SYNC. Global investment themes: technology, media and telecoms Issue No. 141

China’s Tech Sector 5 December 2016

The Syndrome China’s government is intent on upgrading its manufacturing sector and Inside leading the world in a range of advanced technologies. Implicit in its “Made . Players in China 2025” 10-year plan is the notion that China will displace the US as . Trends the world’s dominant technological power. . Value Chain . Industry analysis When we last looked at this issue, back in August 2015 (see “Tech Wars - Electric vehicles 2020: China vs US”), we concluded that the US was likely to remain a - Shared transport leader in all major advanced technologies over the next decade, with - the only Chinese player equipped to challenge the US’s lead in next - Consumer electronics generation technologies such as AI. Eighteen months on, the signs are that - Semiconductors China is closing the overall gap faster than we expected. - High perf. computing - Artificial intelligence Conclusions - Internet platforms This report researches the state and thrust of Chinese technology over the - Cloud infrastructure next two to five years and what it implies for global technology investors. - Genomics Here is what we found: . China Tech Scorecard - Who’s who . Electric vehicles: BYD (Hold) is the Chinese market leader, but - Thematic Screen competition from Alibaba, Baidu, and LeEco will disrupt things. - Valuation Screen - Risk Screen . Robotics: HollySys (Buy), Estun (Avoid) and Siasun (Avoid) are the . Stock Watch List domestic leaders, but best to play this theme via the Japanese parts . Private companies makers: Harmonic Drive, Keyence, Nachi-Fujikoshi, Omron and Daihen. . Consumer electronics: Component makers AAC Tech (Buy) and (Buy) are the best way to play this sector.

. Semiconductors: SMIC (Buy) is China’s leading foundry and should benefit from “Made in China 2025”. . High performance computing: Dawning (Avoid), (Avoid) and (Sell) are leaders in HPC, but whilst they may gain market share, margins are likely to fall under pressure for global domination.

. Artificial intelligence: Baidu (Buy) is the leader in China, although iFlytek (unrated) looks interesting too. . Internet: Baidu (Buy), Tencent (Buy), Alibaba (Avoid), LeEco (Avoid) all benefit from a protected home market and overseas expansion plans. Report type . . Cloud infrastructure: Alibaba (Avoid) is the leader in China, but we Single theme . prefer to lay this theme globally via and . Multi-theme . Sector Scorecard . Genomics: China’s BGI (unlisted) is the world’s largest gene . Best Ideas sequencer. But the US’s Illumina, the world’s largest gene sequencing equipment maker, is the way to play this theme. Cyrus Mewawalla Mike Orme Elgen Strait www.researchcm.com Managing Director, Research Senior Analyst, Research Managing Director, Sales [email protected] [email protected] [email protected] +44 (0) 20 3393 3866 +44 (0) 20 3393 3867 +44 (0) 20 3744 0105

High quality research requires investment Please do not copy or forward © CM Research 2016

SYNC, Issue 141 Chinese Tech 5 December 2016

Contents

PLAYERS ...... 3

TRENDS ...... 4

CHINA AND THE INDUSTRIES OF THE FUTURE ...... 8 Shared transportation ...... 8 Electric vehicles ...... 9 Robotics ...... 10 Consumer electronics ...... 12 Semiconductors ...... 12 High performance computing ...... 13 Artificial intelligence ...... 14 Internet platforms ...... 15 Cloud infrastructure ...... 16 Genomics ...... 17

THE CHINA SYNDROME ...... 19 Why tech investors cannot ignore China ...... 19 The Millennial effect ...... 20 The Trump effect ...... 21 China by the numbers ...... 22 M&A activity ...... 23

STOCK WATCH LIST ...... 24

PRIVATE COMPANIES ...... 28

CHINA TECH SCORECARD ...... 30 Who’s who ...... 30 Thematic screen ...... 31 Valuation screen ...... 32 Risk Screen ...... 33

APPENDIX: OUR “THEMATIC” RESEARCH METHODOLOGY ...... 34

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Players Most of China’s dominant technology players operate in the hardware and Internet sectors. Within hardware, semiconductors remain an area where Chinese firms significantly lag the world’s best, both in chip design and high quality foundry operations. Within the Internet space, China’s champions – Alibaba, Tencent and Baidu – are largely domestic players operating in a protected market, preparing for a period of overseas expansion. remains a weakness for China’s technology sector, although China is a world leader in genomics and making serious inroads into artificial intelligence and autonomous driving. The table below identifies the dominant Chinese players in several important next generation technologies. Many unlisted companies are highly influential on the global technology scene, including , DJI, WuXi AppTec, BGI and Didi Chuxing. Who are the big technology players in China are who are their global rivals?

China Tech Chinese Tech Leaders Global Tech Leaders

Listed companies Private companies Tsinghua Unigroup Semiconductors SMIC RDA Microelectronics Samsung Spreadtrum Qualcomm HiSilicon (Huawei) ARM (Softbank) Lenovo Huawei Alphabet High Performance Inspur Electronic HP Computing Dawning (formerly Sugon) IBM Estun Automation Aviation Ind. Corp. of China ABB Industrial Robotics Midea (Kuka) GSK CNC Fanuc Hardware HollySys Kawasaki Siasun Yaskawa Consumer robotics DJI iRobot Rokid Parrot Ninebot (Segway) Softbank

Consumer AAC Technologies Apple Electronics Foxconn Samsung BYD Tencent/Foxconn Tesla Electric Vehicles LeEco/ Baidu/Changan Auto Ford Alibaba/SAIC Novogene Illumina Genomics BeiGene Shenzhen BGI 23andMe WuXi AppTec Theranos Software Baidu Mobvoi Alphabet Artificial HikVision SenseTime IBM Intelligence iFlytek Turing Robotics Microsoft Alibaba Huawei Amazon Cloud infrastructure Tencent Ucloud Microsoft Kingsoft QingCloud IBM Internet Alibaba Didi Chuxing Alphabet Internet Companies Baidu Ant Financial Amazon Tencent Apple JD.com LeEco Microsoft Source: CM Research

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Trends Here are the key themes spanning across the Chinese technology sector.

Trend What’s happening?

Semiconductors So serious (in Chinese eyes) is the weakness of China’s domestic semiconductor industry that the Communist Party is providing the big State-backed chip companies almost unlimited financial backing in a bid to acquire foreign chip companies. After its failed bid to acquire Micron, government controlled Tsinghua Unigroup, China’s largest chip designer, is building a $2.8 billion memory-chip company, Changjiang Storage, largely with government funding. At the same time, a major State-funded expansion operation is underway at China’s biggest semiconductor foundry, SMIC. The goal is to wean China off its dependence on foreign technology – both in chip design and fabrication. Meanwhile, Intel, Qualcomm, Samsung, Micron and TSMC, among others, will continue to play an intricate “power game” with the Chinese authorities to maintain their footholds in their biggest and fastest growing market while the long game plays out. And, in the interim, Huawei, China’s largest telecom equipment maker, signals what China can achieve and what foreign suppliers must confront in the long game ahead. Huawei’s captive chip operation – called HiSilicon – now provides the key chips for its highly-rated as well as for its KunLun online transaction processing (OLTP) servers for “mission critical” enterprise applications. These chips rival competing “mission critical OLTP servers” powered by Intel Xeon processors and IBM Power8 processors. See “The future of semiconductors” for related themes in the chip sector. M&A backlash Both the US and Europe – who are understandably apprehensive at the thought of State- funded Chinese players acquiring their high-tech champions – are considering stronger restrictions on Chinese takeovers in the technology sector. The all-powerful Committee on Foreign Investment in the (CFIUS) has been assiduous in blocking Chinese attempts to acquire US technology companies, especially semiconductor companies. In mid-November 2016, a congressional panel called the “US- China Economic and Security Review Commission” recommended that Chinese State- owned companies be barred from acquisitions in the US. This followed the announcement by LeEco, the Chinese technology conglomerate, that it may break the investment pledges it gave to US connected car start-up, Faraday Future. German authorities too, in the wake of rising concerns about Midea (a Chinese home appliance maker) taking control of Kuka (a leading German maker), blocked the acquisition of Aixtron (a German chip equipment maker) by Grand Chip Investment Fund. Swiss politicians expressed similar concerns when ChemChina recently bid for Syngenta, an agrochemicals giant. On 29 November 2016, China’s State Council itself indicated it would require all foreign acquisitions valued above $10bn (or $1bn if they are outside the acquirer’s core business) to be pre-approved by the Party State to stem outflows from China's capital account. See “Tech M&A targets” for our predictions of who will be acquired next. Genomics Genomics is the world’s next trillion-dollar industry. China is well-positioned to become the industry’s global headquarters. Spearheaded by world leading DNA decoders like Novogene, Shenzhen BGI, WuXi AppTec and CloudHealth, China enjoys the advantages of scale, skills clusters and a benign regulatory environment in genomics, biotech and regenerative medicine. Neither South Korea nor has anything like China’s test-bed population scale or ethnic diversity for research. The Chinse State is investing $9.5bn over the next 15 to 20 years in the Precision Medicine Initiative. See “MedTech” for more detail on the genomics theme.

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Trend What’s happening?

Internet platform China’s giant Internet platform companies – Baidu, Alibaba and Tencent (the “BATs”) – companies keep jumping into and reshaping adjacent markets such as banking and automobiles. They have shown the world the power of innovation “with Chinese characteristics”. They have leverage and prospects well beyond China. Unlike their US peers, the BATs are only now ramping up digital advertising revenues: the BATs between them account for more than 70% of time spent on mobile phones in China. One area, among many, where they are a global phenomenon is in their thirst for foreign “content”. China is only now shifting wholesale to digital advertising, opening up rich new revenue streams for the BATs: China’s digital advertising market will be worth $42bn in 2016, according to eMarketer. Alibaba accounts for 29% of the total (up from 25% in 2015) whilst Baidu’s share has fallen to 21% (down from 28%). Tencent’s share is 10%. See “Ecommerce themes” for related trends. Industrial Industrial robots account for over 80% of all robot sales. The global industrial robot market is controlled by four companies: Fanuc, Yaskawa, ABB and Kuka. China buys one in every four industrial robots sold. Yet it still ranks only 28th in the world in robot density. Robots are front and centre of China’s ambitions to become an advanced industrial power. Today, China imports the vast majority of industrial robots from Japan, Europe and the US. Japan supplies 90% of the market for specialist robotics components. Native Chinese industrial robot companies now account for only 31% of domestic demand, up from 29% in 2013 and this shift is going to continue with substantial State backing behind the top down drive from President Xi Jinping and the Made in China 2025 project which aims to turn China from a robot importer to a robot exporter. Given the relatively poor quality of Chinese robots, this will be a challenge. However, Chinese robotics companies such as Siasun, HollySys, GSK CNC, Estun and Ningbo Techmation’s E-Deodar are beginning to be more than cheap alternatives to foreign brands. China will, of course, acquire foreign technology where it can: earlier this year, Midea, a Chinese home appliance maker, took control of Kuka; Ninebot bought Segway; Agic Capital, a Chinese private equity house purchased Italy’s Gimatic; and Zhejiang Wanfeng bought Paslin in the US. For investors, we still believe – see “Robotics (Vol. II)” – that the best way to play this theme is via the robot component makers: Cognex, Harmonic Drive, Keyence, InvenSense, Nabtesco, Nachi-Fujikoshi, Omron and Rockwell Automation. Consumer While China significantly lags western rivals in the industrial robot market, it is far more of robots a global player in consumer robots. It has established a strong foothold in the nascent personal robot and home robot sector with products such as Rokid, a charming, conversational table-top robot and Ecovacs, a Chinese version of the leading robot cleaning company, iRobot. A host of well supported start-ups such as CloudMinds, Turing Robot and A.I. Nemo are limbering up in left field. Consumer In consumer electronics markets, Apple and Samsung ought to be worried: Huawei, electronics Lenovo, ZTE, Xiaomi and LeEco are now outgunning them in terms of price/performance metrics in the domestic market. They are also fast adapting themselves to attack the huge addressable Android markets of India, Africa and Latin America. The Chinese electronics players are not afraid to challenge the US leaders in tomorrow’s technologies either. These established players, together with a host of start-ups, are moving beyond smartphones into the next generation of technologies: in VR and AR, (see “Virtual Reality”), DeePoon, ANTVR and 3Glasses already outperform US rivals by volume of headsets sold and there are 200 registered VR/AR companies in alone; in drones, DJI is a world leader; and in wearable technology, Mobvoi, a spin-out from China, is a prime example of next generation technology leadership with its AI-based voice platform for Android wearables. See “Hardware themes” for more on this.

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Trend What’s happening?

