China / Hong Kong Industry Focus China Internet Sector
Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018
2018 Outlook: Bullish; shifting towards online ads HSI : 31,601
Expect market to focus more on online ads with its stronger growth of 29% in 2018F, vs online A N ALYST games’ 24% Tsz Wang TAM CFA, +852 2971 1772 [email protected] Expect more game genres in top 10, but difficult Susanna CHUI +852 2820 4611 to predict successful titles; we like Tencent as it is [email protected] a strong publisher with diversified game genres
Online ad budget shifting to “actionable ads”, favourable to Alibaba who currently owns most of actionable ad inventories through Taobao and Recommendation & valuation Tmall T arget Company Price Price Recom 18F 18F Bullish on China’s Internet sector; market focus shifting from HK$ HK$ PE P/S games to online ads. We are bullish on China’s internet sector x x outlook for 2018, as internet companies’ two key segments - Alibaba# 188.41 234.00 BUY 32.9 9.4 (i) online games and (ii) online advertising - are expected to (BABA US) maintain robust growth of 24% y-o-y and 29% respectively in Tencent 462.8 512.0 BUY 38.0 10.3 2018. We expect the market focus will shift from online games (700 HK) to online ads, due to (i) online ads’ stronger growth and (ii) JD.com 44.32 61.00 BUY 248.3 0.8 lower predictability on successful game titles. We therefore (JD US) prefer Alibaba (BABA US), which also trades at a lower multiple Kingsoft 28.35 34.00 BUY 23.2 4.5 to Tencent (700 HK). (3888 HK) Netdragon Websoft 21.65 36.00 BUY 54.9 1.9 Games: Excitement with new game genres, but lower (777 HK) predictability on game titles. After the conversion of PC game Source: Thomson Reuters, DBS Vickers IPs into mobile games in the past few years, we are excited with the rising new game genres in the top 10 (instead of # FY3/19 being dominated by massively multiplayer online role-playing Note: Closing Price at 13 Mar 2018 games [MMORPGs]), such as survival games (i.e. PUBG) and casual games (i.e. QQ Speed Mobile). But the visibility on potentially successful game titles is much lower. We like (i) game developers with a conversion pipeline from PC IPs such as Kingsoft (3888 HK) and NetDragon (777 HK), (ii) game developers with a more diversified game genres such as Tencent, and (iii) strong game publishers which can secure popular third-party games, such as Tencent.
Online ad: Alibaba benefits from favourable budget shift to “actionable ads”. We forecast that advertisers will have a larger budget on “actionable ads” (ads which lead to action i.e. sales), driven by improving data analytics and therefore better target marketing. Alibaba, with its leading e-commerce platforms which have the most actionable ad inventories, will benefit the most in the medium term. The online ad market is growing faster than mobile games, and Tencent’s ability to catch up in the online ad market will take time. As such, we prefer Alibaba at this stage.
ed-JS / sa-CS / AH
Industry Focus China Internet Sector
Introduction
We are bullish on China’s internet sector outlook for 2018, as 59.8%, and 91.5% of Tencent’s, Alibaba’s, and Baidu’s the two key segments for internet companies - (i) online games revenue. Moreover, we expect that the market will shift its and (ii) online advertising - are expected to deliver strong attention from online games to online ads, due to (i) online growth of 23.8% y-o-y and 29.3% y-o-y respectively in 2018. ads’ stronger growth and (ii) lower predictability on potentially Note that online games accounted for 47% of Tencent’s successful game titles. revenue, while online advertising accounted for 17.8%,
Revenue mix of Tencent (FY16) Revenue mix of Alibaba (FY3/17)
11.3% 18.6%
46.6% 24.3% 21.6% 59.8%
17.8%
Online games Online advertising Content subscriptions Others Online advertising Commissions Others
Revenue mix of Baidu (FY16) Revenue mix of JD (FY16)
Note that commission, online 8.5% advertising, and logistics services 41.7% contributed 40+%, 55.2% 30+% and 10+% of 3P 91.5% revenue
Online advertising Others Direct sales (1P) Thirty-party marketplace (3P)
Source: Company, DBS Vickers
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Industry Focus China Internet Sector
Online games – healthy but less predictable online role-playing games (MMORPGs), such as Fantasy Westward Journey (夢幻西遊), Blade & Soul (劍靈), TLBB (新天 龍八部), Final Fantasy 14 (最終幻想 14), Legend of MIR (熱血 We are bullish on the online game segment with new 傳奇), Ghost (新倩女幽魂), AskTao (問道), Eudemons Online ( excitements including survival games (i.e. PUBG) as well as 魔域), MU Miracle (奇蹟 MU), Jiu Yin Zhen Jing (九陰真經), casual games (i.e. QQ Speed Mobile). iResearch expects China’s and Shenwu 3 (神武 3). online game market to grow by 23.8% y -o-y growth in 2018F, with mobile games expanding by 31.9%, and PC games However, most of the top PC game IPs (based on top 30 PC (including client end and web based) registering moderate games) are now exhausted. We expect the number of mobile single digit growth. Note that online games accounted for games converted from top PC games will drop from 7 in 2017, 46.6%, 30.7%, and 43.3% of Tencent’s (700 HK), Kingsoft to 3 in 2018F. The mobile games that will be converted from (3888 HK) and NetDragon’s (777 HK) FY16 revenue. top 30 PC game IPs in 2018F will be Nexon's (3659 JT)’s DNF Mobile (地下城與勇士), Kingsoft (3888 HK)’s JX3 Mobile (劍俠 情緣 3 手遊) which will be published by Tencent, as well as China's online game market NetDragon’s (777 HK)’s Eudemons 3D Mobile (魔域 3D 手遊).
Rmb bn 2015 2016 2017F 2018F 2019F As the number of mobile games converted from top PC games PC games - 66 61 57 60 63 is getting smaller, the visibility on which game titles or game clients-end developers will standout will be lower. PC games - web 22 16 14 14 10 Mobile games 56 102 142 188 214 No. of mobile games converted from top 30 PC games Others 0 0 3 6 13 Total 144 179 217 268 301
y-o-y 2018 3 PC games - -7.8% -5.6% 5.5% 5.1% clients-end PC games - web -26.1% -12.9% 0.6% -31.0% 2017 7 Mobile games 81.8% 39.2% 31.9% 14.2% Others 89.8% 114.4% Total 24.6% 21.2% 23.8% 12.1% 2016 5 Source: iResearch, DBS Vickers 2015 6 Key trend # 1: Poor visibility now that “conversion of PC games to mobile games” has peaked. ”Conversion of PC 0 2 4 6 8 games to mobile games” was the key driver in the online game segment in the past few years. Mobile games converted from Source: Company, DBS Vickers PC game IPs occupied 7 positions on average among the top 10 mobile games in China on iOS in 2017, vs. 3 and 6 in 2015 and 2016 respectively. Most of them are massively multiplayer
Page 3 Industry Focus China Internet Sector
Key trend # 2: More game genres in top 10, previously dominated by MMORPGs. MMORPGs dominated the top 10 Key trend #3: Survival game the new market focus. mobile games in the past few years, as most of the hit mobile PlayerUnknown’s Battlegrounds, a PC survival game (also a game titles converted from PC games were mostly MMORPGs. third person shooting game) developed by Bluehole was Based on the experience in global markets, we expect to see a launched in 2017 and is well received in the market. We more diversified range of game genres in long term, including reckon a few survival game titles in mobile space will gain (i) casual games, (ii) strategy games, and (ii) survival games. popularity, including NetEase’s Wilderness / Knives out (荒野行 Note that non-MMORPG occupied 3 positions among the top 動) and Terminator 2 (終結者 2) as well as Tencent’s Cross Fire: 10 mobile games in China on iOS in December 2017, vs. only 1 Legends (穿越火線: 槍戰王者) and Glorious Mission (光榮使 position in December 2016. Here are some of the recent hit 命). Separately, Tencent has also launched PUBG: Heroes of games: Example 1: Tencent launched car racing game, QQ Battle (絕地求生: 全軍出擊, co-developed by Bluehole and Speed Mobile (QQ 飛車手遊) in November 2017, based on its Tencent's Timi Studio [Honour of Kings’ developer]) and PUBG: legacy PC game, QQ Speed (QQ 飛車). Its monthly gross billing Exciting Battlefield (絕地求生: 刺激戰場, co-developed by rose quickly to top 2 in China’s mobile games list on iOS for Bluehole and Tencent's Quantum Studio) in February 2018. two months. Example 2: Tencent’s King of Chaos (亂世王者) ranked as one of the top 10 in China’s mobile games list on iOS for five months from July 2017. All in all, we expect a more PUBG: Exciting Battlefield diversified range of game genres to “randomly” pop up in the top 10 ranking.
Casual games (i.e. QQ Speed Mobile)
Source: Company, DBS Vickers
NetEase’s Wilderness had an early-mover advantage in 2017. It Source: Company, DBS Vickers ranked in the top 10 in China’s mobile games list on iOS in February 2018. But it has now been challenged by Tencent’s PUBG: Exciting Battlefield, which is the top China mobile game Strategy games (i.e. King of Chaos) on iOS, in terms of downloads. As these genre games are in early stages of user acquisition in 2018F, we do not expect them to generate meaningful monthly gross billings until 2019F.
Key trend #4: Honour of Kings to remain at the top in 2018. Tencent’s Honour of Kings (王者榮耀) is ranked the top in China on iOS for 16 consecutive months based on monthly gross billings since November 2016. It dominated multiplayer online battle arena (MOBA) game genres. We expect steady revenue from Honour of Kings to Tencent going forward, thanks to its early-mover advantage and network effect. Note that gross billings of League of Legends (英雄聯盟), the world’s Source: Company, DBS Vickers most popular PC MOBA launched in 2009, still grew 17% y-o- y in 2017. For example, NetEase launched Onmyoji: Battle!
Page 4 Industry Focus China Internet Sector
Heian-Kyo (陰陽師: 決戰! 平安京) in January 2018, a MOBA based on its Onmyoji (陰陽師) IP, which has not been well Conclusion received. We are excited on more new game genres (instead of domination by MMORPG) featuring in the top 10 such as Gross billings of League of Legends survival games (i.e. PUBG) and casual games (i.e. QQ Speed Mobile). However, the visibility or the predictability of US$bn successful game titles and game developers is much lower, 2.5 16.7% 0.18 with fewer mobile games converted from top PC IPs. We like (i) 2.1 0.16 game developers which still have conversion pipeline from PC IPs such as Kingsoft (3888 HK) and NetDragon (777 HK), (ii) 2 1.8 0.14 1.63 game developers with more diversified and broader game 0.12 genres such as Tencent (700 HK), and (iii) strong game 1.5 10.4% 0.1 publishers which can secure popular third-party games such as 0.08 Tencent. 1 0.06 0.5 0.04 0.02 0 0 2015 2016 2017
Source: SuperData, DBS Vickers
Top 10 China's mobile games by gross billings (December 2017 versus December 2016)
Top 10 mobile ga me s in China by gross Top 10 mobile ga me s in China by gross revenue (December 2017) revenue (December 2016) Mobile ga me s Publishe rs Mobile ga me s Publishe rs Honour of Kings (王者榮耀) Tencent Honour of Kings (王者榮耀) Tencent Fantasy Westward Journey (夢幻西遊) NetEase Onmyoji (陰陽師) NetEase MU Miracle (奇蹟 : 最強者) Longtu Game Fantasy Westward Journey (夢幻西遊) NetEase Ghost (倩女幽魂) NetEase Ghost (倩女幽魂) NetEase Westward Journey Online (大話西遊) NetEase V.S. Westward Journey Online (大話西遊) NetEase TLBB (天龍八部) Tencent Naruto Mobile (火影忍者) Tencent King Of Chaos (亂世王者) Tencent Fantasy Zhu Xian (梦幻誅仙) Tencent Onmyoji (陰陽師) NetEase AskTao (問道) G-bits Contra: Return (魂斗羅 : 歸來) Tencent JX online (劍俠情缘) Tencent Archangel Sword H5 (大天使之劍H5) 37games Zhengtu (征途) Tencent
Non MMORPG mobile games
Source: App Annie, DBS Vickers
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Top 10 mobile games by gross billings (China versus global)
Top 10 mobile ga me s in China by gross Top 10 globa l mobile ga me s by gross revenue (December 2017) revenue (December 2017) Mobile ga me s Publishe rs Mobile ga me s Publishe rs Tencent, Honour of Kings (王者榮耀) Tencent Honour of Kings (王者榮耀) Garena Online Fantasy Westward Journey (夢幻西遊) NetEase Monster Strike (モンスターストライク) Mixi NetEase, MU Miracle (奇蹟 : 最強者) Longtu Game Fantasy Westward Journey (夢幻西遊) Garena Online Ghost (倩女幽魂) NetEase Fate/Grand Order Sony Activision Westward Journey Online (大話西遊) NetEase V.S. Candy Crush Saga Blizzard, Tencent TLBB (天龍八部) Tencent Dragon Ball Z Dokkan Battle BANDAI King Of Chaos (亂世王者) Tencent Clash Royale Supercell Onmyoji (陰陽師) NetEase Lineage 2 Revolution Netmarble Contra: Return (魂斗羅 : 歸來) Tencent Clash of Clans Supercell NCSOFT, Archangel Sword H5 (大天使之劍H5) 37games Lineage M GAMANIA
Non MMORPG mobile games
Source: App Annie, DBS Vickers
Page 6 Industry Focus China Internet Sector
Online advertising – gaining market focus in 2018 China's online games and advertising market
We believe that market will shift its focus more towards online advertising due to its stronger growth of 29.3% in 2018F, vs. 23.8% for online games, another key segment, according to iResearch. The market size of online advertising is also bigger than online games by two-fold, which points to ample growth potential. Note that online advertising accounted for 17.8%, 59.8%, and 91.5% of Tencent’s, Alibaba’s, and Baidu’s revenue.
