kakao) Social network RMB401m
Note: For the detailed list of major acquisitions by Tencent, pls refer to Appendix.
LBS: Location-based Services, an important part of O2O that rides on the GPS positioning system.
Source: Companies, PEdata.cn, media websites, DBS Vickers
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Industry Focus China Internet Sector
In e-commerce, Tencent has formed strategic cooperation with Ecosystem is taking shape. Mr. Huateng Ma, founder and JD.com since Mar 2014, and it has invested in Meilishuo ( Chairman of Tencent, has mentioned that the company’s core 美麗 ), the shopping guide service provider. The company has also value lies in building a platform that connects large number of 說 invested in China South City (1668 HK) to beef up its presence users with service providers. With this aim, Tencent has in logistics. Tencent acquired stakes in Sogou ( , online developed open systems such as QQ and Weixin, and is 搜狗 search engine), and has developed integrated search services to collaborating with 3rd-party players to establish a connect its key platforms such as Weixin and QQ. Besides, comprehensive ecosystem. To ensure service quality, Tencent Tencent has invested in several LBS service providers including controls key sections in the ecosystem (e.g. online payment Dianping.com ( ) in restaurant rating, Didi Taxi ( channels, social networking and search functions), and 大眾點評 滴滴打 ) in online cab booking, 58.com (58 , NYSE: WUBA) in cooperates with strong players in other sections, including e- 車 同城 online classified ads, Leju ( , NYSE:LEJU) in online real commerce, travel, logistics and O2O / LBS (location-based 樂居 estate services, and NavInfo (002405.CH) in online map data. services). Coupled with rising 3rd-party contributions in In addition, Tencent has invested in LY.com ( ) and Tencent’s core business of online gaming, the company’s 同程旅游 eLong ( ), the online travel / ticketing service providers. desired ecosystem is gradually taking place. 藝龍網
Cross-sector expansion by Tencent
Social Online Online E- Travel LBS Search Logistics network games advertising commerce
Note: LBS – Location-based services. Yixun.com could be gradually incorporated into JD.com.
Source: Companies, DBS Vickers
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Industry Focus China Internet Sector
That said, we believe the “Tencent Family” does not have Aiming to fulfill users’ needs. Thanks to its portability, users presence in sports and vehicle-related segments, and Tencent could access mobile internet for >10 hours per day, which is 5- could potentially cooperate with quality players in these 10x the amount of time users spend on the PCs. Hence, we segments, in our view. We believe it could likely include online believe mobile internet could better fulfill people’s needs in / offline sports event organizers (e.g. Wisdom Group, 1661 HK), almost every aspect of their daily lives. By grouping services wearable sports device operators, and online vehicle sales / ads offered by the “Tencent Family” (i.e. Tencent and its strategic platforms (e.g. Autohome and BitAuto). partners) according to different needs of an individual, we can see that the “Tencent Family” could already fulfill user demand in social networking, e-commerce, job hunting, housing, entertainment and travel, etc.
“Tencent family” could cover most of users’ needs
Food S ocial network Restaurant: Dianping.com Weixin, QQ Healthcare Guahao.com (掛號網), DXY.cn S hopping (丁香園) JD.com, Meilishuo, Yixun.com
Ba nking / Investment Jobs 58.com Webank (微眾銀行)
Housing Entertainment Leju (樂居), 58.com Tencent Games, Tencent Video User Vehicle Travel Sports LY.com (同程), eLong (藝龍) Any ? Any ?
Source: Companies, DBS Vickers
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Industry Focus China Internet Sector
(A) Horizontal expansion – Synergies emerging
its partners, we believe the company’s horizontal expansion to Treasures of large user base. Sitting on >800m active users for other key segments could create much synergies. Besides, its multiple platforms including QQ, Weixin and Qzone, many of Tencent’s active users (especially for QQ) are based in Tencent has large user traffic with good monetization potential. low-tier markets, helping its partners to expand into these As such, the company aims to become the platform operator, areas. providing user traffic and key services (e.g. online payment) to its cooperators. Since Tencent’s size of MAU is >2x bigger than
Tencent’s large user base to benefit its strategic partners
Tencent: Target: To form a strong social circle.
58.com JD.com >200m >80m QQ Sharing 820m LY.com c.1m Leju >21m Dianping >130m Weixin & Wechat 468m Sogou c.260m
Note: Based on monthly active user (MAU) numbers in 3Q14.
Leju & LY.com: Mobile MAU.
Source: Companies, iResearch, DBS Vickers
Aiming to create the “Super App”. Mainly due to limitation on the screen size, mobile users are likely to concentrate on only a few apps. As such, Tencent targets to add more functions into Weixin and Mobile QQ, so as to improve user stickiness on these apps. For example, Weixin and Mobile QQ could now offer services like taxi bookings, e-commerce, restaurant rating and purchase of travel packages. By incorporating more functions, Weixin and Mobile QQ are on track to become the “Super Apps” that could garner a lot of user attention.
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Industry Focus China Internet Sector
Post-M&A synergies. To create cross-selling opportunities, Service offerings on Weixin & Mobile QQ Tencent would introduce cooperators’ services into its multiple Weixin: Mobile QQ: platforms including Weixin, Mobile QQ and Qzone. In this way, user traffic could be directed to its partners, helping to achieve better monetization.
Take Weixin’s cooperation with LY.com (同程旅游) as an example: Weixin users could access LY.com by clicking the “Air Didi Taxi ticket” button in the “Wallet” page. Users could then view LY.com’s offerings of air tickets and travel packages. After JD.com selecting the desired flights and packages, users could settle Didi Taxi the bills via Weixin Payment (微信支付). The entire process completes with just a few clicks within the Weixin app, and user stickiness towards Tencent’s ecosystem could be Dianping.com enhanced. Meilishuo
LY.com Source: DBS Vickers
Case study: Weixin’s cooperation with LY.com
Search
Weixin Payment LY.com
Source: DBS Vickers
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Industry Focus China Internet Sector
More benefits emerge. Riding on its cooperation with Tencent, LY.com could enjoy strong demand from Weixin users. In Case study: LY.com’s O2O cooperation with Weixin Payment LY.com’s own app, users could also log in with their Weixin / QQ IDs (identifications). This login arrangement not only encourages Weixin / QQ users to visit LY.com, but also facilitates the sharing of customer information between Tencent and its partners.
Besides, the strategic partners have been promoting their collaboration with Weixin and Mobile QQ, to Tencent’s benefits. For instance, LY.com has offered “discounted tickets at RMB1 (1 元門票)” to encourage customers to pay via Weixin Payment. According to media reports, LY.com would be spending c.RMB350m to subsidize c.20m customers this year, and many customers could likely become loyal users of Weixin Payment.
Source: Company websites
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Industry Focus China Internet Sector
(B) Vertical integration – Riding on e-commerce value China B2C e-commerce market share (2013) chain Tencent Joining hands with JD.com. Within the internet sector, we 5.6% believe e-commerce is best-positioned to monetize (i.e. Suning.com generating revenue and profits), given its transaction-based 3.7% business model that naturally involves the payment process. As JD.com Amazon such, Tencent has strived to strengthen its e-commerce 16.4% China 2.0% presence, launching Paipai.com (拍拍網) in 2005, QQ Wanggou (QQ ) in 2011, and acquiring Yixun.com ( ) VIPShop 網購 易迅網 1.9% in 2012. However, Tencent’s e-commerce business has registered slower growth compared to leaders like Alibaba Dang Dang Others 1.6% Group and JD.com, mainly attributable to Tencent’s less Tmall 7.6% GOME aggressive expansion strategy, in our view. 57.7% 1.6% Yihaodian VANCL 1.3% 0.6%
Note: In terms of gross merchandise value (GMV).
Source: iResearch
Realizing that cooperation with leading players could be a better option, Tencent formed strategic cooperation with JD.com in Mar 2014, and Tencent would gradually incorporate its e-commerce businesses (QQ Wanggou, Paipai.com and Yixun.com) with JD.com, in return for c.18% stake in JD.com. In addition, Tencent would provide “Level-1 access” for JD.com from Weixin and Mobile QQ, as well as promotion services from other key platforms such as Qzone and Tencent News.
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Industry Focus China Internet Sector
Tencent family’s e-commerce value chain
arranged by S upplier management JD.com
Weixin Portals JD.com / Meilishuo User traffic Mobile QQ
Payment COD / 3rd-party payment - Weixin Payment, Mobile QQ Wallet, Chinabank Payment
Logistics JD.com / China South City
arranged by After-sales services JD.com
Note: COD - Cash on delivery.
Source: Companies, DBS Vickers
Better supply chain management. Through the integration, JD.com takes over e-commerce operations. Tencent’s QQ Tencent and JD.com could gain valuable access to the entire e- Wanggou (B2C marketplace) and Paipai.com (C2C marketplace) commerce value chain. In particular, JD.com could leverage on had been incorporated into JD.com since 2Q14. Particularly, its established relationship with >6,000 suppliers and >50,000 QQ Wanggou was renamed as “JD Wanggou (京東網購)” in merchants (on its online marketplace) to offer >40m SKUs Sep 2014, and we believe it could be gradually absorbed by (stock keeping units) to Tencent’s users. JD.com, given their similarity in business nature. By acquiring Paipai.com, JD.com could gain valuable access to the C2C Traffic support from Tencent. According to the strategic marketplace business, and compete head-on with Alibaba’s cooperation, Tencent provides “Level-1 access” to JD.com, Taobao (淘寶) platform. from the Weixin and Mobile QQ apps. This means users of Weixin and Mobile QQ could visit JD.com with only 1 click on As for Yixun.com (B2C direct sales arm), JD.com currently owns the apps. Besides, Tencent directs user traffic to JD.com from c.10% stake in Yixun, and has the right to purchase the its other key platforms such as Qzone and Tencent News. remaining stake. Given Yixun’s logistics strength in selective Thanks to Tencent’s support, mobile orders accounted for areas (e.g. Shanghai and Shenzhen), the integration could c.40% of JD.com’s total orders during the “Single’s Day” likely complement JD.com’s existing businesses. promotion in Nov14. In our view, JD.com could benefit substantially from Tencent’s large active user base (820m MAU Overall, we believe the integration with Tencent’s e-commerce for QQ, and 468m MAU for Weixin & WeChat in 3Q14), arm could enhance JD.com’s presence across B2C direct sales, especially over the medium-term. B2C marketplace and C2C marketplace. For the first time, JD.com could have the capability to compete with Alibaba Group across these segments, in our view.
Focusing on user experience. The ultimate goal of Tencent and JD.com’s strategic cooperation is to ensure high level of service
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Industry Focus China Internet Sector
quality to e-commerce customers. In addition to synergies in e- Next step: Internet finance. JD.com aims to develop its finance commerce platforms, Tencent could offer online payment units, and ultimately provides consumer financing (e.g. solutions (e.g. Tenpay, Weixin Payment and Mobile QQ Wallet) consumer credit services and instalments) and supplier that complement well with JD.com’s COD model (cash on financing services (e.g. receivable pledging) to its stakeholders. delivery). Besides, JD.com’s in-house fulfilment operations We believe there could be good synergies between Tencent could provide timely delivery services to its customers. This and JD.com, building on Tencent’s online payment channels could be critical to user experience, especially when large such as Tenpay ( ), Weixin Payment and Mobile QQ amount of parcels are delivered to customers during the peak 財付通 Wallet ( QQ ). Tencent’s corporate customers (e.g. its months for e-commerce (e.g. June and November). 手機 錢包 online ad clients) could also have demand for JD.com’s supplier financing products, in our view. More importantly, Tencent’s Low-tier markets to drive growth. So far, majority of JD.com’s development in internet finance, such as the establishment of sales come from the 1st & 2nd-tier markets in China, and we Webank ( ), could potentially benefit JD.com estimate that sales from the rural areas could account for 深圳前海微眾銀行 over the longer-term. <10% of its overall revenue. Besides difficulties in logistics, user awareness on JD.com could be weaker in the low-tier An empire on three pillars. To sum up, Tencent could benefit markets. Thanks to its large active customer base especially for from its active stance on M&As, as well as subsequent QQ (which is popular in rural areas), we believe Tencent is well- cooperation with its partners to build the ecosystem. With positioned in the low-tier markets, and it could help JD.com to further development in payment and logistics services, we better penetrate these areas. believe the alliance could embrace greater success ahead. By that time, the “Tencent Family” could likely become an Breakdown of mobile internet users in China (1H14) internet empire building on three pillars, namely online gaming, online ads and e-commerce.
4th-tier & below 1st-tier 40% cities 13%
2nd & 3rd- tier cities 47%
Note: In terms of user number.
Source: Enfodesk, DBS Vickers
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Industry Focus China Internet Sector
JD.com: 4Q14 previews. We expect JD.com to achieve Valuations & recommendations RMB32.2bn revenue in 4Q14 (+60% y-o-y), mainly driven by 148% growth in service incomes. Such estimate is in line with Tencent: 4Q14 previews. We expect Tencent to register better company guidance of RMB32-33bn revenue for the quarter. performance in 4Q14, with core profit (non-GAAP) to grow Gross margin could ease to 11% in 4Q14 (vs. 12% for 3Q14), 56% y-o-y to RMB7bn for the quarter (vs. 47% core profit as JD.com could offer greater discounts to gain market share growth in 3Q14). This could mainly attribute to higher mobile during the peak season, especially the “Single’s Day” gaming revenue (c.RMB3bn for 4Q14), as well as robust promotion in Nov14. Coupled with higher marketing expenses, contribution from online ads, thanks to the “Guangdiantong we forecast RMB501m core loss (non-GAAP) for 4Q14. That (廣點通)” ad system. Overall, we expect another quarter of said, we believe the market has priced in JD.com’s loss-making solid growth for Tencent, with better outlook for mobile status in 2014-2015, and strong revenue growth could serve as gaming and online ads (please see p.17 for detailed share price catalyst for the counter (please see p.18 for detailed breakdown). breakdown). Initiate Tencent with BUY rating, and HK$148 TP. Based on our Initiate JD.com with BUY rating, and US$30.8 TP. We believe it estimates, Tencent is currently trading at c.26x 12-month is justified to compare JD.com with other major online direct rolling core PE, or c.0.7x PEG. Given its leading position in sales players, namely VIPShop, China Dangdang and Jumei in online gaming, platform value of Weixin and Mobile QQ, and China, as well as Amazon in the US. Based on consensus good potential in online ads as well as e-commerce, we believe estimates, these players are trading at average 1.5x 12-month Tencent could trade at 0.9x PEG, average valuation for Alibaba rolling P/Sales ratio, which we believe is a reasonable target for and Baidu, the other two internet leaders in China. Our Target JD.com. Hence, our Target Price for JD.com is set at US$30.8, Price is set at HK$148 on 0.9x PEG, or 32x 12-month rolling offering 29% upside. core PE, offering 23% upside to the current share price.