High Chinese companies see opportunities in the $11bn global High Performance Computing performance (HPC) market. Until relatively recently, HPC was the province of IBM and HP Enterprise, computing but now Huawei, Lenovo, Dawning (formerly Sugon) and Inspur are in the fray. (HPC) Huawei is the most aggressive Chinese participant – its KunLun mission critical servers are already being used in SAP’s HANA databases. In addition, at a processing of 93 petaflops (i.e. 93 quadrillion floating point operations per second), the Sunway TaihuLight is now the world’s fastest supercomputer. Moreover, there are more accessible supercomputers in China than in the US. What is equally impressive is that this achievement was founded on “native” Chinese processors and interconnect technology. Besides providing China with a significant resource for defence, life sciences and artificial intelligence, the Sunway TaihuLight gives the Chinese HPC drive a cachet that no other country outside the US can command. In November 2016, Japan’s Ministry of Economy, Trade and Industry announced that it plans to spend $173m to try to build a new supercomputer capable of 130 petaflops. Connected China is likely to be the testbed market for 250m autonomous neighbourhood electric Neighbourhood vehicles (NEVs) and a revolution in urban mass transport. NEVs are critical to tackling the Electric Vehicles endemic problems of pollution, gridlock and road kill that the Chinese government is (NEVs) determined to tackle. A host of Chinese enterprises with State support are developing connected car technology. BYD is the leader in e-buses and e-bikes. But several partnerships between technology companies and car makers have come into serious contention this year, including Baidu/Changan Auto, Alibaba/SAIC, LeEco/Faraday Future and Tencent/ Foxconn. Increasingly, this market looks like it will be protected: only this month, BMW pulled out of a connected car joint venture with Baidu. In the midst of all this will be the ride hailing boom. China accounts for over 70% of the 500% growth in global ride hailing revenues this year. Didi Chuxing, jointly controlled by Alibaba and Tencent, is the dominant force, having bought out Uber in China. Much will come down to attitudes towards car ownership in China. At present, less than 10% of Chinese citizens have driving licenses. China will have a huge influence on the global automotive industry as it innovates in the field because it is already the world’s largest car market. See “Batteries” and “Autonomous Vehicles (Vol. II)” for more on how we see the electric vehicle theme playing out. TPP trade deal President-elect Donald Trump has stated that his administration would drop its support for the Trans-Pacific Partnership (TPP), a regional trade pact between 12 nations. The TPP promoted an open Internet economy. Its demise would be bad for the global technology sector because it removed bureaucracy over cross-border data flows and banned countries from forcing companies to store data about their citizens within their own national borders. Scrapping the TPP would make it harder for US technology giants to expand into Asia, limiting their growth prospects. This leaves room for China’s technology companies to fill the vacuum. If China steps in with an alternative trade deal for Asia, it could be the ecosystems of Alibaba, Tencent, Baidu, NetEase and Ctrip that dominate Asia rather than Amazon, Facebook, Google, Activision Blizzard and Priceline. See “Trump on Tech” for more on the implications of a Trump presidency on the global technology sector.

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Trend What’s happening?

Artificial China now publishes more academically accredited papers on advanced AI than the US. Intelligence But this does not mean that it leads the US. Nonetheless, Baidu, under ex-Google “superstar” Andy Ng, operating out of a $350m Silicon Valley R&D facility, is world class in language understanding and the development of “brains” for self-drive vehicles. For now, Baidu is in a class of one, but China has an edge in the brute force approach to AI followed by the world leaders: Google DeepMind’s AlphaGo programme (which beat the world champion in the Chinese game of Go in March 2016) would not have been possible without enormous raw computing resource and huge datasets. China’s advance in AI is likely to get much stronger since many of the required components for success in this field are now in place: . Supercomputers: at 93 peta-flops, China’s Sunway TaihuLight system is the fastest supercomputer in the world; . High performance computing: Huawei and Lenovo make world-class, cloud-based HPC server systems; . Datasets: the sheer volume of data China has at its disposal to curate and analyse is mind boggling; . Data scientists: China’s pool of data scientists – many trained in Silicon Valley – is growing rapidly. AI will give China an advantage in genomics, driverless cars, the Internet of things, virtual reality, voice-based platforms, weapons systems and many more advanced technologies. In the private sector, companies like Mobvoi, iFlytek and Hikvision are all upping the ante in Chinese developed AI. Most of these early phase operations are funded by the BATs. See “AI (Vol. II)” for more on this theme. Cloud As the world of IT shifts from a licensed software model to a cloud-based model, cloud infrastructure services companies will sit in one of three segments of the cloud technology stack: software-as-a-service (SaaS), platform-as-a-service (PaaS) or infrastructure-as-a-service (IaaS). The further down the stack you go, the more sticky the customer base: SaaS services are relatively easy to migrate between; PaaS services tend to be more sticky; and with IaaS it is very difficult to move from one vendor to another because the big IaaS providers – Amazon Web Services, Microsoft Azure, Google Cloud and IBM SoftLayer – run closed proprietary platforms. IaaS services are the most expensive and difficult market for vendors to enter, but once established they are cash cows. Investors continue to underestimate the importance of cloud infrastructure: it is the platform on which the next generation of advanced technologies (such as artificial intelligence or virtual reality) will sit. In China, the leading public cloud IaaS provider is Alibaba. The next two players are Amazon and Microsoft. Below them sit a further cluster of home grown vendors such as Huawei, UCloud, QingCloud, Kingsoft, Tencent and Baidu. Given the role that network effects play in IaaS, we believe Alibaba has the best chance of reaping the largest share of the IaaS industry’s profits pie. See “Cloud computing” for more on this theme.

Source: CM Research In “Tech Wars 2020: US vs China”, published in August 2015, we looked at whether the US or China is better placed to dominate the next generation of advanced technologies. We concluded back then that the US’s technological lead over China is likely to widen by 2020, so investors are likely to be better off investing in the top US technology companies than in their Chinese peers. Eighteen months on, the signs are that China is closing the overall gap faster than we expected.

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China and the industries of the future In May 2015, China's State Council announced its “Made in China 2025” initiative. The goal was to modernize the country's manufacturing sector by moving into the most lucrative parts of the value chain, encouraging innovation and acquiring intellectual property assets in high technology industries from overseas. As part of the Made in China 2025 initiative, we are seeing the rise of Chinese champions in several high-tech industries: . Electric vehicles . Shared transportation . Robotics . Digital hardware . Semiconductors . High performance computing . Genomics . Artificial intelligence . Cloud infrastructure . Internet platforms

Shared transportation Didi Chuxing, China’s leading taxi hailing app was valued at $36bn at its most recent funding round. That compares to Uber’s $62bn. Given that Didi Chuxing covers China only, whilst Uber is global, this is some achievement. Pollution, gridlock, carnage and the future of mass transit In 2015, China retained its status as the world’s number one market for automobiles, with sales reaching 24.6m units, up 4.7% year on year. This compared to 17.2m vehicles sold in the U.S. But being the world’s largest automobile market creates problems: pollution, traffic congestion and road accident fatalities – at least 200,000 people die every year in traffic accidents in China, according to the World Health Organisation. Technology can fix many of these problems. When it comes to the next generation of automobiles, China has a test-bed market of 250m urban millennials at its disposal. Moreover, China’s State Council has made it clear that tackling the joined-up problems of pollution, traffic chaos, road kill carnage and deep dependence on imported oil are high priority. The sheer scale and political impetus driving China’s automobile market gives it a good chance of attaining world leadership status by 2025. At an FT Motor Industry Summit Conference in June there was a hard consensus among the assembled industry executives from all over the world that “car sharing will trump ownership” in the medium term. In China, the urban millennials signal just that: less than 10% of Chinese adults hold licenses or wish to drive themselves. Many Chinese executives, upper middle-class people and Party officials see the car as “a third space” between home and office where they can work or be entertained. This is already fed into design changes that foreign suppliers are having to offer – saloons with a lot of rear leg room and back seat infotainment. For the emerging world of urban mass transport, cars will have to be re-imagined. This shared transportation revolution is taking off at scale in China, the only market where a local ride hailing app, Didi Chuxing, was able to beat Uber at its own game: in August 2016, Uber agreed to sell UberChina in return for a 20% equity stake in Didi Chuxing. There are no listed stocks through which to play the shared transportation theme in China.

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Shared transportation: Chinese leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Shared Didi Chuxing Uber Ola transportation Tujia Lyft BlaBlaCar Xiaozhu GrabTaxi Yandex Tesla Gett Source: CM Research

Electric vehicles Within a decade, China may well lead the world in making autonomous neighbourhood electric vehicles (NEVs) a mainstream consumer product. The Chinese government has given carte blanche to non-auto companies to enter the autos market. It aims to fund and protect the development of a countervailing power against the foreign auto makers and auto parts suppliers. As a result, the large Chinese Internet platforms – Baidu, Alibaba, Tencent (the “BATs”) and LeEco – are getting involved in designing their own connected cars. Alibaba has already launched a smart, electric SUV – referred to as the “Internet Car” – with State owned enterprise SAIC. The smart part will be run from Alibaba’s cloud operation. Tencent is working with Foxconn and China Harmony Motor to enter the connected car market. Meanwhile, the highly aggressive management team at LeEco controls the mysterious Californian start-up, Faraday Future. Getting into connected NEVs fits well with the BATs’ core competencies in the fields of customer relationship management, smart consumer electronics gadgets, real-time datasets, online marketing, mobile banking and ecommerce. In the case of Alibaba, order fulfilment and logistics also represents a key asset. Much of urban NEV transit will involve electric buses and electric bikes. BYD is dominant in this space and has a presence in the US, Latin America and Eastern Europe. It also happens to be China’s largest manufacturer of batteries, the key enabling technology. Batteries and electric vehicles: Chinese leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Joint ventures Tesla Ford BYD Tencent/Foxconn Renault- BMW Batteries and Geely Baidu/Changan Auto Mitsubishi Volkswagen electric vehicles Alibaba/SAIC Daimler LeEco/Faraday Future Toyota Tata Motors Source: CM Research

There is some confusion as to where China is placing its bets. It has been favouring lithium-iron-phosphate over lithium-ion technology. Lithium-iron-phosphate batteries are safer than lithium-ion ones (because they don’t heat up so much), but are less powerful. BYD has recently hedged its position by forming an alliance with Samsung, whose lithium-ion batteries came under increasing scrutiny following the mass recall of the Samsung Note 7 in October 2016. As far as self-driving technology is concerned, Baidu is acknowledged to be in the vanguard, having successfully “self-driven” a retrofitted BMW through 18.6 miles of last December. Baidu, like Google, aims to build the brains rather than the cars and hopes to capture the dragon’s share of that $30bn advanced driver assistance systems (ADAS) market, according to Citic Securities forecasts.

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However, in November 2016, BMW pulled out of their self-driving partnership, giving Baidu’s connected car strategy a big jolt. Baidu is now signalling that, like Google and Apple, its focus will be on building the brains for vehicles. Meanwhile, LeEco is having problems of its own. Faraday Future, the electric car start-up which claims to be a challenger to Tesla, has suffered a string of production delays for its first vehicle because its main financial backer, the Internet conglomerate LeEco, faces serious financial troubles. Until now, Faraday had raised hundreds of millions of dollars in funding, almost all of it from LeEco. Its overall headcount is now up to 1,200 people, including star engineers from Tesla and BMW. If LeEco fails, Faraday Future may run out of options. LeEco’s financial worries generated a wave of calls in the US to vet overseas buyers of US tech start-ups. The route towards self-drive will be messy with many setbacks across the world. But it will be less of a mess in China where an autocratic government has thrown its weight behind autonomous vehicles and mass transit electrification. Whilst BYD is currently the incumbent player, it is by no means certain that it will remain so in the future. With large Internet players – Alibaba, Baidu, Tencent and LeEco – pouring money into this technology, investors should expect to see major disruption. See “Batteries” and “Autonomous vehicles (Vol. II)” for more on these themes. Robotics Over the next decade, China’s government has committed to upgrading its manufacturing sector. Critical to its “Made in China 2025” targets is the need for China to “robotise” itself and fast. Industrial robots In 2015, 27% of all industrial robots made were shipped to China, according to the International Federation of Robotics. Despite already being the biggest robot market in the world it still deployed less than 40 robots per 10,000 manufacturing workers in 2015 compared to around 300 in , for example, and over 500 in South Korea. China is ranked 28th in the world in robot density, with just 36 robots per 10,000 manufacturing workers Dashed grey line indicates global average Industrial robot density, 2015 (No. of robots per 10,000 employees in manufacturing industry) 600

400

200

Robots per 10,000 employees 10,000 per Robots 0 South Korea Singapore Japan Germany USA France UK China

Source: World Robotics Report 2016 (International Federation of Robotics) CM Research

The State Council is pushing for China’s robot density to increase from 36 in 2015 to 150 by 2020. President Xi Jinping made clear earlier this year that China needs to become a world power in robotics technology and not just as the world’s biggest importer of industrial robots. A huge effort is going into supporting the domestic robot industry which is still largely associated with supplying relatively low quality robots at a 30% discount to branded robots made by the Japanese and the Europeans. The domestic suppliers’ market share has been creeping up, from 29% in 2013 to 31% last year led by Siasun Robot and Automation and GSK CNC. A new player, HIT Robot Group (HIT stands for the Harbin Institute of Technology), is making waves while general purpose automation services and components group HollySys – China’s version of Rockwell Automation – is a clear favourite with the railways and nuclear industries.