China's advertising market
Rmb bn 2015 2016 2017F 2018F 2019F Online 218290388502632 PC 119115124132148 Mobile 100175265370484 Source: iResearch, DBS Vickers TV 108105103103102 Radio 1515151515 Key trend #1: “Actionable ads” will register robust growth. We Print 271712 97 analysed the advertising market based on advertising objectives T otal 369 427 518 630 756 (namely, “attention”, “interest & desire” and “action”), instead of traditional matrix such as user numbers and time y -o-y spent. (For details, please refer to Asian Insights SparX-China Online 32.9%33.8%29.3%25.8% Internet Sector: Where does online ad spend go?). The key PC -2.9%7.2%7.2%11.6% conclusion is that advertisers will spend a greater part of their Mobile 75.4%51.3%39.6%30.9% budget on “actionable ads” (ads which lead to action i.e. TV -3.2%-1.8%0.3%-1.1% sales), driven by improving data analytics and therefore better Radio 1.5%2.1%1.6%0.9% target marketing. We expect the market size of actionable ads Print -39.1% -28.7% -21.7% -27.7% in China to deliver growth of 52.1% in 2018F, versus 29.3% T otal 15.7% 21.5% 21.6% 20.0% for the overall online ad industry.
Source: iResearch, DBS Vickers E-commerce platforms provide the most actionable ad inventories. Alibaba (BABA US) operates the leading e- commerce platforms, i.e. Taobao and Tmall in China, and will therefore benefit from the budget shift in the medium term.
Page 7 Industry Focus China Internet Sector
Key trend #2: Tencent catching up through partnerships. Conclusion Tencent’s key asset, WeChat, has a massive user base (monthly The online ad segment will be gaining more attention in active users [MAUs]: 980m), which is naturally good value for 2018F, and therefore like Alibaba (BABA US) which will benefit online ads in gaining “attention”. However, in view of the from the favourable shift in ad budgets. rising budget for online “actionable ads”, Tencent has been cultivating its ecosystem through partnerships with e- commerce platforms. For example, Tencent has invested in an 18.1% stake in JD, and formed Jing Teng Collaboration (京騰 計劃) with JD, on which merchants can place online ads on Tencent’s WeChat or Qzone to attract traffic to their online stores. We expect to see more of such collaborations with other e-commerce platforms in 2018F; however, material monetisation will take time.
Market share of online advertising in China (2016)
38.70% 29.80% ( 32.3% in 2019) ( 35% in
22.20% 9.30% ( 17% in 2019) ( 15% in 2019)
Alibaba Baidu Tencent Others
Source: iResearch, Company, DBS Vickers
Page 8 Industry Focus China Internet Sector
E-commerce Market share of China's e-commerce based on GMV in iResearch expects China's e-commerce market in terms of gross merchandise value (GMV) to grow by 15.8% in 2018F, to 2016 account for 16.6% of China’s retail sales (vs. 15.6% in 2017). The growth is expected to be driven mainly by product 2% category expansion as well as penetration into lower-tier cities. 8% Despite moderate growth of GMV, Alibaba (BABA US) and JD (JD US) have been increasingly monetising GMV via online advertising. E-commerce platforms mainly monetise through 14% online ads, logistics services, and commission fees. Please refer to our previous segment on online advertising.
China's e-commerce market 76%
8000 7500 40.0% 7000 35.7% 6600 35.0% 5700 6000 30.0% Alibaba JD.com Vipshop Others 4700 5000 25.0% 3800 23.7% 4000 21.3% 20.0% Source: Company, DBS Vickers 3000 15.8% 15.0% 13.6% 2000 10.0% Key trend #1: Fierce competition in 3C, apparel and FMCG 1000 5.0% segments. 3C products and apparels are well penetrated at 23- 35%, in which JD and Alibaba have strong presence. JD and 0 0.0% Alibaba are competing with each other in these two segments, 2015 2016 2017F 2018F 2019F especially given that merchants are diversifying their sales channels. Fast moving consumer goods (FMCG), which is an China's e-commerce market (Rmb bn) y-o-y under penetrated segment, is another battlefield. We expect fierce competition between Alibaba and JD in terms of Source: Company, DBS Vickers investments in marketing and fulfilment networks (such as fixed assets and technologies).
Key trend #2: Faster pace in implementing the new retail strategy. Alibaba Chairman Jack Ma coined the concept of new retail as an integration of online, offline, logistics and data across a single value chain. While the market has yet to fully evaluate the economic benefits of new retail, we expect Alibaba and JD to continue to increase their investments in offline retail companies, and fasten the pace in implementing the new retail strategy.
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Industry Focus China Internet Sector
Recent acquisitions of retailers by internet companies
Inve stme nt % of Da te Compa ny Ta rge t a mount owne rship Note s Te nc e nt a nd JD Aug-15 JD Yonghui Superstores (601933 CH) Rmb4.2bn 10% Dec-17 Tencent Yonghui Superstores (601933 CH) Rmb4.2bn 5% Jan-18 Tencent Carrefour SA (China division) NA Jointly invests with Yonghui Superstores (601933 CH) Jan-18 Tencent and Wanda Commercial Properties Rmb34bn 14% Jointly invest with Suning JD Commerce (002024 CH) and Sunac (1918 HK) Feb-18 Tencent Heilan Home (600398 CH) Rmb2.5bn 5%
Aliba ba Mar-14 Alibaba Intime Retail US$692m 28% Aug-15 Alibaba Suning Commerce (002024 CH) US$4.6bn 20% Jan-17 Alibaba Intime Retail US$2.6bn 72% Privatise Intime Retail May-17 Alibaba Lianhua Supermarket (980 HK) Rmb851m 18% Nov-17 Alibaba Sun Art (6808 HK) HK$22.4bn 36%
Source: 17173, DBS Vickers
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Industry Focus China Internet Sector
Stock implications Kingsoft (3888 HK) Kingsoft is a leading online game developer in China with strong IPs derived from JX (劍俠). Online games accounted for Tencent (700 HK) 62.8% of FY17F total revenue. Its online games revenue is expected to grow 25.8% y-o-y in FY18F. We expect it to Tencent is a leading online game developer and publisher in launch JX2 Mobile (劍俠情緣 2 手遊) and the much-anticipated China with 45.8% market share in the online games market in JX3 Mobile (劍俠情緣 3 手遊) which is converted from JX3 terms of revenue in 2017. The company has consistently Online (a top 10 PC game in China) in mid-2018. Potential developed mobile games that are ranked in the top 10 in listing of WPS and financing of its cloud segment will also China across various genres, such as Honour of Kings (王者榮 support re-rating. 耀) in MOBA, King of Chaos (亂世王者) in strategy, and recently QQ Speed (QQ 飛車) in casual games. We are also We currently have a BUY rating on Kingsoft with TP of HK$34 excited about the two survival games co-developed with based on SOTP methodology pegged to (1) 15x FY18F PE for Bluehole, i.e. PUBG: Heroes of Battle (絕地求生：全軍出擊) online games (HK$14 per share); (2) 10x FY18F PE for Cheetah and PUBG: Exciting Battlefield (絕地求生：刺激戰場). We and WPS (HK$5); (3) Valuation from series D financing for expect its online game revenue to grow by 36.8% y-o-y. Kingsoft Cloud (HK$6). Meanwhile, Tencent will continue to cultivate its ecosystem in the online ad market. Kingsoft - Sum of the parts valuation (HK$ per share) We currently have a BUY rating on Tencent with TP of HK$512 based on SOTP methodology pegged to (1) 10x/30x FY18F normalised net profit from PC games/mobile games (HK$162 Others, 2 per share), (2) 50x FY18F normalised net profit from social networks (HK$211), (3) 50x FY18F normalised net profit from online advertising (HK$71).
Online Cash, 7 Tencent - Sum of the parts valuation (HK$ per share) games, 14 PC games, Cloud, 6 18 Others, Cheetah 68 and WPS, 5 Mobile Online ad, games, 71 144 Source: Company, DBS Vickers
Social networks, 211
Source: Company, DBS Vickers
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Industry Focus China Internet Sector
NetDragon (777 HK) Alibaba (BABA US) NetDragon is a leading online game developer in China. Two Alibaba operates China’s largest e-commerce platforms, flagship games are Eudemons Online (魔域) and Hero Evolved ( Taobao and Tmall, with 75.8% market share in terms of gross 英魂之刃). Online games accounted for 45.0% of FY17F total merchandise value (GMV) expected in FY3/18F. It mainly revenue. Its online game revenue is expected to grow 33.1% y - monetises through online advertising with revenue o-y in FY18F. NetDragon will launch three new games under contribution accounting for 67.3% of China’s total e- Eudemons Online IP and 3 new games under Heroes Evolved IP commerce retail revenue in FY3/18F. Alibaba is the largest in 2018. In particular, management highlighted that it will online advertising platform in China, with 32.0% market share launch Eudemons 3D Mobile (魔域 3D 手遊) in 2H18 with a in 2017. Alibaba is a beneficiary in the budget shift towards strong publisher. We expect its monthly gross billing to actionable ads. We believe that the market will shift its focus probably be at least double that of Eudemons Mobile. We towards online advertising due to its stronger growth of expect NetDragon’s online game revenue to grow 33.1% in 29.3%, vs. online games at 23.8%. FY18F. NetDragon is also expanding into online education We currently have a BUY rating on Alibaba. We derive our TP business, with a 2m teacher base in international markets. of US$234 based on SOTP methodology pegged to (1) 30x While this segment is still in the user acquisition stage and loss FY3/19F normalised net profit for e-commerce/cloud making, we expect the company to start to monetise high- (US$200/US$7 per share); (2) market price or valuation implied margin content in FY18F. by recent equity financing for other investments (US$21). We reiterate our BUY call on NetDragon with TP of HK$36 based on STOP methodology pegged to (1) 15x FY18F PE for online games (HK$24 per share); (2) 10x FY17F normalised net profit from hardware and 20x potential net profit from content Alibaba - Sum of the parts valuation (US$ per share) and apps for its online education business (HK$8).
NetDragon - Sum of the parts valuation (HK$ per share) Cloud, 7 Others, 27
Others, 4
E-commerce, Education 200 , 8 Online games, 24
Source: Company, DBS Vickers
Source: Company, DBS Vickers
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Industry Focus China Internet Sector
JD (JD US) JD operates China’s second largest e-commerce platform. JD - Sum of the parts valuation (US$ per share) Direct sales (1P) and third party (3P) accounted for 57.5% and 42.5% of its total GMV in FY17. Its 3P model is mainly monetised through transaction-based commission, online advertising and fulfilment. JD is also a beneficiary in the budget shift towards actionable ads. Moreover, Tencent views JD as a JD key partner in building its ecosystem in relation to online logistics, 9 JD advertising. Their Jing Teng collaboration allows JD’s merchants Finance, 3 to place online ads on Tencent’s WeChat or Qzone. We expect JD to deliver GMV/revenue CAGR of 31%/ 32% in FY18F. We reiterate our BUY call on JD. We derive our TP of US$61 based on SOTP methodology: (1) 1.0x price to sales ratio for e- E-commerce, commerce (US$49 per share); (2) valuation from series A 49 financing for JD Finance (US$3); and (3) valuation from series A financing for JD Logistics (US$9).
Source: Company, DBS Vickers
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Industry Focus China Internet Sector
Top 30 PC games in China
PC ga me De ve lope r Ope ra tor Ge nre 1 DNF (地下城與勇士) Nexon Tencent Action RPG 2 League of Legends (英雄聯盟) Riot Tencent MOBA 3 Fantasy Westward Journey (夢幻西遊) NetEase NetEase MMORPG 4 JX 3 (劍網3) Kingsoft KingsoftMMORPG 5 Hearth Stone (爐石傳說) Blizzard NetEase TCG 6 Blade & Soul (劍靈) Ncsoft TencentMMORPG 7 World of Warcraft (魔獸世界) Blizzard NetEaseMMORPG 8 QQ Speed (QQ飛車) Tencent TencentCausal 9 Path of Exile (流放之路) Grinding Gear Games TencentMMORPG 10 Maple Story 2 (冒險島2) Nexon TencentAction RPG 11 CrossFire (穿越火線) Smilegate TencentFPS 12 TLBB (新天龍八部) Changyou ChangyouMMORPG 13 The Magic Blade (天涯明月刀) Tencent TencentMMORPG 14 Final Fantasy 14 (最終幻想14) Square EnixShandaMMORPG 15 T-Game (逆戰) Tencent TencentFPS 16 DOTA2 Valve Perfect World MOBA 17 Overwatch (守望先鋒) Blizzard NetEaseFPS 18 World of Tanks (坦克世界) Wargaming KongzhongTPS 19 Legend of MIR (熱血傳奇) Wemade ShandaMMORPG 20 Ghost (新倩女幽魂) NetEase NetEaseMMORPG 21 Kartrider (跑跑卡丁車) Nexon TiancityCausal 22 AskTao (問道) G-bits GY GameMMORPG 23 Eudemons Online (魔域) NetDragon NetDragonMMORPG 24 Minecraft (我的世界) Mojang NetEaseSandbox 25 Cross Gate (魔力寶貝) Square EnixPOL-ChinaMMORPG 26 Guild Wars 2 (激戰2) ArenaNet KongzhongMMORPG 27 World of Warships (戰艦世界) Wargaming KongzhongTPS 28 MU Miracle (奇蹟MU) Webzen Taren MMORPG 29 Jiu Yin Zhen Jing (九陰真經) Snail GamesSnail GamesMMORPG 30 Shenwu 3 (神武3) Duoyi Duoyi MMORPG
PC games that were already converted to mobile games
Source: 17173, DBS Vickers
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Industry Focus China Internet Sector
China’s hit PC-to-mobile games
Dev eloper Publisher Launch date 2015 PC-to-mobile games Fantasy Westward Journey (夢幻西遊) NetEase NetEase Feb-15 Westward Journey Online (大話西遊) NetEase NetEase Aug-15 Hearthstone: Heroes of Warcraft (爐石戰記:魔獸英雄傳) Blizzard NetEase Feb-15 Legend of MIR 2 (熱血傳奇) Shanda Tencent Aug-15 CrossFire Mobile (穿越火線) Smilegate Tencent Dec-15 Maple Story (冒險島) Nexon Tencent Sep-15 Kartrider (跑跑卡丁車) Nexon Tiancity May-15
2016 PC-to-mobile games Ghost (倩女幽魂) NetEase NetEase Apr-16 Tian Xia (天下) NetEase NetEase Jul-16 Demon Seals (鎮魔曲) NetEase NetEase Dec-16 Heroes of Tang Dynasty (大唐無雙) NetEase NetEase Nov-16 Final Fantasy: Awakening (最終幻想:覺醒) Square Enix Perfect World Dec-16 Jade Dynasty (誅仙) Perfect World Perfect World Aug-16 Fantasy Zhu Xian (夢幻誅仙) Perfect World Tencent Oct-16 The World of Legend (傳奇世界) Shanda Tencent Dec-16 Zhengtu (征途) Giant Tencent Apr-16 Dragon Nest (龍之谷) Eyedentity Tencent Oct-16 JX Mobile (劍俠情缘手游) Kingsoft Tencent Jun-16 JX World Mobile (劍俠世界手游) Kingsoft Xiaomi Sep-16 AskTao (問道) G-bits G-bits 42461 The Epoch of Eternity (永恒纪元:戒) Ncsoft 37games Nov-16 Lineage 2: Xue Meng (天堂2:血盟) Ncsoft Woniu Jul-16 Blade & Soul (劍靈) Ncsoft Tencent Feb-16 Jiu Yin Zhen Jing (九陰真經) Snail Games Snail Games Aug-16
2017 PC-to-mobile games TLBB Mobile (天龍八部) Changyou Tencent May-17 Contra: Return (魂斗羅:歸來) Konami Tencent May-17 XunXian (尋仙) Pixel Game Tencent Jul-17 The Legend of Sword and Fairy 5 (仙劍奇俠傳五) Changyou Jgyou Jul-17 Re Xue Jiang Hu (熱血江湖) Mgame Longtu Game Apr-17 Archangel Sword H5 (大天使之劍H5) 37games 37games Sep-17 MU Miracle (奇蹟:最強者) Ourpalm Longtu Game Dec-17 Eudemons Online (魔域) NetDragon Kingsoft Oct-17 Minecraft (我的世界) Mojang NetEase Sep-17 QQ Speed (QQ飛車) Tencent Tencent Nov-17 World of Tanks (坦克世界) Wargaming NetEase Dec-17 Shenwu 3 (神武3) Duoyi Duoyi Nov-17
2018 PC-to-mobile game pipeline DNF Mobile (地下城與勇士) Nexon Tencent JX3 Mobile (劍網3) Kingsoft Tencent Lineage II Revolution (天堂2: 革命) Netmarble Tencent Stone Age (石器時代) Netmarble Tencent 魔域 手遊 Eudemons 3D Mobile ( 3D ) NetDragon n.a.