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Industry Focus China Internet Sector
Tencent: 4Q14 & 2014 preview
RMB m 1Q14 2Q14 3Q14 4Q14F 2014F Remark V alue added services (V AS) 14,413 15,713 16,047 16,553 62,726 Expect mobile game revenue to reach c.RMB3bn in 4Q14F (3Q14: RMB2.6bn) Online advertising 1,177 2,064 2,440 2,599 8,280 Mainly driven by video ad and mobile ad, especially performance-based ad in "Guangdiantong" E-commerce transactions 2,524 1,324 459 493 4,800 E-commerce business mostly trasferred to J D.com Others 286 645 862 895 2,688 Revenue 18,400 19,746 19,808 20,540 78,494 Cost of revenue (7,800) (7,574) (7,167) (6,686) (29,227) Gross profit 10,600 12,172 12,641 13,853 49,266 Interest income 375 406 452 500 1,733 Other gains/(losses), net 1,607 691 118 - 2,416 Included disposal gains of e-commerce assets to JD.com Selling & marketing expenses (1,855) (1,973) (1,906) (2,665) (8,399) General & admin expenses (2,937) (3,453) (3,790) (3,949) (14,129) Mainly driven by R&D expenditure Operating profit 7,790 7,843 7,515 7,739 30,887 Finance costs, net (238) (354) (317) (262) (1,171) Share of profit/(losses) of 44 23 (139) (23) (95) associates & J V s Profit before tax 7,596 7,512 7,059 7,455 29,622 Income tax expenses (1,164) (1,686) (1,383) (1,247) (5,480) Noncontrolling interests 25 10 (19) (20) (4) Net profit 6,457 5,836 5,657 6,188 24,138 One-off items (1,263) 38 776 827 378 Mainly included non-cash items such as share-based compensation, amortization of intangibles and impairments Core profit (non-GAAP) 5,194 5,874 6,433 7,015 24,516
Growth (y-o-y): 1Q14 2Q14 3Q14 4Q14F 2014F - V alue added services (V AS) 35% 46% 38% 39% 39% - Online advertising 39% 59% 76% 74% 64% - E-commerce transactions 32% -40% -81% -85% -51% E-commerce business mostly trasferred to JD.com - Others 141% 374% 471% 312% 332% Group revenue 36% 37% 28% 21% 30% Operating profit 54% 72% 56% 63% 61% Profit before tax 49% 63% 46% 57% 54% Net profit 60% 59% 46% 58% 56% Core profit (non-GAAP) 29% 41% 47% 56% 44%
Margins: Gross margin 58% 62% 64% 67% 63% Improving gross margin as e-commerce sales decline (w ith low margins) Operating margin 42% 40% 38% 38% 39% Profit before tax margin 41% 38% 36% 36% 38% Net margin 35% 30% 29% 30% 31% Core net margin (non-GAAP) 28% 30% 32% 34% 31%
Source: DBS Vickers
Page 17
Industry Focus China Internet Sector
JD.com: 4Q14 & 2014 preview
RMB m 1Q14 2Q14 3Q14 4Q14F 2014F Remark Online direct sales 21,781 27,018 27,369 30,210 106,378 Services & others 876 1,595 1,643 1,946 6,060 Support from QQ Wanggou and Paipai.com from JD.com's Strategic Cooperation with Tencent in Mar14 Net revenues 22,657 28,613 29,012 32,156 112,437 Cost of revenue (20,396) (25,458) (25,468) (28,463) (99,784) Gross profit 2,261 3,155 3,544 3,693 12,653 Fulfillment expenses (1,360) (2,002) (2,119) (2,306) (7,787) Marketing expenses (594) (1,066) (880) (1,107) (3,647) Higher marketing expenses in 2Q and 4Q, peak season for e-commerce Technology & (285) (420) (512) (514) (1,731) content expenses General & admin (3,874) (455) (439) (460) (5,228) 1Q14: High share-based payments expenses Loss from (3,852) (788) (407) (694) (5,740) operations Interest income 98 155 198 61 511 Interest expenses (5) (8) (8) (6) (28) Others, net (39) 59 59 1 80 Loss before tax (3,798) (582) (158) (639) (5,177) Income tax expenses 3 (0.4) (6) (0.4) (4) Preferred shares (1,494) (6,464) - - (7,958) Preferred shares of JD.com were redeemed before its IPO. redemption value accretion Attributable loss (5,289) (7,046) (164) (639) (13,139) One-off items 5,208 7,034 535 138 12,916 Mainly included one-off items such as preferred shares redemption value accretion, share-based payments and amortization of intangibles Core profit (non- (81) (12) 371 (501) (223) GAAP)
Growth (y-o-y): 1Q14 2Q14 3Q14 4Q14F 2014F - Online direct sales 63% 60% 57% 56% 59% - Services & others 117% 186% 185% 148% 161% Group revenue 65% 64% 61% 60% 62%
Margins: 1Q14 2Q14 3Q14 4Q14F 2014F Gross margin 10% 11% 12% 11% 11% Operating margin -17% -3% -1% -2% -5% Loss before tax margin -17% -2% -1% -2% -5% Net margin -23% -25% -1% -2% -12% Core net margin (non- -0.4% -0.04% 1% -2% -0.2% GAAP) Source: DBS Vickers
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Industry Focus China Internet Sector
Peers comparison
Mkt PE PE PEG PEG P/Sales P/Sales ROE ROE Currency Price Cap Fiscal 15F 16F 15F 16F 15F 16F 15F 16F Company Name Code Local$ US$m Yr x x x x x x % % HK-listed peers Tencent Holdings*^ 700 HK HKD 119.6 144,468 Dec 26.0 20.2 0.7 0.7 9.0 7.0 32.5 31.2 Hc International 2280 HK HKD 8.17 703 Dec 12.4 8.6 0.3 0.2 3.2 2.5 26.8 29.1 Cogobuy Group 400 HK HKD 4.75 842 Dec 14.9 11.0 0.2 0.3 0.5 0.4 17.0 19.2 Boyaa Interactive Intl. 434 HK HKD 6.01 587 Dec 8.7 6.8 0.3 0.2 2.9 2.2 25.7 26.6 Forgame Holdings 484 HK HKD 14.3 234 Dec 18.2 10.0 n.a. 0.1 1.5 1.3 15.3 29.1 Netdragon Websoft 777 HK HKD 12.8 840 Dec 14.1 12.8 2.2 1.3 4.7 4.2 7.1 7.3 IGG 8002 HK HKD 3.25 574 Dec 6.4 5.0 0.3 0.2 2.3 1.9 27.9 30.7 Haier Electronics* 1169 HK HKD 20.85 7,218 Dec 13.2 11.2 0.6 0.6 0.5 0.5 26.3 24.6 Gome* 493 HK HKD 1.16 2,537 Dec 10.9 9.5 1.6 0.6 0.2 0.2 8.3 9.1 Average 13.9 10.6 0.8 0.5 2.8 2.2 20.8 23.0
US-listed peers Alibaba# BABA US USD 109.89 273,152 Mar 36.2 27.3 1.0 0.8 15.7 12.2 29.0 29.0 J D.Com*^ J D US USD 23.91 33,044 Dec n.a. 158.9 n.a. n.a. 1.2 0.8 (8.1) (4.8) Baidu BIDU US USD 234.74 64,654 Dec 27.5 20.1 0.8 0.6 5.8 4.4 30.0 30.0 VIPShop VIPS US USD 22.17 12,577 Dec 42.2 26.6 0.6 0.5 2.1 1.4 51.1 47.6 China Dangdang DANG US USD 10.09 548 Dec 17.9 14.6 0.1 0.6 0.4 0.3 34.9 39.6 J umei Int'l J MEI US USD 16.45 1,413 Dec 20.2 13.6 0.5 0.3 2.0 1.5 19.2 23.3 Average 28.8 20.5 0.6 0.6 3.8 2.9 26.0 27.5
Global players Amazon.Com AMZN US USD 326.31 151,084 Dec 367.5 96.1 n.a. n.a. 1.4 1.2 13.9 18.9 EBay EBAY US USD 55.02 68,355 Dec 16.8 15.0 1.5 1.3 3.4 3.0 15.7 18.5 Facebook FB US USD 75.46 167,818 Dec 39.6 29.6 n.a. 0.9 9.9 7.5 16.3 21.5 Google 'A' GOOGL US USD 538.59 153,399 Dec 17.7 15.0 1.0 0.8 2.0 1.7 17.3 17.9 Average 24.7 19.9 1.3 1.0 4.2 3.4 15.8 19.2 # FY15: FY16; FY16: FY17
^ Core EPS
Note: We exclude JD.com and Amazon in calculating average PE, as they operate under the direct sales model with low earnings.
Source: Thomson Reuters, *DBS Vickers
Page 19
China / Hong Kong Company Focus
Tencent
Bloomberg: 700 HK Equity | Reuters: 0700.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 December 2014
BUY HK$119.60 HSI : 23,654 Connectivity is king (Initiate Coverage) 12-Month HK$148 Price Target: Being a leader in online gaming, Tencent has actively Reason for Report: Initiate coverage • expanded into mobile games to drive growth Potential Catalyst: Strong mobile game and online ads revenue; M&As Vast user base for its Weixin / Mobile QQ platforms • DBSV vs Consensus: Our FY14F / FY15F net profits are 3% / 2% offers good monetization potential above consensus Strategic cooperation with various partners (e.g. • Analyst JD.com, 58.com and Dianping.com) could create Mark LI CFA, +852 2971 1935 [email protected] greater synergies over the medium-term Initiate with BUY recommendation, and TP of HK$148 • is based on 0.9x PEG (or 32x 12-month rolling core PE) Price Relative HK$ Relative Index 146.1 387 Dominating the online game segment. We like Tencent’s 126.1 337 strong position in online games, especially in the fast- 106.1 287 growing mobile games. Building on its solid track record, 86.1 237 wide game offerings, strong distribution channels and 66.1 187 payment solutions, Tencent has enjoyed good customer 46.1 137 recognition, and has led the industry in monetization. 26.1 87 Dec-10 Dec-11 Dec-12 Dec-13 Dec-14 Riding on the “Super Apps”. Tencent has been successful Tencent (LHS) Relative HSI INDEX (RHS)
with its social network products, particularly Mobile QQ Forecasts and Valuation and Weixin. With MAU of 542m / 468m in 3Q14, the two
FY Dec (RMB m) 2013A 2014F 2015F 2016F apps have become the “Super Apps” that garner a lot of Turnover 60,437 78,494 98,911 127,323 user attention. By offering more services to the large EBITDA 23,218 32,419 42,526 54,101 Pre-tax Profit 19,281 29,622 37,967 49,071 number of users, Tencent could explore even bigger Net Profit 15,502 24,138 30,714 39,697 opportunities in mobile gaming, ads and e-commerce. Core Profit (non- 17,063 24,516 33,401 42,958 GAAP) Joining hands for a better future. In addition to organic Core EPS (RMB) 1.86 2.68 3.65 4.69 growth, Tencent aims to enhance its business outlook via Core EPS (HK$) 2.35 3.38 4.60 5.91 M&As and partnerships. Specifically, we believe its strategic Core EPS Gth (%) 18.9 43.7 36.2 28.6 DPS (HK$) 0.20 0.31 0.39 0.51 cooperation with JD.com could bear fruits over the BV Per Share (HK$) 7.85 10.89 14.75 19.73 medium-term, enabling both companies to enjoy strong e- Core PE (X) 50.9 35.5 26.0 20.2 commerce growth. We initiate coverage on Tencent with a P/Cash Flow (X) 35.7 30.1 24.2 19.0 P/Free CF (X) 43.9 37.2 29.4 22.6 BUY recommendation, and our Target Price of HK$148 EV/EBITDA (X) 35.8 25.4 18.9 14.4 (based on 0.9x PEG or 32x 12-month rolling core PE) offers Net Div Yield (%) 0.2 0.3 0.3 0.4 23% potential upside. P/Book Value (X) 15.2 11.0 8.1 6.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) 31.2 34.9 32.5 31.2 At A Glance 9,367 Earnings Rev (%): New New New Issued Capital (m shrs) Consensus EPS, based on Net Mkt. Cap (HK$m/US$m) 1,120,331 / 144,468 2.57 3.30 4.20 Profit (RMB): Major Shareholders Other Broker Recs: B: 34 S: 1 H: 4 Naspers Limited (%) 34.0
ICB Industry: Technology Ma Huateng (%) 10.3 ICB Sector: Software & Computer Services Zhang Zhidong (%) 6.2 A leading online game operator in China Principal Business: JPMorgan Chase & Co. (%) 5.0
Free Float (%) 44.5 Source of all data: Company, DBSV, HKEX Avg. Daily Vol.(‘000) 19,842
www.dbsvickers.com ed-TH & JS / sa-CW
Industry Focus China Internet Sector
INVESTMENT THESIS
Profile Rationale Tencent stands as a dominant leader in China’s online game Leading online game player industry, with rising exposure to the fast-growing mobile game • Tencent enjoys leading positions in client games and segment. It also rides on large active user base for Weixin and web games, and it has increasingly focused on the Mobile QQ platforms, offering good monetization potential. mobile game segment leveraging on its Weixin and Mobile QQ platforms.
Online ads segment drives growth • Leveraging on its “Guangdiantong” ads system, Tencent could offer more performance-based ads on its key platforms, so as to enhance sales growth and profitability ahead.
Valuation • Risks We benchmark our Target Price for Tencent at 0.9x PEG User experience is the key (implying 32x 12-month rolling core PE), the average valuation • Potential downside could include unsuccessful for Alibaba and Baidu, the other two internet leaders in China. monetization efforts on Weixin and Mobile QQ that could affect user experience.
Source: DBS Vickers
Page 21 Industry Focus China Internet Sector
SWOT Analysis
Strengths Weakness
Leading position in online games with rising mobile Its e-commerce operations would be gradually exposure absorbed by JD.com following their strategic cooperation in Mar14, while Tencent could have Traffic advantage thanks to its large active user base limited influence on JD.com Multiple social network platforms could enhance customer recognition
Solid financial position facilitates M&A initiatives
Opportunities Threats
Rising synergies between mobile games, online ads and Slowdown in online game revenue social networks Unsuccessful monetization on Weixin and Mobile QQ Licensed games’ contributions could improve return on investment and reduce execution risk that could affect user experience
Performance-based ads (“Guangdiantong”) could enhance growth in online ads
Greater synergies with strategic cooperators such as JD.com, 58.com, Dianping.com and LY.com
Efforts in developing mobile payment systems to pay off
Source: DBS Vickers
Page 22 Industry Focus China Internet Sector
Business review
A leader in online gaming. Tencent stands as a dominant player Mobile game market share in China (2Q14) in China’s online gaming industry, with 50% market share in client games ( ), 36% share in web games, and 39% 客戶端游戲 Lilith Games share in mobile games during 2Q14 (source: Enfodesk). For (莉莉絲游戲) 9M14, Tencent reported online game revenue of RMB33bn, up 4% 5agame ( ) 40% y-o-y, and we believe it continues to outperform the 愛樂遊 Tencent 4% overall market. Games Babeltime 39% (巴別時代) In the more mature client game / web game segments, Tencent 3% has leveraged on the success of key products such as “Crossfire Locojoy ( )”, “League of Legends ( )” and “Blade & (卓越游戲) 穿越火線 英雄聯盟 3% Soul (劍靈)”. Coupled with strong user recognition on its game platforms, we believe Tencent could gain market share in client Linekong Others game / web game segments ahead. (藍港在線) 42% 3% Positioning for mobile games. The mobile game segment has YH (銀漢游戲) been the bright spot in online games, and the mobile game 2% market size grew 83% y-o-y to RMB12.5bn in 1H14 (or +56% h-o-h). Being the leader in this segment, Tencent has launched Note: Market share for mobile game developers. successful mobile games such as “Timi series ( )” and 天天系列 Source: Enfodesk “Everybody series (全民系列)”. According to iResearch, Tencent’s mobile games took 9 of the top 10 places on the Apple iOS platform during 2Q14, and 6 of the top 10 places on the Android platform. We believe Tencent could register c.RMB10bn revenue in mobile games this year, representing >350% growth.
Top mobile games in China (2Q14)
Name Company Daily Name Company Daily appearance appearance Apple iOS platform: Android platform: 1 Timi Run Everyday Tencent 295,000 1 Timi Run Everyday Tencent 745,000 ( ) ( ) 天天酷跑 天天酷跑 2 Timi Speed Ev ery day Tencent 286,000 2 Space-time Hunters Huayi Brothers 717,000 ( ) ( ) ( ) 天天飛車 時空獵人 華誼兄弟 3We Fly Tencent 261,000 3 Fight the Landlord Tencent 644,000 ( ) ( ) 全民飛機大戰 歡樂鬥地主 4Rhythm Master Tencent 258,000 4 Rhythm Master Tencent 610,000 ( ) ( ) 節奏大師 節奏大師 5 Timi Match Ev ery day Tencent 250,000 5 Timi Speed Ev ery day Tencent 573,000 ( ) ( ) 天天愛消除 天天飛車 6 Fight the Landlord Tencent 188,000 6 We Fly Tencent 451,000 ( ) ( ) 歡樂鬥地主 全民飛機大戰 7 QQ Fight the Landlord Tencent 175,000 7 Dota Hero Longtu Game 396,000 (QQ ) ( ) ( ) 歡樂鬥地主 刀塔傳奇 龍圖游戲 8 Timi Link Ev ery day Tencent 149,000 8 Timi Match Everyday Tencent 355,000 ( ) ( ) 天天連萌 天天愛消除 9We Fight Tencent 123,000 9 I Am MT Online Locojoy 336,000 ( ) ( MT Online) ( ) 天天炫鬥 我叫 樂動卓越 10 Space-time Hunters Huayi Brothers 103,000 10 Fight the Landlord Boyaa Interactive 333,000 ( ) ( ) ( ) ( ) 時空獵人 華誼兄弟 博雅鬥地主 博雅互動 Source: iResearch
Page 23 Industry Focus China Internet Sector
Social network rides on vast user base. Tencent’s key competitive strength lies in its large active user number. The Penetration for social network websites in China (1H14) number of monthly active users (MAU) for QQ and Weixin ( ) 微信 57.3% reached 820m / 468m in 3Q14, respectively. In a recent CNNIC 60% survey, >65% of respondents have been using QQ and Weixin, 50% 40% 57% of respondents have been using Qzone (QQ 空間), indicating Tencent’s dominant position in social networks. 30% Coupled with the company’s other platforms such as Pengyou 20% 16.4%14.8% ( ), Tencent has huge user traffic to be better utilized over 10.2% 9.3% 8.5% 8.3% 朋友網 10% 6.1% the medium-term. 0% ) ) ) ) Heading into the mobile era, Tencent aims to unlock the ) 啪啪 空間 微視 monetization potential of its large number of social network 豆瓣 ) 朋友網 人人網 ) users (i.e. generating greater revenues and profits). The ) 開心網 Papa ( Papa company would further strengthen e-commerce, LBS (location- Weishi ( Douban ( Kaixin ( Renren ( based services) and online payment functions for its Weixin and Qzone (QQ Pengyou ( Mobile QQ ( QQ) apps, to fulfil user demand.