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The legendary Foxconn with its one million human workers and 2011 prediction that it would install one million robots by end 2014 – it only had 40,000 in its factories at the last count – is a major force in the sector. At work now is the scissors movement between robot capex and human opex. The former is falling in China while the latter is rising making the case for robotisation even stronger. Foxconn is finding that adding robots to assembly lines where dexterity, flexibility and common sense are of paramount importance – for example, a box comes down the line at an odd angle – is a non-trivial challenge still. Robots need to develop richer “belief spaces” about the balance of probabilities in their operating environments. Meanwhile, as China drives ahead to deploy “dark factories”, the regime faces huge challenges of what to do with displaced workers. The leading industrial robot companies in China include Estun Automation, HollySys, Siasun Robot and, now, Midea (which has taken control of Germany’s leading industrial robot maker, Kuka). However, as we explained in “Robotics (Vol. II)”, the best way to play the industrial robot theme over the next two to three years is to buy the Japanese parts makers, which account for 90% of the market for specialist robotics components. They include Harmonic Drive, Keyence, Nabtesco, Nachi-Fujikoshi, Omron and Daihen.

Industrial robots: China’s leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies ABB Foxconn Estun Automation Aviation Ind. Corp. of Ch Fanuc Keyence HollySys GSK CNC Kawasaki Nabtesco Industrial robots Midea (Kuka) HIT Robot Group Yaskawa Nachi Fujikoshi Siasun Robot Zhejiang Wanfeng Cognex Omron Ningbo Techmation (E-Deodar) Harmonic Drive Rockwell Automati Intuitive Surgical Roper Technologie Daihen Comau Epson Staubli Source: CM Research

Consumer robots Where Foxconn’s founder, Terry Gou, may be especially influential is in consumer robots rather than just industrial robots. Along with Alibaba, he has formed an association with SoftBank to “globalise” Pepper (Softbank’s social robot) which is partly orchestrated by IBM’s Watson from the cloud. And here is where the scene is wide open: as cloud robotics takes off, a range of different form factors will emerge, ranging from table-top, voice-driven speakers such as Rokid or Amazon’s Echo to Softbank’s walking, talking Pepper.

Consumer robots: China’s leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies DJI Aeryon Parrot A.I. Nemo Cyberdyne SkyWard Consumer robots CloudMinds CyPhy Softbank Ecovacs Robotics Honda Toyota Ehang iRobot Zano Ninebot (Segway) Nixie 3D Robotics Rokid Turing Robot Source: CM Research

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There will be a huge Chinese market for social and home robots. These range from Rokid (a home hub) to Ecovacs (a cleaning robot) to consumer drones made by the likes of DJI. There is a surge of start-up activity in this space in China and this emerging consumer robot market plays to the very strengths that have made the likes of Huawei, Xiaomi and OnePlus such successes in the smartphone market. For investors, there are precious few pure play Chinese consumer robot companies on the listed market. Consumer electronics In consumer electronics markets, Apple and Samsung ought to be worried: Huawei, Lenovo, ZTE, Xiaomi and LeEco are now outgunning them in terms of price/performance metrics in the domestic market. And they are fast adapting themselves to attack the huge addressable Android markets of India, Africa and Latin America. The Chinese electronics players are not afraid to challenge the US leaders in tomorrow’s technologies either. These companies and a host of start-ups are moving beyond smartphones into the next generation of technologies: in VR and AR, (see “Virtual Reality”), DeePoon, ANTVR and 3Glasses already outperform US rivals by volume of headsets sold and there are 200 registered VR/AR companies in Shanghai alone; in drones, DJI is a world leader; and in wearable technology, Mobvoi, a spin-out from Google China, is a prime example of next generation technology leadership with its AI-based voice platform for Android wearables. On the downside, if President-elect Donald Trump follows through on his campaign promises to impose 45% import tariffs on Chinese-made goods, most of these companies will take a hit to profitability. Two component makers that really stand out as world leaders in miniature acoustic components are AAC Technologies and GoerTek, making them the most attractive stocks for investors in this space, in our view. See “Hardware themes” for more on this sector. Consumer electronics: China’s leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Acer Murata AAC Technologies Foxconn Amphenol Nikon GoerTek Huawei Apple Nintendo Hikvision Cannon Consumer electronics LeEco Mobvoi Fitbit Pegatron Lenovo OnePlus Foxconn Quanta Suzhou Anjie Oppo Garmin Samsung ZTE Vivo GoPro Seiko Epson Sunny Optical Xiaomi HP Inc Sharp HTC Sony Largan TE Connectivity LG Electronics Source: CM Research

Semiconductors The most lucrative part of the digital hardware value chain is semiconductors, where China is particularly weak. The State Council’s desire to become a global chip player will mean that the M&A boom in the chip design sector – where China is particularly weak – is likely to continue. There is a high chance, however, that President-elect Trump will make it virtually impossible for Chinese companies to acquire US chip companies. US semiconductor companies, led by Intel, pioneered the global semiconductor industry. They enjoy huge benefits of scale, exploitation of the long operation of the industry learning curve, deep benches of chip designers, materials scientists and fabrication scientists and engineers, and the creation and nurturing of rich and diverse Global Innovation Networks (GINs). China’s semiconductor industry, by contrast, only began in the 1990s and developed raggedly over its first two decades via the creation at one stage of 130 small fabrication plants and foundries in over 15 provinces. The

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SYNC, Issue 141 Chinese Tech 5 December 2016 industry achieved neither the scale nor scope to become world class and focused in any case on short-term revenues and profit instead of R&D, meaning that the country did not and still has not created a cadre of world-class chip designers. The result is that although China accounts for half of global demand for semiconductors it still relies on imports for some 90% of its integrated circuit requirements mainly from Intel, Samsung, Qualcomm, Micron and SK Hynix. Chinese policy has now swung over to the creation of “National Champions” in the semiconductor industry, led by Tsinghua Unigroup, whose unofficial mission is the acquisition and co-option of the semiconductor resource that China’s economy needs for its next phase without having to be critically dependent on foreign suppliers. All the while playing in the background is the complex game of “technology transfer for market access swaps” with the likes of Intel, Qualcomm and NXP. In this fraught game, the Chinese State, which needs foreign intellectual property in chip design, “leans” on these foreign suppliers, secure in the knowledge that the suppliers themselves need to operate in the world’s biggest and fastest growing semiconductor market. The issue becomes ever more important as more and more of the value of electronic products from Chinese manufacturers such as Lenovo or Xiaomi resides in their product-defining chip sets. As cited in “Trump on Tech”, the US is likely to take an increasingly tough line over what intellectual property it will sell to China. In a complex and politically charged situation, the US has a clear lead over China in semiconductors. There are few ways investors can get exposure to the domestic Chinese chip industry. We predict, however, that a Chinese chip group will acquire MediaTek – not just for its design capabilities but also its priority access to foundry capacity at TSMC. See “The future of semiconductors” for related themes in the chip sector. Semiconductors: China’s leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Analog Devices NXP HiSilicon (Huawei) ASML Qualcomm SMIC RDA Microelectronics Infineon Samsung Semiconductors Spreadtrum Intel Texas Instruments Tsinghua Unigroup MediaTek TSMC Nvidia Xilinx Source: CM Research

High performance computing China is going for world domination in high performance computing (HPC) to enable it to leapfrog the world’s current leaders in the space, defence, industrial design and genomics industries. The unveiling of the Sunway TaihuLight System earlier this year was a genuine breakthrough. Not only does it outgun the world’s previous fastest supercomputer – China’s own Tianhe 2 – but it does so on the back of Chinese-made processor and interconnect technologies. Previously, the Chinese had relied on Intel processors. The native processors were designed at the Shanghai High Performance IC Design Centre, while the whole supercomputer system was developed by the WuXi National Computing Centre. Meanwhile, Huawei, Lenovo, Dawning (formerly Sugon) and Inspur are aggressively competing against IBM and HPE in the enterprise and cloud online transaction processing (OLTP) server spaces. An OLTP server supports mission critical applications that run on the Internet and need to be extremely robust, reliable and fast. The HPC market is worth $11bn, according to IDC. Huawei’s top line KunLun servers are based on its own silicon from its HiSilicon chip subsidiary. Huawei has landed SAP as a powerful “reference” customer.

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While Lenovo, Inspur and Dawning are the obvious candidates to play this investment theme, we believe that political pressure on them to gain global market share in the HPC market may squeeze their margins to the limit. For this reason, we would avoid these stocks. High performance computing: China’s leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies AMD HP Enterprise High Lenovo Huawei Cisco IBM Performance Inspur Electronic Cray Intel Computing Dawning (formerly Sugon) NEC Nvidia Source: CM Research

Artificial intelligence Clearly, the deployment of AI will be critical to China’s industrial future in autonomous vehicles, robotics, genomics, virtual reality and other next generation technologies. There was nervous excitement in the US when it turned out that China now publishes more cited scientific papers on advanced AI than the US. Yet, this achievement does not imply that China has overtaken the US in AI as many mass media headlines have suggested. Nonetheless, China is gradually closing the gap. Baidu, through ex-Google superstar Andy Ng’s Sunnyvale AI centre, is making real breakthroughs in natural language understanding, automatic translation and voice technologies. In addition, Baidu Maps is an advanced AI system for self-driving vehicles where Baidu shows true promise. For Baidu, as for Google, deep learning is at the centre of everything it does. Hikvision, China’s eighth ranked software company, has developed advanced sound and movement recognition for security applications. Among a slew of AI starts-ups in China, Mobvoi, SenseTime, Turing Robot and Rokid stand out. As Google DeepMind’s AlphaGo programme (the first computer programme to convincingly beat the world champion in the Chinese game of Go, back in March 2016) clearly showed, algorithmic breakthroughs in AI are dependent on enormous amounts of computing power and huge datasets. And here China certainly is not lacking. Its prowess in high performance computing – via national champions such as Huawei, Lenovo, Dawning and Inspur – is critical to cloud-based data storage and access. And when it comes to the sheer scale of data China has a distinct edge, notably in genomics. It also has an abundance of software engineers, ten of whom cost the same as a single US superstar. There is still a lot that brute power can do in AI. See “Artificial intelligence (Vol. II)” for more on this theme. For investors, our favourite long term pick in this category of Chinese tech is Baidu, with iFlytek being the wildcard. Artificial intelligence: Chinese leaders vs. global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Alphabet Artificial Baidu Mobvoi Amazon IBM intelligence Hikvision SenseTime Apple Microsoft iFlytek Turing Robot Facebook NEC Alibaba Rokid Fujitsu Palantir Source: CM Research

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Internet platforms Facebook, Google and Twitter are banned from . The Communist Party’s crackdown on the “spreading of online rumours” has meant that Chinese Internet companies have benefitted from overt protectionism, allowing them to grow at scale without the threat of any real competition. The BATs – Baidu, Alibaba and Tencent – with their huge feedback loops of online users, have become powerful shapers of the Chinese economy. LeEco has tried to join this group, but failed to manage its finances sensibly and is now facing a serious funding crisis. With their large cash piles, the BATs are jumping into adjacent markets and funding many of the start-ups in AI, smart connected electric vehicles, fintech and genomics. They themselves are evolving into very different forms from where they started a decade ago: Baidu, while still the leading Chinese search company, is developing the brains for autonomous vehicles; Alibaba is moving beyond online market bazaars into finance, and the Cloud in order to offer a comprehensive range of services for millions of companies across the world, especially SMEs; meanwhile, Tencent – still largely associated with the soaring success of its mobile-based messenger app WeChat – has become the world’s biggest gaming company accounting for 13%-15% of the global gaming market, with more to come on the back of its acquisition of Supercell and Riot Games. Tencent also has a stake in genomics via its large investment in iCarbonX. Given its protected status, China’s domestic Internet industry has nurtured several national champions in a wide range of Internet sectors, as the schematic below illustrates. Internet platforms: Chinese leaders vs. global leaders

Internet platforms Chinese Leaders Global Leaders

Alibaba Alphabet Facebook Baidu Amazon Microsoft Internet ecosystems Tencent Apple Softbank

Tencent Sony Activision Blizzard Online video games NetEase Microsoft Electronic Arts

500.com Unibet SportingBet Online gambling GVC Holdings PaddyPower Betfair

51job Info Edge India Seek Online recruitment Internet Zhaopin Worldwide platforms Ctrip Expedia Priceline Online travel Qunar MakeMyTrip TripAdvisor