Source: App Annie, DBS Vickers
Page 15
Industry Focus China Internet Sector
Share price performance
300 Rebased (1 Jul 16 = 100)
250
200
150
100
50
0 Jul-16 Jul-17 Jan-17 Jan-18 Jun-17 Oct-16 Feb-17 Oct-17 Feb-18 Sep-16 Apr-17 Sep-17 Dec-16 Dec-17 Nov-16 Nov-17 Mar-17 Aug-16 Aug-17 May-17
Tencent Baidu Alibaba Kingsoft Netdragon
Share price performance (%) 1-mth 3-mth 6-mth 12-mth YTD TENCENT (7.3) 6.0 27.8 32.0 31.1 BAIDU (8.0) (2.8) (0.1) (18.3) (13.8) ALIBABA (11.6) 1.3 16.5 16.5 14.4 KINGSOFT (10.6) 17.6 (2.3) (9.1) (10.5) NETDRAGON (7.7) (5.3) 1.4 (2.3) 16.8
Source: Thomson Reuters, Company, DBS Vickers
Page 16 Industry Focus China Internet Sector
Peers valuation
Mk t PE PE P/S P/S P/Bk P/Bk ROE ROE Currency Price Cap 18F 19F 18F 19F 18F 19F 18F 19F Company Name Code Local$ US$m x x x x x x % % Chinese Internet companies (HK listed) Tencent Holdings*^ 700 HK HKD 462.8 564,469 38.0 26.6 10.3 7.4 11.5 8.5 32.7 35.4 Kingsoft*^ 3888 HK HKD 28.35 4,972 23.2 13.7 4.5 3.3 3.1 2.5 13.7 19.8 Netdragon Websoft*^ 777 HK HKD 21.65 1,454 54.9 32.4 1.9 1.6 2.3 2.2 4.1 6.8 IGG 799 HK HKD 11.98 2,022 9.3 8.8 2.5 2.3 5.4 4.2 65.3 52.2 A v erage 31.4 20.4 4.8 3.6 5.5 4.4 28.9 28.5 Chinese Internet companies (US listed) Alibaba*# BABA US USD 188.41 482,547 32.9 24.5 9.4 7.2 6.8 5.3 22.9 24.2 Baidu 'A' BIDU US USD 258.35 90,701 30.0 24.4 6.3 5.2 4.4 3.8 15.0 15.7 Vipshop Holdings VIPS US USD 17.65 10,124 22.2 17.0 0.8 0.6 5.1 4.0 27.2 27.9 JD.com* JD US USD 44.32 63,249 248.3 102.3 0.8 0.7 7.4 6.9 3.0 7.0 Ctrip.Com Intl. CTRP US USD 48.78 25,544 44.3 29.1 5.3 4.3 2.4 2.3 5.1 8.1 Weibo Class 'A' Adr WB US USD 131.13 30,420 46.6 32.6 16.9 12.3 15.0 10.2 39.3 37.9 Sina SINA US USD 117.71 8,418 33.9 23.5 3.8 2.8 2.5 2.2 7.6 9.6 Soufun Hdg SFUN US USD 4.49 1,989 19.8 13.1 4.1 3.6 3.2 2.5 19.3 22.7 Autohome ATHM US USD 85.76 15,190 28.6 22.9 14.6 12.0 6.7 5.2 27.1 25.3 Bitauto Holdings BITA US USD 30.93 2,218 15.4 11.6 1.3 1.1 1.0 0.9 6.3 8.3 Netease NTES US USD 311.62 41,165 23.8 20.6 4.1 3.2 4.9 4.1 24.3 23.4 Changyou Com CYOU US USD 28.88 1,715 13.0 13.2 3.2 3.3 1.2 1.2 12.5 9.2 Momo MOMO US USD 36.82 5,754 16.2 13.1 3.2 2.6 5.6 4.0 37.2 33.5 YY YY US USD 118.18 7,978 15.7 12.7 3.6 2.9 4.2 3.2 28.7 29.0 A v erage 42.2 25.8 5.5 4.4 5.0 4.0 19.7 20.1 Global Internet companies Alphabet A GOOGL US USD 1139.9 794,286 27.5 23.5 5.9 5.1 4.8 3.5 18.3 17.6 Amazon.Com AMZN US USD 1588.2 768,849 191.1 103.2 3.3 2.7 21.8 16.0 16.8 22.4 Facebook Class A FB US USD 181.88 528,347 25.1 20.6 9.6 7.5 5.6 4.4 25.2 24.5 A v erage 81.2 49.1 6.3 5.1 10.7 8.0 20.1 21.5
# FY3/19, FY3/20
^ Core EPS
Source: Thomson Reuters, *DBS Vickers
Page 17
Industry Focus China Internet Sector
Alibaba: PE band Alibaba: PB band
x x 8.0 40 7.5 35 7.0 6.5 30 +1SD: 23.1x 6.0 +1SD: 5.4x 25 5.5 Avg: 18.1x 5.0 Avg: 4.4x 20 4.5 -1SD: 3.5x 4.0 15 -1SD: 13.2x 3.5
10 3.0
Jun-15
Jun-16
Jun-17
Jun-15
Jun-16
Jun-17
Sep-14
Sep-15
Sep-16
Sep-17
Sep-14
Sep-15
Sep-16
Sep-17
Dec-14
Dec-15
Dec-16
Dec-17
Dec-14
Dec-15
Dec-16
Dec-17
Mar-15
Mar-16
Mar-17
Mar-15 Mar-16 Mar-17
JD.com: PS band JD.com: PE band
x x 11.0 1.9 10.0 1.7 9.0 1.5 +1SD: 1.3x +1SD: 8.2x 1.3 8.0 7.0 1.1 Avg: 1x 0.9 6.0 Avg: 6.8x -1SD: 0.7x 0.7 5.0 -1SD: 5.4x
0.5 4.0
Feb-15
Feb-16
Feb-17
Feb-18
Nov-14
Nov-15
Nov-16
Nov-17
Aug-14
Aug-15
Aug-16
Aug-17
May-14
May-15
May-16
May-17
Feb-15
Feb-16
Feb-17
Feb-18
Nov-14
Nov-15
Nov-16
Nov-17
Aug-14
Aug-15
Aug-16
Aug-17
May-14
May-15 May-16 May-17
Tencent: PE band Tencent: PB band
x x 43 18.0 16.0 38 14.0 +1SD: 29.6x 33 12.0 +1SD: 9.7x 28 10.0 23 8.0 6.0 Avg: 7.3x 18 Avg: 23.5x 4.0 -1SD: 17.4x -1SD: 5x 13 2.0
8 0.0
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15
Jun-16
Jun-17
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
Jun-10
Jun-11
Jun-12
Jun-13
Jun-14
Jun-15 Jun-16 Jun-17
Source: Thomson Reuters, DBS Vickers
Page 18
Industry Focus China Internet Sector
Kingsoft: PE band Kingsoft: PB band
x x 60 7.0 6.0 50 5.0 +1SD: 3.5x 40 +1SD: 27.1x 4.0 30 Avg: 2.5x 3.0 Avg: 16.2x 20 2.0
10 -1SD: 5.4x 1.0 -1SD: 1.5x 0 0.0 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17
NetDragon: PE band NetDragon: PB band
x x 4.5 250 4.0 200 3.5 3.0 150 +1SD: 106.6x 2.5 +1SD: 2.3x 100 2.0 Avg: 38.8x Avg: 1.5x 50 1.5 0 1.0 -1SD: 0.7x -50 -1SD: -28.9x 0.5 -100 0.0 Jul-12 Jan-09 Jan-16 Jun-08 Jun-15 Oct-10 Oct-17 Feb-13 Sep-13 Apr-14 Dec-11 Nov-07 Nov-14 Mar-10 Mar-17 Jul-08 Jul-10 Jul-12 Jul-14 Jul-16 Aug-09 Aug-16 May-11 Nov-07 Nov-09 Nov-11 Nov-13 Nov-15 Nov-17 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
Source: Thomson Reuters, DBS Vickers
Page 19 China / Hong Kong Company Guide Alibaba Group Version 2 | Bloomberg: BABA US Equity| Reuters: BABA.N Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018
BUY E-commerce upside driven by online Last Traded Price ( 13 Mar 2018):US$188.41(NA SDAQ : 7,497) Price Target 12-mth:US$234 (24% upside) advertising A nalyst China’s largest e-commerce platform. Alibaba operates the largest e- Tsz Wang TAM CFA,+852 2971 1772 [email protected] commerce platforms in China, namely Taobao and Tmall. The Susanna CHUI+852 2820 4611 [email protected] company has a dominant 76% market share in terms of gross What’s New merchandise value (GMV) in FY3/18F. We have a BUY call on Alibaba Expect market share gains in online advertising in on its monetisation potential through online ads. We expect its online China in 2018 ad revenue to grow 36% during FY3/19F through continuous market Benefits from the favourable industry trend of a share gains. shift in ad budget towards “actionable ads” where Where w e differ. Ad function in “action” matters. We analysed the Taobao and Tmall have most inventories advertising market based on advertising objectives (namely, Expect 34% non-GAAP net profit growth in FY3/19 “attention”, “interest & desire” and “action”), instead of traditional Reiterate BUY and TP of US$234 matrix such as user numbers and time spent. We forecast that Price Relative advertisers will spend more of their budgets on “actionable ads” (ads which lead to action [i.e. sales]), driven by improving data analytics and therefore better targeted marketing. Alibaba’s e-commerce platforms have most of actionable ad inventories which allow it to benefit from the budget shift. Other critical factors. GMV growth through product expansion and penetration into lower tier cities. Alibaba drives GMV growth through expansion in product categories, such as food and perishable goods Forecasts and Valuation FY Mar (RMBm) 2017A 2018F 2019F 2020F through the Tmall supermark et. It also provides services into lower- Turnover 158,273 245,035 325,086 421,699 tier cities through Taobao Villages. It is continuously building its EBITDA 54,236 85,267 112,959 149,457 ecosystem for O2O services though Koubei (China’s second-largest Pre-tax Profit 55,002 87,005 116,344 156,189 Net Profit 43,675 67,388 90,113 120,974 O2O platform) and Ele.me (China’s second-largest online food- Net Pft (Pre Ex) (core profit) 60,309 87,793 117,900 155,933 delivery platform). We expect its GMV growth to be 15% in FY3/19. Net Profit Gth (Pre-ex) (%) (38.9) 54.3 33.7 34.2 EPS (RMB) 17.52 27.03 36.15 48.53 Valuation: EPS (US$) 2.77 4.28 5.72 7.68 We derive our TP of US$234 based on SOTP methodology: (1) 30x Core EPS (US$) 3.83 5.57 7.49 9.90 FY19F normalised net profit for e-commerce/cloud (US$200/US$7 per Core EPS (RMB) 24.19 35.22 47.29 62.55 share); (2) market price or valuation implied by recent equity financing EPS Gth (%) (39.7) 54.3 33.7 34.2 for other investments (US$21); and (3) FY19F net cash (US$6). Core EPS Gth (%) 38.4 45.6 34.3 32.3 Diluted EPS (US$) 2.69 4.15 5.54 7.44 Key Risks to Our View: DPS (US$) 0.00 0.00 0.00 0.00 Competition from other e-commerce platforms including JD will slow BV Per Share (US$) 17.89 22.17 27.89 35.57 down Alibaba’s GMV growth and monetisation rate; competition in PE (X) 68.0 44.1 32.9 24.5 CorePE (X) 49.2 33.8 25.2 19.0 payment, logistics, O2O services and new retail also represent P/Cash Flow (X) 39.4 30.1 26.0 19.8 downside risks in building the e-commerce ecosystem. P/Free CF (X) 44.4 34.7 30.7 23.3 At A Glance EV/EBITDA (X) 54.4 34.3 25.6 18.9 2,561 Net Div Yield (%) 0.0 0.0 0.0 0.0 Issued Capital (m shrs) P/Book Value (X) 10.5 8.5 6.8 5.3 Mkt. Cap (US$m) 482,547 Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders ROAE(%) 17.5 21.4 22.9 24.2 SoftBank (%) 32.0 Earnings Rev (%): Nil Nil Yahoo (%) 15.4 Consensus EPS (RMB) 33.57 43.68 56.46 Jack Yun MA (%) 7.8 Other Broker Recs: B: 51 S: 0 H: 2 Joseph C. TSAI (%) 3.2 Source of all data on this page: Company, DBSV, Thomson Reuters, Free Float (%) 41.6 HKEX 3m Avg. Daily Val. (US$m) 3,657.7 I CB Industry :Consumer Services / General Retailers
ed-JS / sa- CS / AH Company Guide Alibaba Group
CRITICAL FACTORS TO WATCH Annual active customers (m) Critical Factors E-commerce platform’s GMV growth Alibaba drives its GMV growth through expansion in product categories, such as food and perishable good through Tmall supermarket (天貓超市). It also provides services into lower-tier cities, such as via Taobao Villages (農村淘寶). We also expect Alibaba to strengthen its O2O platform through Koubei (口碑, China’s second-largest O2O platform) and Ele.me (餓了麼, China’s second-largest online food-delivery platform), which had market shares of 41% and 35% respectively in 2016. We Average annual spending per customer expect 15% GMV growth in FY3/19 in Alibaba’s China’s e- commerce (retail) category, supported by 5% increase in number or customers and 9% increase in average spending.