手機 51.com (51 游戲社區 Note: Percentage of respondents who had used the website. Qzone, Penetration for instant messengers in China (1H14) Pengyou and Weishi are operated by Tencent; Kaixin is invested by Tencent. 78% 80% Source: CNNIC survey (sample size =30,000) 70% 65% 60% Synergies with mobile games. Tencent has provided easy access 50% 21% 15% to mobile games on its Weixin and Mobile QQ apps, and users 40% 10.2% 30% 9.8% could enter the game center with just 1 click in these apps. 5.6% 20% 2.9% 2.7% 1.8% Users’ game scores are also ranked, allowing them to compare 4.2% 10% 2.7% 1.8% 0.6% their scores with friends. Thanks to these initiatives, popularity 0% of mobile games on Weixin and Mobile QQ has improved ) ) ) ) )
YY significantly, and >60% of the top mobile games in 2Q14 were QQ Line 來往 飛信 ) 易信 米聊 陌陌 Skype launched on these apps. Weixin Whatsapp Yixin ( Yixin Feixin ( Miliao ( Given Weixin and Mobile QQ’s social networking nature, as well Ali Wangwang Laiwang ( Immomo (
Renren Desktop as users’ fragmented time spent on these apps, casual games 語音 (QT Talk QQ have been welcomed by the customers. Average revenue per user (ARPU) of Weixin / Mobile QQ games was RMB100- Note: Percentage of respondents who had installed the app. QQ, RMB110 in 3Q14 (vs. >RMB200 ARPU for other games). With Weixin and QQ Talk are operated by Tencent. improving graphics for mobile devices and development in Source: CNNIC survey (sample size =30,000) online payment systems, we believe Tencent could potentially raise ARPU for its Weixin / Mobile QQ games ahead.
Page 24 Industry Focus China Internet Sector
Preparing for the next leap. Following decent mobile game Mobile game entrances on Weixin & Mobile QQ performance in 1H14, Tencent believes its mobile game revenue Weixin: Mobile QQ: could normalize in the near-term, as it could take some time to beef up licensed games’ revenue contributions. 3Q14 was a bit slow, with mobile game revenue down 13% q-o-q to RMB2.6bn, mainly due to delayed game upgrades at Weixin and Mobile QQ platforms. We believe this could be mostly one- off, and mobile game revenue could rebound to c.RMB3bn for Game 4Q14F. As revenue from licensed mobile games picks up, we expect Tencent’s mobile game revenue to further accelerate in 2015.
Quarterly mobile game revenue
RMB bn Game 3.5 250% 200% 3.0 3.0 3.0 2.6 200% 2.5 150% 2.0 1.8 Source: DBS Vickers 100% 1.5 67% 50% 1.0 -13% 0.6 15% 0% Increasing focus on licensed games. Aimed to be the leading 0.5 platform for both self-developed games and licensed games, 0.0 -50% Tencent has encouraged licensed mobile games to be launched 4Q13 1Q14 2Q14 3Q14 4Q14F on Weixin and Mobile QQ. Some of the licensed games have Mobile game revenue (LHS) Growth q-o-q (RHS) been quite successful on these apps. For instance, “Thunder Fighter (雷霆戰機)”was launched on Weixin and Mobile QQ in Source: Company, media websites, DBS Vickers Feb 2014, and it had generated c.40m user accounts in about 2 months. “MoDoo Marble (天天富翁, developed by CJ Games)” Mobile games could account for c.23% of Tencent’s online became the top mobile game on the iOS platform in Aug14, game revenue, or c.13% of its overall revenue this year (as per and “Candy Crush Saga” (developed by King Digital) reached our estimates), and we believe accelerating growth momentum the top in Sep14. in mobile games could enhance Tencent’s overall revenue growth ahead. Riding on licensed games, Tencent could widen its game offerings to customers, and the company could still enjoy good margins as the channel provider. According to industry sources, Tencent could receive c.70% of gross revenue of the licensed mobile games, with the rest going to game developers. Operating under this model, Tencent could save most of the development costs, and lower the execution risk. Hence, Tencent is able to focus on promoting licensed games and benefit both parties, in our view.
Page 25 Industry Focus China Internet Sector
Online ads: Emerging contributor. Tencent is relatively new to On its mobile platforms such as Mobile Qzone, Tencent News the online ad segment, and its market share was merely 5% in and Tencent Video, Tencent has adopted various ad formats 2Q14, much lower than Baidu (32%) and Alibaba Group (25%). including banner ads ( ), splash screen ads ( ) Despite its smaller presence, we believe Tencent has good 橫幅廣告 開屏廣告 and overlay ads ( ). Coupled with Tencent’s PC-based potential to catch up with the leaders in the burgeoning mobile 橫屏廣告 platforms such as QQ.com, Qzone, Microblog and QQ Game ads market. According to iResearch, the mobile ads market is Platform, ad clients could tap their target audience with both expected to reach RMB27.3bn this year, up 76% y-o-y. Its PC ads and mobile ads. Besides, Tencent has leveraged on CAGR for 2014F-2017F could also stand at 67%. Thanks to its major public events, such as the 2014 FIFA World Cup, to mobile games and social network products with good user launch promotion campaigns on Tencent News, Tencent Video, recognition, Tencent could launch more ads on these platforms Weixin and Mobile QQ, helping ad clients to catch attention of to generate ad revenue. The company has also implemented a their target audience. joint platform advertising strategy (coordinated by “Guangdiantong” ad system), to increase its bargaining power as well as effectiveness of the ads. Tencent’s online ad offerings
Online ad market share in China (2Q14)
Tencent, 4.6% Google China, 4.2% Sohu, 3.5%
Qihoo 360, 3.0%
Alibaba Group, Splash Sina, 2.5% Banner ads 25% screen ads
Appstore Youku Tudou, ads Overlay 2.4% ads Baidu, 32%
Source: iResearch
Source: Company, media websites
Page 26 Industry Focus China Internet Sector
Performance-based ads gaining traction. Traditionally, online E-commerce: Joining hands with JD.com. Tencent formed ads were priced according to time or number of showcases. strategic cooperation with JD.com in Mar 2014, and provides Pricing models of these ads were predominantly CPT (cost per “Level-1 access” to JD.com on Weixin and Mobile QQ apps. In time) and CPM (cost per mille). Seeing ad clients’ rising demand this way, users of Weixin and Mobile QQ can access JD.com’s for performance-based ads (i.e. ads are priced according to their webpage by clicking only once on their apps. Besides, Tencent effectiveness), Tencent launched the “Guangdiantong (廣點 would direct user traffic to JD.com from other platforms such as 通)”online ad system in Jun 2013, and combined its ad Qzone and Tencent News. Tencent would also dispose QQ resources on multiple platforms into the system. Wanggou (B2C online marketplace) and Paipai.com (C2C online marketplace), as well as 10% stake of Yixun.com (B2C direct Together, Tencent’s platforms have >800m active users, and sales platform) to JD.com. JD.com would have the right to buy >10bn user visits per day. “Guangdiantong” uses CPC (cost per out Yixun.com at its fair value or RMB800m, whichever is higher. click) and CPA (cost per action) as major pricing models, helping In return, Tencent acquires c.18% stake in JD.com (post IPO), to align interests of Tencent and its ad clients. Besides, and receives RMB631m in cash from JD.com. “Guangdiantong” adopts a real-time bidding system for ad clients, helping Tencent to enjoy better pricing for its prime ad Following the cooperation, most of Tencent’s e-commerce resources. operations would be incorporated into JD.com. Thanks to Tencent’s support on user traffic and key processes including Since its launch, “Guangdiantong” has helped to drive ad online payment channels, we believe JD.com would have better revenues for Tencent. For instance, upon purchasing Tencent’s potential to compete with Alibaba Group in e-commerce. As for ad resources via “Guangdiantong”, Xiaomi (小米) launched its Tencent, it could leverage on JD.com’s e-commerce success, RedMi mobile phones at Qzone last year. Over 7m customers and generate greater synergies with its core businesses such as placed orders for RedMi, and 100,000 units were sold out online gaming and online ads. within 90 seconds of the launch. Vanke (萬科) spent only a small sum of RMB30,000 on “Guangdiantong” to send ad messages via QQ to selective customers, and it generated >20m user views and RMB4m property sales, implying good return on the investment.
Page 27 Industry Focus China Internet Sector
Growth drivers Mobile game market size in China
Mobile gaming to outperform. We believe the mobile game RMB bn market in China bears great potential, especially with 45 42.7 180% improvements in mobile games’ graphics and online payment 40 156% 160% channels. According to Enfodesk, the mobile game market in 33.8 35 140% China could achieve 45% CAGR for 2013-2016F, to reach 30 120% RMB42.7bn. Given Tencent’s steady performance of self- 23.8 developed games and rising contributions from licensed games, 25 100% 20 71% 80% we believe the company will be able to outperform the market 13.9 in the future. 15 37% 42% 60% 10 26% 40% 4.0 5.4 Regarding monetization, mobile game ARPU for Tencent 5 20% reached RMB100-RMB110 in 3Q14, versus average of 0 0% >RMB200 ARPU for its PC-based games, based on our estimates. 2011 2012 2013 2014F 2015F 2016F As mobile games progressively integrate with social network Market size (LHS) Growth y-o-y (RHS) platforms such as Weixin and Mobile QQ, and online payment methods (e.g. Weixin Payment and Mobile QQ Wallet) become Source: Enfodesk more mature, we believe Tencent’s ability to raise ARPU for its mobile games would improve further. Creating the ecosystem. Tencent aims to develop Weixin and Mobile QQ into the “Super Apps” that could attract as much user attention as possible. Hence, we believe Tencent would look to add new functions into these apps, so as to improve user experience. When user stickiness is established, Tencent could start the monetization process, such as recommendation of mobile games, online ads and e-commerce.
To ensure that user experience is not affected by too much ads and promotions, Tencent is likely to monetize its franchise step- by-step. For instance, the company launched online ads on Weixin in May 2014, and users could view the ads in articles within Weixin’s Public Accounts (公眾帳號). Online ads have done well on other platforms such as Qzone, and have become the key driver for Tencent’s ads business. As such, we believe ads on Weixin also have good potential over the medium-term.
Page 28 Industry Focus China Internet Sector
Development of mobile ads
Source: Company
RMB11,944bn, and Tencent’s market share is relatively low at Multiple propellers for online ads. In addition to advertising c.20% (vs. Alibaba’s c.50% share). As Tencent incorporates potential on Weixin and Mobile QQ, we believe more synergies more payment-related functions to its Weixin / Mobile QQ could be created across Tencent’s multiple platforms, thanks to ecosystem (e.g. game centers, e-commerce, taxi booking, and better coordination under “Guangdiantong” ad system. For catering), the company could be a long-term winner in the instance, we have seen more offerings of video clips on Tencent mobile payment segment. News, and video ad clients could tap into the news audience in this way. At the same time, Tencent Video could cover more In addition, Tencent has cooperated with Baiyeyuan Investment customers, increasing its bargaining power versus ad clients. ( ) and Li Ye Group ( ) to establish Webank Online ads only account for c.11% of Tencent’s total revenue 百業源投資 立業集團 ( ), in which Tencent has c.30% stake. this year, and Tencent’s c.5% ad market share is significantly 深圳前海微眾銀行 Webank was approved by China Banking Regulatory below Baidu (32%) and Alibaba Group (25%). As such, we Commission (CBRC) in July 2014, and it is likely to commence believe online ads could be among the key drivers for Tencent operations in early 2015. Combining Webank’s financial ahead. product offerings with Tencent’s strong online presence, we believe Tencent could benefit as a pioneer in internet finance. Internet finance is the next step. Since the launch of its mobile payment tool “Mobile QQ Wallet” in Mar 2014, Tencent has Overseas expansion. Tencent has implemented a two-way organized promotion campaigns to enhance user awareness of expansion strategy in overseas markets. On one hand, WeChat its payment channels. For instance, those using “Mobile QQ (overseas version of Weixin) has penetrated overseas markets Wallet” to pay their mobile phone bills could receive subsidies especially South-east Asia. According to media reports, from Tencent. As a result, the company has seen robust user WeChat’s overseas users have exceeded 200m this year growth for both “Mobile QQ Wallet” and “Weixin Payment” (implying >100% growth), and we believe it would become an this year. iResearch expects the mobile payment market in important MAU driver ahead. China to achieve 60% CAGR for 2014-2017 to reach
Page 29 Industry Focus China Internet Sector
On the other hand, Tencent has invested in a series of Tencent has not started the monetization process given its focus international internet companies, such as CJ Games, Activision on user experience. Blizzard, Epic Games and Daum Kakao (previously Kakao Corp.). Tencent’s overseas acquisitions have created good synergies Looking into the upcoming years, we believe mobile game with its core businesses (especially online games and social would gather steam again on accelerated game launches, networks), and we think it is a wise way to swiftly build up its especially for licensed games. Online ads could be well overseas presence. supported by further ramp-up of “Guangdiantong” ad system, and e-commerce may be less of a drag on an easier base. We Better years ahead. Overall, Tencent’s near-term performance are encouraged to see Tencent’s efforts in monetizing its could likely be dragged by mild revenue growth for mobile strengths in online gaming, social networks and online ads, and games, and decline in e-commerce sales following disposal of we believe rising synergies with JD.com would allow both most e-commerce operations to JD.com. Besides, many new parties to become strong e-commerce players, and thus functions have just been added to Weixin and Mobile QQ, and enhance Tencent’s medium-term outlook.
Page 30
Industry Focus China Internet Sector
Valuation & recommendation In view of Tencent’s leadership in online gaming, platform value with QQ and Weixin’s large user base, as well as good potential Trading at a discount to Alibaba and Baidu. As per our in online ads and e-commerce (cooperating with JD.com), we estimates, Tencent is currently trading at c.26x 12-month rolling believe it is justified to compare Tencent’s valuation with core PE, or c.0.7x PEG. The stock has been trading between 25x Alibaba Group and Baidu, the internet leaders in China. to 35x rolling core PE this year, as investors value its decent According to consensus, Alibaba is trading at c.39x 12-month mobile game development and dominant positions for Weixin rolling PE or c.1.0x PEG, and Baidu trades at c.28x rolling PE or and Mobile QQ. c.0.9x PEG. Hence, we believe 0.9x PEG is a reasonable target multiple for Tencent.