JD.com eBay Rakuten Online retail Vipshop Amazon Zalando

Soufun.com Rea Group Zillow Online property Leju Rightmove Zoopla

Autohome Carsales.com Online automobile Bitauto TrueCar

Didi Chuxing Uber Ola Taxi hailing apps Lyft BlaBlaCar

Yirendai LendingClub LendingTree FinTech Lufax OnDeck Seedrs Source: CM Research

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Social media For Millennials, Tencent’s WeChat has become “The Great Enabler”. WeChat and China’s urban millennials are now synonymous. Within just a couple of years, WeChat overtook Weibo as China’s leading online network. WeChat makes other messaging platforms seem rather primitive by comparison. It is not just a messaging platform. It was designed mobile first, as a profusion of apps within an app. Today, WeChat contains over ten million third party apps. Virtually anyone can make an app on WeChat – media companies, banks, celebrities, brands or start-ups and simply those with “accounts”. They can access APIs (application programming interfaces) that allow them to easily add features like direct messaging, voice messaging, payments and location. WeChat is almost like a web browser with each individual account acting like a web page. So, once you are inside WeChat, you can hail a cab, manage your credit card, check the news – all from within the main app. This is why WeChat is ubiquitous across China. And this is why Facebook made the decision to copy it. In China’s space, Tencent is the only player worth investing in. Social media: Chinese leaders vs. global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Tencent DeNa Mail.ru Sina Facebook Naver Social media Weibo Gree TripAdvisor YY Kakao Twitter Renren Line Xing Momo LinkedIn (Microsoft) Yahoo! Source: CM Research

Cloud infrastructure We continue to believe that investors underestimate the importance of cloud infrastructure as the foundation for the next generation of advanced technologies – such as artificial intelligence, virtual reality, Internet TV, the Internet of Things and mobile payments. Cloud infrastructure allows companies to rent servers and networking equipment as a service rather than building their own data centres, resulting in significant cost savings. This is explained in more detail in “Cloud Computing”. The market leader in China’s cloud infrastructure is Alibaba Cloud. However, Microsoft Azure and Amazon Web Services are close behind. Public cloud infrastructure providers: Chinese leaders vs. global leaders

Chinese Leaders Global Leaders

Listed companies Private companies Alibaba Huawei Amazon 21Vianet UCloud Microsoft Public cloud infrastructure Kingsoft QingCloud Google Baidu IBM JD.com Rackspace Source: CM Research

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Microsoft launched its Azure service in mainland China as recently as March 2014 in partnership with 21Vianet, a leading Chinese Internet data centre company. This allowed Microsoft to roll out its services very quickly acrosss a ready-made network. In China, we expect Alibaba to remain the market leader, generating the bulk of profits in the cloud infrastructure market. However, globally we expect Amazon and Microsoft to be the two most profitable players in cloud infrastructure. Genomics China’s leaders believe that the wealth and power that came from being at the core of the Internet’s commercialisation extended America’s superpower reign by at least ten years. Now, they see genomics as the next trillion-dollar industry and they are determined that China will be its leader. Genomics refers to the science of reading and analysing the DNA (or Deoxyribonucleic acid) that stores genetic information in all living cells. The State Council has identified it as an economic pillar of China’s 21st century industrial ambitions. It has managed, with the help of China’s leading research institutes, to attract back to China over 80,000 Western educated Chinese national PHDs. China lacks the West’s ethical hang-ups about genetic and advanced medical research. For example, CRISPR-Cas9 – a genome editing tool that is much faster and cheaper than previous tools – has generated ethical worries over the potential to easily create biological weapons, a corrupted human genome or babies made to order. China has more relaxed regulations and a huge and ethnically diverse population for test-bed research. Unlike in the US, the Chinese government and insurance companies make it easy for genomics and biotech companies to recoup their R&D costs. At the same time, drug development cycles in the US – which are regulated by the FDA – are exceedingly slow. Given that CRISPR technology has brought down the time it takes to modify human genes from years to weeks, this could put the US at a significant competitive disadvantage by extending the time to bring new technologies to market. Given the kinds of personalised medicine made possible by genetic sequencing – see “MedTech” – this regulatory issue could help China leapfrog the West to become the world leader in genomics. In October 2016, for example, Chinese scientists at Sichuan University became the first in the world to deploy CRISPR-Cas9 in a human case, when they injected CRISPR-modified white blood cells into a patient to attack a malignant lung tumour. China already accounts for 20%-30% of all DNA sequencing worldwide. The Beijing Genomics Institute in Shenzhen (known as BGI) is the single biggest DNA sequencer in the world. When it was prompted to develop a sequencing operation in the early 2000s, BGI found that “policy” banks would lend whatever money was needed on very soft terms for equipment, land and staff. There is a very clear “whatever it takes” attitude now within the upper echelons of the Communist Party. This year the State Council launched a 15-year $9.2bn Precision Medicine Initiative and will almost certainly match or exceed whatever the US comes up with. Meanwhile, Illumina, the world’s largest manufacturer of gene sequencing equipment, has dramatically lowered the costs of gene sequencing. With the arrival of the Illumina HiSeq X Ten sequencer – which enables full genome sequencing for under $1,000 – several competitors have emerged to dent BGI’s previous monopoly. BGI also took a wrong turn by trying to develop its own machines, which turned out to be less effective than Illumina’s. Nonetheless, BGI is still the world’s number one gene sequencer and is working on building a bank of a million human genomes, a million plant and animal genomes and a million microbial ecosystems. As more human genomes are made available for analysis, more knowledge can be gained on the causes of disease, leading to the prescription of more personalised therapies. The most prominent among the new breed of Chinese competitors are Novogene, WuXi NextCODE (a subsidiary of the WuXi AppTec) and CloudHealth.

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WuXi NextCODE has an alliance with Huawei over cloud infrastructure and, on some measures, ranks as the world’s leading contract research company in this field. Zai Lab is a good example of a company founded by a US Chinese national returnee. It licenses experimental treatments from pharma companies to develop into home grown drugs. New companies with the right pedigree of leadership have no problem in raising venture capital, either from VC houses such as the highly-rated Sequoia China or from Internet companies like Alibaba. One of the most interesting of all is iCarbonX founded by Jun Wang, the former CEO of BGI, who seeks to marry massive genomic data with clinical information. Tencent has put up much of the $100m start-up funding, and also offers its expertise in data collection platforms. Genomics: Chinese leaders vs global leaders

Chinese Leaders Global Leaders

Listed companies Private companies CloudHealth iCarbonX 23andMe Intellia Therapeutic Genomics BeiGene JHL Biotech Editas Medicine Oxford Nanopore Novogene Human Longevity Theranos Shenzhen BGI Illumina Veritas Genetics WuXi AppTec Zai Lab Source: CM Research

China provides genomics companies with an ideal home because of the following characteristics of the Chinese marketplace: . Significant government support, including financial support . Access to the world’s fastest supercomputers . A huge amount of genetic and other epigenetic and lifestyle data available to mine . A lack of ethical and eugenic hang-ups . A disregard for individual privacy Gene sequencing is all based on statistics and China may well become the global headquarters for the operation that builds a giant genetic database that provides customers across the world with the best gene therapies.

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The China Syndrome As a Western diplomat once put it, “Trying to get to grips with China is like wrestling with a greasy pig.” Another phrased it slightly differently. “China is so vast and so diverse that almost anything you say about it is both right and wrong at the same time.” This report looks at the state and thrust of Chinese technology over the next two to five years and what it implies for global technology investors. As China’s technology sector becomes more influential on the global stage, investors increasingly will be forced to incorporate a “China strategy” into their portfolios. Why tech investors cannot ignore China Expressed as a share of world GDP on a purchasing power parity basis, China’s GDP has grown from 2.3% in 1980 to 7.5% in 2000 to an expected 17.9% in 2016, according to the IMF. It will likely account for the bulk of global economic growth over the next five years, while becoming ever more diverse. Its “Made in China 2025” initiative targets several advanced technology industries as “strategic” goals for the country. In the wide-open battle for domination of the industries of the future – artificial intelligence, the Internet of things, robotics, genomics, clean energy and the sharing economy – China is clearly in the bidding. With massive amounts of state support, deep pockets of patient money, a war mentality, cyber espionage on a ruthless scale and an ultra-Darwinian competitive environment, China will be able to bring forth extremely strong and adaptable global competitors in these sectors. Leads and lags It’s a piebald picture. For example, China lags the global leaders in software-as-a-service, virtual reality, artificial intelligence and healthcare right now. But it leads the world in mobile payments, transportation and e-commerce. Moreover, it has just put into operation a manned space station, seems to have cracked the science of quantum communications and has increased its lead in raw supercomputing based on its own “native” processors. Yet it struggles to catch up in such key enabling technologies as semiconductors and batteries. Terraforming society and the economy The Chinese authorities are intent on moving a further 100m people into the cities from the countryside by 2025. The Communist Party’s aim is to reach 70% urbanisation, with one billion urbanites by 2030. The extent to which this yields a huge millennial urban middle class in China – currently standing at around 245m – will be the main determinant of China’s economic growth path for the next decade. Lifestyles and spending habits will change as a new generation replaces the Millennials – see “Generation Hashtag”. This new generation is a mobile first, tech savvy Chinese urban millennial and she will soon start to shape the Chinese economy. What kind of transport will she favour? What is her attitude to genomics and regenerative medicine? Will she be surrounded by personal service robots? How will she deploy artificial intelligence? How patriotic will she be in choosing Chinese designed goods in favour of western rivals? It will also yield urban agglomerations of tech entrepreneurship to compete with Silicon Valley and other such technology clusters as Boston, San Diego, Cambridge (England), Tel Aviv, Tokyo, Singapore and Seoul setting up to become global centres for new industries such as genomics, robotics and cybersecurity. If the high demands of the “Jiulinghou” (those born after 1990) are not satisfied, there may be problems. Mirroring the growing rift caused by income inequality in the west, a similar contrast between the lifestyles of the registered urban millennials in China and some 250m urban “migrants” who lack “hukou” rights invite serious social unrest.

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Speed, innovation, cutthroat competition at scale Meanwhile, China’s frenetic rate of activity on the tech scene is unnerving the rest of the world. Many western technology companies see threats to their own business in four key areas: . Scale: the frantic “generate and test” culture, cutthroat Darwinian competition and sheer scale of many Chinese businesses gives Chinese tech companies a distinct competitive advantage. . Cyber-espionage: the alleged theft of intellectual property (IP) by Chinese threat actors in cyberspace has been another area of contention – with some experts estimating that $300bn of IP is cyber-snatched by the Chinese every year (although companies such as Tencent, DJI, Mobvoi and Shenzhen BGI copy no one: indeed, Facebook’s Messenger platform is a straight copy of Tencent’s WeChat). . Human momentum: the sheer speed and intensity with which things move in China, the short product cycles and the vast numbers of people that make it an “kill-or-be-killed” environment that urges forward momentum in all things at any cost. Where it lacks a super-star engineer, Chinese enterprises can, for the same cost, sweat 10 graduate engineers on a task. . Funding: despite the mayhem and scores of businesses falling by the wayside, nearly $40bn of venture capital went into Chinese start-ups last year and the big platform companies, nudged and supported by central and provincial governments, are backing flotillas of new companies in China and overseas. Correcting lagged perceptions The common perception amongst institutional investors outside Greater China is that China’s technology companies significantly lag their western rivals. In some sectors, this is true. But, in many, that gap is narrowing fast. In other sectors, still – such as ecommerce, social media or some areas of gene sequencing – it is the West that is behind. Whatever investors’ historical perceptions of China, the current situation is that: . Chinese companies are truly innovating, rather than just copying. . Chinese companies are taking hyper-scaling to new heights: it is not first to market but first to massive scale up that counts. . Large numbers of Chinese technology companies are getting funded – both by the Party State as well as by the private equity and venture capital industries – and the winners will emerge as very strong global competitors given the obsessive competitiveness and “war mentality” that many pursue. Innovation with Chinese characteristics As global investors embark on a journey to seek out the world’s highest growth technology companies, they need to keep in mind that the Chinese mindset is not binary: it sees everything in constant flux, as extremely fragile and poised to become catastrophic and unmanageable in an instant; it pays more attention to the peripheral opportunities than a narrow lens focus on a core competency – the polar opposite to the typical Western mindset. Legendary Intel cofounder, Andy Grove, captured some of it in the title of his book, Only the Paranoid Survive. The Millennial effect Numbering 250m, China’s urban millennials (those people aged 16 to 35) may be the single most influential force in the global economy. They are likely to remain so for more than a decade, by which time Indian and Africa millennials come on stream. The attitude of Chinese millennials towards car ownership, virtual assistants and genetic engineering will be key drivers of corporate earnings. Chinese millennials are mobile crazy, tech savvy, pragmatic and materialistic. The generation gap between them and their parents and grandparents is much more marked than is the case in the West. Amongst them, the “Balinghou” generation (those born after 1980) tend to be idealistic and trend setting. These cohorts have seen in their lifetime a China that has moved from a planned to a market economy, from high to low fertility and from autarky to globalisation. Huge changes.