Rising monetisation rate on its e-commerce platform. Alibaba mainly monetises its e-commerce platforms through online advertising. The related revenue contribution is estimated to account for 67% of its China’s total e-commerce retail revenue in FY3/18F. We expect Alibaba’s monetisation rate (online ad and commission revenue as a percentage of GMV) to increase China e-commerce (Retail) GMV (Rmb bn) from 4.0% in FY3/18F to 4.6% in FY3/19F, driven by favourable industry trend of a budget shift towards actionable ads. and thus market share gains. Alibaba will continue to improve its data analytic capabilities through its ecosystem, such as Alipay (支付寶, China’s largest third-party mobile payment service provider), Cainiao Logistics (菜鳥物流, China’s largest logistics platform), AliCloud (阿里雲, China’s largest public cloud service provider), UCWeb [China’s second largest mobile search platform], and Youku Tudou [優酷土豆, China’s third largest mobile video platform]). Monetisation rate (%)
China e-commerce (Retail) revenue (Rmb m)
Source: Company, DBS Vickers
Page 21 Company Guide Alibaba Group
Balance Sheet: Leverage & Asset Turnover (x) Net cash position. As of March 2017, Alibaba had a strong net cash position of Rmb55bn (Rmb92bn in debt and Rmb147bn in cash). It has healthy operating cashflow of Rmb75bn in FY3/17.
Share Price Drivers: Rising monetisation rate on its e-commerce platform. Alibaba mainly monetises its e-commerce platforms through online advertising. This will be driven by favourable industry trend of a shift in budgets towards actionable ads and market share gains. We expect its online ad revenue to grow 36% during Capital Expenditure FY3/19F through continuous market share gains.
Key Risks: Competition from other e-commerce platforms. Alibaba’s market share in China’s e-commerce decreased from 78% in 2015 to 76% in 2016. Potential competition from other platforms including JD will slow down the GMV growth and monetisation rate.
Competition in other parts of the e-commerce ecosystem. Competition in payment, logistics, O2O services and new ROE retail represents downside risk for Alibaba in building the e- commerce ecosystem. This will in turn affects market share gain and monetisation rate.
Company Background Alibaba operates China’s largest e-commerce platform, namely Taobao (淘寶), Tmall (天貓) and 1688.com, with 507m monthly active users (MAUs) in 4QFY17. It has an extensive e-commerce ecosystem including Alipay (支付寶, Logistics – Cainiao Logistics (菜鳥物流), and AliCloud (阿里雲 Forward PE Band ), (1) Commerce, (2) Cloud computing, (3) Digital media and entertainment (i.e. Youku Tudou [優酷土豆] and UCWeb), and (4) Innovation initiatives and others (i.e. AutoNavi [高德地 圖] accounted for 85%, 4%, 9%, and 2% of Alibaba's FY3/17 revenue respectively. Jack Ma (馬雲) is the Chairman and the lead founder.
PB Band
Source: Company, DBS Vickers
Page 22 Company Guide Alibaba Group
Alibaba's share price vs. Alibaba's GMV/online advertising revenue and China's e-commerce GMV/online advertising advertisingmarket
Rebased 21 May 14 = 100 300 250
250 200
200 150
150 100
100 50
50 0 15 16 17 15 16 17 14 15 16 15 16 17 14 15 16 15 16 17 ------Jul Jul Jul Jan Jan Jan Sep Sep Sep Nov Nov Nov Mar Mar Mar May May May Alibaba (LHS) Alibaba's GMV (RHS) China's e-commerce GMV (RHS)
Rebased 21 May 14 = 100 300 400 350 250 300 200 250 200 150 150 100 100 50 50 0 Jul-15 Jul-16 Jul-17 Jan-15 Jan-16 Jan-17 Sep-14 Sep-15 Sep-16 Sep-17 Nov-14 Nov-15 Nov-16 Nov-17 Mar-15 Mar-16 Mar-17 May-15 May-16 May-17 Alibaba (LHS) Alibaba's online advertising revenue (RHS) China's online advertising market (RHS)
2014 (IPO): Alibaba’s share price rose 53%, as its GMV grew 56% y-o-y in FY15, though its monetisation rate dropped from 2.5% in FY14 to 2.4% in FY15, dragged down by a greater mobile GMV mix, which has a lower monetisation rate (Mobile: 1.8% versus PC: 2.8%). 2015: Alibaba’s share price dropped 22%, as its GMV growth softened from 56% in FY15 to 27% in FY16, while its monetisation rate improved from 2.4% in FY15 to 2.6% in FY16. Its market share of China’s online ad market dropped from 24% in 2014 to 23% in 2015. 2016: Alibaba’s share price rose 8%, as its monetisation rate greatly improved from 2.6% in FY16 to 3.0% in FY17, supported by improvement in its data analytics. Its market share of China’s online ad market increased from 23% in 2015 to 30% in 2016.
2017: Alibaba’s share price rose 96%, thanks to its accelerating monetisation rate and continuous growth in share of China’s online ad market. Source: Bloomberg Finance L.P., Company, National Bureau of Statistics of China, DBS Vickers
Page 23 Company Guide Alibaba Group
Key assumptions Key assumptions Rmb m F Y16 F Y17 F Y18F F Y19F F Y20F Rev enue E-Commerce 92,335 133,880 210,101 278,050 358,845 China e-commerce (Retail, Taobao and Tmall) 80,033 114,109 178,130 231,941 294,108 Customer management (Online advertising) 54,239 79,842 119,806 163,395 217,447 Commission 25,794 34,267 47,032 55,642 63,757 China e-commerce (Wholesale, 1688.com) 4,288 5,679 7,078 9,206 11,905 International e-commerce (Retail, AliExpress) 2,204 7,336 15,087 25,830 40,521 International e-commerce (Wholesale, Alibaba.com) 5,425 6,001 6,560 6,871 6,982 Other e-commerce 385 755 3,246 4,201 5,329 Cloud computing 3,019 6,663 12,086 18,675 28,141 Digital media and entertainment (i.e. Youku Tudou and UCWeb) 3,972 14,733 18,997 23,362 28,422 Innovation initiatives and others (i.e. AutoNavi) 1,817 2,997 3,851 4,999 6,291 T otal 101,143 158,273 245,035 325,086 421,699
Growth E-Commerce 33.0% 45.0% 56.9% 32.3% 29.1% China e-commerce (Retail, Taobao and Tmall) 34.0% 42.6% 56.1% 30.2% 26.8% Customer management (Online advertising) 41.1% 47.2% 50.1% 36.4% 33.1% Commission 21.2% 32.8% 37.3% 18.3% 14.6% China e-commerce (Wholesale, 1688.com) 33.8% 32.4% 24.6% 30.1% 29.3% International e-commerce (Retail, AliExpress) 24.7% 232.8% 105.7% 71.2% 56.9% International e-commerce (Wholesale, Alibaba.com) 15.0% 10.6% 9.3% 4.7% 1.6% Other e-commerce 0.0% 96.1% 330.0% 29.4% 26.8% Cloud computing 137.5% 120.7% 81.4% 54.5% 50.7% Digital media and entertainment (i.e. Youku Tudou and UCWeb) 0.0% 270.9% 28.9% 23.0% 21.7% Innovation initiatives and others (i.e. AutoNavi) 0.0% 64.9% 28.5% 29.8% 25.8% T otal 32.7% 56.5% 54.8% 32.7% 29.7%
Source: Company, DBS Vickers
Page 24 Company Guide Alibaba Group
Alibaba's sum-of-the-parts (SOTP) valuation
Business segment F Y19F Normalised Normalised Stak e V aluation V aluation Valuation method Rev enue NPM net profit (US$ m) per share (Rmb m) (Rmb m) (US$) E-Commerce 278,050 42.5% 118,171 100% 499,955 200.5 30x FY19F PER Cloud computing 18,675 22.5% 4,202 100% 17,777 7.1 30x FY19F PER Other investment 51,500 20.7 Ant Financial 33% 19,800 7.9 Implied valuation from B round and financing Cainiao Network 51% 10,200 4.1 Implied valuation from B round and financing Weibo (WB.US) 31% 6,107 2.4 Market capitalisation Youku 100% 3,500 1.4 Fair value Suning (002024.CH) 20% 3,0351.2Market capitalisation Koubei 50% 3,0411.2 Fair value Ali Pictures (1060 HK) 50% 2,187 0.9Market capitalisation Momo (MOMO US) 20% 1,804 0.7Market capitalisation Sanjiang Shopping (601116 CH) 32% 476 0.2Market capitalisation Shiji (002153.CH) 14% 526 0.2Market capitalisation Enlight Media (300251.CH) 9% 347 0.1Market capitalisation Singapore Post (SPOST.SP) 15% 302 0.1Market capitalisation Huayi Media (300027.CH) 5% 175 0.1Market capitalisation Net Cash 100% 15,583 6.1 as at FY19F Total valuation 234
Source: Company, DBS Vickers
Page 25 Company Guide Alibaba Group
Key Assumptions FY M ar 2016A 2017A 2018F 2019F 2020F Annual active customers 423.0 454.0 477.4 503.5 530.2 (m) Average annual spending 7.3 8.3 9.3 10.1 10.7 per customer China e-commerce (Retail) 3,092.0 3,767.0 4,429.1 5,093.0 5,679.5 GMV (Rmb bn) Monetisation rate (%) 2.6 3.0 4.0 4.6 5.2 China e-commerce (Retail) 80,033.0 114,109.0 178,129.9 231,941.2 294,107.9 revenue (Rmb m) Source: Company, DBS Vickers
Segmental Breakdown (RMB m) FY M ar 2016A 2017A 2018F 2019F 2020F R e venues (RMB m) E-commerce 92,335 133,880 210,101 278,050 358,845 Cloud computing 3,019 6,663 12,086 18,675 28,141 Digital media and 3,972 14,733 18,997 23,362 28,422 entertainment Innovation initiatives and 1,817 2,997 3,851 4,999 6,291 others T otal 101,143 158,273 245,035 325,086 421,699 Gross profit (RMB m) E-commerce 71,983 104,799 155,633 202,986 261,965 Cloud computing (797) 657 1,159 1,789 2,696 Digital media and (1,207) (4,048) (6,916) (8,539) (10,387) entertainment Innovation initiatives and (3,192) (2,618) (900) (1,192) (1,500) others T otal 66, 788 98, 790 148,976 195,044 252,773 Gross profit Margins (%) E-commerce 78.0 78.3 74.1 73.0 73.0 Cloud computing (26.4) 9.9 9.6 9.6 9.6 Digital media and (30.4) (27.5) (36.4) (36.5) (36.5) entertainment Innovation initiatives and (175.7) (87.3) (23.4) (23.9) (23.9) others T otal 66. 0 62. 4 60. 8 60. 0 59. 9 Source: Company, DBS Vickers
Page 26 Company Guide Alibaba Group
Income Statement (RMB m) FY M ar 2016A 2017A 2018F 2019F 2020F Revenue 101,143 158,273 245,035 325,086 421,699 Cost of Goods Sold (34,355) (59,483) (96,059) (130,042) (168,926) Gross Profit 66, 788 98, 790 148,976 195,044 252,773 Other Opng (Exp)/Inc (37,686) (50,735) (70,686) (88,879) (108,414) O pe rating Profit 29, 102 48, 055 78, 290 106,165 144,359 Other Non Opg (Exp)/Inc 2,058 6,086 4,901 5,689 6,325 Associates & JV Inc (1,730) (5,027) (4,901) (6,502) (8,434) Net Interest (Exp)/Inc 50,308 5,888 8,714 10,993 13,939 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 79, 738 55, 002 87, 005 116,344 156,189 Tax (8,449) (13,776) (21,791) (29,140) (39,120) Minority Interest 171 2,449 2,175 2,909 3,905 Preference Dividend 0 0 0 0 0 Ne t Profit 71, 460 43, 675 67, 388 90, 113 120,974 Net Profit before Except. 42,962 60,309 87,793 117,900 155,933 EBITDA 32,816 54,236 85,267 112,959 149,457 Growth Revenue Gth (%) N/A 56.5 54.8 32.7 29.7 EBITDA Gth (%) N/A 65.3 57.2 32.5 32.3 Opg Profit Gth (%) N/A 65.1 62.9 35.6 36.0 Net Profit Gth (%) N/A (38.9) 54.3 33.7 34.2 M a rgins & Ratio Gross Margins (%) 66.0 62.4 60.8 60.0 59.9 Opg Profit Margin (%) 28.8 30.4 32.0 32.7 34.2 Net Profit Margin (%) 70.7 27.6 27.5 27.7 28.7 ROAE (%) 65.8 17.5 21.4 22.9 24.2 ROA (%) 39.2 10.0 12.2 13.7 15.5 ROCE (%) 16.4 9.7 12.5 14.3 16.1 Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers
Page 27 Company Guide Alibaba Group
Interim Income Statement (RMB m) FY M ar 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 42,416 58,727 66,446 91,827 105,306 Cost of Goods Sold (13,842) (20,513) (24,867) (34,616) (39,462) Gross Profit 28, 574 38, 214 41, 579 57, 211 65, 844 Other Oper. (Exp)/Inc (17,018) (20,668) (23,720) (27,015) (31,747) O pe rating Profit 11, 556 17, 546 17, 859 30, 196 34, 097 Other Non Opg (Exp)/Inc 980 1,078 2,631 3,455 3,624 Associates & JV Inc (523) (1,207) (2,035) (2,992) (2,270) Net Interest (Exp)/Inc 44,571 5,737 (125) 6,013 3,360 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 56, 584 23, 154 18, 330 36, 672 38, 811 Tax (3,065) (5,384) (4,113) (9,663) (7,372) Minority Interest 78 93 956 1,493 912 Ne t Profit 53, 597 17, 863 15, 173 28, 502 32, 351 Net profit bef Except. 18,775 24,086 25,893 34,416 43,017