Core PE band chart for Tencent (since 2013) As a cross-check, global internet leaders such as Google and eBay on average trades at c.1.3x PEG, given their technological Share Price (HK$) advantages and international exposure. Tencent’s 0.9x target 200 35x PEG could be justified, in our view. 180 160 31x Initiate coverage with BUY and TP of HK$148. At 0.9x PEG, the 140 27x target PE multiple for Tencent is 32x 12-month rolling core PE. 120 22x Our Target Price is hence set at HK$148, offering 23% upside. 100 18x We initiate coverage on Tencent with BUY recommendation. 80 60 Key risks and concerns. In our view, downside risk may come 40 from slowdown in game revenue especially for client games and 20 web games, unsuccessful monetization efforts on Weixin and 0 Mobile QQ, and rising content costs for video and games amid intensifying competition. Jul-13 Jul-14 Jan-13 Jan-14 Jan-15 Oct-13 Oct-14 Apr-13 Apr-14 Apr-15 Source: Thomson Reuters
Core PE band chart PB band chart
Share Price (HK$) Share Price (HK$) 250 300 14.8x 38x 250 200 11.5x 31x 200 150 24x 8.2x 150 100 17x 100 5.0x 50 9x 50 1.7x 0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
Page 31
Industry Focus China Internet Sector
Key Assumptions FY Dec 2012A 2013A 2014F 2015F 2016F
MAU of QQ 798.2 808.0 818.7 828.4 837.2
Smart device MAU of QQ 244.8 426.0 599.0 720.6 779.2
Combined MAU of 160.8 355.0 547.1 754.2 897.1 Weixin & Wechat
Segmental Breakdown (RMB m) FY Dec 2012A 2013A 2014F 2015F 2016F Revenues (RMB m) Value added services 35,718 44,985 62,726 81,191 101,507 (VAS) Online advertising 3,382 5,034 8,280 12,818 18,086 E-commerce transactions 4,428 9,796 4,800 0 0 Others 366 622 2,688 4,902 7,730 Total 43,894 60,437 78,494 98,911 127,323 Gross profit (RMB m) Value added services 23,654 29,601 43,908 56,834 71,562 (VAS) Online advertising 1,649 2,257 3,961 6,131 8,742 E-commerce transactions 236 557 0 0 0 Others 148 244 1,398 2,294 3,618 Total 25,687 32,659 49,266 65,259 83,922 Gross profit Margins (%) Value added services 66.2 65.8 70.0 70.0 70.5 (VAS) Online advertising 48.8 44.8 47.8 47.8 48.3 E-commerce transactions 5.3 5.7 0.0 N/A N/A Others 40.4 39.2 52.0 46.8 46.8 Total 58.5 54.0 62.8 66.0 65.9 Source: Company, DBS Vickers
Page 32 Industry Focus China Internet Sector
Income Statement (RMB m) Margins Trend FY Dec 2011A 2012A 2013A 2014F 2015F 2016F 42.0% Revenue 28,496 43,894 60,437 78,494 98,911 127,323 40.0% Cost of Goods Sold (9,928) (18,207) (27,778) (29,227) (33,652) (43,401) 38.0% Gross Profit 18,568 25,687 32,659 49,266 65,259 83,922 36.0% Other Opng (Exp)/Inc (6,062) (9,897) (13,727) (19,809) (26,565) (34,358) 34.0% Operating Profit 12,506 15,790 18,932 29,457 38,694 49,564 32.0% Other Non Opg (Exp)/Inc 0 0 0 0 0 0 30.0% Associates & JV Inc (190) (80) 171 (95) (76) (61) 28.0% 26.0% Net Interest (Exp)/Inc 504 488 1,230 562 1,705 2,524 24.0% Dividend Income 16 407 509 76 331 305 2012A 2013A 2014F 2015F 2016F
Exceptional Gain/(Loss) (737) (1,554) (1,561) (378) (2,687) (3,261) Operating Margin % Net Income Margin % Pre-tax Profit 12,099 15,051 19,281 29,622 37,967 49,071 Tax (1,874) (2,266) (3,718) (5,480) (7,214) (9,323) Minority Interest (22) (53) (61) (4) (39) (51) Preference Dividend 0 0 0 0 0 0 Net Profit 10,203 12,732 15,502 24,138 30,714 39,697 Core Profit (non-GAAP) 10,940 14,286 17,063 24,516 33,401 42,958 EBITDA 14,271 18,738 23,218 32,419 42,526 54,101
Growth Revenue Gth (%) 45.0 54.0 37.7 29.9 26.0 28.7 EBITDA Gth (%) 30.1 31.3 23.9 39.6 31.2 27.2 Opg Profit Gth (%) 23.7 26.3 19.9 55.6 31.4 28.1 Net Profit Gth (%) 26.7 24.8 21.8 55.7 27.2 29.2
Margins & Ratio Gross Margin (%) 65.2 58.5 54.0 62.8 66.0 65.9 Opg Profit Margin (%) 43.9 36.0 31.3 37.5 39.1 38.9 Net Profit Margin (%) 35.8 29.0 25.6 30.8 31.1 31.2 ROAE (%) 40.6 36.5 31.2 34.9 32.5 31.2 ROA (%) 22.0 19.3 17.0 18.7 18.3 19.0 ROCE (%) 29.5 27.0 23.1 24.8 23.6 23.7 Div Payout Ratio (%) 8.2 8.7 9.5 9.5 9.5 9.5 Net Interest Cover (x) NM NM NM NM NM NM Source: Company, DBS Vickers
Page 33 Industry Focus China Internet Sector
Interim Income Statement (RMB m) FY Dec 1H2012 2H2012 1H2013 2H2013 1H2014
Revenue 20,175 23,719 27,931 32,505 38,146 Cost of Goods Sold (8,148) (10,060) (12,544) (15,234) (15,374) Gross Profit 12,027 13,659 15,388 17,271 22,772 Other Oper. (Exp)/Inc (4,144) (5,344) (5,895) (7,323) (9,145) Operating Profit 7,883 8,315 9,493 9,948 13,627 Other Non Opg (Exp)/Inc 0 0 0 0 0 Associates & JV Inc (12) (69) 151 21 67 Net Interest (Exp)/Inc 178 310 532 697 189 Exceptional Gain/(Loss) (618) (937) (466) (1,095) 1,225 Pre-tax Profit 7,431 7,620 9,710 9,571 15,108 Tax (1,358) (908) (1,955) (1,763) (2,850) Minority Interest (23) (30) (31) (30) 35 Net Profit 6,050 6,682 7,724 7,778 12,293 Core Profit (non-GAAP) 6,667 7,619 8,190 8,873 11,068
Growth Revenue Gth (%) N/A N/A 38.4 37.0 36.6 Opg Profit Gth (%) N/A N/A 20.4 19.6 43.5 Net Profit Gth (%) N/A N/A 27.7 16.4 59.2
Margins Gross Margin (%) 59.6 57.6 55.1 53.1 59.7 Opg Profit Margin (%) 39.1 35.1 34.0 30.6 35.7 Net Profit Margin (%) 30.0 28.2 27.7 23.9 32.2
Source: Company, DBS Vickers
Page 34 Industry Focus China Internet Sector
Quarterly Income Statement (RMB m) FY Dec 2Q2013 3Q2013 4Q2013 1Q2014 2Q2014 3Q2014
Revenue 14,384 15,535 16,970 18,400 19,746 19,808 Cost of Goods Sold (6,590) (7,036) (8,198) (7,800) (7,574) (7,167) Gross Profit 7,794 8,499 8,772 10,600 12,172 12,641 Other Oper. (Exp)/Inc (3,081) (3,516) (3,807) (4,448) (4,697) (4,802) Operating Profit 4,713 4,983 4,965 6,152 7,475 7,839 Other Non Opg (Exp)/Inc 0 0 0 0 0 0 Associates & JV Inc 31 39 (18) 44 23 (139) Net Interest (Exp)/Inc 338 314 383 137 52 135 Exceptional Gain/(Loss) (472) (504) (591) 1,263 (38) (776) Pre-tax Profit 4,610 4,832 4,739 7,596 7,512 7,059 Tax (926) (955) (808) (1,164) (1,686) (1,383) Minority Interest (4) (10) (20) 25 10 (19) Net Profit 3,680 3,867 3,911 6,457 5,836 5,657 Core Profit (non-GAAP) 4,152 4,371 4,502 5,194 5,874 6,433
Growth Revenue Gth (%) 36.6 34.3 39.6 35.8 37.3 27.5 Opg Profit Gth (%) 17.0 17.2 22.2 28.7 58.6 57.3 Net Profit Gth (%) 18.7 20.1 12.9 59.7 58.6 46.3
Margins Gross Margin (%) 54.2 54.7 51.7 57.6 61.6 63.8 Opg Profit Margin (%) 32.8 32.1 29.3 33.4 37.9 39.6 Net Profit Margin (%) 25.6 24.9 23.0 35.1 29.6 28.6
Source: Company, DBS Vickers
Page 35 Industry Focus China Internet Sector
Balance Sheet (RMB m) Asset Breakdown FY Dec 2011A 2012A 2013A 2014F 2015F 2016F Net Fixed Debtors - Assets - 3.9% 13.8% Net Fixed Assets 6,065 7,959 10,734 12,881 15,457 18,548 Invts in Associates & JVs 4,495 7,345 12,179 42,744 51,352 61,717 Other LT Assets 10,740 23,443 30,636 31,532 32,512 33,588 Cash & ST Invts 31,271 29,709 43,982 52,647 73,800 100,882 Assocs'/JVs - Inventory 0 568 1,384 692 0 0 Inventory - 46.0% Debtors 2,021 2,354 2,955 3,663 4,886 6,290 0.7% Other Current Assets 2,212 3,878 5,365 6,217 8,106 10,783 Bank, Cash and Liquid Total Assets 56,804 75,256 107,235 150,376 186,113 231,808 Assets - 35.5% ST Debt 7,999 1,077 2,589 2,848 3,133 3,446 Creditors 2,244 4,212 6,680 5,730 6,598 8,509 Other Current Liab 10,940 15,376 23,998 27,684 30,421 33,431 LT Debt 0 2,106 3,323 3,655 4,021 4,423 Other LT Liabilities 6,533 10,337 12,182 29,465 32,328 35,472 Shareholder’s Equity 28,464 41,298 57,945 80,372 108,867 145,632 Minority Interests 625 850 518 622 746 895 Total Cap. & Liab. 56,804 75,256 107,235 150,376 186,113 231,808
Non-Cash Wkg. Capital (8,951) (12,788) (20,974) (22,842) (24,027) (24,867) Net Cash/(Debt) 23,271 26,526 38,070 46,144 66,647 93,014 Debtors Turn (avg days) 23.9 18.2 16.0 15.4 15.8 16.0 Creditors Turn (avg days) 82.8 75.6 82.2 86.3 74.8 70.5 Inventory Turn (avg days) N/A 6.7 14.7 14.4 4.2 N/A Asset Turnover (x) 0.6 0.7 0.7 0.6 0.6 0.6 Current Ratio (x) 1.7 1.8 1.6 1.7 2.2 2.6 Quick Ratio (x) 1.6 1.6 1.4 1.6 2.0 2.4 Net Debt/Equity (X) CASH CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) (0.8) (0.6) (0.7) (0.6) (0.6) (0.6) Capex to Debt (%) 68.8 128.4 77.2 84.7 88.5 92.5 Z-Score (X) 17.9 9.2 21.4 18.1 0.0 NA
Source: Company, DBS Vickers
Page 36 Industry Focus China Internet Sector
Cash Flow Statement (RMB m) Capital Expenditure (RMB m) FY Dec 2011A 2012A 2013A 2014F 2015F 2016F
8000 Pre-Tax Profit 12,099 15,051 19,281 29,622 37,967 49,071 7000 Dep. & Amort. 1,939 2,621 3,606 2,981 3,577 4,292 6000 Tax Paid (1,836) (2,225) (3,118) (5,480) (7,214) (9,323) 5000 Assoc. & JV Inc/(loss) 190 80 (171) 95 76 61 4000 (Pft)/ Loss on disposal of FAs 97 21 0 0 0 0 3000 2000 Chg in Wkg.Cap. 1,177 3,507 5,915 1,979 2,392 2,772 1000 Other Operating CF (308) 374 (1,139) (292) (848) (1,165) 0 Net Operating CF 13,358 19,429 24,374 28,905 35,951 45,708 2012A 2013A 2014F 2015F 2016F Capital Exp.(net) (5,504) (4,088) (4,564) (5,506) (6,332) (7,282) Capital Expenditure (-) Other Invts.(net) (3,697) (11,427) (9,841) 0 0 0 Invts in Assoc. & JV (3,724) (3,668) (4,465) (5,124) (5,893) (6,777) Div from Assoc & JV 0 0 0 0 0 0 Other Investing CF (2,431) 2,913 (264) (1,380) (1,587) (1,825) Net Investing CF (15,355) (16,270) (19,134) (12,011) (13,812) (15,884) Div Paid (838) (1,108) (1,468) (2,286) (2,909) (3,760) Chg in Gross Debt 6,678 (1,059) 4,699 591 650 715 Capital Issues (1,326) 97 (1,295) 0 0 0 Other Financing CF (140) (316) (228) (6,947) (3,106) (4,907) Net Financing CF 4,373 (2,386) 1,708 (8,642) (5,365) (7,951) Currency Adjustments (172) (2) (103) 0 0 0 Chg in Cash 2,204 771 6,845 8,252 16,774 21,873 Opg CFPS (RMB) 1.34 1.74 2.02 2.94 3.66 4.69 Free CFPS (RMB) 0.86 1.68 2.16 2.55 3.23 4.19
Source: Company, DBS Vickers
Page 37 Regional Company Focus JD.com
Bloomberg: JD US Equity | Reuters: JD.O Refer to important disclosures at the end of this report
DBS Group Research . Equity 3 December 2014
On fast track BUY US$23.91 USA - NASDAQ : 4,756 (Initiate coverage)
Price Target: 12-Month US$ 30.8 The leading online retailer in China with a direct sales • Reason for Report: Initiate coverage model Potential Catalyst: Swift expansion of online marketplace; synergies from Strategic Cooperation with Tencent In-house e-commerce and logistics operations improve • DBSV vs Consensus: Our 2015F / 2016F revenue estimates are 1% / user experience 4% above Bloomberg consensus Strategic cooperation with Tencent enhances medium- • Analyst term business outlook Mark LI CFA, +852 2971 1935 [email protected] We initiate coverage with BUY rating and TP of • US$30.8, based on 1.5x 12-month rolling P/Sales ratio Price Relative US$ Relative Index
35.1 JD.com is China’s leading 209 An online direct sales leader. 33.1 31.1 189 B2C direct sales operator, and stands out on its product 29.1 169 quality, competitive pricing and self-operated logistics 27.1 25.1 149 capability. The company is leveraging on its integrated 23.1 129 21.1 business model to enhance user experience, and its logistics 109 19.1 17.1 89 network could be further improved by the ramp-up of May-14 Aug-14 Nov-14 facilities, especially the “Asia No.1” automated warehouses. JD.com Inc (LHS) Relative CCMP INDEX (RHS) More synergies from Tencent cooperation. JD.com has Forecasts and Valuation formed strategic cooperation with Tencent since Mar 2014, FY Dec (RMB m) 2013A 2014F 2015F 2016F where JD.com would incorporate Tencent’s QQ Wanggou Turnover 69,340 112,437 170,845 245,566 EBITDA 182 1,366 1,545 3,126 and Paipai.com to enhance its own e-commerce presence. Pre-tax Loss (2,485) (13,135) (2,266) (1,242) As more users can access JD.com via Weixin and Mobile QQ Net Loss (2,485) (13,139) (2,266) (1,242) platforms, we believe JD.com could benefit from rising Core Profit (non- 224 (223) (173) 1,280 mobile contributions and stronger user traffic down the road. GAAP)* EPS (RMB) (1.80) (9.51) (1.64) (0.90) Riding on its logistics capability, EPS (US$) (0.29) (1.55) (0.27) (0.15) Better scalability ahead. Core EPS (US$)* 0.03 (0.03) (0.02) 0.15 as well as Tencent’s support in terms of user traffic and Core EPS (RMB)* 0.16 (0.16) (0.13) 0.93 online payment channels, JD.com’s online marketplace had Core EPS Growth (%)* N/A N/A (22) N/A generated 214% y-o-y GMV growth in 9M14, and it could BV Per Share (US$) 1.09 3.41 3.14 2.98 enhance the company’s overall profitability ahead. We Core PE (X)* 907.8 nm nm 158.9 P/Cash Flow (X) 57.0 301.1 40.3 26.0 currently expect JD.com to turn profitable in 2016F (based P/Free CF (X) 86.2 nm 52.2 31.8 on core profit), and our TP of US$30.8 is based on 1.5x 12- EV/EBITDA (X) 1043.6 131.4 115.6 56.2 month rolling P/Sales ratio. Initiate coverage with BUY Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 22.0 7.0 7.6 8.0 recommendation. Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) (47.2) (68.7) (8.1) (4.8) * Core profit excludes one-off / non-cash items such as losses from At A Glance 1,382 preferred share redemption, share-based compensation & amortization. Issued Capital (m shrs) Earnings Rev (%): New New New Mkt. Cap (US$m) 33,044 Consensus EPS (RMB) (0.004) 0.024 0.284 Major Shareholders Other Broker Recs: B: 12 S: 0 H: 8 Mr. Richard Qiangdong Liu (%) 20.1 Tencent (%) 17.6 ICB Industry: Consumer Services General Retailers Tiger Global Management (%) 15.6 ICB Sector: Hillhouse Capital Management (%) 11.0 Principal Business: A leading online direct sales operator in China, with emerging marketplace operations DST Global (%) 6.8 Free Float (%) 28.9 5,135 Source of all data: Company, DBSV, Thomson Reuters, HKEX Avg. Daily Vol.(‘000)
www.dbsvickers.com ed-TH/ sa- MH
Industry Focus China Internet Sector
INVESTMENT THESIS
Profile Rationale JD.com is the leading online direct sales operator in China, and Focus on user experience stands out on its good product quality, high service standards • JD.com’s direct sales model and in-house fulfilment and timely delivery capability. The company launched its online infrastructure could enhance product quality and marketplace in 2010, helping to enhance its growth prospects delivery speeds, so as to improve customer experience ahead. especially during the peak season for e-commerce.
Online marketplace improves outlook • Riding on JD.com’s high service standards and self-operated fulfilment facilities, its online marketplace could register strong sales performance ahead.
Valuation Risks Our Target Price is based on 1.5x 12-month rolling P/Sales ratio, Intensifying competition which is the average valuation for online direct sales operators • Downside could include intensifying competition with such as VIPShop, Jumei, China Dangdang and Amazon. leading e-commerce operators, especially Alibaba Group.
Source: DBS Vickers
Page 39 Industry Focus China Internet Sector
SWOT Analysis
Strengths Weakness
Leading B2C direct sales operator in China High requirement in management of working capitals, especially inventories Stands out on product quality and competitive pricing, thanks to its direct operation model Direct operating model could carry low margins Timely delivery capability aided by in-house fulfilment infrastructure
Opportunities Threats
Rising contributions from online marketplace could widen Intensifying competition with leading online product offerings marketplace operators, especially Alibaba Group
Launch of “Asia No.1” automated warehouses could beef up logistics capability ahead
Penetration into the low-tier markets enhances business outlook
Strategic Cooperation with Tencent to bear fruit Internet finance could be the long-term driver
Source: DBS Vickers
Page 40 Industry Focus China Internet Sector
Company overview China B2C direct sales market share (2013) An online direct sales leader. JD.com stands as the leading B2C direct sales operator in China, with c.47% market share Amazon in 2013 (source: iResearch). The company was founded by Mr. Yixun.com China, *, 5.8% 5.6% Richard Qiangdong Liu in 2004, and it stands out on good Suning.com VIPShop, , 10.7% product quality, competitive pricing and timely delivery 5.4% capability. The company launched its online marketplace in Dang Dang, 4.7% 2010, aiming to widen product offerings to fulfil customer needs. As of 3Q14, JD.com had c.46m active customer GOME accounts, with c.50,000 merchants operating on its online Online, 3.9% marketplace. JD.com, Yihaodian, 46.5% 3.7% Vancl, 1.7%
Others, 12%
Note: In terms of sales revenue for online direct sales players.