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Then, there is the “Jiulinghou” generation (those born after 1990) who tend to be more individualistic and more demanding and more likely to follow trends. Here are some raw statistics on what Chinese millennials do with their time: . Go online for 30 hours a week compared to 21 hours in the US . Watch videos for a further hour per day . Play video games for a further hour per day . Use mobiles, not laptops or tablets . Check their phones every 15 mins, on average . Shop online at least once a week . Account for 40% of Chinese outbound travel Chinese millennials tend to be mobile app biased, open minded, well informed homebodies. This latter point is important. It is the “zhai” or homebody culture. Chinese cities are so polluted, densely populated and intense that online entertainment options override a night out with friends. So, when these millennials are not at work or traveling abroad they tend to be at home. Among other things, this suggests that even those Millennials that can afford to do so will not be as keen to become car owners as the generations before them. Meanwhile, there is a dark side. If the “system” cannot deliver their high demands they are more likely to rebel against the authorities, stretching the people management skills of the security forces to their limit. See “Generation Hashtag” for more on the Millennials investment theme. The Trump effect If President-elect Trump follows through on his campaign promises, China’s technology industry could be hit hard. After all, he has accused China of “raping” America. Mr Trump has proposed 45% import tariffs on Chinese-made goods and restrictions on the ability of Chinese companies to acquire US assets in the technology and media sectors, amongst other anti-China measures (see “Trump on Tech”). If these polices are implemented, it could strengthen China’s hand in the geopolitical arena in the medium term, allowing it to be more influential in world trade, climate change and even help extend China’s soft power. However, for the likes of Tencent, Alibaba, Baidu, Huawei, BYD and LeEco who are all trying to establish footholds in the US market and purchase US technology and media assets, it would stunt their growth prospects. Should a US-China confrontation on trade restrictions trigger broad scale global protectionism, global growth will stall as both the US and China become more inward looking. Meanwhile, the possible fall-out from President-elect Trump's telephone conversation with the Taiwanese leader, Tsai Ing-wen, is worrying for regional stability. Damage control will be needed to ward off a deterioration in US-China relations given that “One China” is an existential issue for the mainland Communist Party. There will be some consternation in Beijing as the Chinese authorities try to work out how President-elect Trump does business. Do they take literally his Tweets about currency manipulation and US military build-up in the South China Sea? Do they take seriously his earlier breach of the hitherto accepted protocol between the US and China over Taiwan’s status?

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China by the numbers . In 2016, China’s GDP is expected to account for 17.9% of world GDP on a purchasing power parity basis, according to the IMF. . China’s economy is expected to grow at between 5.5% and 6.5% per annum in real terms between 2016 and 2020, based on IMF forecasts. . China’s manufacturing accounts for 37% of China’s GDP and 24% of global manufacturing output by value. . China makes 80% of the world’s air conditioners, 70% of its mobile phones and 63% of its shoes. . Labour in China’s urban centres is 75% more expensive than labour in Vietnam, Thailand or Indonesia. . In 2015, China ranked 28th in the world in robot density at 36 robots per 10,000 manufacturing workers compared to 531 in South Korea and 301 in Germany. But by 2019, 40% of the world’s industrial robot production, by volume, will be sold in China – up from 27% in 2015, according to the International Federation of Robotics (IFR). . By 2025, China will have moved 100m more people from the countryside to cities. . By 2025, China will have 221 cities with populations of over 1m. . By 2030, 1bn Chinese will be living in urban areas, but around 240m of them will have no rights to education, housing or healthcare under the “Hukou” system. . By 2022, 75% of China’s urban consumers will earn between $9,000 and $34,000 per annum. . By 2030, two-thirds of China’s population will be urban and will earn $12 to $50 per day. . Between 2010 and 2050 China’s workforce (aged 15 to 59) will fall from over 900m to below 800m. . China’s millennials (aged 16 to 35) account for over 30% of its population – its urban millennials number 245m, or almost three times the 87m millennials in the US. . Online sales will grow at a CAGR of 20%-30% between 2016 and 2020. . 620m of China’s 688m Internet users own mobile devices while the BATs account for 70% of mobile users’ digital activity . In 2016, ecommerce will account for 18% of retail sales in China, compared with just 8% in the US.

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M&A activity As China’s economy slows, Chinese corporations and investors are diversifying into foreign assets. In 2016, China is likely to be the top acquirer of overseas companies, unseating the US for the first time. Data from China’s Ministry of Commerce show that companies from mainland China have made non-financial overseas investments of $146bn over the first 10 months of 2016, surpassing last year’s record of $121bn. These overseas investments reflect the ambitious goals China set itself in its latest 10-year plan, known as the “Made in China 2025” initiative, which seeks to upgrade China’s manufacturing capabilities, boost innovation and own a host of next generation technologies. As the chart below illustrates, Chinese players have been frenetically buying up technology and media assets overseas, especially in the US. Significant M&A transactions involving Chinese acquisitions of overseas technology companies

Ctrip acquires Skyscanner

Ant Financial acquires EyeVerify

ChemChina acquires Syngenta

Didi Chuxing acquires Uber China 2016 Leshi (LeEco) acquires Vizio Agic Capital acquires Gimatic Midea acquires Kuka Tencent acquires Supercell Fujian Grand Chip Inv Fund acquires Aixtron* Foxconn acquires Microsoft's handsets business Alibaba acquires Lazada Zhejiang Wanfeng acquires Paslin HNA acquires Ingram Micro acquires GE Home Appliances Wanda acquires Legendary Entertainment E-Town Dragon acquires Mattson Tech Alibaba acquires SCMP 2015 Tsinghua Holdings acquires (15% stake)* Changjiang acquires STATS ChipPAC Jianguang acquires NXP's RF unit Ninebot acquires Segway Hua Capital Management acquires Omnivision 0 10 20 30 40 50 Acquisition value $bn

Source: CM Research * Note: these deals were later aborted

The taking of control of Kuka and Syngenta – both global leaders in advanced technologies – by Chinese companies has sparked a growing backlash against a wave of Chinese acquisitions of overseas technology companies. Consequently, both the US and Europe are considering stronger restrictions on Chinese takeovers of their national champions. In November 2016, a US congressional panel recommended that Chinese state-owned companies be barred from acquisitions in the US. In addition, there is resistance from Chinese authorities themselves on excessive overseas investment by Chinese companies. On 29 November 2016, the State Council, China’s cabinet, indicated it would soon put in place measures to curb outbound mergers and acquisitions of more than $10bn (or $1bn if they were outside the core business of the acquirer) in order to stem outflows in China's capital account.

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Stock watch list Our stock watch list below names the big players in the Chinese technology sector. The stock ratings shown below reflect our assessment of the net impact of the most important investment themes, after taking account of valuation and risk. A fuller explanation of our investment research methodology is shown in the Appendix.

Company Rating Sector Competitive position in China’s tech sector

AAC Buy Electronic AAC Technologies is a world leader in miniature acoustic components. It supplies Technologies components high value components for Apple’s iPhone 7. Given its manufacturing and design prowess, it is one of the few Chinese electronic component makers that we consider to have strong growth prospects. Alibaba Avoid Internet Alibaba dominates China’s ecommerce market through its online shopping malls. ecosystems Whilst ecommerce accounts for 8% of retail sales in the US, it accounts for 18% in China. By 2020, according to McKinsey, nearly 60% of China’s population will have incomes above $16,000 and 50% of consumer and business transactions will occur online. Alibaba is unlikely to be dislodged by then. Its ambition is to become a one-stop services shop for millions of business inside and outside China offering financial services, logistics, big data, cloud computing, marketing and cross-border trading. Alibaba Cloud is on a growth trajectory to reach $8bn in revenues within five years. The company has had its run ins with the SEC and with the Chinese authorities over fake goods and suspicious accounting and it remains unclear exactly who owns it. Much of its growth is expected to come from global expansion, but the Trump factor could affect Alibaba’s ability to acquire US assets. Thematically Alibaba is very strong, but the risk to reward ratio is simply not in investors’ favour, so avoid owning it. We explain the risks in detail in “Alibaba – What’s it worth?” Baidu Buy Internet Baidu is still China’s leading and a rising star in artificial ecosystems intelligence, voice platforms and autonomous driving. It is the most attractively priced BAT because its shares have been held back by the temporary revenue impact of regulatory probes which followed the premature death of a cancer patient who was sold inappropriate drugs via Baidu’s ad network. Baidu has a clearer focus on three or four key markets whilst Alibaba, Tencent and LeEco are more opportunistic. Baidu is the “Google” of China with no real competition, least of all from Google itself which is banned from China. BYD Hold Batteries BYD is China’s largest battery and electric vehicle manufacturer. In 2008, and electric Berkshire Hathaway invested $230m of “patience money” for a 10% stake. vehicles Like Tesla, BYD is developing a vertically integrated model – it makes batteries, electric vehicles and energy storage products. BYD has twice the scale of Tesla’s battery operation, although it is largely based on the less powerful but safer lithium-iron-phosphate technology that is currently preferred by the Chinese authorities. BYD’s NEVs have nothing like the cachet of Tesla’s, but it is aiming at the e-bus, e-van and e-bike segments which are more relevant to China’s mass transit needs. Its e-buses have proved successful in several overseas markets, while its saloon cars (it has sold nearly 50,000) have proved underwhelming. BYD’s energy storage battery technology has achieved global penetration with Chevron and EDF along with State Grid Corp in China. It has deployed nearly 500 megawatts of battery storage capacity worldwide. Despite its dominant position, the Chinese autos market is being disrupted heavily by the BATs. As the incumbent electric vehicle maker, BYD looks vulnerable. Ctrip Buy Internet – Ctrip is China’s largest online travel platform. Whilst its merger with Qunar has online travel created integration issues which have held it back, Ctrip is one of the strongest Chinese Internet platforms in terms of top line growth. Last month, it acquired the UK’s Skyscanner, a travel price comparison site, for $1.8bn, setting itself up for overseas expansion. Dawning Avoid High Formerly known as Sugon, Dawning is a national champion in high performance Performance computing, but is likely to be forced – probably by the Party State – to sacrifice Computing profit for global domination. Expect it to gain market share, but squeeze margins.

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Company Rating Sector Competitive position in China’s tech sector

Estun Avoid Robotics Estun Automation is a robot maker that specialises in metal joining and electro- Automation hydraulic robots. Like some other Chinese robot companies, Estun customises “naked” robots supplied by the Big Four (ABB, Fanuc, Kuka and Yaskawa). The Chinese robot industry as a whole suffers from low quality product relative to the Big Four and typically has to offer 30% discounts. Like local rival Siasun, it has set up an M&A Fund which is looking to acquire US start-ups spinning out of university labs. Investors in the robotics theme should buy Japanese robotic component makers instead. These include Harmonic Drive, Keyence, Nachi- Fujikoshi, Omron and Daihen. Haier Not Home Haier is China’s biggest maker of washing machines and water heaters with a rated appliances major line in air conditioners. As such, it is a mid-term play in the growth of urban residential occupancy and growth in discretionary incomes in China. It is a darling of management consultants all over the world as a case study in how to adapt under shifting market conditions. Haier is an imaginative innovator around its product categories which are now designed, made, marketed and funded via a constellation of “self-managed” teams. It has global ambitions having made unsuccessful forays into the US market. However, it has acquired GE’s US appliance business and is morphing itself into an online supplier of interactive home appliances. Two years ago, Apple made Haier one of its first home appliance partners for its Smart Home platform. Haier has substantial backing from Alibaba and KKR and is developing a strong logistics and delivery business with franchise networks serving lower tier cities. Hikvision Not Electronics Hikvision is one of the world’s leading CCTV and recorder companies with a rated commanding position in high-technology video surveillance. It derives a third of sales overseas ranging from systems for Iraqi oil wells and South African university campuses to London’s streets. It is now showing prowess in advanced sound and movement recognition technologies for next generation security applications. Hikvision is fast becoming a software first, AI operation and now ranks within China’s top ten software companies. In a world full of political and social turmoil and given the Communist Party’s number one priority of maintaining internal peace and stability, Hikvision has a strong and established position in what will be a robust mid-term domestic growth market, while its foothold in key overseas markets should enable it to capitalise on the rising global focus on security and population management. However, global investors and indeed customers need to be fully aware that it is 50% owned by the Chinese State and has recently moved up the ranks of the Party by being granted the privilege of having an authorised internal Communist Party Committee. HollySys Buy Robotics HollySys Automation Technologies is very much the Rockwell Automation of Automation China. It is the premier supplier of industrial automation products to the Chinese rail, subway and nuclear power industries. Meanwhile, HollySys is strategically important in regard to the government’s “Made in China 2025” programme, which involves the upgrading and automation of China’s factories. This is an urgent project, which is starting from a relatively low automation base – China still has less than 40 robots per 10,000 manufacturing employees, compared to over 300 in Germany, Japan and South Korea. This suggests strong mid-term growth prospects for HollySys.