Growth Revenue Gth (%) 30.1 34.7 56.7 56.4 58.5 Opg Profit Gth (%) N/A 46.9 54.5 72.1 90.9 Net Profit Gth (%) N/A 102.3 (71.7) 59.6 113.2
M a rgins Gross Margins (%) 67.4 65.1 62.6 62.3 62.5 Opg Profit Margins (%) 27.2 29.9 26.9 32.9 32.4 Net Profit Margins (%) 126.4 30.4 22.8 31.0 30.7 Source: Company, DBS Vickers
Page 28 Company Guide Alibaba Group
Quarterly Income Statement (RMB m) FY M ar 3Q2017 4Q2017 1Q2018 2Q2018 3Q2018
Revenue 53,248 38,579 50,184 55,122 83,028 Cost of Goods Sold (19,126) (15,490) (17,460) (22,002) (35,078) Gross Profit 34, 122 23, 089 32, 724 33, 120 47, 950 Other Oper. (Exp)/Inc (13,458) (13,557) (15,211) (16,536) (21,460) O pe rating Profit 20, 664 9, 532 17, 513 16, 584 26, 490 Other Non Opg (Exp)/Inc 3,015 440 1,887 1,737 (842) Associates & JV Inc (1,548) (1,444) (1,388) (882) (18,452) Net Interest (Exp)/Inc 136 5,877 672 2,688 22,799 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 22, 267 14, 405 18, 684 20, 127 29, 995 Tax (5,110) (4,553) (4,653) (2,719) (6,663) Minority Interest 698 795 652 260 741 Ne t Profit 17, 855 10, 647 14, 683 17, 668 24, 073 Net profit bef Except. 23,186 11,230 20,668 22,349 27,748 EBITDA 1,313 1,313 1,986 1,748 2,057
Growth (QoQ) Revenue Gth (%) 55.3 (27.5) 30.1 9.8 50.6 EBITDA Gth (%) (2.8) 4.1 51.3 (12.0) 17.7 Opg Profit Gth (%) 128.5 (53.9) 83.7 (5.3) 59.7 Net Profit Gth (%) 134.2 (40.4) 37.9 20.3 36.3
Growth (YoY) Revenue Gth (%) 54.1 59.5 56.1 60.7 55.9 EBITDA Gth (%) (0.6) 76.7 58.8 34.8 63.1 Opg Profit Gth (%) 66.2 86.5 98.7 83.3 28.2 Net Profit Gth (%) 42.9 98.5 94.5 131.8 34.8
M a rgins Gross Margins (%) 64.1 59.8 65.2 60.1 57.8 Opg Profit Margins (%) 38.8 24.7 34.9 30.1 31.9 Net Profit Margins (%) 33.5 27.6 29.3 32.1 29.0 Source: Company, DBS Vickers
Page 29 Company Guide Alibaba Group
Balance Sheet (RMB m) FY M ar 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 16,505 24,897 37,889 55,126 77,486 Invts in Associates & JVs 91,461 120,368 120,368 120,368 120,368 Other LT Assets 122,244 179,031 229,690 279,717 330,146 Cash & ST Invts 117,042 153,456 184,759 224,999 295,709 Inventory 0 0 0 0 0 Debtors 0 0 0 0 0 Other Current Assets 16,993 29,060 29,060 29,060 29,060 T otal Assets 364,245 506,812 601,766 709,270 852,768
ST Debt 4,304 14,897 23,063 30,598 39,691 Creditors 0 0 0 0 0 Other Current Liab 47,735 78,874 94,540 101,889 111,869 LT Debt 53,262 76,835 76,835 76,835 76,835 Other LT Liabilities 9,055 12,085 17,993 23,410 30,765 Shareholder’s Equity 217,337 281,791 349,179 439,292 560,266 Minority Interests 32,552 42,330 40,155 37,246 33,342 T otal Cap. & Liab. 364,245 506,812 601,766 709,270 852,768
Non-Cash Wkg. Capital (30,742) (49,814) (65,480) (72,829) (82,809) Net Cash/(Debt) 59,476 61,724 84,861 117,566 179,183 Debtors Turn (avg days) N/A N/A N/A N/A N/A Creditors Turn (avg days) N/A N/A N/A N/A N/A Inventory Turn (avg days) N/A N/A N/A N/A N/A Asset Turnover (x) 0.6 0.4 0.4 0.5 0.5 Current Ratio (x) 2.6 1.9 1.8 1.9 2.1 Quick Ratio (x) 2.2 1.6 1.6 1.7 2.0 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 7.4 9.1 13.0 16.0 19.2 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers
Page 30 Company Guide Alibaba Group
Cash Flow Statement (RMB m) FY M ar 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 79,738 55,002 87,005 116,344 156,189 Dep. & Amort. 3,386 5,122 6,976 7,607 7,206 Tax Paid (8,449) (13,776) (21,791) (29,140) (39,120) Assoc. & JV Inc/(loss) 1,730 5,027 4,901 6,502 8,434 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 17,768 23,915 21,575 12,765 17,335 Other Operating CF 0 0 0 0 0 Ne t Operating CF 94, 173 75, 290 98, 665 114,079 150,045 Capital Exp.(net) (4,261) (8,392) (12,992) (17,237) (22,359) Other Invts.(net) (56,674) (59,695) (57,635) (57,635) (57,635) Invts in Assoc. & JV (59,314) (33,934) (4,901) (6,502) (8,434) Div from Assoc & JV 0 0 0 0 0 Other Investing CF (1,752) (2,214) 0 0 0 Ne t Investing CF ( 122,001) ( 104,235) ( 75,528) ( 81,374) ( 88,428) Div Paid 0 0 0 0 0 Chg in Gross Debt 4,973 34,166 8,166 7,535 9,093 Capital Issues (220) 20,779 0 0 0 Other Financing CF 20,749 12,227 0 0 0 Ne t Financing CF 25, 502 67, 172 8, 166 7, 535 9, 093 Currency Adjustments 0 0 0 0 0 Chg in Cash (2,326) 38,227 31,303 40,240 70,710 Opg CFPS (RMB) 31.08 20.61 30.92 40.64 53.23 Free CFPS (RMB) 36.58 26.83 34.37 38.85 51.22
Source: Company, DBS Vickers
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating 3 Price T arget 2 4 213.0 Price 1 1: 7-Jul-17 US$144.87 US$170 Buy 193.0 2: 18-Aug-17 US$163.92 US$220 Buy 173.0 3: 3-Nov-17 US$184.81 US$234 Buy 4: 14-Dec-17 US$174.64 US$234 Buy 153.0
133.0
113.0
93.0 Jul-17 Jan-18 Jun-17 Oct-17 Feb-18 Apr-17 Sep-17 Dec-17 Nov-17 Mar-17 Mar-18 Aug-17 May-17
Source: DBS Vickers
Analyst: Susanna CHUI
Page 31 China / Hong Kong Company Guide Tencent Version 5 | Bloomberg: 700 HK Equity| Reuters: 0700.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018
BUY Leading social communication platform Last Traded Price( 13 Mar 2018):HK$462.80(HSI : 31,601) Price Target 12-mth:HK$512 (11% upside) and game arsenal in China A nalyst Tsz Wang TAM CFA,+852 2971 1772 [email protected] T he largest social communication platform in China. Tencent’s WeChat Susanna CHUI+852 2820 4611 [email protected] is the largest social communication platform in China, with the highest What’s New monthly-active-users (MAUs) of 980m in 3Q17. We have a BUY call on Honour of Kings remains as one of the top games in China Tencent on (i) its leading position in mobile game developing and Excited on the two survival games based on PUBG publishing which is projected to account for 41% FY17F revenue, and (ii) monetisation of its user number through online advertising. Continuously cultivating its ecosystem for monetising users through online advertising Where w e differ. Online game arsenal, with diversified game genres. Investors have lower visibility on the next successful game titles after Reiterate BUY and TP of HK$512 Honour of Kings. We re-iterate that the company has a track record of Price Relative developing mobile games ranking in the top 10 in China across genres, HK$ Relative Index such as Honour of Kings in multiplayer online battle arena (MOBA),
485.2 272 King of Chaos in strategy, and recently QQ Speed in casual game. The 435.2 next potential hit game will be PUPG in survival games. It is also a 385.2 222 335.2 strong game publisher which is able to secure popular third-party 285.2 172 235.2 games. We expect Tencent’s mobile games revenue to grow by 37% in 185.2 122 135.2 FY18F. 85.2 72 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Other critical factors. Catching up in online advertising. We expect Tencent (LHS) Relative HSI (RHS) Tencent’s online ad revenue to grow 51% y-o-y in FY18F. Tencent’s Forecasts and Valuation WeChat is naturally positioned for online ads for “attention”. However, FY Dec (RMBm) 2016A 2017F 2018F 2019F in view of the rising budget for online ad for “action”, Tencent has Turnover 151,938 241,289 342,816 478,372 EBITDA 63,622 104,112 132,733 189,869 been cultivating its ecosystem through partnership with e-commerce Pre-tax Profit 51,640 88,549 111,475 161,614 platforms such as JD. The market size of online advertising is also Net Profit 41,095 70,175 88,344 128,079 bigger than online game’s by two-folds, which represents ample Net Pft (Pre Ex) (core profit) 45,420 65,362 92,212 131,753 potential for Tencent in the long term. Net Profit Gth (Pre-ex) (%) 42.7 70.8 25.9 45.0 EPS (RMB) 4.38 7.48 9.42 13.66 Valuation: EPS (HK$) 5.44 9.28 11.69 16.94 We currently rate BUY on Tencent with TP of HK$512 based on SOTP Core EPS (HK$) 6.01 8.65 12.20 17.43 methodology. Key components are (1) 10/30x FY18F normalised net Core EPS (RMB) 4.84 6.97 9.83 14.05 profit from PC games/mobile games (HK$162 per share), (2) 50x FY18F EPS Gth (%) 41.5 70.8 25.9 45.0 Core EPS Gth (%) 39.0 43.9 41.1 42.9 normalised net profit from social networks (HK$211), (3) 50x FY18F Diluted EPS (HK$) 5.37 9.17 11.54 16.73 normalised net profit from online advertising (HK$71). DPS (HK$) 0.66 1.12 1.41 2.05 Key Risks to Our View: BV Per Share (HK$) 22.85 30.44 40.29 54.36 PE (X) 85.2 49.9 39.7 27.4 Tencent’s success in transiting its large and sticky user base from QQ CorePE (X) 77.1 53.6 38.0 26.6 and Qzone in the PC era to WeChat in the mobile era may not translate P/Cash Flow (X) 41.2 29.6 27.0 18.8 well into the next computing platform. P/Free CF (X) 45.3 33.0 31.1 21.5 EV/EBITDA (X) 54.9 33.3 25.8 17.7 At A Glance Net Div Yield (%) 0.1 0.2 0.3 0.4 Issued Capital (m shrs) 9,499 P/Book Value (X) 20.3 15.2 11.5 8.5 Mkt. Cap (HK$m/US$m) 4,402,445 / 564,469 Net Debt/Equity (X) CASH CASH CASH CASH Major Shareholders ROAE (%) 27.9 34.5 32.7 35.4 Earnings Rev (%): Nil Nil Naspers Limited (%) 33.2 Consensus EPS (RMB) 6.90 8.75 11.50 Ma Huateng (%) 8.6 Other Broker Recs: B: 37 S: 0 H: 1 JPMorgan Chase & Co. (%) 6.3 Source of all data on this page: Company, DBSV, Thomson Reuters, Zhang Zhidong (%) 6.2 HKEX Free Float (%) 45.7 3m Avg. Daily Val. (US$m) 1,320.5 I CB Industry: Technology / Software & Computer Services
ed-JS / sa- CS /AH Company Guide Tencent
CRITICAL FACTORS TO WATCH Weixin and WeChat MAU (m) 1063 1,074 1026 989 Critical Factors 920 889 Mobile games: Number of paying gamers and ARPU growth 767 697 Tencent’s online games segment accounted for 41% of FY17F 614 revenue. Number of paying gamers and ARPU will depend on 460 the popularity of game titles. So number to game titles in top 307 10 ranking (based on gross billing) will be an indicator of 153 mobile game revenue in the medium term. Tencent’s Honour 0 of Kings (王者榮耀) dominated top ranking in the past 1-2 2015A 2016A 2017F 2018F 2019F years. We expect the company to diversify into other game Tencent's mobile game paying gamers (m) genres, including casual games such as QQ Speed (QQ 飛車) 186 181.9 and survival games such as PUBG: Heroes of Battle (絕地求生: 145.9 全軍出擊) and PUBG: Exciting Battlefield (絕地求生:刺激戰場). 148
We expect the number of paying mobile gamers and APRU to 112.1 111 increase by 30% and 15% respectively for FY18F. 71.3 74
Online advertising: increasing monetisation 37.4 37 Tencent’s key asset, WeChat, has a massive user base (monthly active users [MAUs]: 980m), which is naturally good value for 0 2015A 2016A 2017F 2018F 2019F online ads in gaining “attention”. However, in view of the Tencent's mobile game ARPU mid-point (Rmb) rising budget for online “actionable ads”, Tencent has been cultivating its ecosystem through partnerships with e- 816 800.4 commerce platforms, such as JD (JD US) as well as Meituan 672.7 653 570.0 584.4 Dianping (美團點評) and Meituan Deliveries (美團外賣). We 538.3 expect Tencent to monetises its user base through online ads. 490 We expect its market share in online advertising to increase 327 from 9% in 2016 to 15% in 2019, and to deliver segmental revenue CAGR of 52% during FY16-19F. 163