* Yixun.com (易迅網) would be gradually incorporated into JD.com, according to JD.com’s strategic cooperation with Tencent since Mar 2014. Source: iResearch
Milestones for JD.com
Mar: Strategic cooperation with Tencent; acquired Tencent's QQ Wanggou (B2C) Jan: Mr. Richard and Paipai (C2C) operations, Qiangdong Liu launched and 10% stake of Yixun(易迅 a website that mainly 網); sells computer products, Started to offer e-books, May: Listed on NASDAQ (ticker: the predecessor of private label products JD); offered 108m American JD.com. By 2007, sales Started to offer food, and travel-related Depositary Shares (c.8% stake) were gradually Started to offer beverage, nutritional products; at US$19ps; expanded to mobile general supplements and Oct: Acquired online Oct: JD.com'sfirst highly handsets, consumer merchandise books; payment service automated "Asia No.1" products, and autoparts products and Oct: Launched online provider Chinabank warehouse was officially / accessories. launched in Shanghai home appliances marketplace Payments (網銀在線)
2004 2007 2008 2009 2010 2011 2012 2013 2014
Started to build Started to Started to sell Started to sell and operate own sell cosmetics movie tickets groceries and fresh nationwide and other and other media produce fulfillment personal care products infrastructure items
Source: Company
Page 41 Industry Focus China Internet Sector
Stands out on product quality and service standards. Riding In addition, JD.com has established comprehensive after-sales on its direct sales model, JD.com could effectively control the service standards for its customers. For instance, the company quality of its products. Besides, the company has established promises that customers could return the goods that they good relationship with >6,000 suppliers, offering authentic purchased without any reason, as long as they file for a return products at competitive prices. According to a survey by within 7 days of purchase. For quality-related issues, JD.com CNNIC, 83% of respondents believe outstanding product could provide free delivery services. JD.com also offers 1-year quality is the main reason for repeat purchase on JD.com. As repair services to its customers. We believe JD.com could such, JD.com has earned good customer recognition on its enjoy better customer recognition ahead, thanks to its high product quality and service standards. standards of after-sales service offerings compared to peers.
Reasons for repeat purchase on JD.com
100% 83% 79% 80% 65% 63% 62% 60% 52% 50%
40% 26% 20%
0%
Gifts Used to it experience Website user Product variety Product Product quality Logistics service Price discounts & After-sales services After-sales
Note: Percentage of respondents that agreed to the reasons. Source: CNNIC survey (sample size: 30,000)
E-commerce order flow for JD.com
Source: Company
Page 42 Industry Focus China Internet Sector
JD.com’s nationwide fulfilment network
Note: Fulfilment infrastructure includes warehouses and delivery operations. Source: Company
Fulfilment capability is the key. Besides product quality and was launched in Oct 2014, with GFA of c.100,000 s.m. (for service standards, we believe timeliness of product deliveries the 1st phase). The warehouse operates on automated sorting could be essential to good customer experience. As such, technologies that could sort up to 16,000 packages per hour, JD.com has operated own fulfilment infrastructure (i.e. with 99.99% accuracy. The Shanghai “Asia No.1” warehouse warehousing and delivery facilities) since 2007. We believe significantly enhances JD.com’s delivery capability in E.China, JD.com runs the largest e-commerce fulfilment operations in especially during the peak season of “Single’s Day” promotion China, with 118 warehouses (total GFA of c.2.3m s.m.), 2,045 in Nov 2014. delivery stations and 1,045 pickup stations across 1,855 Construction of “Asia No.1” warehouses in Guangzhou, counties and districts as of 30 Sep 2014. Majority of JD.com’s Wuhan and Shenyang has started, targeting to be launched in products could be delivered to end customers within 3 days of 2015. More “Asia No.1” warehouses in Beijing, Chengdu and purchase, versus peers that could spend up to a week. Xi’an have been planned for the coming years, helping to In particular, JD.com has focused on constructing highly- further improve JD.com’s logistics capability in these areas. automated warehouses, “Asia No.1 (亞洲一號)”, in the key areas. The company’s fist “Asia No.1” warehouse in Shanghai
Page 43 Industry Focus China Internet Sector
Details of JD.com’s delivery services
Program name Coverage Details (as of Sep 2014)
"211 (211 )" 130 counties and Orders placed before 11am could be delivered within the same day; orders placed 限時達 districts before 11pm could be delivered by 3pm the next day. Small-sized products that use JD.com's warehousing and delivery services could be entitled to the program. c.41% of the orders placed in 2013 were under this program. Next-day deliv ery 815 counties and Orders placed could be delivered the next day. Products that use JD.com's ( ) districts warehousing and delivery services could be entitled to the program. 次日達 Night-time delivery Beijing, Shanghai, Orders placed by 3pm could be delivered at 7pm-10pm that day. Small-sized products ( ) Chengdu, Guangzhou, that use JD.com's warehousing and delivery services could be entitled to the program. 夜間配 Wuhan Timed delivery Selective regions Specific delivery time could be set in the 7 days following the orders (10 days for ( ) home appliances). Products that use JD.com's warehousing and delivery services could 定時達 be entitled to the program. Speed deliv ery Beijing, Shanghai, RMB49/order. Products could be delivered within 3 hours of purchase. ( ) Guangzhou, Chengdu 極速達 Two-day delivery Regions not covered by Products could be delivered within 48 hours of purchase. Products that use JD.com's ( ) "211" and "Next-day warehousing and delivery services could be entitled to the program. 隔日達 deliv ery " "211 for home Selective regions Orders placed before 11am could be delivered within the same day; orders placed appliances before 6pm could be delivered by 8pm the next day. Large-sized products that use ( 211 )" JD.com's warehousing and delivery services could be entitled to the program. 大家電 限時達 Night-time delivery for Beijing, Shanghai, Orders placed by 3pm could be delivered at 6pm-10pm that day. Large-sized products home appilances Guangzhou, Shenzhen that use JD.com's warehousing and delivery services could be entitled to the program. ( ) 大家電夜間配 Customer pickup 1,045 pickup stations Customers could pay and collect the products at JD.com's pickup stations. ( ) 自提 Source: Company
JD.com’s delivery operations in Beijing
Source: DBS Vickers
Expanding sales categories. JD.com started off selling digital Currently JD.com is working with >6,000 suppliers to offer products in 2004. Aimed to enhance its growth prospects, the >2.4m SKUs (stock-keeping units) at its direct sales operations. company has actively expanded to new categories including Leveraging on customer recognition and supports such as in- home appliances, general merchandise, personal care house fulfilment capacity and after-sales services, JD.com products, food & beverage, auto parts and media products. launched its B2C online marketplace in 2010, allowing
Page 44 Industry Focus China Internet Sector merchants to sell their products at its website. Within a few GMV growth by segment years, the online marketplace has attracted >50,000 472% merchants, offering c.38m SKUs in total (vs. >2.4m SKUs 500% offered by JD.com’s direct sales arm). GMV (gross 450% merchandise value) of online marketplace had also been 400% growing rapidly to account for 36% of total GMV in 9M14 (vs. 350% 25% for 2013). JD.com aims to offer standardized products 300% (e.g. digital and home appliance products) mainly at its direct 250% 214% sales platform, while non-standardized products are mainly 200% sold at its marketplace. 150% 92% 100% 50% Percentage of GMV from online marketplace 90% 0% 65% 68% 2012 2013 9M14 40% 36% Online direct sales 35% Services & other revenues (online marketplace)
30% 25% Note: Growth for online marketplace picked up in 9M14, thanks to contributions from QQ Wanggou and Paipai.com since 2Q14. 25% 23% Source: Company, DBS Vickers 20% Solid management control. According to JD.com’s prospectus, 15% 9% its founder, Chairman and CEO Mr. Richard Qiangdong Liu 10% has c.20% stake in the company. Listed on NASDAQ, JD.com adopts a dual class ordinary share structure, in which Class B 5% Ordinary Shares are entitled to twenty votes per share on all 0% matters, versus one vote per share for Class A Ordinary Shares. 2011 2012 2013 9M14 Being the only holder of Class B shares, Mr. Liu has c.84% Source: Company voting power in JD.com. Having >15 years of solid experience in retail and e-commerce, we believe Mr. Liu’s firm control on the company could ensure smooth execution of its business Joining hands with Tencent. JD.com has formed Strategic strategies. Cooperation with Tencent since Mar 2014, aiming to further strengthen its presence in e-commerce. Tencent’s QQ Wanggou (B2C marketplace) and Paipai.com (C2C Shareholding & voting power structure marketplace) has been incorporated into JD.com since 2Q14, enhancing its competitiveness especially in the C2C segment. Shareholders Stake V oting power Paipai.com launched the mobile store division, “Paipai Mr. Richard Qiangdong Liu 20.1% 83.6% Weidian (拍拍微店)” in Oct 2014, and merchants could Tencent 17.6% 3.7% leverage on Tencent’s “Guangdiantong” ad system to Tiger Global Management 15.6% 3.2% promote their stores at platforms like Weixin, Mobile QQ and Hillhouse Capital Management 11.0% 2.3% Mobile Qzone. At the initial stage, c.40% of orders on “Paipai DST Global 6.8% 1.4% Weidian” came from Weixin users, and c.20% from Mobile Capital Today 6.5% 1.3% QQ users, showing good progress in monetizing Tencent’s Bull Capital 1.9% 0.4% strong user traffic. Thanks to contributions from QQ Sequoia Capital 1.4% 0.3% Wanggou (now renamed to JD Wanggou) and Paipai.com, Others 19.0% 3.8% GMV growth of JD.com’s online marketplace accelerated to 100.0% 100.0% 214% y-o-y growth for 9M14, and we expect robust growth Note: Mr. Richard Qiangdong Liu owns c.556m shares of Class B in the future. Ordinary Shares, which are entitled to twenty votes per share on all matters (vs. one vote per share for Class A Ordinary Shares). Source: Company
Page 45 Industry Focus China Internet Sector
Marketplace to boost margins. We believe JD.com’s online Growth prospects marketplace division could ride on the company’s self- E-commerce carries good potential. The e-commerce market operated fulfilment facilities, as well as support from Tencent posted 60% CAGR for 2010-2013 to reach RMB1,892bn, and in online payment channels and user traffic. Hence, its online accounted for c.8% of China’s total retail sales in 2013. marketplace could attract more merchants and register better iResearch expects it to register 31% CAGR for 2013-2017F, sales growth momentum. Of note, the number of merchants thanks to growing online customer numbers and their rising on JD.com’s online marketplace has exceeded 50,000, e-commerce spending. Of note, online customers account for compared to c.29,000 in Mar14. GMV of marketplace also c.60% of total netizens in China, and we believe the reached RMB63.5bn for 9M14, up 214% y-o-y. penetration could rise further, on development of online JD.com charges 2%-10% of commission to marketplace GMV payment channels and delivery operations. (depending on categories), and commission income carries much higher profitability versus its direct sales operations. As such, we expect rising contributions from marketplace could E-commerce market size in China lift JD.com’s gross margin to 13.3% in 2016F (vs. 11.2% for 9M14). RMB bn 75% 6,000 70% 5,634 80% 4,772 JD.com’s online marketplace GMV 5,000 59% 70% 51% 60% 46% 3,780 4,000 50% RMB bn % 37% 472% 3,000 2,760 40% 70 63.5 500% 1,892 26% 2,000 18% 30% 1,187 60 785 20% 400% 461 1,000 10% 50 0 0% 40 300% 31.8 214% 30
2010 2011 2012 2013 200% 2014F 2015F 2016F 2017F E-commerce market size (LHS) 20 16.6 92% Growth y-o-y (RHS) 100% 10 2.9 Note: In terms of GMV (general merchandise value). 0 0% Source: iResearch 2011 2012 2013 9M14 Online marketplace GMV (LHS) Number of e-commerce customers in China Growth y-o-y (RHS)
m 60% Source: Company 450 70% 390 400 49% 60% Fulfilment: Building up strengths in key regions. JD.com’s first 350 302 “Asia No.1” automated warehouse in Shanghai was launched 43% 50% 300 38% in Oct 2014, helping to enhance its delivery capability 35% 242 250 40% 194 especially during the “Single’s Day” promotion in Nov14. 200 161 30% JD.com has been constructing another three “Asia No.1” 150 20% warehouses in Guangzhou, Wuhan and Shenyang, to be 100 completed in 2015. It also has plans to develop more “Asia 10% 50 No.1” warehouses in cities like Beijing, Chengdu and Xi’an. 0 0% 2010 2011 2012 2013 2014F In addition, JD.com has set up Forward Distribution Centers Number of customers (LHS) (FDC, 前置配送中心) around its key warehouses, to improve As % of total netizen (RHS) logistics coverage especially for the best-selling products. The company has operated multiple FDCs in cities like Jinan, Nanjing and Chongqing. Riding on its fulfilment network Source: CNNIC covering >1,800 counties and districts, JD.com provides
Page 46 Industry Focus China Internet Sector delivery services to >90% of orders from direct sales, and Rising synergies from Tencent cooperation. Mobile orders >30% of orders from merchants in its online marketplace. We accounted for c.30% of JD.com’s total orders in 3Q14, and believe JD.com’s strengthening delivery capability could attract the majority of mobile orders were generated via JD.com’s more merchants to cooperate, and improve customer own app, rather than Weixin and Mobile QQ. We believe experience ahead. there could be good potential for Weixin and Mobile QQ to ramp up their contributions to JD.com. The company has actively cooperated with Tencent to develop better access JD.com’s “Asia No.1” Warehouse in Shanghai points on Weixin / Mobile QQ, and we stay confident on rising mobile contribution for JD.com down the road. Going rural. So far, JD.com’s success has been mostly built on robust customer demand in the 1st & 2nd-tier markets, and orders from low-tier markets could potentially account for merely single-digit’s sales for the company. According to CNNIC, rural e-commerce customers could grow at a faster pace, implying bigger potential for e-commerce in China’s rural areas.
Number of e-commerce customers in China
m 300 + 22% 243 250 200 200
150
100 59 42 + 40% 50
0 2012 2013 Urban online customers Rural online customers
Source: CNNIC
Thanks to improving awareness among rural customers, as well as expanding coverage of logistics networks, JD.com achieved c.150% y-o-y sales growth in the low-tier markets during 3Q14 (vs. 60% overall sales growth). Building on rising Source: Company rural affluence as well as promotions via Mobile QQ and Weixin platforms, we believe these markets could become the growth driver for JD.com over the medium-term.
Page 47 Industry Focus China Internet Sector
Internet finance could be the longer-term driver. Seeing plenty Pattern of usage between urban & rural netizens in of opportunities in internet finance (e.g. consumer finance China (2013) and supplier finance), JD.com is striving to improve its finance Function Urban Rural Difference capability. The company acquired online payment service usage usage (A-B) provider Chinabank Payments (網銀在線) in Oct 2012, and (A) (B) launched its supplier financing product “Jing Bao Bei (京保 Instant messaging 86.3% 86.0% 0.3% 貝)” in Nov12. JD.com then introduced its consumer financing Blogs 70.9% 70.5% 0.4% product “Consumer Credit Line (京東白條)”in Feb14, crowd Group buying 25.4% 15.2% 10.2% financing (眾籌) product “Cou Fen Zi (湊份子)”in Jul14, and Music 77.3% 66.9% 10.4% financing product “Jing Xiao Dai (京小貸)” for its merchants Games 58.4% 46.7% 11.7% on marketplace in Nov14. Search 82.8% 70.5% 12.3% Altogether, these products could fulfill the financing needs of Video 74.4% 55.0% 19.4% its customers, suppliers and merchants, and offer good Online payment 47.9% 25.7% 22.2% margins for JD.com. For instance, gross margin of supplier E-commerce 55.2% 31.1% 24.1% financing products could potentially reach 90%, as per media Note: Percentage of urban / rural respondents that had used the reports. Given JD.com’s >RMB20bn net cash on hand, the functions. E-commerce, online payment and video have bigger company is in a sound position to support its financial product potential in the rural areas. offerings. In addition, user information collected from the Source: CNNIC survey (sample size: 30,000) financial services could in turn create cross-selling opportunities for JD.com.