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Company Rating Sector Competitive position in China’s tech sector iFlytek Not Artificial iFlytek is China’s leading developer of voice platforms. It accounts for 70% to 80% rated intelligence of China’s fledging market. It enjoys “key software enterprise” status which gives it tax and other advantages and has been endorsed by President Xi Jinping as an important innovator – the president has visited the main company facility (very important in terms of establishing a company’s significance). It has also been asked by China’s Ministry of Industry and Information Technology to lead the working group establishing standards in the “voice” industry. It works with key Chinese State departments and state owned enterprises (SOEs) on the development and deployment of speech self-services. With this kind of State and Party backing, the company is likely to flourish. The shares were held back recently by a private placement. Inspur Avoid High Inspur is a leader in high performance computing. Like Dawning, it is likely to be Performance forced – probably by the Party State – to sacrifice profit for global domination. Computing Expect it to gain market share, but squeeze margins. JD.com Buy Internet JD.com is the second largest e-commerce player in China. Its partnership with ecosystems Tencent makes it a particularly potent rival to Alibaba. The Chinese e-commerce market is big enough and growing fast enough to accommodate two profitable, high growth companies. LeEco Avoid Internet LeEco is an Internet conglomerate. Its founder, , spent $5bn over 6 ecosystem years trying to build a company that resembles Apple, Amazon, Netflix and Tesla all rolled into one. Formerly known as LeTV, it started off as an online video platform, but has since expanded into televisions (Vizio), connected cars (Faraday Future), mobile phones and even bikes. LeEco’s complex empire may be about to unravel because its financial position has rapidly deteriorated. It has funded Faraday Future’s car plant in Nevada, but has been dogged by delays. With its current financial woes, it is likely that its connected car ambitions are almost certainly going to be the first to go. Lenovo Sell Electronic Lenovo is the world’s largest PC maker with 20% global market share. Over the hardware years, it has acquired IBM’s PC business, IBM’s x86 server business and ’s mobile phone business. It had ambitions to become China’s IBM, but its execution has been woeful. As the PC and smartphone industries derive more of their revenues from software, Lenovo has shown that it lacks the management and skillset to thrive in this new world. NetEase Buy Internet NetEase is the purest way to invest in China’s recession-proof video games ecosystem market for Chinese millennials. NetEase has a top position in online games for PCs and increasingly for mobiles. In the former it has an alliance with Activision Blizzard with a strong franchise in China for such games as Fantasy Westward Journey, Diablo 111 and World of Warcraft. At the same time, it is rapidly building up its development slate of games for mobiles, including legacy PC games going to mobiles. It now has 41 games on the slate. It is a prime way to capitalise on “homebody” millennials, who on average spend an hour a day gaming. SMIC Buy Chips Since its IPO ten years ago, Semiconductor Manufacturing International Corp (SMIC) has signally failed to impress. As China’s largest semiconductor foundry, it has done nothing to dent Intel and TSMC’s command of the Chinese foundry scene. And it had to spend five years making itself profitable at the expense of technological development. Having returned 13 consecutive profitable quarters, it may now be a true recovery stock on the back of the Chinese government’s $100bn commitment to create a world-class “native” semiconductor industry out of what is currently a piecemeal and generally low quality affair, with rare exceptions such as Huawei’s HiSilicon subsidiary. The State Council is on a mission to wean China off its total dependence on foreign controlled chip supplies. SMIC is now in the leader pack on the long march to semiconductor autonomy. SMIC is about to embark on a $10bn exercise to expand its capacity and upgrade its fabrication capabilities. Given the support it now has from the government and from a host of Chinese fabless chip companies SMIC’s shares look attractive.

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Company Rating Sector Competitive position in China’s tech sector

Tencent Buy Internet Still largely associated in the West with WeChat – with its 750m monthly active ecosystem users –Tencent is, in fact, predominantly a gaming company. It derives over 50% of its revenues from gaming compared to 23% from social networking. Tencent’s gaming operation is on track to account for 13%-15% of the global gaming market this year. Its acquisition of Supercell involved a complex consortium based deal which included Chinese State interests. The Supercell division brings the 3 most popular mobile games to the Tencent mobile-based WeChat party – Hay Day, Clash of Clans and Boom Beach – and immediately extends Tencent’s global footprint. Moreover, Tencent’s ownership of Riot Games (which publishes League of Legends) is another prime asset because e-sport is becoming ever more popular. The gaming operation is on a 30% growth trajectory while social networking is growing at 40% clip and online ads at a 120% clip. The latter accounts for around 20% of Tencent revenues and reflects the fact that digital advertising is only now taking off in China. Facebook has spent the last two years copying WeChat. Weibo Buy Social media Weibo was China’s premier social network until WeChat came along. In 2013, the star personalities on Weibo drew attention to corruption and abuses of power. This led to a period of intense censorship by the authorities, lest “online rumours” caused damage to the social fabric of society. Today, Weibo is less about political blogging and more about celebrities building a fan base. Like Twitter, many of Weibo’s users aim to promote their personal or business brands rather than make political statements. As such, Weibo has a unique ability to target ads. Given Weibo’s shift to pure advertising and given that China’s digital advertising boom is only now just starting, Weibo is well-placed. If the ban on Facebook and Twitter in China were suddenly lifted, however, things may not look so rosy for Weibo.

Source: Company Data, CM Research

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Private companies Below, we look at the competitive position of some interesting unlisted companies in China’s tech sector.

Company Sector Competitive position in China’s tech sector

Ant Fintech Ant Financial Services Group is a fintech company that operates the Alipay payment platform Financial and runs the Sesame Credit credit profiling system. Formerly known as Alipay, the company is an affiliate company of . Alipay is, by far, the largest online payment platform in China and is the primary source of payment used on Alibaba, the largest ecommerce platform. It is expected to IPO in 2017. The biggest risk for investors are related party interests, side deals with Alibaba and corporate governance. BGI Genomics Beijing Genomics Institute (BGI), based in Shenzhen, is the world’s single biggest DNA sequencer, with 20%-30% of the global market, having totally dominated it until five years ago. Whilst still a major force, it has lost ground notably to Chinese start-ups such as Novogene and WuXi NextCODE who offer better price/performance sequencers than BGI’s proprietary technology can currently match. Nonetheless, BGI, which remains a government “champion”, is embarked on a programme of sequencing a million human genomes, a million plant and animal genomes and a million microbial ecologies. Didi Taxi Didi Chuxing is China’s largest ride hailing operation by far. It will be an increasingly powerful Chuxing hailing force in the Chinese economic landscape as urban millennials eschew car ownership and the app government looks to promote taxi hailing apps as a way to reduce pollution, traffic chaos and carnage on the roads. The company recently bought out Uber’s China unit as both companies bled billions trying to dominate the Chinese market – when Apple invested $1bn in Didi in May 2016, Uber realised the game was up. Didi handles 20m rides a day in 400 Chinese cities and in the process, is building up an invaluable real time updatable dataset. It has backing from Tencent, Alibaba, Baidu and Apple among others with all of them potential partners in the of a transportation service based on smart connected cars that will, in time, become fully autonomous. Huawei Telecom Huawei is, on some measures, China’s most impressive tech company. It is a world leader in equipment telecom and networking equipment, consumer electronics and high performance computing with an actuarial spread of assets and markets outside China. On the downside, the US has blocked it from doing a number of deals, particularly with major US telecom operators, on national security grounds. ZTE is in the same boat. Huawei is now number three to Apple and Samsung in the global smartphone market, with growing traction outside China, especially in Europe. It sees its prowess in 5G as key to future success in smartphones and smart connected devices in a rich variety of form factors. The company has also aggressively entered the global HPC market for mission critical OLTP enterprise servers used in Internet data centres on the back of its own high-end silicon technologies. It is putting considerable research into wireless broadband and cloud infrastructure. Its cloud is providing much of the infrastructure for China’s world-class genomics industry. iCarbonX Genomics iCarbonX is a spin-out of BGI. It is led by BGI’s former CEO, Wang Jun, and is backed by $158m of funding from Tencent and the Development Bank. It aims to build the ultimate “live medicine” platform from data points at all stages in life, including genetic data. It turns this data into insight using AI while enjoying access to China’s world beating supercomputing resource. BGI is the world’s biggest DNA sequencer and almost certainly sports the world’s largest and richest genetic datasets. Like BGI, iCarbonX is not a state-owned enterprise (SOE). But given that it operates in a “strategic” industry for China, it should get all the State support it needs. Meitu Consumer Meitu is a smartphone maker that is known for its “” app (photo editing software that electronics allows users to touch up photos of themselves). Meitu has 456m monthly active users for its signature app, but 95% of its revenues are derived from selling smartphones and it has never made a profit. It plans to IPO in Hong Kong on 15 December 2016, raising around $700m on a valuation of around $5.2bn. The rise and fall of Xiaomi – another Chinese smartphone maker whose valuation was hyped on the strength of its Internet ecosystem – should stand as a warning to investors. Meitu makes very little money from its selfie app or its peripheral ecosystem. It is just another smartphone maker whose margins are likely to remain at 2% to 3% in the medium to long term.

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Company Sector Competitive position in China’s tech sector

Ninebot Consumer Ninebot is a mobile robotics company that manufactures personal transportation robots (i.e. robots motorised scooters). Its backers include Sequoia Capital and Xiaomi. In 2015, it acquired Segway, a US scooter firm. Segway owns an international distribution network of more than 250 retail points in 80 countries. Rokid Consumer Among a spate of Chinese start-ups aiming at the personal robot and home robot market, robots Rokid stands out. It is an “AI first” company that makes an interactive table top robot serving a similar purpose to Amazon’s Alexa, although it is not yet as advanced. Nonetheless, Rokid was an Innovation Awards Honouree at CES and figured in the Red Herring Top 100 Asia. It has raised a total of $85m with the last round led by IDG Capital. It is a good way to play the theme of the gimmick-crazy, urban millennial homebodies. WuXi Genomics WuXi AppTec is a gene sequencer that is the leading challenger to BGI via its US subsidiary AppTec WuXi NextCODE. It is also the world’s leading contract researcher to the global pharma and biotech industries. WuXi NextCODE has tied up with Huawei over genomics cloud infrastructure. Xiaomi Consumer Xiaomi was once the start-up that stood a chance of toppling Apple in China’s fast-moving electronics smartphone market. But it has crashed and burned. Only 18 months ago, Xiaomi was valued at over $40bn – then the world’s most valuable start-up – but now it is valued at under $4bn. It has lost out not just to Huawei but to Chinese competitors such as Oppo, Vivo and LeEco which came out with innovations such as curved screens and rapid charging. The company is plotting a comeback with a virtually bezel-less display enabling it to fit a 6.4-inch screen in an iPhone pack size in its new Mi-Mix smartphone designed by legendary designer Phillipe Starck.

Source: Company data, CM Research

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China Tech Scorecard The next four pages comprise our scorecard for the Chinese technology industry, including a thematic screen, a valuation screen and a risk screen. Our methodology is explained in the Appendix. Who’s who Who does what in the Chinese technology space?