0 2015A 2016A 2017F 2018F 2019F China's online advertising market (Rmb bn)
632 638
502 511
388 383 290 255 218
128
0 2015A 2016A 2017F 2018F 2019F Tencent's share of China's online advertising market (%)
16 15 14 13.1 12 11.2 10 9.3 8 8
6
4
2
0 2015A 2016A 2017F 2018F 2019F Source: Company, DBS Vickers
Page 33 Company Guide Tencent
Balance Sheet: Leverage & Asset Turnover (x) 0.7 Strong balance sheet. As of December 2016, Tencent was in a 0.60 strong net cash position of Rmb18bn (Rmb110bn in debt and 0.7 0.50 Rmb128bn in cash). Operating cashflow was healthy at 0.6 Rmb85bn. 0.40 0.6 0.30
Share Price Drivers: 0.20 0.5
Number of top 10 game titles. Popularity of game titles is 0.10 0.5 critical to mobile game revenue. Game titles that rank top 10 is 0.00 0.4 an early indicator of mobile game’s gross billing and therefore 2015A 2016A 2017F 2018F 2019F revenue going forward. Thus, the market will focus on new Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure games’ ranking. RMBm 30,000.0
Grow th in online advertising market. Tencent has been 25,000.0 cultivating its ecosystem for future monetisation of its huge 20,000.0
WeChat user base. Rising monetisation through online 15,000.0 advertising will be positive to segmental revenue growth and 10,000.0 share price. We expect Tencent’s online ad market share to 5,000.0 increase from 9% in 2016 to 15% in 2019F. 0.0 2015A 2016A 2017F 2018F 2019F
Key Risks: Capital Expenditure (-) Competition from other social-communication platforms. ROE Tencent was successful in transiting its large and sticky user 35.0% base from QQ and Qzone in the PC era to WeChat in the 30.0% mobile era. However, such transition into new computing 25.0% platforms is always uncertain. 20.0%
15.0% Lack of top game titles. 10.0% Tencent’s Honour of Kings was a key growth driver for mobile 5.0% game segment in the past 1-2 years. It sets a high base for 0.0% FY16 and FY17F. The company strives to diversify into other 2015A 2016A 2017F 2018F 2019F game genres (instead of just MOBA). However, development Forward PE Band of games titles is uncertain, and lack of hit games will be a risk (x) to Tencent’s growth. 39.5
+2sd: 35.2x Slow -than-expected monetisation through online ads. Market 34.5 has high expectation on Tencent’s monetisation of its huge +1sd: 31.9x 29.5 user base. But the company may be cautious in monetisation Avg: 28.5x before raising data analytic and cultivating its ecosystem. They 24.5 -1sd: 25.1x care user experience for long term growth. -2sd: 21.7x 19.5 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Company Background Established in 1998, Tencent operates the largest social PB Band (x) communication platform China - Wechat, with monthly- 16.8 +2sd: 15.28x active-users of 980m. Tencent is a leading game developer 14.8 and game publisher in China. It is also engaged in other 12.8 +1sd: 12.62x digital content (i.e. video, music, and literature), online 10.8 Avg: 9.95x advertising, payment and cloud etc. Pony Ma (馬化騰) is one 8.8 of the founders and now the Chief Executive Officer. 6.8 -1sd: 7.29x
4.8 -2sd: 4.63x
2.8 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 Source: Company, DBS Vickers
Page 34 Company Guide Tencent
Tencent's share price vs. Tencent's online game/advertising revenue and China's online game/advertising market
Rebased 01 Jan 12 = 100 1,250 500 450 1,050 400 850 350 300 650 250 200 450 150 250 100 50 50 0 12 13 14 15 16 12 13 14 15 16 17 12 13 14 15 16 17 12 13 14 15 16 17 ------Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr Tencent (LHS) Tencent's online game revenue (RHS) China's online game market (RHS)
Rebased 01 Jan 12 = 100 1,250 2,000
1,050 1,500 850
650 1,000
450 500 250
50 0 12 13 14 15 16 12 13 14 15 16 17 12 13 14 15 16 17 12 13 14 15 16 17 ------Jul Jul Jul Jul Jul Jul Jan Jan Jan Jan Jan Jan Oct Oct Oct Oct Oct Apr Apr Apr Apr Apr Apr
Tencent (LHS) Tencent's online advertising market (RHS)
2012: Tencent’s share price rose 60%, driven by WeChat’s monthly active user (MAU) uptick to 158m in 4Q12, in anticipation of potential for monetisation. 2013: Tencent’s share price rose 99%, as the company started to monetise WeChat’s MAU through mobile games, such as Timi Match Everyday (天天愛消除). 2014: Tencent’s share price rose only 14%, as its online-game peer NetEase started to convert its massively popular multiplayer online role-playing games (MMORPGs) into mobile games. 2015: Tencent’s share price increased 38% in 1H15, driven by its online advertising ramp-up. Its share of China’s online ad market increased from 5% in 2014 to 8% in 2015. In 3Q15, Tencent’s share price dropped 16%, dragged down by China’s stock market turbulence.
2016: Tencent’s share price increased 24%. It successfully converted third-party popular PC games into mobile games, in response to NetEase’s successful PC-to-mobile games. Its market share of China’s online ad market increased from 8% in 2015 to 9% in 2016. 2017: Tencent’s share price rose 114%, thanks to its strong self-developed, market-leading multiplayer online battle arena (MOBA) Honour of Kings (王者榮耀) and the continuous growth in its share of China’s online ad market.
Source: Bloomberg Finance L.P., Company, National Bureau of Statistics of China, DBS Vickers
Page 35 Company Guide Tencent
Key assumptions
Rmb m F Y15 F Y16 F Y17F F Y18F F Y19F Rev enue Value-added services 80,669 107,810 156,421 222,062 314,180 PC game 35,287 32,444 33,860 37,804 40,122 Mobile game 21,300 38,400 65,522 98,177 145,608 Social networks 24,082 36,966 57,040 86,081 128,450 Online advertising 17,468 26,970 43,480 65,780 94,799 Media brand ads 8,784 11,164 14,758 17,920 21,085 Social performance ads 8,684 15,806 28,721 47,860 73,714 Others 4,726 17,158 41,388 54,974 69,394 T otal 102,863 151,938 241,289 342,816 478,372
Growth Value-added services 27.4% 33.6% 45.1% 42.0% 41.5% PC game 5.2% -8.1% 4.4% 11.6% 6.1% Mobile game 90.2% 80.3% 70.6% 49.8% 48.3% Social networks 29.8% 53.5% 54.3% 50.9% 49.2% Online advertising 110.3% 54.4% 61.2% 51.3% 44.1% Media brand ads 72.1% 27.1% 32.2% 21.4% 17.7% Social performance ads 171.0% 82.0% 81.7% 66.6% 54.0% Others -35.4% 263.1% 141.2% 32.8% 26.2% T otal 30.3% 47.7% 58.8% 42.1% 39.5%
Gross profit margin Value-added services 64.8% 65.1% 60.1% 59.4% 58.8% PC game 68.3% 71.6% 70.0% 70.0% 70.0% Mobile game 55.0% 55.0% 60.0% 60.0% 60.0% Social networks 68.2% 69.9% 54.3% 54.0% 54.0% Online advertising 48.8% 42.9% 36.8% 41.9% 46.2% Media brand ads 27.9% 4.6% -18.6% -20.3% -20.3% Social performance ads 70.0% 70.0% 65.2% 65.2% 65.2% Others 9.7% 16.0% 21.1% 20.3% 20.3% T otal 59.5% 55.6% 49.2% 49.8% 50.7%
Source: Company, DBS Vickers
Page 36 Company Guide Tencent
Tencent's sum-of-the-parts (SOTP) valuation
Business segment F Y18F Normalised Normalised Stak e V aluation V aluation Valuation method Rev enue NPM net profit (HK$ m) per share (Rmb m) (Rmb m) (HK$)
PC game 37,804 40.0% 15,122 100% 173,898 18.5 10x FY18F PE justified by FY16-19F revenue CAGR of 7.8% Mobile game 98,177 40.0% 39,271 100% 1,354,845 144.5 30x FY18F PE justified by FY16-19F revenue CAGR of 33.4%
Social networks 86,081 40.0% 34,432 100% 1,979,857 211.2 50x FY18F PE justified by FY16-19F revenue CAGR of 48.4%
Online advertising 65,780 17.5% 11,512 100% 661,914 70.6 50x FY18F PE justified by FY16-19F revenue CAGR of 52.0%
Payment 100% 234,000 25.0 50% of Ant Financial's implied valuation from B round financing Other investment 310,820 33.2 JD.com 18% 81,602 8.7 Market capitalisation China Literature 53% 46,478 5.0 Market capitalisation Dianping 28% 38,536 4.1 Historical transaction value Didi 10% 38,048 4.1 Historical transaction value Supersell 39% 29,883 3.2 Historical transaction value Tesla 5% 21,064 2.2 Market capitalisation 58.com 23% 19,551 2.1 Market capitalisation Sogou 44% 17,792 1.9 Market capitalisation Snap 10% 11,907 1.3 Market capitalisation Kingsoft 8% 2,241 0.2 Market capitalisation Cheetah 17% 1,994 0.2 Market capitalisation BitAuto 8% 1,724 0.2 Market capitalisation Net Cash 100% 96,189 10.3 as at FY18 Total valuation 512
Source: Company, DBS Vickers
Page 37 Company Guide Tencent
Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Weixin and WeChat MAU 697.0 889.3 989.2 1,026.2 1,063.1 (m) Tencent's mobile game 37.4 71.3 112.1 145.9 181.9 paying gamers (m) Tencent's mobile game 570.0 538.3 584.4 672.7 800.4 ARPU mid-point (Rmb) China's online advertising 218.5 290.3 388.4 502.3 632.0 market (Rmb bn) Tencent's share of China's online advertising market 8.0 9.3 11.2 13.1 15.0 (%) Source: Company, DBS Vickers
Segmental Breakdown (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F R e venues (RMB m) Value added services (VAS) 80,669 107,810 156,421 222,062 314,180 Online advertising 17,468 26,970 43,480 65,780 94,799 Others 4,726 17,158 41,388 54,974 69,394 T otal 102,863 151,938 241,289 342,816 478,372 Gross profit (RMB m) Value added services (VAS) 52,247 70,188 93,978 131,847 184,805 Online advertising 8,527 11,574 15,991 27,575 43,795 Others 458 2,737 8,731 11,178 14,110 T otal 61, 232 84, 499 118,701 170,601 242,710 Gross profit Margins (%) Value added services (VAS) 64.8 65.1 60.1 59.4 58.8 Online advertising 48.8 42.9 36.8 41.9 46.2 Others 9.7 16.0 21.1 20.3 20.3 T otal 59. 5 55. 6 49. 2 49. 8 50. 7 Source: Company, DBS Vickers
Page 38 Company Guide Tencent
Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 102,863 151,938 241,289 342,816 478,372 Cost of Goods Sold (41,631) (67,439) (122,589) (172,215) (235,662) Gross Profit 61, 232 84, 499 118,701 170,601 242,710 Other Opng (Exp)/Inc (24,818) (34,595) (49,703) (68,582) (93,014) O pe rating Profit 36, 414 49, 904 68, 998 102,019 149,696 Other Non Opg (Exp)/Inc 1,886 3,594 16,890 6,856 9,567 Associates & JV Inc (2,793) (2,522) 1,206 1,714 2,392 Net Interest (Exp)/Inc 709 664 1,454 886 (41) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 36, 216 51, 640 88, 549 111,475 161,614 Tax (7,108) (10,193) (17,710) (22,295) (32,323) Minority Interest (302) (352) (664) (836) (1,212) Preference Dividend 0 0 0 0 0 Ne t Profit 28, 806 41, 095 70, 175 88, 344 128,079 Net Profit before Except. 32,410 45,420 65,362 92,212 131,753 EBITDA 42,136 63,622 104,112 132,733 189,869 Growth Revenue Gth (%) 30.3 47.7 58.8 42.1 39.5 EBITDA Gth (%) 26.5 51.0 63.6 27.5 43.0 Opg Profit Gth (%) 39.5 37.0 38.3 47.9 46.7 Net Profit Gth (%) 21.0 42.7 70.8 25.9 45.0 M a rgins & Ratio Gross Margins (%) 59.5 55.6 49.2 49.8 50.7 Opg Profit Margin (%) 35.4 32.8 28.6 29.8 31.3 Net Profit Margin (%) 28.0 27.0 29.1 25.8 26.8 ROAE (%) 28.8 27.9 34.5 32.7 35.4 ROA (%) 12.1 11.7 15.6 15.8 18.4 ROCE (%) 18.1 15.8 16.1 19.2 22.5 Div Payout Ratio (%) 12.8 12.2 12.2 12.2 12.2 Net Interest Cover (x) NM NM NM NM 3,623.8 Source: Company, DBS Vickers