Structure of JD.com’s Finance Unit (金融事業部)
JD.com Finance Unit
Consumer finance S upply chain finance Financial products Crowd funding ( ) Consumer Credit Line O nline payment 眾籌 Jing Bao Bei (京保貝) Chinabank Payments Jing Xiao Dai(京小貸) Cou Fen Zi ( ) (京東白條) 湊份子
Source: Company, media websites
Page 48
Industry Focus China Internet Sector
Valuation & recommendation DCF valuation implies fair price of US$31.4. We have run a DCF valuation to cross-check our valuation for JD.com. Based on a Scale is the priority. JD.com believes that gaining market share is 10-year horizon, 4% terminal growth and 13% WACC, our the winning strategy in e-commerce, hence it does not have any DCF-based fair price for the company could be US$31.4, which profit target for 2014F-2015F. That said, thanks to better scale is fairly in line with our TP of US$30.8. and rising contributions from online marketplace (with higher margins than direct sales), we expect JD.com’s overall gross margin to gradually improve to 12.4% / 13.3% for 2015F / DCF valuation for JD.com 2016F (vs. 11.2% for 9M14), and the company could become Terminal growth: 3.5% 4.0% 4.5% profitable starting 2016F (based on non-GAAP core profit). Initiate with BUY. Given JD.com’s direct sales model (direct sales RMB m could account for c.95% of total net revenue this year), we Equity value 253,792 262,462 272,156 believe it is justified to compare its price-to-sales valuation with other major online direct sales players, namely VIPShop, China Fair Price (USD) 30.4 31.4 32.6 Dangdang and Jumei in China, as well as Amazon in the US. Based on consensus estimates, these players on average trade at Assumptions: c.1.5x 12-month rolling P/Sales ratio, which we believe is Risk-free rate 2.2% Cost of debt 4.0% reasonable for JD.com. Hence, our TP is hence set at US$30.8, Beta 1.5 D/E ratio 0.1% offering 29% upside. We initiate coverage on JD.com with BUY rating. Market return 9.5% RMB/USD 0.17 (NASDAQ) rate WACC 13.0%
Price-to-sales valuation for JD.com Source: Bloomberg Finance L.P., DBS Vickers Price to sales (x) 2014F 2015F 2016F Risks and concerns. Major risks related to JD.com could include J D.Com*^ 1.8 1.2 0.8 intensifying online price competition that could hurt its margins, as well as pressure from major marketplace operators, especially VIPShop 3.4 2.1 1.4 the Alibaba Group. China Dangdang 0.4 0.4 0.3 J umei Int'l 2.6 2.0 1.5 Amazon.Com 1.7 1.4 1.2 Av erage 2.0 1.5 1.1
Note: We exclude marketplace operators such as Alibaba Group and eBay, as they operate on different business model (e.g. marketplace model with higher margins).
Source: Thomson Reuters, *DBS Vickers
Page 49
Industry Focus China Internet Sector
P/Sales band chart PB band chart
Share Price (US$) Share Price (US$) 40 35 1.8x 33 10.1x 35 31 1.7x 29 9.1x 30 1.5x 27 8.1x 1.3x 25 25 23 1.1x 7.1x 21 20 19 6.1x 17 15 15 Jul-14 Jul-14 Jun-14 Jun-14 Oct-14 Oct-14 Sep-14 Sep-14 Nov-14 Nov-14 Aug-14 Aug-14 May-14 May-14
Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers
Page 50 Industry Focus China Internet Sector
Management profile
Directors & Age Position / Title Remark Executiv e Officers Mr. Richard 41 Founder, Chairman Mr. Liu has >15 years of experience in retail and e-commerce industries. He received Qiangdong Liu of the Board & awards such as "2011 China Economic Person of the Year" (by CCTV), and "2012 Chinese ( ) CEO Businessman" (by Fortune China). He received a bachelor's degree in Sociology from 劉強東 People's University of China, and EMBA degree from the China Europe International Business School. Mr. Martin Chi Ping 41 Director Mr. Lau is President and Executive Director of Tencent. Prior to joining Tencent in 2005, he Lau worked at Goldman Sachs. He receiv ed a bachelor's degree in Electrical Engineering from ( ) the Univ ersity of Michigan, a master's degree in Electrical Engineering from Stanford 劉熾平 University, and MBA degree from Kellogg School of Management, Northwestern Univ ersity . Prof. Ming Huang 50 Independent Prof. Huang has been a professor of Finance at China Europe International Business School ( ) Director since 2010. He received a bachelor's degree in Physics from Peking University, Ph.D. in 黃明 Theoretical Physics from Cornell University, and Ph.D. in Finance from Stanford University. Mr. Louis T. Hsieh 50 Independent Mr. Hsieh has served as the CFO of New Oriental Education & Technology Group since ( ) Director 2005. He received a bachelor's degree in Industrial Engineering and Engineering 謝東螢 Management from Stanford University, MBA degree from Harvard Business School, and J .D. degree from University of California at Berkeley. Prof. David Daokui 50 Independent Prof. Li is currently the Mansfield Freeman Chair Professor of the School of Economics & Li Director Management of Tsinghua University. He is currently a delegate to the Beijing People's ( ) Congress and a member of the Chinese People's Political Consultative Committee (CPPCC). 李稻葵 He received a bachelor's degree in Management Information Systems from Tsinghua University, and Ph.D. in Economics from Harvard University. Mr. Haoyu Shen 44 CEO of J D Mall Mr. Shen has served as CEO of JD Mall since Apr 2014. In Aug 2011-Apr 2014, he was ( ) (B2C business COO in charge of supply chain management and customer service functions. Previously, 沈皓瑜 group) Mr. Shen worked at Baidu (2007-2011) and American Express (2011-2007). He received a bachelor's degree in International Finance from People's University of China, and MBA degree from University of Iowa. He is a CFA Charterholder. Mr. Ye Lan 44 Chief Marketing Mr. Lan has served as CMO since Feb 2012, in charge of procurement, sales, marketing ( ) Officer (CMO) and public relations functions. He has >18 years of experience in sales and marketing. Prior 藍燁 to joining JD.com, he was Executive Vice President in China at Acer Group (2010-2012), President and CEO of Founder Technology Group (2008-2010), and Lenovo Group (1993-2008). He received EMBA degree from Tsinghua University. Ms. Yu Long 39 Chief Human Ms. Long has served as Chief Human Resources Officer and General Counsel since Aug ( ) Resources Officer 2012. Previously, she was Senior Vice President at UTStarcom Holdings (2010-2012). She 隆雨 & General Counsel received her bachelor's degree in Economics Law from China Southwest Political & Law University, and EMBA degree from China Europe International Business School. She is a qualified attorney in the PRC. Mr. Sidney Xuande 49 CFO Mr. Huang has served as CFO since Sep 2013. Previously, he was CFO of Pactera Huang ( ) Technology (2006-2013). Mr. Huang is currently Director of Bitauto Holdings. He received 黃宣德 bachelor's degree in Accounting from Bernard M. Baruch College, and MBA degree from Kellogg School of Management at Northwestern University. Mr. Shengqiang 38 CEO of Internet Mr. Chen has served as CEO of Internet Finance Group since Sep 2013. He has >15 years Chen Finance of experience in Finance and Accounting Management. He was CFO of J D.com (Mar ( ) 2012-Sep 2013), Finance Vice President (Jan 2009-Mar 2012), and Finance Controller 陳生強 (Apr 2007-Dec 2008). He received a bachelor's degree in Accounting from Beijing Technology & Business University, and MBA degree from Beijing Institute of Technology. He has also completed his studies at the EMBA Program of China Europe International Business School. Mr. Daxue Li 44 Senior Vice Mr. Li is in charge of R&D and IT infrastructure. He joined JD.com in May 2008. Previously, ( ) President of he was Vice President of China Popular Computer Week Management Co. (2006-2008), 李大學 Technology and Chief Technology Officer of Tianji Media Group (1999-2005). He received bachelor's degree from Shandong University, and master's degree from Chongqing University.
Source: Company
Page 51 Industry Focus China Internet Sector
Key Assumptions FY Dec 2012A 2013A 2014F 2015F 2016F GMV - online direct sales 56.7 93.7 148.7 223.0 317.6 (RMB bn) GMV - online 16.6 31.8 89.8 163.6 257.7 marketplace (RMB bn) GMV (RMB bn) 73.3 125.5 238.6 386.6 575.3
Segmental Breakdown (RMB m) FY Dec 2012A 2013A 2014F 2015F 2016F Revenues (RMB m) Online direct sales 40,335 67,018 106,378 159,482 227,155 Services & other incomes 1,046 2,322 6,060 11,363 18,411 Total 41,381 69,340 112,437 170,845 245,566 Gross profit (RMB m) Online direct sales 2,437 4,522 6,593 9,885 14,306 Services & other incomes 1,046 2,322 6,060 11,363 18,411 Total 3,483 6,844 12,653 21,248 32,718 Gross profit Margins (%) Online direct sales 6.0 6.7 6.2 6.2 6.3 Total 8.4 9.9 11.3 12.4 13.3 Note: Services & other incomes are mainly from online marketplace, and margins are high. Source: Company, DBS Vickers
Page 52 Industry Focus China Internet Sector
Income Statement (RMB m) Margins Trend FY Dec 2012A 2013A 2014F 2015F 2016F 1.0% Revenue 41,381 69,340 112,437 170,845 245,566 Cost of Goods Sold (37,898) (62,496) (99,784) (149,597) (212,848) -1.0% 2012A 2013A 2014F 2015F 2016F Gross Profit 3,483 6,844 12,653 21,248 32,718 -3.0% Other Opng (Exp)/Inc (5,206) (7,149) (13,436) (21,920) (31,993) -5.0% Operating Profit (1,724) (305) (783) (672) 724 -7.0%
Other Non Opg (Exp)/Inc 60 194 80 0 0 -9.0%
Associates & JV Inc 0 0 0 0 0 -11.0% Net Interest (Exp)/Inc 167 335 483 498 556 -13.0% Dividend Income 0 0 0 0 0
Exceptional Gain/(Loss) (1,814) (2,709) (12,916) (2,093) (2,522) Operating Margin % Net Income Margin % Pre-tax Loss (3,310) (2,485) (13,135) (2,266) (1,242) Tax (6) 0 (4) 0 0 Minority Interest 0 0 0 0 0 Preference Dividend 0 0 0 0 0 Net Loss (3,316) (2,485) (13,139) (2,266) (1,242) Core Profit (non-GAAP) (1,502) 224 (223) (173) 1,280 EBITDA (1,478) 182 1,366 1,545 3,126
Growth Revenue Gth (%) 95.8 67.6 62.2 51.9 43.7 EBITDA Gth (%) (23.6) N/A 651.5 13.1 102.3 Opg Profit Gth (%) N/A N/A N/A N/A N/A Net Profit Gth (%) N/A N/A N/A N/A N/A
Margins & Ratio Gross Margin (%) 8.4 9.9 11.3 12.4 13.3 Opg Profit Margin (%) (4.2) (0.4) (0.7) (0.4) 0.3 Net Profit Margin (%) (8.0) (3.6) (11.7) (1.3) (0.5) ROAE (%) (180.1) (47.2) (68.7) (8.1) (4.8) ROA (%) (23.3) (11.3) (33.3) (4.0) (1.9) ROCE (%) (26.1) (3.5) (3.9) (2.3) 2.6 Div Payout Ratio (%) N/A N/A N/A N/A N/A Net Interest Cover (x) NM NM NM NM NM Note: Core profit excludes one-off / non-cash items such as losses from preferred share redemption, share-based compensation and amortization of intangibles.
Source: Company, DBS Vickers
Page 53 Industry Focus China Internet Sector
Interim Income Statement (RMB m) FY Dec 1H2013 2H2013 1H2014
Revenue 31,178 38,162 51,270 Cost of Goods Sold (28,150) (34,346) (45,854) Gross Profit 3,028 3,816 5,416 Other Oper. (Exp)/Inc (3,128) (4,021) (5,771) Operating Profit (100) (205) (355) Other Non Opg (Exp)/Inc 93 101 20 Associates & JV Inc 0 0 0 Net Interest (Exp)/Inc 129 206 240 Exceptional Gain/(Loss) (1,556) (1,154) (12,242) Pre-tax Loss (1,433) (1,052) (12,338) Tax (3) 3 3 Minority Interest 0 0 0 Net Loss (1,436) (1,049) (12,335) Core Profit (non-GAAP) 119 105 (93)
Growth Revenue Gth (%) N/A N/A 64.4 Opg Profit Gth (%) N/A N/A N/A Net Profit Gth (%) N/A N/A N/A
Margins Gross Margin (%) 9.7 10.0 10.6 Opg Profit Margin (%) (0.3) (0.5) (0.7) Net Profit Margin (%) (4.6) (2.7) (24.1)
Note: Core profit excludes one-off / non-cash items such as losses from preferred share redemption, share-based compensation and amortization of intangibles.
Source: Company, DBS Vickers
Page 54 Industry Focus China Internet Sector
Quarterly Income Statement (RMB m) FY Dec 1Q2014 2Q2014 3Q2014
Revenue 22,657 28,613 29,012 Cost of Goods Sold (20,396) (25,458) (25,468) Gross Profit 2,261 3,155 3,544 Other Oper. (Exp)/Inc (2,399) (3,372) (3,416) Operating Profit (138) (217) 129 Other Non Opg (Exp)/Inc (39) 59 59 Associates & JV Inc 0 0 0 Net Interest (Exp)/Inc 93 147 190 Exceptional Gain/(Loss) (5,208) (7,034) (535) Pre-tax Loss (5,292) (7,046) (158) Tax 3 0 (6) Minority Interest 0 0 0 Net Loss (5,289) (7,046) (164) Core Profit (non-GAAP) (81) (12) 371
Growth Revenue Gth (%) 65.1 63.9 60.8 Opg Profit Gth (%) N/A N/A N/A Net Profit Gth (%) N/A N/A N/A
Margins Gross Margin (%) 10.0 11.0 12.2 Opg Profit Margin (%) (0.6) (0.8) 0.4 Net Profit Margin (%) (23.3) (24.6) (0.6)
Note: Core profit excludes one-off / non-cash items such as losses from preferred share redemption, share-based compensation and amortization of intangibles.
Source: Company, DBS Vickers
Page 55 Industry Focus China Internet Sector
Balance Sheet (RMB m) Asset Breakdown
FY Dec 2012A 2013A 2014F 2015F 2016F Net Fixed Debtors - Assets - 3.1% 12.8% Net Fixed Assets 1,001 2,262 4,574 5,717 7,146 Invts in Associates & JVs 0 0 0 0 0 Assocs'/JVs - Other LT Assets 1,205 1,268 11,948 12,347 12,841 0.0% Cash & ST Invts 10,177 14,603 25,063 26,143 29,388 Inventory 4,754 6,386 8,893 12,923 17,512
Debtors 479 502 1,104 1,443 1,939 Inventory - Other Current Assets 269 989 1,231 1,575 2,000 24.9% Bank, Cash Total Assets 17,886 26,010 52,812 60,148 70,828 and Liquid Assets - 59.2% ST Debt 867 933 1,166 1,458 1,822 Creditors 8,097 11,019 16,628 24,518 34,302 Other Current Liab 2,519 4,818 6,021 7,525 9,405 LT Debt 0 0 0 0 0 Other LT Liabilities 0 0 0 0 0 Shareholder’s Equity 6,403 9,240 28,997 26,647 25,300 Minority Interests 0 0 0 0 0 Total Cap. & Liab. 17,886 26,010 52,812 60,148 70,828
Non-Cash Wkg. Capital (5,114) (7,960) (11,421) (16,103) (22,254) Net Cash/(Debt) 9,310 13,670 23,897 24,685 27,567 Debtors Turn (avg days) 3.2 2.6 2.6 2.7 2.5 Creditors Turn (avg days) 56.8 56.1 51.6 51.0 51.0 Inventory Turn (avg days) 36.4 32.7 28.5 27.0 26.4 Asset Turnover (x) 2.9 3.2 2.9 3.0 3.7 Current Ratio (x) 1.4 1.3 1.5 1.3 1.1 Quick Ratio (x) 0.9 0.9 1.1 0.8 0.7 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 89.4 129.8 198.2 78.4 78.4 Z-Score (X) NA NA NA NA NA
Source: Company, DBS Vickers
Page 56 Industry Focus China Internet Sector
Cash Flow Statement (RMB m) Capital Expenditure (RMB m) FY Dec 2012A 2013A 2014F 2015F 2016F
2500 Pre-Tax Profit (1,723) (50) (5,177) (2,266) (1,242) Dep. & Amort. 186 293 2,069 2,217 2,402 2000
Tax Paid 0 0 (4) 0 0 1500 Assoc. & JV Inc/(loss) 0 0 0 0 0 1000 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 2,721 3,111 3,461 4,681 6,152 500
Other Operating CF 220 216 326 408 510 0 Net Operating CF 1,404 3,570 675 5,040 7,822 2012A 2013A 2014F 2015F 2016F Capital Exp.(net) (775) (1,211) (2,312) (1,143) (1,429) Capital Expenditure (-) Other Invts.(net) (2,080) (800) (2,045) (987) (1,234) Invts in Assoc. & JV 0 0 0 0 0 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (514) (660) (9,039) (821) (1,026) Net Investing CF (3,369) (2,671) (13,395) (2,951) (3,689) Div Paid 0 0 0 0 0 Chg in Gross Debt 872 75 233 292 364 Capital Issues 1,571 2,720 32,963 0 0 Other Financing CF 410 0 (12,061) (2,288) (2,486) Net Financing CF 2,854 2,795 21,136 (1,996) (2,122) Currency Adjustments 1 (59) 0 0 0 Chg in Cash 889 3,635 8,415 92 2,012 Opg CFPS (RMB) (0.95) 0.33 (2.02) 0.26 1.21 Free CFPS (RMB) 0.46 1.71 (1.18) 2.82 4.63
Source: Company, DBS Vickers
Page 57 Industry Focus China Internet Sector
Appendix
China internet sector – Total revenue size Revenue breakdown for China internet sector (2013)
RMB bn CAGR= 28% % 2,000 60% 52% 51% 1,723 1,800 Online ads Online 1,600 50% 21% Online payment 38% 3% 1,400 40% games 1,200 15% 1,000 826 30% 800 600 20% Others 600 398 6% 400 262 10% E-commerce 200 55% 0 0% 2011 2012 2013 2014F 2017F
Market size (LHS) Growth y-o-y (RHS)
Note: E-commerce only captures revenue, instead of gross merchandise value (GMV). Source: iResearch Source: iResearch
Number of netizens & mobile netizens in China Number of e-commerce customers in China
m m 60% 700 618 632 450 70% 390 600 564 400 49% 513 500 527 60% 457 350 302 500 420 43% 50% 384 300 38% 400 356 35% 242 298 303 250 40% 194 300 233 200 161 30% 200 150 118 20% 100 100 50 10% 0 0 0% 2010 2011 2012 2013 2014F 2008 2009 2010 2011 2012 2013
Jun-14 Number of customers (LHS) Netizen Mobile netizen As % of total netizen (RHS)
Source: CNNIC Source: CNNIC
Page 58 Industry Focus China Internet Sector
E-commerce market size in China E-commerce market size in China (quarterly)
RMB bn RMB bn 75% 6,000 70% 5,634 80% 800 81% 90% 4,772 70% 700 68% 80% 5,000 59% 64% 61% 70% 51% 3,780 60% 600 4,000 46% 51% 50% 60% 50% 500 44%46% 37% 43%42% 50% 3,000 2,760 40% 400 26% 31% 40% 1,892 30% 300 2,000 18% 30% 1,187 785 20% 200 20% 1,000 461 10% 100 217 260 287 422 364 427 462 640 525 624 691 10% 0 0% 0 0% 2010 2011 2012 2013 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 2014F 2015F 2016F 2017F E-commerce market size (LHS) Growth y-o-y (RHS) E-commerce market size (LHS) Growth y-o-y (RHS)
Note: In terms of gross merchandise value (GMV). Note: In terms of gross merchandise value (GMV).