Top 50 China TMT (50 stocks)

CM Mkt cap Company Ticker Research Sector Company description (US$m) Rating

21 Vianet VNET US A void 861 Web Hosting Provider of carrier-neutral internet data centre services 51job JOBS US A void 2,102 E-Commerce (online recruitmOnline recruitment site 58.com WUBA US A void 3,533 E-Commerce (online retailer Online marketplace and ad tech platform AAC Technologies 2018 HK Buy 10,921 Electronics (components) Manufacturer of miniature acoustic components Alibaba BABA US A void 219,882 E-Commerce China's leading E-commerce company Autohome ATHM US - 3,139 E-Commerce (automobile seOnline portal for Chinese automobile consumers Baidu BIDU US Buy 43,921 Internet search Internet search engine with Chinese internet ecosystem Beijing Gehua Catv Ne 600037 CH - 3,296 Cable & Satellite operators Chinese cable TV operator Bitauto BITA US - 1,254 E-Commerce (automobile seE-commerce site focused on automobile sector Byd 1211 HK Hold 14,130 Automobiles Chinese manufacturer of batteries and electric vehicles Changyou.Com CYOU US A void 402 Software (video games) MMPORG online video games developer China Mobile 941 HK Hold 220,232 Telecom operators (mobile) China's largest mobile operator China Telecom 728 HK Hold 38,596 Telecom operators (integrateChina's largest fixed line operator China Unicom 762 HK Hold 29,044 Telecom operators (mobile) Chinese telecom operator Ctrip CTRP US Buy 22,089 E-Commerce (online travel a Online travel agency Dawning 603019 CH A void 2,795 Electronics (computers) Manufacturer of computers and servers. Estun Automation 002747 CH A void 1,453 Robotics Manufacturer of mechanical equipment focusing on metal forming and electro-hydraulic robotic machines. GoerTek 002241 CH Buy 6,229 Electronics (components) Manufacturer of acoustic components and audio products like microphones and micro receivers - Component sup Hikvision 002415 CH - 22,525 Electronics (AV) Manufacturer of video surveillance products, video and audio compression cards, network hard disk video recorder HollySys Automation HOLI US Buy 1,113 Robotics Producer of process, industrial, rail and subway, and nuclear power plant automation equipment iFlytek 002230 CH - 5,433 Software (voice recognition) Developer of speech intelligence and artificial intelligence technology. Inspur Electronic 000977 CH A void 3,227 Electronics (computers) Manufacturer of computer servers, computer terminal products, electronic products, and telecommunication equip JD.com JD US Buy 31,813 E-Commerce (online retailer China's second largest e-commerce company Joyson 600699 CH A void 3,487 Auto parts Chinese auto parts maker Jumei JMEI US - 406 E-Commerce (online retailer Online retailer of beauty products Kingsoft 3888 HK A void 2,855 Software (video games) Developer of online games and productivity software LeEco 300104 CH A void 11,179 E-Commerce (video streami Chinese video and internet TV content provider Leju LEJU US - 538 E-Commerce (online real esOnline real estate agent Lenovo 992 HK Sell 6,830 Electronics (computers) PC, server and smartphone manufacturer NetEase NTES US Buy 29,250 Software (video games) Portal with high share of China's MMORPG games market 600718 CH - 3,283 IT Services Provider of IT services, software development and business process Ningbo Bird 600130 CH A void 1,024 Telecom equipment (smartp Mobile handset manufacturer Ourpalm 300315 CH A void 4,309 Software (video games) Mobile gaming developer PCCW 8 HK Hold 4,487 Telecom operators (integrateHong Kong incumbent operator - leader in IPTV Qunar QUNR US Hold 4,368 E-Commerce (online travel a Online price comparison site for travel services Renren RENN US Sell 422 Social media Online social network site Siasun Robot 300024 CH A void 5,430 Robotics Manufacturer of industrial robots, service robots and personal robots. Products include automatic guided vehicles Sina SINA US Buy 4,986 Internet ecosystems China's largest portal - known as China's CNN for 24 hour news coverage SMIC 981 HK Buy 5,469 Chips (foundry) Chip foundry in China, run by Taiwanese Sohu SOHU US - 1,277 Internet ecosystems Internet portal with search engine and gaming Soufun.Com SFUN US A void 1,026 E-Commerce (online real esOnline real estate agent Sunny Optical 2382 HK Buy 5,359 Electronics (components) Manufacturer of optical products, including glass/plastic lenses, prisms, mobile phone camera modules, microsc Suzhou Anjie 002635 CH - 2,055 Electronics (components) Apple component supplier Television Broadcasts 511 HK Sell 1,578 TV broadcasters TV broadcaster and programmer with large Chinese content library Tencent 700 HK Buy 232,080 Internet ecosystems Chinese internet ecosystem monetised by WeChat messaging platform and gaming platform Vipshop VIPS US A void 5,806 E-Commerce (online retailer Online discount retailer providing coupons and deals Weibo WB US Buy 4,626 Social media Chinese social media platform Yirendai YRD US A void 1,553 Crowdfunding Chinese P2P lender YY YY US Buy 2,303 Social media Social network ZTE 763 HK - 9,245 Telecom Equipment Manufacturer of telecom equipment and smartphones

Source: Company data, Bloomberg, Infinancials, CM Research

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Thematic screen Baidu is the strongest Chinese tech company thematically, by our estimates, while Beijing Gehua CATV is the weakest. Our thematic screen ranks stocks on the basis of overall technology leadership in the ten technology cycles that matter most to their industry, generating a leading indicator of future earnings growth.

Top 50 China TMT CM Research Thematic Screen (50 stocks) 10% 10% 10% 10% 8% 8% 12% 12% 10% 10% 100% High CM E- Internet performa Mkt cap Industrial Self driving Internet of Thematic Company Research commerc advertisin Cloud nce Gaming Robotics AI (US$m) Internet car Things ranking Rating e g computin g Baidu 43,921 Buy 4 5 4 5 5 5 4 4 4 5 1 Alibaba 219,882 A void 5 5 4 4 4 5 4 3 3 4 2 Tencent 232,080 Buy 5 4 4 3 3 3 3 5 3 4 3 21 Vianet 861 A void 4 3 4 3 3 4 3 4 3 3 4 Tech Lenovo 6,830 Sell 4 3 4 3 3 4 4 3 3 3 5 Leader LeEco 11,179 A void 4 3 4 3 4 4 3 3 3 3 6 Dawning 2,795 A void 3 3 4 4 3 4 5 3 3 3 7 Inspur Electronic 3,227 A void 3 3 4 4 3 4 5 3 3 3 8 ZTE 9,245 - 4 3 4 3 3 4 3 3 3 3 9 Kingsoft 2,855 A void 4 3 4 3 3 3 3 4 3 3 10 iFlytek 5,433 - 3 3 4 3 3 5 3 3 3 5 11 AAC Technologies 10,921 Buy 3 3 3 4 3 4 3 4 4 3 12 Yirendai 1,553 A void 4 3 4 3 3 3 3 3 3 4 13 HollySys Automation 1,113 Buy 3 3 3 5 3 4 3 3 4 4 14 China Mobile 220,232 Hold 3 3 4 3 3 4 3 3 3 3 15 Hikvision 22,525 - 3 3 4 3 3 4 3 3 3 3 16 Vipshop 5,806 A void 4 3 4 3 3 3 3 3 3 3 17 Sohu 1,277 - 4 3 3 3 3 3 3 4 3 3 18 Sunny Optical 5,359 Buy 3 3 3 4 4 4 3 3 3 3 19 58.com 3,533 A void 5 3 3 3 3 3 3 3 3 3 20 Jumei 406 - 5 3 3 3 3 3 3 3 3 3 21 SMIC 5,469 Buy 4 4 4 4 3 4 3 3 4 2 22 China Telecom 38,596 Hold 3 3 4 3 3 3 3 3 3 3 23 4,626 Buy 3 4 3 3 3 4 3 3 3 3 24 Weibo Joyson 3,487 A void 3 3 3 3 4 4 3 3 3 3 25 Estun Automation 1,453 A void 3 3 3 3 3 3 3 3 4 4 26 Changyou.Com 402 A void 3 3 3 3 3 3 3 4 3 3 27 GoerTek 6,229 Buy 3 3 3 3 3 3 3 4 3 3 28 Ourpalm 4,309 A void 3 3 3 3 3 3 3 4 3 3 29 Suzhou Anjie 2,055 - 3 3 3 3 3 3 3 4 3 3 30 Sina 4,986 Buy 3 4 3 3 3 3 3 3 3 3 31 JD.com 31,813 Buy 5 3 4 3 3 3 3 2 3 3 32 China Unicom 29,044 Hold 3 3 3 3 3 3 3 3 3 3 33 Leju 538 - 3 3 3 3 3 3 3 3 3 3 34 Neusoft 3,283 - 3 3 3 3 3 3 3 3 3 3 35 Ningbo Bird 1,024 A void 3 3 3 3 3 3 3 3 3 3 36 PCCW 4,487 Hold 3 3 3 3 3 3 3 3 3 3 37 YY 2,303 Buy 3 3 3 3 3 3 3 3 3 3 38 Autohome 3,139 - 5 4 3 3 5 3 3 1 3 3 39 Bitauto 1,254 - 5 4 3 3 5 3 3 1 3 3 40 NetEase 29,250 Buy 3 3 3 3 3 2 3 5 3 3 41 Renren 422 Sell 2 3 3 3 3 3 3 5 3 3 42 Ctrip 22,089 Buy 5 3 3 3 3 3 3 1 3 3 43 Qunar 4,368 Hold 5 3 3 3 3 3 3 1 3 3 44 Tech Soufun.Com 1,026 A void 5 3 3 3 3 3 3 1 3 3 45 Laggard Siasun Robot 5,430 A void 3 3 3 4 3 3 3 3 4 2 46 51job 2,102 A void 4 3 3 3 3 3 3 1 3 3 47 Television Broadcast 1,578 Sell 3 2 3 3 3 1 3 3 3 3 48 Byd 14,130 Hold 3 3 3 3 2 2 3 3 4 2 49 Beijing Gehua Catv N 3,296 - 1 1 3 3 3 2 3 1 3 3 50

Source: CM Research Key: 1 (red) implies this technology theme will have a negative impact on earnings over the next 12 months; 3 (amber) implies a neutral impact; and 5 (green) a positive impact. See page 34 for an explanation of our research methodology

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Valuation screen China Telecom is the cheapest Chinese technology stock in our universe, whilst Renren is the most expensive.

Our valuation screen ranks stocks within a sector based on selected consensus valuation metrics.

Top 50 China TMT CM Research Valuation Screen (50 stocks) Weighting: 25% 25% 15% 15% 20% 100% Company Mkt cap CM Research Ticker (US$m) Rating Relative EV/EBITDA EV/sa le s Div yield P/E 2017 FCF yield valuation 2016 2016 ranking

China Telecom 38,596 Hold 728 HK 3.7 1.0 2.8 12.3 6.8 1

China Mobile 220,232 Hold 941 HK 4.2 1.5 3.5 12.7 4.4 2

PCCW 4,487 Hold 8 HK 6.0 1.8 6.0 16.1 13.9 3

Lenovo 6,830 Sell 992 HK 5.7 0.2 3.3 9.6 -0.9 4 Cheap ZTE 9,245 - 763 HK 10.4 0.6 1.3 15.7 8.2 5 YY 2,303 Buy YY US 7.9 1.9 8.9 10.4 6 HollySys Automation 1,113 Buy HOLI US 5.7 1.5 1.1 7.4 3.5 7 Television Broadcasts 1,578 Sell 511 HK 10.4 2.3 9.3 20.3 8.2 8 Yirendai 1,553 A void YRD US 10.2 2.9 9.3 8.5 9 Sohu 1,277 - SOHU US 10.6 0.3 - 20.6 10 Changyou.Com 402 A void CYOU US - -0.4 7.4 44.2 11 Leju 538 - LEJU US 18.9 0.5 21.3 6.8 12 China Unicom 29,044 Hold 762 HK 4.1 1.2 1.3 27.3 -2.2 13 Vipshop 5,806 A void VIPS US 11.9 0.7 17.1 -1.0 14 Jumei 406 - JMEI US - 0.0 5.7 4.4 15 Kingsoft 2,855 A void 3888 HK 15.6 1.9 0.8 19.2 4.1 16 NetEase 29,250 Buy NTES US 13.4 4.7 1.6 15.3 3.7 17 Byd 14,130 Hold 1211 HK 10.0 1.4 1.1 23.2 -9.2 18 Autohome 3,139 - ATHM US 14.4 3.2 16.0 6.7 19 SMIC 5,469 Buy 981 HK 5.1 2.0 12.9 -11.0 20 AAC Technologies 10,921 Buy 2018 HK 14.8 5.0 2.4 15.3 2.3 21 Bitauto 1,254 - BITA US 11.5 1.0 15.6 -29.3 22 Sunny Optical 5,359 Buy 2382 HK 21.8 2.4 1.3 22.3 4.1 23 51job 2,102 A void JOBS US 14.2 4.4 18.6 5.7 24 Beijing Gehua Catv Ne 3,296 - 600037 CH 10.6 5.8 1.4 26.3 4.0 25 Joyson 3,487 A void 600699 CH 13.5 1.3 26.2 -1.2 26 GoerTek 6,229 Buy 002241 CH 15.8 2.4 0.6 19.9 0.9 27 Hikvision 22,525 - 002415 CH 19.6 4.5 2.3 16.1 1.3 28 Baidu 43,921 Buy BIDU US 16.9 3.8 26.8 4.8 29 Sina 4,986 Buy SINA US 21.8 3.7 32.3 5.7 30 Alibaba 219,882 A void BABA US 20.9 9.6 21.8 4.8 31 Inspur Electronic 3,227 A void 000977 CH 39.5 1.8 0.5 32.4 -2.8 32 Neusoft 3,283 - 600718 CH 56.6 2.5 0.9 32.9 -1.2 33 Tencent 232,080 Buy 700 HK 23.7 10.0 0.4 29.0 2.3 34 Weibo 4,626 Buy WB US 27.3 6.6 37.0 3.7 35 JD.com 31,813 Buy JD US 102.9 0.8 - -3.7 36 Soufun.Com 1,026 A void SFUN US - 0.5 37.1 -20.5 37 Ourpalm 4,309 A void 300315 CH 28.9 16.0 0.9 26.0 1.1 38 LeEco 11,179 A void 300104 CH 23.5 3.2 0.2 65.8 -2.7 39 Suzhou Anjie 2,055 - 002635 CH 28.0 7.0 28.0 0.5 40 Ningbo Bird 1,024 A void 600130 CH - 2.3 - 1.2 41 Dawning 2,795 A void 603019 CH 67.9 4.1 0.5 58.7 -1.1 42 58.com 3,533 A void WUBA US 37.9 2.9 52.3 -5.3 43 21 Vianet 861 A void VNET US 32.3 2.2 - -15.8 44 Ctrip 22,089 Buy CTRP US - 9.1 41.3 1.7 45 Expensive iFlytek 5,433 - 002230 CH 69.2 10.5 0.5 56.7 -1.1 46 Siasun Robot 5,430 A void 300024 CH 88.4 17.7 0.2 68.5 -1.1 47 Estun Automation 1,453 A void 002747 CH 141.8 16.4 0.3 100.8 -1.1 48 Qunar 4,368 Hold QUNR US - 5.5 - -7.9 49 Renren 422 Sell RENN US - 10.9 - -12.1 50 Median 15.6 2.4 0.1 21.5 1.5 Mean 26.0 4.1 0.9 26.9 1.3

Source: InFinancials, CM Research. Key: Green denotes that the stock is cheap relative to its global peers; amber denotes it is within 15% of the sector median value; and red denotes that it is expensive relative to peers. See page 34 for an explanation of our research methodology.