Page 39 Company Guide Tencent
Interim Income Statement (RMB m) FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017
Revenue 45,828 57,035 67,686 84,252 106,158 Cost of Goods Sold (17,956) (23,675) (28,641) (38,798) (52,409) Gross Profit 27, 872 33, 360 39, 045 45, 454 53, 749 Other Oper. (Exp)/Inc (10,606) (14,212) (14,064) (20,531) (18,619) O pe rating Profit 17, 266 19, 148 24, 981 24, 923 35, 130 Other Non Opg (Exp)/Inc 1,023 863 1,417 2,177 7,153 Associates & JV Inc (762) (2,031) (1,381) (1,141) (92) Net Interest (Exp)/Inc 345 364 461 203 117 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 17, 872 18, 344 25, 478 26, 162 42, 309 Tax (3,546) (3,562) (5,330) (4,863) (8,479) Minority Interest (129) (173) (228) (124) (253) Ne t Profit 14, 197 14, 609 19, 920 21, 175 33, 577 Net profit bef Except. 15,177 17,233 21,351 24,069 14,211
Growth Revenue Gth (%) 20.1 39.8 47.7 47.7 56.8 Opg Profit Gth (%) 37.5 41.3 44.7 30.2 40.6 Net Profit Gth (%) 15.5 26.8 40.3 44.9 68.6
M a rgins Gross Margins (%) 60.8 58.5 57.7 54.0 50.6 Opg Profit Margins (%) 37.7 33.6 36.9 29.6 33.1 Net Profit Margins (%) 31.0 25.6 29.4 25.1 31.6 Source: Company, DBS Vickers
Page 40 Company Guide Tencent
Quarterly Income Statement (RMB m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 40,388 43,864 49,552 56,606 65,210 Cost of Goods Sold (18,560) (20,238) (24,109) (28,300) (33,529) Gross Profit 21, 828 23, 626 25, 443 28, 306 31, 681 Other Oper. (Exp)/Inc (9,160) (11,371) (10,170) (8,449) (9,659) O pe rating Profit 12, 668 12, 255 15, 273 19, 857 22, 022 Other Non Opg (Exp)/Inc 1,155 1,022 3,191 3,962 4,565 Associates & JV Inc (619) (522) (375) 283 326 Net Interest (Exp)/Inc 33 170 117 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 13, 237 12, 925 18, 206 24, 103 26, 912 Tax (2,461) (2,402) (3,658) (4,821) (5,382) Minority Interest (130) 6 (72) (181) (202) Ne t Profit 10, 646 10, 529 14, 476 19, 101 21, 328 Net profit bef Except. 11,737 12,332 14,211 0 0 EBITDA 4,520 4,520 4,722 781 826
Growth (QoQ) Revenue Gth (%) 13.2 8.6 13.0 14.2 15.2 EBITDA Gth (%) 14.6 41.4 4.5 (83.5) 5.8 Opg Profit Gth (%) (1.0) (3.3) 24.6 30.0 10.9 Net Profit Gth (%) (0.8) (1.1) 37.5 32.0 11.7
Growth (YoY) Revenue Gth (%) 51.9 44.1 54.9 58.6 61.5 EBITDA Gth (%) 94.0 120.5 120.7 (72.0) (74.2) Opg Profit Gth (%) 38.3 22.7 25.3 55.2 73.8 Net Profit Gth (%) 43.0 47.0 57.6 77.9 100.3
M a rgins Gross Margins (%) 54.0 53.9 51.3 50.0 48.6 Opg Profit Margins (%) 31.4 27.9 30.8 35.1 33.8 Net Profit Margins (%) 26.4 24.0 29.2 33.7 32.7 Source: Company, DBS Vickers
Page 41 Company Guide Tencent
Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 9,973 13,900 20,825 30,261 42,977 Invts in Associates & JVs 66,945 80,299 80,299 80,299 80,299 Other LT Assets 70,848 147,131 202,872 251,983 302,333 Cash & ST Invts 85,641 129,286 166,349 214,567 305,886 Inventory 222 263 478 672 919 Debtors 7,061 10,152 16,122 22,906 31,963 Other Current Assets 66,128 14,868 14,868 14,868 14,868 T otal Assets 306,818 395,899 501,814 615,556 779,245
ST Debt 15,315 15,744 25,003 35,523 49,569 Creditors 15,700 27,413 49,831 70,003 95,793 Other Current Liab 93,391 60,616 72,362 76,947 86,975 LT Debt 50,014 93,753 93,753 93,753 93,753 Other LT Liabilities 10,298 12,126 15,926 18,244 23,314 Shareholder’s Equity 120,035 174,624 232,653 307,962 415,505 Minority Interests 2,065 11,623 12,287 13,123 14,335 T otal Cap. & Liab. 306,818 395,899 501,814 615,556 779,245
Non-Cash Wkg. Capital (35,680) (62,746) (90,724) (108,505) (135,018) Net Cash/(Debt) 20,312 19,789 47,594 85,291 162,564 Debtors Turn (avg days) 20.7 20.7 19.9 20.8 20.9 Creditors Turn (avg days) 127.1 143.6 133.5 145.7 145.9 Inventory Turn (avg days) 2.4 1.6 1.3 1.4 1.4 Asset Turnover (x) 0.4 0.4 0.5 0.6 0.7 Current Ratio (x) 1.3 1.5 1.3 1.4 1.5 Quick Ratio (x) 0.7 1.3 1.2 1.3 1.5 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 8.0 7.0 10.2 13.3 16.8 Z-Score (X) 0.0 NA NA NA NA Source: Company, DBS Vickers
Page 42 Company Guide Tencent
Cash Flow Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 36,216 51,640 88,549 111,475 161,614 Dep. & Amort. 6,629 12,646 17,018 22,144 28,214 Tax Paid (7,108) (10,193) (17,710) (22,295) (32,323) Assoc. & JV Inc/(loss) 2,793 2,522 (1,206) (1,714) (2,392) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 13,132 28,443 31,778 20,099 31,583 Other Operating CF 0 0 0 0 0 Ne t Operating CF 51, 662 85, 058 118,428 129,709 186,696 Capital Exp.(net) (5,208) (7,643) (12,138) (17,245) (24,064) Other Invts.(net) (40,657) (77,054) (62,360) (60,282) (60,296) Invts in Assoc. & JV (15,603) (15,876) 1,206 1,714 2,392 Div from Assoc & JV 0 0 0 0 0 Other Investing CF (4,706) (8,159) (5,186) (3,164) (6,919) Ne t Investing CF ( 66,174) ( 108,732) ( 78,478) ( 78,977) ( 88,887) Div Paid (3,683) (5,029) (8,588) (10,811) (15,673) Chg in Gross Debt 29,745 44,168 9,259 10,520 14,046 Capital Issues 14,899 18,523 (3,559) (2,223) (4,862) Other Financing CF (348) 9,206 0 0 0 Ne t Financing CF 40, 613 66, 868 ( 2,887) ( 2,514) ( 6,489) Currency Adjustments 0 0 0 0 0 Chg in Cash 26,101 43,194 37,063 48,218 91,319 Opg CFPS (RMB) 4.14 6.04 9.24 11.69 16.54 Free CFPS (RMB) 5.00 8.26 11.34 11.99 17.35 Source: Company, DBS Vickers
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating 6 Price T arget 491.0 Price 5 1: 22-Mar-17 HK$225.20 HK$238.00 Buy 441.0 4 2: 23-Mar-17 HK$225.20 HK$260.00 Buy 2 391.0 3 3: 27-Mar-17 HK$225.20 HK$260.00 Buy 4: 18-May-17 HK$259.80 HK$336.00 Buy 341.0 5: 17-Aug-17 HK$323.20 HK$426.00 Buy 291.0 6: 14-Dec-17 HK$395.60 HK$512.00 Buy 1 241.0
191.0 Jul-17 Jan-18 Jun-17 Oct-17 Feb-18 Apr-17 Sep-17 Dec-17 Nov-17 Mar-17 Mar-18 Aug-17 May-17
Source: DBS Vickers
Analyst: Susanna CHUI
Page 43 China / Hong Kong Company Guide JD.com Inc Version9 | Bloomberg: JD US Equity| Reuters: JD.O Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018 BUY Monetisation potential in online Last Traded Price( 13 Mar 2018):US$44.32(NASDAQ : 7,497) advertising Price Target 12-mth:US$61.00 (38% upside) (Prev US$61.00) Analyst China’s second-largest e-commerce platform. We have a BUY call on Susanna CHUI+852 2820 4611 [email protected] JD. The company is China’s second-largest e-commerce platform, Tsz Wang TAM CFA,+852 2971 1772 [email protected] with 293m annual active customers in 4Q17. We believe it is on What’s New track to increasingly monetise this through online advertising, and Benefits from favourable industry trend of ad budget improve profitability arising from economies of scale. shift towards “actionable ads” Encouraging 3P monetisation through online Where we differ. Ad function in “action” matters. We analysed the advertising advertising market based on advertising objectives (namely, “attention”, “interest & desire”, and “action”), instead of traditional On track to deliver profitability, driven by 1P GPM matrix such as user numbers and time spent. We forecast that improvement and high-margin 3P revenue growth advertisers will spend a greater portion of their budgets on ads Reiterate BUY and TP of HK$61 which will lead to “action”, driven by improving data analytics and therefore better targeted marketing. We expect JD, which is well- Price Relative positioned in actionable ads, to catch up because the company’s US$ Relative Index 221 algorithm improvement is driving meaningful improvements in click- 52.1 201 47.1 through and conversion rates. 181 42.1 161 37.1 141 32.1 Other critical factors. JD is on the way to higher profitability. 2018 is 27.1 121 JD’s year of investing in technology (i.e. artificial intelligence [AI] 22.1 101 17.1 81 algorithm) and logistics. Many investors are concerned with JD’s May-14 May-15 May-16 May-17 profitability. But we believe JD‘s margin improvement arising from JD.com Inc (LHS) Relative NASDAQ (RHS) economies of scale would offset any margin drag caused by Forecasts and Valuation investment in new initiatives. We expect JD to improve non-GAAP FY Dec (RMBm) 2017A 2018F 2019F 2020F net margin moderately from 1.4% in FY17 to 1.5% in FY18F. And Turnover 362,332 471,529 587,114 676,495 EBITDA 332 1,059 3,406 5,762 investment in technology and logistics will accelerate growth in Pre-tax Profit 121 2,140 5,196 11,863 online ad and logistics service revenue in the medium to long term. Net Profit (152) 1,605 3,897 8,897 Net Pft (Pre Ex) (core profit) 4,968 7,000 10,181 14,092 Net Profit Gth (Pre-ex) (%) 92.4 N/A 142.8 128.3 Valuation: EPS (RMB) (0.11) 1.13 2.74 6.26 We derive our TP of US$61 based on SOTP methodology: (1) 1.0x EPS (US$) (0.02) 0.18 0.43 0.99 price to sales ratio for e-commerce (US$49 per share); (2) valuation Core EPS (US$) 0.55 0.78 1.13 1.57 from series A financing for JD Finance (US$3.00); and (3) valuation Core EPS (RMB) 3.49 4.92 7.16 9.91 from series A financing for JD Logistics (US$9). EPS Gth (%) 92.5 N/A 142.8 128.3 Core EPS Gth (%) 136.8 40.9 45.4 38.4 Diluted EPS (US$) (0.02) 0.17 0.42 0.97 Key Risks to Our View: DPS (US$) 0.00 0.00 0.00 0.00 Intensifying competition from leading e-commerce platforms. BV Per Share (US$) 5.79 5.97 6.40 7.39 PE (X) nm 248.3 102.3 44.8 CorePE (X) 80.2 56.9 39.1 28.3 At A Glance P/Cash Flow (X) 21.5 32.6 22.4 15.1 Issued Capital (m shrs) 1,193 P/Free CF (X) 30.7 79.5 45.4 24.9 Mkt. Cap (US$m) 62,561 EV/EBITDA (X) 1158.2 358.7 109.2 62.1 Major Shareholders Net Div Yield (%) 0.0 0.0 0.0 0.0 P/Book Value (X) 7.7 7.4 6.9 6.0 Richard Qiangdong Liu (%) 16.2 Net Debt/Equity (X) CASH CASH CASH CASH Huang River Investment Limited (%) 18.0 ROAE(%) (0.4) 3.0 7.0 14.4 Hillhouse Capital Management, Ltd. (%) 8.1 Earnings Rev (%): (27.3) (37.3) NEW Free Float (%) 57.7 Consensus EPS (RMB) 5.03 8.13 13.68 3m Avg. Daily Val. (US$m) 614.0 Other Broker Recs: B: 35 S: 1 H: 4 ICB Industry :Consumer Services / General Retailers Source of all data on this page: Company, DBSV, Thomson Reuters, HKEX
ed-JS / sa- CS /AH Company Guide JD.com Inc
CRITICAL FACTORS TO WATCH Annual active customers (m) 418 423 384 Critical Factors 362 326 Gross merchandise value (GMV) growth 302 Gross merchandise value (GMV) is one of the key indicators of 263 242 revenue. We expect JD to deliver GMV CAGR of 21% during 196 181 FY17-20F, driven by: 121 (1) Growth in annual active customers: We expect JD to 60 deliver annual active customer CAGR of 17% during 0 FY17-20F, supported by: (i) JD's partnership with Tencent 2016A 2017A 2018F 2019F 2020F (JD’s largest shareholder), which grants JD entry into Average annual spending per customer (Rmb) WeChat and Mobile QQ to drive its customer base, (ii) JD's 5,475.6 5,585 5,257.0 5,036.3 partnership with Wal-Mart (JD’s third-largest shareholder) 4,800.5 4,914.2 on an online supermarket initiative to increase its customer 4,468 base, thanks to expanding product categories, and (iii) JD's 3,351 efforts to extend its logistical advantage into lower-tier cities to increase its customer base there. 2,234 (2) Growth in average annual spending per customer: We 1,117 expect JD to deliver average annual spending per customer CAGR of 4% during FY17-20F, with expanding categories, 0 2016A 2017A 2018F 2019F 2020F such as online supermarkets. Average 1P revenue per customer (Rmb)