Source: iResearch Source: iResearch
Breakdown of China e-commerce market B2C market share breakdown (2013)
Tencent B2C 100% 5.6% 90% Suning.com 80% 42% 40% 3.7% 52% 46% 70% 65% 60% 75% JD.com Amazon 60% 86% 16.4% China 50% 2.0% 40% VIPShop 1.9% 30% 58% 61% 48% 54% 20% 40% Dang Dang 35% Others 1.6% 10% 25% 14% Tmall 7.6% GOME 0% 57.7% 1.6% Yihaodian 1.3% 2010 2011 2012 2013 VANCL 2014F 2015F 2016F 2017F 0.6% B2C C2C
Note: B2C – Business to consumers; C2C – Consumers to consumers. Note: In terms of gross merchandise value (GMV).
Source: iResearch Source: iResearch
Page 59
Industry Focus China Internet Sector
China: Mobile operating system (OS) market share (2013) China: Preferred mobile internet connections (1H14)
60% 55%
50% Windows 2% Apple iOS 40% 23% Symbian 30% 0.4% Others 7% 20% 17% Android 15% 68% 10% 6%
0% Wifi 4G 3G 2G & 2.5G
Source: CNNIC Source: CNNIC survey (sample size = 30,000)
China: Breakdown of mobile internet users by city tier China: Pattern of internet usage between urban & rural (1H14) netizens (2013)
Function Urban Rural Difference usage usage (A-B) (A) (B) 4th-tier & Instant messaging 86.3% 86.0% 0.3% below 1st-tier Blogs 70.9% 70.5% 0.4% 40% cities Group buying 25.4% 15.2% 10.2% 13% Music 77.3% 66.9% 10.4% Games 58.4% 46.7% 11.7% Search 82.8% 70.5% 12.3% Video 74.4% 55.0% 19.4% 2nd & 3rd- tier cities Online payment 47.9% 25.7% 22.2% 47% E-commerce 55.2% 31.1% 24.1%
Note: Percentage of respondents that had used the function.
Source: Enfodesk Source: CNNIC survey (sample size = 30,000)
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Industry Focus China Internet Sector
China: Paid service categories for mobile netizens (1H14) Number of mobile game users in China
70% 62% m 250 50% 60% 215 50% 200 33% 40% 30% 43% 40% 34% 139 31% 150 26% 30% 25% 30% 19% 107 18% 20% 14% 100 78 20% 7% 45 10% 50 10% 0% 0 0%
2009 2010 2011 2012 2013
News Games Social
network Mobile game users (LHS) Life-style Time Readings Education As % of mobile netizen (RHS) management Note: Among all the respondents that had paid for internet services.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC
Popularity of mobile games by genre (1H14) Reasons to choose game platforms (2013) – Strong influence from social networks
Multi-play er game Single-player game 60% Parkour ( ) 48% Chess & cards 47% 跑酷 50% Chess & cards 46% Racing 47% 50% Racing 44% Casual 47% 40% Music 38% Parkour ( ) 45% 31% 31% 跑酷 30% 24% Shooter 31% Music 37% 23% 21% Casual 30% Puzzle 30% 20% 12% Puzzle 27% Shooter 26% 10% RPG 26% Strategy 25% Strategy 20% RPG 25% 0% Adventure 19% Adventure 25% Fighting 16% Fighting 20% Sports 15% Sports 15%
Game quality Game variety Free resources Free Easy to register to Easy Easy to operate to Easy Friends are using Brand awareness Brand Note: Percentage of respondents that had played the genre of game. Note: Percentage of respondents that agreed with the reason.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC survey (sample size = 30,000)
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Industry Focus China Internet Sector
Purpose to pay for mobile games (2013) Payment methods in mobile games
100% 60% 52% 77% 47% 44% 80% 50% 43% 40% 60% 30% 26% 24% 23% 18% 40% 27% 16% 25% 22% 20% 13% 13% 11% 18% 6.6% 20% 13% 10% 5.4% 0% 0%
)
) 財付通 支付寶 Q Coin Credit cards Point cards / cards Point operators items Alipay ( Online banking in games Pay via Telecom via Pay Tenpay ( Mobile accounts
Recharge accounts 2012 2013 Pay to down games Subscription services Activate checkpoints Purchase weapons & Purchase game cards Note: Among all the respondents that had paid for mobile games. Note: Among all the respondents that had paid for mobile games.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC survey (sample size = 30,000)
Factors to consider when purchasing online (2013) Percentage of e-commerce customers that have made purchases via mobile devices
100% 7% 5% 50% 46% 8% 7% 80% 8% 8% 9% 40% 60% 17% 28% 40% 22% 30% 23% 20% 38% 25% 20% 0% Familiar products Unfamiliar products User feedback Website awareness 10% Price Past experience Brand Logistics & services 0% Others 2012 2013
Note: Percentage of respondents that would consider the factor. Note: Among all the respondents that had made online purchases.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC survey (sample size = 30,000)
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Industry Focus China Internet Sector
Penetration of instant messengers (1H14) Penetration of social network websites (1H14)
80% 78% 60% 57.3% 65% 70% 50% 60% 50% 21% 40% 15% 40% 10.2% 30% 30% 9.8% 20% 16.4%14.8% 20% 5.6% 2.9% 2.7% 10.2% 9.3% 8.5% 8.3% 1.8% 10% 6.1% 10% 4.2% 2.7% 1.8% 0.6% 0% 0% ) ) ) ) ) ) ) ) ) ) ) ) ) ) YY QQ Line 語音 來往 啪啪 飛信 空間 米聊 易信 豆瓣 微視 陌陌 Skype Weixin 朋友網 人人網 開心網 游戲社區 Whatsapp Yixin ( Yixin Papa ( Papa Feixin ( Miliao ( Weishi ( Douban ( Ali Wangwang Laiwang ( Kaixin ( Immomo ( Renren Desktop Renren ( Qzone (QQ QQ Talk (QT Talk QQ Pengyou (
51.com (51 Note: Percentage of respondents that had used the product. Products in Note: Percentage of respondents that had used the product. Products in red are invested by Tencent. red are invested by Tencent.
Source: CNNIC survey (sample size = 30,000) Source: CNNIC survey (sample size = 30,000)
China: Market share of app stores (1H14) China: Market share of mobile app (1H14)
Wandoujia Sogou Map Tencent (Mobile (豌豆夾) (搜狗地圖) Housekeeper & 8% Mobile's own 10% YingYongBao) app stores 7% AMAP Google Map 15% 9% (高德地圖) Apple App Store 21% 7% Qihoo (360 PP Assistant Mobile Assistant) Tencent Map (PP ) 19% 助手 8% 5% Tiger Map Anzhi App Market (老虎地圖) Baidu Map 3% (安智市場) Others 3% 42% 6% Others China Mobile's Baidu (Baidu & 7% China Mobile's AppChina Map 91 Wireless) app store ( ) 25% (應用匯) 2% 和地圖 2% 1%
Source: CNNIC Source: CNNIC
Page 63
Industry Focus China Internet Sector
Ranking of popular apps in China (1H14)
Male F emale Age 24 & below 25-40 41 & above Age 24 & below 25-40 41 & above
1 QQ Weixin Weixin QQ Weixin Weixin
2 Weixin QQ QQ Weixin QQ QQ
3 UC Browser UC Browser QQ Browser Qzone Taobao 360 Mobile Security 4 Qzone QQ Browser 360 Mobile Taobao QQ Browser Taobao Security 5 QQ Browser Tencent Mobile Tencent Mobile Weibo Qzone QQ Browser Housekeeper Housekeeper ( ) ( ) 手機管家 手機管家 6 Tencent Mobile 360 Mobile UC Browser Tencent Mobile Tencent Mobile Tencent Mobile Housekeeper Security Housekeeper Housekeeper Housekeeper ( ) ( ) ( ) ( ) 手機管家 手機管家 手機管家 手機管家 7 Taobao Taobao Tencent News QQ Browser 360 Mobile Tencent News Security 8 Youku Video Tencent Baidu UC Browser Sogou Pinyin Sogou Pinyin YingYongBao ( ) 應用寶 9Tencent Tencent News 360 Mobile Youku V ideo UC Browser Qzone YingYongBao Security ( ) 應用寶 10 360 Mobile Security Qzone Tencent Sogou Pinyin Weibo UC Browser YingYongBao ( ) 應用寶
Source: EnfoDesk
Page 64
Industry Focus China Internet Sector
Tencent’s major M&As (since 2012)
Date Buy er Deal Seller Category Inv estment Details Dev elopment size Oct 2014 Tencent 7% stake in China n.a. Lottery HK$446m China LotSynergy mainly provides technology and services for n.a. LotSynergy lottery systems, terminal equipment, gaming products and ( ; 1371.HK) operations in China. It was transferred to Main Board of HK 華彩 Stock Exchange (from GEM Board) in Oct13. Tencent has option to increase its stake to 10%. Oct 2014 Tencent Invested in Guahao.com n.a. Healthcare n.a. Guahao.com is a leading healthcare appointment website in n.a. ( ) China. 掛號網 Sep 2014 Tencent Investsed in DXY.cn n.a. Healthcare c.US$70m DXY.cn is the largest online professional social network in the Tencent may explore potentials in providing ( ) healthcare industry in China. healthcare information on Weixin and 丁香園 Mobile QQ. Jun 2014 Tencent 24% stake in 58.com n.a. LBS >US$830m 58.com is China's largest online marketplace serving local 58.com could receive traffic from Tencent's (58 ; NYSE: WUBA) merchants; Tencent raised its stake to 24% (16% of voting platforms, and cooperate in O2O. 同城 rights). Jun 2014 Tencent 0.1% stake in CITIC n.a. Conglomerate US$50m CITIC Group is the leading financial and industrial conglomerate Tencent has cooperated with CITIC Bank in Group (267.HK) in China. internet finance (e.g. WeChat Credit Card). May 2014 Tencent 11% stake in NavInfo China Surv ey LBS RMB1.2bn NavInfo is one of the leading providers of digital map, NavInfo provides map data for Tencent ( ; 002405.CH) ( ) telematics, dynamic traffic information service and big data Map. Both companies launched car internet 四維圖新 中國四維 v ertical application serv ices in China. product WeDrive ( ) in Oct14. 趣駕 May 2014 Tencent c.18% stake in J D.com n.a. E-commerce n.a. A cquired 15% stake in Mar14 by cash, certain e-commerce Tencent offers "Level-1 access" at Weixin assets, and 10% stake in Yixun; JD.com could acquire 90% and Mobile QQ to JD.com. It also promotes stake of Yixun at the higher of RMB800m and its fair value. JD.com on its other key platforms. Tencent acquired another 5% stake of JD.com for US$1.3bn in May14 (c.18% stake in total, after dilutions). Mar 2014 Tencent 15% stake in Leju E-House ( ; LBS US$180m Leju is a leading prov ider of real estate online serv ices including Leju could receive user traffic from 易居 ( ) NYSE: EJ ) advertising, listings and product launch information, and O2O e- Tencent's Weixin, contact customers via 樂居 commerce serv ices. Leju was listed on NYSE in A pr 2014. Weixin's Official Accounts, and settle via Weixin Pay ment. Mar 2014 Tencent 28% stake in CJ Games CJ E&M Games KRW533bn CJ Games is an online and mobile game developer and publisher CJ Games to develop game titles, to be in South Korea. published and distributed by Tencent. Mar 2014 Tencent Controlling stake in n.a. E-commerce n.a. Mmb.cn is an e-commerce operator with focus in mobile e- Mmb.cn could access to Tencent's QQ Mmb.cn ( ) commerce in low-tier markets, with an edge in sales of mobile customer base. 買賣寶 phones.
Source: Companies, PEdata.cn, media websites, DBS Vicker s
Page 65
Industry Focus China Internet Sector
Tencent’s major M&As (since 2012, continued)
Date Buy er Deal Seller Category Inv estment Details Dev elopment size Feb 2014 Tencent 20% stake in n.a. LBS c.US$400m Dianping is China's leading online provider of merchant Dianping would receive user traffic from Dianping.com ( information, consumer ratings, group-buying, online restaurant Tencent's Weixin and Mobile QQ platforms; 大眾點 ) reservation, take-away service, e-coupon promotions and other it would also ride on Weixin Payment. 評網 O2O services. Should Dianping have IPO, Tencent could raise another 5% stake. Feb 2014 Tencent Increased its stake in n.a. Trav el n.a. LY.com is one of China's leading online prov iders of trav el LY.com has access points at Weixin in LY.com ( ) to services, with an edge in ticketing of tourist attractions. Apr14. LY.com promotes Weixin Payment 同程網 c.20% Tencent invested in LY.com in May12. as the preferred pay ment method. Jan 2014 Tencent c.12% stake in China n.a. Logistics c.HK$2.3bn China South City (CSC) is one of the leading developers and CSC may ride on Weixin's customer base, South City ( ; operators of large-scale integrated logistics and trade centers in and potentially cooperate with J D.com's 華南城 1668.HK) China. delivery network. Jan 2014 Tencent Increased its stake in Didi n.a. LBS Tencent Didi Taxi is one of the leading taxi-booking apps in China. Didi Taxi has access points at Weixin. Taxi ( ) inv ested a Tencent invested c.US$15m in May 2013. Tencent could promote Weixin Payment via 滴滴打車 total of Didi Taxi. US$45m Dec 2013 Tencent CyanogenMod n.a. Mobile software n.a. CyanogenMod is a developer of mobile open source ROM n.a. sy stems based in the US. Dec 2013 Tencent QuizUp n.a. Games n.a. QuizUp is a mobile game developer based in the US. n.a. Dec 2013 Tencent Invested in Howbuy n.a. Wealth n.a. Howbuy is one of the leading 3rd-party investment consultancy Howbuy launched the first fund trading ( ) management firms in China, and was granted 3rd-party fund sales license in platform on Weixin in Aug13. 好買財富 Feb12. Nov 2012 Tencent Invested in Meilishuo n.a. E-commerce n.a. One of the leading female fast-fashion e-commerce platforms in Tencent provides access points for ( ) China. Meilishuo.com in Mobile QQ. 美麗說 Sep 2013 Tencent c.37% stake in Sogou Sohu.com ( ; Search RMB3.2bn Sogou is one of the leading search service providers in China. Sogou provides search services to Tencent's 搜狐 ( ) NYSE: SOHU) Tencent has 25% voting rights. Tencent's Soso.com and QQ products such as Weixin, QQ, Qzone, 搜狗 Pinyin (QQ ) were incorporated into Sogou. QQ.com, QQ Explorer, etc. Tencent directs 輸入法 user traffic to Sogou. Jul 2013 Tencent c.6% stake in Activision V iv endi SA (EPA : Games US$1.4bn Activision Blizzard (AB) is one of the world's largest game Tencent partners with AB to bring AB's Blizzard (NASDAQ: VIV) developers and publishers. "Call of Duty Online" game to China. ATVI) Jun 2013 Tencent Raised stake in Cheetah Kingsoft Mobile software RMB290m Cheetah Mobile (CM) is 2nd-largest internet security software Tencent pays CM to promote its products Mobile (NYSE: CMCM) (3888.HK) provider in China, with good overseas exposure. on CM's platforms. by 8ppts to 18%
Source: Companies, PEdata.cn, media websites, DBS Vicker s
Page 66
Industry Focus China Internet Sector
Tencent’s major M&As (since 2012, continued)
Date Buy er Deal Seller Category Inv estment Details Development size Jun 2013 Tencent Invested in US e- n.a. E-commerce n.a. Fab.com is a leading e-commerce platform for designer products Tencent would take a board seat in commerce operator based in the US. Fab.com, and helps its expansion into Asia. Fab.com Sep 2012 Tencent 100% stake in TongCard DF J & Shenzhen A dv ertising & c.US$10m TongCard is one of the leading providers of CRM (Customer Tencent could enhance its CRM services to ( ) Capital Group promotion Relationship Management) in China, with an edge in membership its customers (i.e. offline stores). 通卡 promotion for the catering industry. Jul 2012 Tencent <20% stake in Caixin n.a. Media c.RMB60m Caixin Media is a multimedia platform in China with an edge in Caixin Media could be a content provider Media ( ) financial news reports. for Tencent News. 財新傳媒 Jul 2012 Tencent Invested in Lewa n.a. Mobile software c.RMB50m Lewa is a leading 3rd-party mobile ROM system developer in Lewa's LewaOS could cooperate with ( ) China. Tencent WeSecure ( ) 樂蛙科技 騰訊手機管家 Jun 2012 Tencent 48% stake in Epic n.a. Games RMB2.1bn Epic Games is a US developer in game engine technology Epic could ride on Tencent's distribution Games ("Unreal Engine") and game titles (e.g. Gears of War, Unreal, channels to access the Asian market. Unreal Tournament, Infinity Blade). May 2012 Tencent Acquired Yixun.com n.a. E-commerce c.RMB500m Yixun.com is a B2C online retailer in China. Tencent has invested JD.com acquired 10% stake in Yixun.com ( ) in Yixun.com since 2010. in Mar 2014, with options to acquire its 易迅網 remaining stake. Apr 2012 Tencent Acquired 14% stake in n.a. Social network RMB401m Daum Kakao mainly provides instant messaging and content Tencent's mobile game could introduce Kakao Corp (now Daum distribution services via its KakaoTalk app. successful games on KakaoTalk. Kakao) Jan 2012 Tencent Acquired 49% stake in MIH (major Games RMB348m Level Up is a publisher of online games and game magazines Level Up could help Tencent identify Lev el Up International shareholder of based in Singapore. Tencent has options to increase its stake to opportunities in online game sector in Tencent) 67%. Emerging Markets like Brazil and Philippines. Jan 2012 Tencent 8% stake of ChinaV ision n.a. Media HK$248m The company is mainly engaged in media-related businesses, ChinaV ision Media was acquired by Alibaba Media (1060.HK) including production, publishing and distribution of TV dramas Group in Mar14 (subsequently renamed to and movies, as well as other operations. Ali Pictures), and Tencent sold its stakes.