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Risk Screen Yirendai is the riskiest Chinese technology company, by our estimates, whilst Tencent is the least risky. Our risk screen ranks stocks within a particular industry on the basis of overall investment risk.

Top 50 China TMT CM Research Risk Screen (50 stocks) Weightings: 20% 25% 25% 30% 100% Company Mkt cap CM Research Country Corporate Accounting Industry risk Political risk (US$m) Rating governance risk risk Risk ranking

Tencent 232,080 Buy China 1 4 5 4 1 NetEase 29,250 Buy China 1 3 4 4 2 Lenovo 6,830 Sell China 1 3 3 4 3 PCCW 4,487 Hold Hong Kong 2 3 3 3 4 Low risk Byd 14,130 Hold Hong Kong 1 2 3 4 5 Estun Automation 1,453 A void China 1 2 3 4 6 HollySys Automation 1,113 Buy China 1 2 3 4 7 Joyson 3,487 A void China 1 2 3 4 8 Siasun Robot 5,430 A void China 1 2 3 4 9 Baidu 43,921 Buy China 2 2 3 3 10 AAC Technologies 10,921 Buy China 1 2 3 3 11 Kingsoft 2,855 A void Hong Kong 1 2 3 3 12 Neusoft 3,283 - China 1 2 3 3 13 Ningbo Bird 1,024 A void China 1 2 3 3 14 Suzhou Anjie 2,055 - China 1 2 3 3 15

Hikvision 22,525 - China 1 3 4 2 16 China Mobile 220,232 Hold China 1 4 3 2 17 China Telecom 38,596 Hold China 1 4 3 2 18 China Unicom 29,044 Hold China 1 4 3 2 19 Sunny Optical 5,359 Buy Hong Kong 2 2 3 2 20 SMIC 5,469 Buy China 1 2 2 5 21 ZTE 9,245 - China 1 2 2 4 22 Sohu 1,277 - China 1 2 3 2 23 Weibo 4,626 Buy China 1 2 3 2 24 Television Broadcasts 1,578 Sell Hong Kong 2 2 2 3 25 GoerTek 6,229 Buy China 1 2 2 3 26 Dawning 2,795 A void China 1 3 4 1 27 Inspur Electronic 3,227 A void China 1 3 4 1 28 Changyou.Com 402 A void China 1 1 3 3 29 Leju 538 - China 1 1 3 3 30 Ourpalm 4,309 A void China 1 1 3 3 31 JD.com 31,813 Buy China 1 2 4 1 32 Autohome 3,139 - China 1 1 4 2 33 1,254 - China 1 1 4 2 34 Bitauto 58.com 3,533 A void China 1 2 2 2 35 Ctrip 22,089 Buy China 1 2 2 2 36 LeEco 11,179 A void China 1 2 2 2 37 Qunar 4,368 Hold China 1 2 2 2 38 Sina 4,986 Buy China 1 2 2 2 39 YY 2,303 Buy China 1 2 2 2 40 21 Vianet 861 A void China 1 1 3 2 41 iFlytek 5,433 - China 2 3 2 1 42 Vipshop 5,806 A void China 1 2 2 1 43 51job 2,102 A void China 1 1 2 2 44

Beijing Gehua Catv N 3,296 - China 1 1 2 2 45 Jumei 406 - China 1 1 2 2 46 Renren 422 Sell China 1 1 2 2 47 High risk Soufun.Com 1,026 A void China 1 1 2 2 48 Alibaba 219,882 A void China 1 1 3 1 49 Yirendai 1,553 A void China 1 1 1 1 50

Source: CM Research Key: green denotes low risk; amber denotes medium risk; red denotes high risk See page 34 for an explanation of our research methodology

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Appendix: Our “thematic” research methodology Fundamental equity research does a poor job of valuing technology stocks Traditional bottom-up valuation methodologies have a poor track record of predicting share prices in the technology sector. In part, this is because technology cycles these days move pretty fast and it is difficult to judge where you are on the growth curve. Also, valuations tend to be permanently high. Introducing CM Research’s “thematic” valuation approach So we, at CM Research, have developed an entirely new three-screen valuation methodology for the technology, media and telecom sectors based on a thematic investment approach. This is how it works. First, we split the global TMT industry into 18 subsectors – ranging from PCs to social media. Second, we identify and rank the top ten investment themes for each subsector. Third, we publish in-depth research on specific investment themes, identifying the technology winners and losers. The problem is that companies are exposed to multiple investment themes, all acting concurrently: some will send a stock up; others will send it down. So, our fourth step is to create a thematic screen for each sector to calculate overall technology leadership rankings after taking account of all themes impacting that sector. Finally, we combine this thematic screen with valuation screen and a risk screen to generate a sector scorecard used to create investment ideas. Our five-step approach for generating investment ideas Sectors Themes Technologies Thematic Screen Investment ideas

1. Split the global TMT 2. Identify and rank the 3. Identify technology 4. Calculate overall 5. Combine our 3 screens to sector into 18 subsectors. top 10 investment themes leaders and laggards technology leadership generate investment ideas. for each subsector. for each theme. rankings for all themes.

Music, Film & TV CM Research Thematic Screen (38 stocks) Weightings: 30% 20% 15% 5% 5% 5% 5% 5% 5% 5% 100%

Content E- Artificial Music CM Research Internet Virtual Ecosyste Thematic Company creation Mobile Gaming Big Data commerc intelligen distributio Rating TV reality ms ranking (film) e ce n Semiconductors Sony Buy 5 5 5 5 4 4 5 2 4 5 1 Eros Buy 4 5 3 3 3 4 3 3 3 3 2 Sector Scorecard = Youku Tudou Buy 5 4 5 3 5 4 3 3 3 4 3 Walt Disney Sell 2 5 4 5 3 4 4 4 3 3 4 Netflix Sell 5 4 4 2 3 5 4 3 3 3 5 Storage & networking Lions Gate Entertainmen Buy 4 5 3 4 3 3 3 1 3 1 6 1. Mobile Market Challengers Zee Entertainment Hold 3 5 3 3 1 3 3 2 3 3 7 Big Data Management 21st Century Fox Sell 2 5 3 3 3 3 3 4 3 3 8 leaders Viacom Sell 2 5 3 3 3 3 3 2 3 3 9 Time Warner Sell 2 5 3 4 3 3 3 4 3 1 10 Alcatel Lucent Avaya Dreamworks Buy 4 5 3 3 3 1 3 1 3 1 11 Electronics Cisco Brocade Nippon TV Sell 2 5 3 3 1 3 3 2 3 2 12 Insight Analytics Networking Thematic screen Ericsson Lenovo Starz Sell 2 5 3 3 1 3 3 2 3 1 13 Layer equipment HP Riverbed Technology Network 18 Media Hold 3 4 3 3 1 3 3 2 3 3 14 QVC Group Sell 4 3 3 3 3 5 3 3 3 3 15 Juniper Networks ZTE Database Vivendi Sell 2 4 3 4 2 3 3 2 3 5 16 Grupo Televisa Sell 2 4 3 3 2 3 3 2 3 3 17 Software Hold 3 5 2 3 1 3 3 2 3 1 18 CenturyLink (Savvis) Sun TV Network + Data Cloud Amazon Web Services Fujitsu Entertainment One A void 3 3 3 3 3 3 3 3 3 3 19 Layer IT integration infrastructure ITV Sell 2 4 3 3 1 4 3 2 3 1 20 IBM (Softlayer) 2. Big Data Scripps Networks Interac Sell 2 5 2 3 1 3 3 2 3 1 21 Verizon (Terremark) Pandora Sell 3 2 4 1 5 5 3 3 3 5 22 E-commerce Network RTL Sell 2 4 2 3 2 3 3 2 3 3 23 Sell 2 4 2 3 1 3 3 2 3 3 24 Valuation screen Equinix 21 Vianet CBS Data centres Rackspace Hosting Fuji Media Sell 2 4 2 3 1 3 3 2 3 1 25 Infrastructure Naspers - 2 1 3 3 3 4 3 3 3 1 26 Security Telecity Layer Atresmedia Sell 2 2 3 3 2 3 3 2 3 2 27 AMC Networks Sell 2 4 1 3 1 3 3 2 3 1 28 Social media BT NTT ProSiebenSat.1 Sell 1 4 3 3 1 4 4 2 3 1 29 + Storage Global network AT&T Level 3 Discovery Communicatio Sell 1 4 3 3 1 3 3 2 3 2 30 Sell 2 3 2 3 1 3 3 2 3 1 31 service providers Deutsche Telekom Reliance Globalcom Television Broadcasts Sirius XM Radio - 1 4 5 1 1 2 3 1 3 5 32 Orange Tata Comms Modern Times Group Sell 1 4 2 3 1 3 3 2 3 3 33 Music, film & TV Verizon Telefonica TV Francaise (T.F.1) Sell 1 4 2 3 1 3 3 2 3 1 34 10. Robotics Mediaset Sell 1 1 3 3 1 3 3 2 3 1 35 Risk Screen M6-Metropole TV Sell 1 3 2 3 1 3 3 2 3 3 36 Cumulus Media - 1 3 4 1 1 1 3 1 3 4 37 Advertising…. ABS CBN broadcasting Sell 1 3 2 3 1 3 3 1 3 3 38

Source: CM Research

Each sector scorecard has three screens: . The thematic screen tells us who are the overall technology leaders in the ten technology cycles that matter most to this industry. Each company is scored on the basis of whether we expect earnings in the next 12 months to outperform or underperform consensus numbers on the back of each theme. . The valuation screen tells us which players are the most attractively priced, relative to their peers, using the consensus-based valuation metrics which we believe are most appropriate for each industry. . The risk screen tells us who the riskiest players in each industry are, based on four categories – corporate governance risk, accounting risk, technology risk and political risk. How our research reports fit into our overall research methodology We produce four tiers of thematic reports to help our clients select stocks: . Single Theme: These reports offer in-depth research into a specific theme. They identify winners and losers based on technology leadership, market position and other factors. Recent themes include the Internet of Things, Internet TV, Big Data, Artificial Intelligence, Robotics and the Cloud. . All Themes: These reports cover all stocks and all themes within a sector, giving readers a strong sense of how everything fits together and how conflicting themes might interact with one another. . Sector Scorecard: Each sector scorecard has a thematic screen, a risk screen and a valuation screen. The thematic screen identifies overall winners and losers in a sector based on all themes impacting that specific sector. Live scorecards for each of our 18 sectors are available on our client portal, together with our up-to-date stock ratings. . Best Ideas Report: These reports include our high-conviction stock ideas.

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About CM Research CM Research is an independent research provider with a blue-chip list of institutional clients. We analyse emerging trends in the technology, media and telecoms sectors and develop them into global investment themes. We research these themes in detail and then feed the results into a scorecard system to quantify the impact of conflicting themes on individual stocks. Our focus is on disruptive technologies. Our stock coverage includes the top 500 global TMT stocks. Our clients include institutional investors, corporations, consultancies and governments. At a time when many of our competitors have had their reputations mired by conflicts of interest, we fiercely guard our independence. Our service is available exclusively to our clients.

Contact CM Research Research Cyrus Mewawalla Michael Orme Managing Director, Research Senior analyst, Research [email protected] [email protected] +44 20 3393 3866 +44 20 3393 3867

Sales Elgen Strait Matt Barker Brian Kern Managing Director, Global Sales Director, US Sales Director, US Sales [email protected] [email protected] [email protected] +44 20 3744 0105 +1 646 831 4649 +1 804 901 2202

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