Source: Companies, PEdata.cn, media websites, DBS Vicker s
Page 67
Industry Focus China Internet Sector
Tencent’s service offerings
Communications: Name Monetization User Base
QQ IM Free 820m MAU (3Q14) 542m MAU from smart devices (3Q14) Weixin & WeChat Free 468m combined MAU (3Q14)
Value Added Services (VAS): Fee-based VAS registered subscriptions as of Jun14: 88m a) Social Networks: Name Monetization User Base
QQ Membership RMB10 per month Not disclosed Super VIP RMB20 per month Not disclosed Qzone Free; monthly subscription fee for VIP privileges (RMB10); and items 629m MAU (3Q14) sales from apps on open platform Tencent Microblog Free 157m MAU (2Q14) QQ Show (Avatars) Free; monthly subscription fee for VIP privileges (RMB10); or item sales Not disclosed QQ Music Free; monthly subscription fee for VIP privileges (RMB10); or item sales Not disclosed QQ Mail Free 227m MAU (2Q14) Mobile VAS Monthly subscription fee for VIP privileges (RMB5-15); or item sales Not disclosed (RMB1- 2 per item) b) Online Games: Name Monetization User Base
QQ Game Platform Monthly subscription fee for VIP privileges (RMB10-15) or item sales Not disclosed ACGs Monthly subscription fee for VIP privileges (RMB10-30) or item sales Combined ACU of 7.7m (3Q14) (See Table 2) MMOGs Monthly subscription fee for VIP privileges (RMB20) or item sales; Time- Combined ACU of 1.7m (3Q14) based (See Table 3) Mobile Games Monthly subscription fee for VIP privileges (RMB10) or item sales Not disclosed
Online Adv ertising: Name Monetization User Base
Brand display Inventories on QQ.com and verticals; regional portals; online video Over 1,000 brand display advertisers as platform; QQ IM; Tencent News app, etc. of 3Q14 Pricing mainly by CPT or CPD. Performance display Inventories mainly on social networks: Qzone, QQ IM, Weixin Official Accounts, and Microblog, etc. Pricing mainly by CPC or CPA through bidding system. Note: MAU - Monthly active users; PCU - Peaking concurrent users; ACU - Average concurrent users; ACGs - Advanced Casual Games; MMOGs – Massively Multiplayer Online Games; CPT - Cost per time; CPD - Cost per day; CPC - Cost per click; CPA - Cost per action.
Source: Company
Page 68
Industry Focus China Internet Sector
Tencent’s Advanced Casual Games (ACGs)
Game T it le Commercial Developer Genre Charging Model PCU Milestone Launch Commercialized: QQ Tang 1Q05 In-house Casual style combat Free; monthly subscription fee for V IP N/A QQ privileges (RMB10); or item sales 堂 R2beat 3Q06 Licensed Roller-blade racing Free; monthly subscription fee for V IP N/A QQ privileges (RMB10); or item sales 音速 QQ Speed 1Q08 In-house Car racing Free; monthly subscription fee for V IP 3m as of 3Q12 QQ privileges (RMB10); or item sales 飛車 QQ Dancer 2Q08 In-house Music and dancing Free; monthly subscription fee for V IP 3m as of 4Q12 QQ privileges (RMB20); or item sales 炫舞 Crossf ire 3Q08 Licensed FPS Free; monthly subscription fee for V IP 4m as of 3Q12 privileges (RMB30); or item sales 穿越火線 A.V .A. (Alliance of 1Q10 Licensed High-end FPS Free; monthly subscription fee for V IP N/A Valient Arms) privileges (RMB30); or item sales 戰地之王 League of Legends 3Q11 In-house MOBA F ree; item-based 8m as of 1Q14 (Riot Games) globally 英雄聯盟 Assault Fire 3Q12 In-house F PS F ree; item-based N/A 逆戰 Warface 1Q13 Cry tek F PS F ree; item-based N/A 戰爭前線 QQ Dancer 2 1Q13 In-house Music and dancing Free; monthly subscription fee for V IP N/A QQ 2 privileges (RMB10); or item sales 炫舞 NBA2K online 2Q13 Co-developed Sports F ree; item-based N/A with Take-Two War of Zombie 2Q13 Licensed Zombie theme F PS F ree; item-based N/A 生化戰場 Freestyle Football 2Q14 Licensed Sports TBC N/A 自由足球 FIFA Online 3 2Q14 Licensed Sports TBC N/A 足球在線 Age of Gunslinger 3Q14 In-house Third-person Shooter TBC N/A 槍神紀
Pipeline: Call of Duty Online TBC Licensed High-end FPS TBC N/A Online 使命召喚 Core F ight TBC In-house 2D side-scrolling TBC N/A fighting game 炫鬥之王 Metro Conflict: Presto TBC Licensed Science fiction theme TBC N/A FPS 重火力 Three Kingdoms TBC In-house RTS TBC N/A Online 霸三國 SMITE TBC Licensed 3D MOBA TBC N/A 神之浩劫 Note: ACG - Advanced Casual Games; PCU - Peaking concurrent users; FPS - First-person Shooter; MOBA - Multiplayer Online Battle Arena; RTS - Real-time Strategy.
Source: Company
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Industry Focus China Internet Sector
Tencent’s Massively Multiplayer Online Games (MMOGs) Game T it le Commercial Developer Description Charging Model PCU Launch Milestone Commercialized: QQ Fantasy 4Q05 In-house 2D Chinese mythology cartoon- Time-based; Item-based N/A QQ sty le 幻想 QQ SanGuo 3Q07 In-house 2D light MMORPG, ancient F ree; item-based N/A QQ Chinese history storyline 三國 QQ Huaxia 3Q07 In-house 2D hard-core fighting MMORPG Free; item-based N/A QQ 華夏 Dungeon & Fighter 2Q08 Licensed 2D side-scrolling action Free; monthly subscription fee for V IP 3m as of privileges (RMB20); or item sales 3Q12 地下城與勇士 Journey to the Fairyland 4Q08 Licensed 3D Chinese mythology water- Free; monthly subscription fee for V IP N/A colour painting style MMORPG privileges (RMB20); or item sales 尋仙 Hero Island 3Q09 In-house 2D fighting cartoon style F ree; item-based N/A MMORPG 英雄島 Dragon Power 2Q10 Licensed 2D hard-core fighting Chinese-style F ree; item-based N/A MMORPG 大明龍權 World of Fantasy 2Q10 In-house 2D community-based Chinese F ree; item-based N/A fantasy storyline cartoon-style 幻想世界 MMORPG World of West 1Q11 Licensed 3D Chinese fantasy story line F ree; item-based N/A QQ cartoon-style MMORPG, based on 西游 "J ourney to the West" QQ Xian Xia Zhuan 3Q11 In-house 3D community-based ancient F ree; item-based N/A QQ Chinese fantasy MMORPG 仙俠傳 Lineage 1 1Q12 Licensed 2D hard-core fighting MMORPG Free; item-based N/A 1 天堂 Continent of the Ninth 2Q12 Licensed 3D action, high-end v isual and F ree; item-based N/A console style MMORPG 第九大陸 Legend of Yulong 3Q12 In-house 3D fighting MMORPG, based on F ree; item-based 800,000 as of ancient Chinese history culture of 3Q13 御龍在天 the Warring States period Legend of Xuanyuan 4Q12 In-house 3D fighting MMORPG, based on F ree; item-based N/A ancient Chinese my thology 軒轅傳奇 Lineage II 2Q13 Licensed 3D fighting MMOG F ree; item-based N/A 2 天堂 QQ Fairy 1Q13 In-house 3D Turn-based ( ) casual- F ree; item-based N/A 回合制 QQ type MMOG 仙靈 Asura 3Q13 In-house 2.5D action MMORPG, based on F ree; item-based 600,000 as of ancient Chinese my thology 4Q13 鬥戰神 Game of Gods 3Q13 In-house 2D side-scrolling action MMOG Free; item-based N/A QQ 封神記 Blade & Sword II 4Q13 Licensed 3D fighting MMOG F ree; item-based N/A 2 刀劍 Blade & Soul 4Q13 Licensed 3D fantasy martial arts style Free; monthly subscription fee for V IP 1.5m as of fighting MMOG privileges (RMB9.8); or item sales 1Q14 劍靈 Pipeline: ArcheAge TBC Licensed 3D fighting MMORPG TBC N/A 上古世紀 Kritika TBC Licensed 3D cartoon style fighting action TBC N/A 疾風之刃 Monster Hunter Online TBC Licensed 3D fighting MMORPG TBC N/A OL 怪物獵人 Moonlight Blade TBC In-house 3D martial arts style MMORPG TBC N/A 天涯明月刀 Mystic Fighter TBC Licensed 2D arcade game sty le action TBC N/A MMOG 魂之獵手 Sura TBC Licensed 3D next-generation high-end TBC N/A fighting MMOG 天剎 Note: MMOG - Massively Multiplayer Online Games; MMORPG - Massively Multiplayer Online Role-playing Games. Source: Company
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Industry Focus China Internet Sector
Tencent’s mobile games on Mobile QQ / Weixin Game Centres
Commerc ial Game Title Launch Developer Genre Charging Model Milestone Commercialized: Timi Match Ev ery day 3Q13 In-house Puzzle Free; item-based Registered user accounts over 天天愛消除 40m as of Aug 2013; Timi Link Ev ery day 3Q13 In-house Puzzle Free; item-based N/A 天天連萌 Rhythm Master 3Q13 In-house Music Free; item-based N/A 節奏大師 Timi Run Everyday 3Q13 In-house Action Free; item-based N/A 天天酷跑 Fight the Landlord 4Q13 In-house Traditional board F ree; item-based N/A 歡樂鬥地主 & card Plants V s Zombie 2 2 4Q13 Licensed Tower defense F ree; item-based N/A 植物大戰僵屍 We Heroes 4Q13 Licensed Card F ree; item-based N/A 全民英雄 Timi Speed Ev ery day 4Q13 In-house Action Free; item-based N/A 天天飛車 We Fly 1Q14 In-house Shooter Free; item-based Registered user accounts over 全民飛機大戰 100m as of Mar 2014 Mahjong 1Q14 In-house Traditional board F ree; item-based N/A 歡樂麻將 & card We Poker 1Q14 In-house Card Free; item-based N/A 天天德州 Tower of Saviors 1Q14 In-house Puzzle & card Free; item-based N/A 神魔之塔 Thunder Fighter 1Q14 Licensed Shooter Free; item-based Registered user accounts nearly 雷霆戰機 40m as of Apr 2014 We Dance 2Q14 In-house Music Free; item-based N/A 全民炫舞 Everybody PongPongPong 2Q14 Licensed Mini game Free; item-based N/A 全民砰砰砰 We Town 2Q14 In-house Simulation Free; item-based N/A 全民小鎮 We Fight 2Q14 In-house Action Free; item-based N/A 天天炫鬥 Cast le Clash 2Q14 Licensed Strategy Free; item-based N/A 城堡爭霸 Taming Monster 2Q14 Licensed Action & card Free; item-based N/A 全民打怪獸 All Men are Brothers 2Q14 In-house Card Free; item-based N/A 全民水滸 My Elf 2Q14 In-house Simulation Free; item-based N/A 全民精靈 Joyful West 3Q14 In-house Card Free; item-based N/A 歡樂西游 QFarm 3Q14 In-house Simulation Free; item-based N/A 全民農場 Mini Empire 3Q14 Licensed Strategy Free; item-based N/A 迷你帝國 Candy Crush Saga 3Q14 Licensed Puzzle TBC N/A 糖果傳奇 MoDoo Marble 3Q14 Licensed Simulation Free; item-based N/A 天天富翁
Pipeline: Battle Of Sango TBC Licensed Card TBC N/A 赤壁亂舞 Fruit Ninja TBC Licensed Action TBC N/A 水果忍者 Source: Company
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Industry Focus China Internet Sector
Tencent’s other platforms
Description Charging Model PCU Mini Casual Games Board, chess and card games, etc.; 130 mini casual Free; RMB10, 15 and 50 per month for N/A games as of 2Q14 V IP priv ileges or item sales Web Games In-house & third-party web games; 75 web games as F ree; item-based N/A of 2Q14
Commercial Game Title Launch Developer Description Charging Model PCU Roco Kingdom 3Q10 In-house Community, targeting Free; RMB10 per month for VIP privileges PCU over 1m 洛克 children (1Q13) 王國
Platform Open date Remark Qzone / Pengyou 3Q10 c.400,000 registered apps; c.850,000 registered developers (as of Apr 2013) TenPay 3Q10 N/A Tencent Microblog 4Q10 N/A Discuz 2Q11 N/A QQ Game Platform 3Q11 75 web games (2Q14); ranks No.1 in client game / web game / mobile game in 2Q14 Tencent Video 2011 Ranked No.2 in Monthly Unique Visitors (MUV) in 2Q14 QQ Browser 2010 Ranked No.2 in mobile browser MAU in 2Q14 QQ.com n.a. No.1 portal in China by Page V isits (PV ) and User Visits (UV) for 2Q14 Source: Company
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Industry Focus China Internet Sector
DBSV recommendations are based an Absolute Total Return* Rating system, defined as follows: STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame) BUY (>15% total return over the next 12 months for small caps, >10% for large caps) HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FULLY VALUED (negative total return i.e. > -10% over the next 12 months) SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
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The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBSVHK and/or DBSVH) do not make any representation or warranty as to its accuracy, completeness or correctness. Opinions expressed are subject to change without notice. This document is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain separate independent legal or financial advice. DBSVHK accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. DBSVH is a wholly-owned subsidiary of DBS Bank Ltd. DBS Bank Ltd along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. DBSVHK, DBS Bank Ltd and their associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies.
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Industry Focus China Internet Sector
COMPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBSVHK and its subsidiaries do not have a proprietary position in the securities recommended in this report as of the date the report is published. 2. DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may beneficially own a total of 1% or more of any class of common equity securities of the subject companies mentioned in this document as of the latest available date of the updated information. 3. Compensation for investment banking services: DBSVHK, DBSVUSA, DBS Bank Ltd and/or other affiliates may have received compensation, within the past 12 months, and within the next 3 months may receive or intends to seek compensation for investment banking services from the subject companies mentioned in this document.
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