1,453.9 3P monetisation potential growth 1,483 1,386.1 1,317.5 3P monetisation is another key indicator of revenue. JD’s third- 1,216.3 1,259.8 1,186 party marketplace (3P) GMV is mainly monetised through transaction-based commission, online advertising, and logistics 890 services. We expect an average first-party direct sales (1P)/3P 593 revenue per customer CAGR of 5%/12% during FY17-20F. The faster growth of 3P revenue per customer will be driven by 297 increasing online advertising from merchants as a percentage 0 of revenue. 2016A 2017A 2018F 2019F 2020F Average 3P revenue per customer (Rmb)
163 Non-GAAP net margin expansion 164 We believe JD‘s margin improvement arising from economies 145 131 127 of scale would offset any margin drag caused by investments in 116 104 new initiatives. We expect gross profit margin (GPM) to expand 99 from 14.0% in FY17 to 15.4% in FY20F, driven by 1P GPM improvement arising from economies of scale, and more 3P 66 contribution commanding higher margins. We expect non- 33 GAAP net margin to expand from 1.4% in FY17 to 2.1% in 0 FY20F. 2016A 2017A 2018F 2019F 2020F Non-GAAP net margin (%)
3 2.08 2 1.73 1.48 2 1.37
1 0.8
1
0 2016A 2017A 2018F 2019F 2020F
Source: Company, DBS Vickers
Page 45 Company Guide JD.com Inc
Balance Sheet: Leverage & Asset Turnover (x) Net cash position. As at end-December 2017, JD had a net 2.6 0.60 2.6 cash position of Rmb2.7bn (Rmb28.6bn debt and Rmb31.3bn 2.5 0.50 cash). Management disclosed it will increase capex on its 2.5 logistics business. 0.40 2.4 2.4 0.30 2.3 Share Price Drivers: 0.20 2.3 2.2 GMV market share gain driven by growth in customers and 0.10 spending per customer. We see growth in annual active 2.2 0.00 2.1 customers and average annual spending per customer driven 2016A 2017A 2018F 2019F 2020F by increasing penetration and product category expansion (i.e. Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure online supermarket). This is supported by its partnerships with RMBm Tencent (JD’s largest shareholder) and Wal-Mart (JD’s third- 12,000.0 largest shareholder) as well as its logistical advantage, which it 10,000.0 is expanding into lower-tier cities. 8,000.0
6,000.0 Non-GAAP net margin expansion driven by 1P GPM 4,000.0 improvement and high-margin 3P revenue growth. We see 2,000.0 improvement in 1P GPM from economies of scale, and rapid 0.0 growth of 3P revenue which commands higher margins. We 2016A 2017A 2018F 2019F 2020F see further potential for margin improvements given increasing Capital Expenditure (-) contribution by high-margin online advertising revenue. ROE 14.0%
Key Risks: 12.0%
Intense competition from leading e-commerce platforms. JD 10.0% may fail to differentiate its fulfilment capability and grow its 8.0% market share, due to competition from leading e-commerce 6.0% platforms, such as Alibaba. 4.0%
2.0% Investment in lower-tier cities may result in higher fulfilment 0.0% expense ratio. JD is extending its logistics advantage into 2016A 2017A 2018F 2019F 2020F online supermarkets and lower-tier cities, where the current Forward PE Band profitability is lower given the low order size and order (x) frequency, respectively. Slower-than-expected growth in order 486.7 +2sd: 473.2x size and order frequency in these cities may result in fulfilment 386.7 expenses and margin pressure. +1sd: 323.4x 286.7
Company Background 186.7 Avg: 173.6x JD is the second largest e-commerce platform in China, with 86.7 -1sd: 23.9x 293m annual active customers in 4Q17. In 2004, JD started its -13.3 May-14 May-15 May-16 May-17 direct-sales (1P) B2C e-commerce platform of 3C (computer, -113.3 communication & consumer electronics) products in China. In 2010, JD introduced a third-party (3P) B2C e-commerce PB Band (x) platform. Third-party marketplace (3P) accounted for 8.4% of 11.1
FY17 revenue. Richard Liu (劉強東), Chairman and Chief 10.1 +2sd: 9.65x Executive Officer, is the founder of the company. 9.1 +1sd: 8.53x 8.1 Avg: 7.41x 7.1
6.1 -1sd: 6.29x
5.1 -2sd: 5.17x
4.1 May-14 May-15 May-16 May-17 Source: Company, DBS Vickers
Page 46 Company Guide JD.com Inc
JD's share price vs. JD's GMV and China's e-commerce GMV
2014 (IPO): JD’s share price rose 22%, with growing market share in China’s e-commerce market from 7% in 2013 to 9% in 2014, until funds flowed to Alibaba’s IPO in 2H14. 2015: JD’s market share in China’s e-commerce market grew from 9% in 2014 to 12% in 2015. JD’s share price increased 47% in 1H15. In 3Q15, JD’s share price dropped 5% in 2H15, dragged down by China’s stock market turbulence. 2016: JD’s share price dropped 21%, as its 3P market place gross merchandise value (GMV) softened from 108% y-o-y in FY15 to 36% in FY16 on anti-brushing activities, though its 1P direct sales GMV growth remained at 51% in FY16. 2017: JD’s share price advanced by 60%, as its 3P GMV regained growth momentum to 44% and 50% y-o-y in 1Q17 and 2Q17 respectively. And Tencent and Wal-Mart increased their stakes in JD in 2H16 and 1H17 respectively.
Source: Bloomberg Finance L.P., Company, National Bureau of Statistics of China, DBS Vickers
Page 47 Company Guide JD.com Inc
Key assumptions
Rmb m F Y16A F Y17A F Y18F F Y19F F Y20F Rev enue Direct-sale (1P) 237,944 331,824 429,985 531,644 608,398 Third party (3P) 20,346 30,507 41,543 55,470 68,096 T otal 258,290 362,332 471,529 587,114 676,495
Growth Direct-sale (1P) 41.7% 39.5% 29.6% 23.6% 14.4% Third party (3P) 55.2% 49.9% 36.2% 33.5% 22.8% T otal 42.7% 40.3% 30.1% 24.5% 15.2%
GPM Direct-sale (1P) 6.3% 7.6% 8.2% 8.7% 9.2% Third party (3P) 100.0% 83.5% 77.7% 74.4% 71.1% T otal 13.7% 14.0% 14.3% 14.9% 15.4%
Source: Company, DBS Vickers
Sum-of-the-parts (SOTP) valuation
FY18F Revenue V aluation Valuation per Stake Valuation method (Rmb m) (Rmb m) share (US$) E-commerce 471,529 100% 471,528.9 49 1.0x FY18F PSR JD Finance 69% 32,002 3Implied valuation from Series A financing JD Logistics 81% 88,174 9Implied valuation from Series A financing Total Valuation 591,705 61
Source: Company, DBS Vickers
Page 48 Company Guide JD.com Inc
Key Assumptions FY Dec 2016A 2017A 2018F 2019F 2020F Annual active customers 195.6 263.4 326.4 383.6 418.5 (m) Average annual spending 4,800.5 4,914.2 5,036.3 5,257.0 5,475.6 per customer (Rmb) Average 1P revenue per 1,216.3 1,259.8 1,317.5 1,386.1 1,453.9 customer (Rmb) Average 3P revenue per 104.0 115.8 127.3 144.6 162.7 customer (Rmb) Non-GAAP net margin 0.8 1.4 1.5 1.7 2.1 (%) Source: Company, DBS Vickers
Segmental Breakdown (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenues (RMB m) Direct sales (1P) 237,944 331,824 429,985 531,644 608,398 Thirty-party marketplace 20,346 30,507 41,543 55,470 68,096 (3P) Total 258,290 362,332 471,529 587,114 676,495 Gross profit (RMB m) Direct sales (1P) 15,026 25,358 35,102 46,067 55,820 Thirty-party marketplace 20,346 25,484 32,292 41,271 48,415 (3P) Total 35,373 50,842 67,393 87,339 104,235 Gross profit Margins (%) Direct sales (1P) 6.3 7.6 8.2 8.7 9.2 Thirty-party marketplace 100.0 83.5 77.7 74.4 71.1 (3P) Total 13.7 14.0 14.3 14.9 15.4 Source: Company, DBS Vickers
Page 49 Company Guide JD.com Inc
Income Statement (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F Revenue 258,290 362,332 471,529 587,114 676,495 Cost of Goods Sold (222,917) (311,489) (404,135) (499,776) (572,259) Gross Profit 35,373 50,842 67,393 87,339 104,235 Other Opng (Exp)/Inc (36,624) (51,678) (68,126) (86,144) (99,231) Operating Profit (1,252) (835) (732) 1,195 5,004 Other Non Opg (Exp)/Inc 1,543 1,316 1,713 2,133 2,458 Associates & JV Inc (2,782) (1,927) (1,700) (1,700) (1,700) Net Interest (Exp)/Inc 608 1,567 2,859 3,568 6,101 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit (1,882) 121 2,140 5,196 11,863 Tax (166) (140) (535) (1,299) (2,966) Minority Interest 48 (134) 0 0 0 Preference Dividend 0 0 0 0 0 Net Profit (2,000) (152) 1,605 3,897 8,897 Net Profit before Except. 2,068 4,968 7,000 10,181 14,092 EBITDA (881) 332 1,059 3,406 5,762 Growth Revenue Gth (%) 42.7 40.3 30.1 24.5 15.2 EBITDA Gth (%) 78.9 N/A 219.1 221.7 69.2 Opg Profit Gth (%) (52.0) (33.3) (12.4) (263.2) 318.8 Net Profit Gth (%) 74.1 92.4 N/A 142.8 128.3 Margins & Ratio Gross Margins (%) 13.7 14.0 14.3 14.9 15.4 Opg Profit Margin (%) (0.5) (0.2) (0.2) 0.2 0.7 Net Profit Margin (%) (0.8) 0.0 0.3 0.7 1.3 ROAE (%) (6.2) (0.4) 3.0 7.0 14.4 ROA (%) (1.6) (0.1) 0.8 1.7 3.3 ROCE (%) (2.4) 0.2 (0.7) 1.0 3.4 Div Payout Ratio (%) N/A N/A 0.0 0.0 0.0 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers
Interim Income Statement (RMB m) FY Dec 2H2015 1H2016 2H2016 1H2017 2H2017
Revenue 98,718 118,705 139,585 168,420 193,912 Cost of Goods Sold (84,814) (102,819) (120,098) (144,939) (166,551) Gross Profit 13,904 15,886 19,487 23,482 27,361 Other Oper. (Exp)/Inc (16,067) (16,564) (20,060) (23,223) (28,455) Operating Profit (2,164) (679) (573) 258 (1,094) Other Non Opg (Exp)/Inc (239) 0 79 0 1,157 Associates & JV Inc (3,107) (1,244) (1,538) (893) (1,034) Net Interest (Exp)/Inc 84 1,706 367 675 1,051 Exceptional Gain/(Loss) (2,750) 0 0 0 0 Pre-tax Profit (8,176) (217) (1,665) 41 80 Tax 9 (64) (103) (73) (66) Minority Interest 10 9 39 44 91 Net Profit (8,157) (272) (1,729) 12 105 Net profit bef Except. (629) 805 1,264 2,298 2,670
Growth Revenue Gth (%) 54.9 43.8 41.4 41.9 38.9 Opg Profit Gth (%) 86.1 (56.1) (73.5) (138.1) 90.9 Net Profit Gth (%) (1,218.5) 77.7 78.8 N/A N/A
Margins Gross Margins (%) 14.1 13.4 14.0 13.9 14.1 Opg Profit Margins (%) (2.2) (0.6) (0.4) 0.2 (0.6) Net Profit Margins (%) (8.3) (0.2) (1.2) 0.0 0.1 Source: Company, DBS Vickers
Page 50 Company Guide JD.com Inc
Quarterly Income Statement (RMB m) FY Dec 4Q2016 1Q2017 2Q2017 3Q2017 4Q2017
Revenue 79,411 75,218 93,202 83,746 110,165 Cost of Goods Sold (68,565) (64,390) (80,549) (70,756) (95,794) Gross Profit 10,846 10,828 12,653 12,990 14,371 Other Oper. (Exp)/Inc (11,185) (10,167) (13,056) (12,488) (15,967) Operating Profit (338) 661 (403) 502 (1,596) Other Non Opg (Exp)/Inc (18) 0 0 485 673 Associates & JV Inc (1,069) (520) (373) (477) (557) Net Interest (Exp)/Inc 247 227 448 521 529 Exceptional Gain/(Loss) 0 0 0 0 0 Pre-tax Profit (1,179) 368 (327) 1,031 (951) Tax (101) (90) 16 (53) (13) Minority Interest 18 20 24 36 55 Net Profit (1,261) 299 (287) 1,014 (909) Net profit bef Except. 780 1,322 977 2,221 449 EBITDA 440 440 443 446 449
Growth (QoQ) Revenue Gth (%) 32.0 (5.3) 23.9 (10.1) 31.5 EBITDA Gth (%) (0.1) (1.8) 0.7 0.9 0.6 Opg Profit Gth (%) 44.4 (295.4) (160.9) (224.7) (417.7) Net Profit Gth (%) 169.9 (123.7) (196.1) (453.4) (189.6)
Growth (YoY) Revenue Gth (%) 45.4 39.8 43.6 39.2 38.7 EBITDA Gth (%) 22.2 25.6 21.8 (0.3) 0.3 Opg Profit Gth (%) (77.4) (226.9) 155.6 (314.3) 371.6 Net Profit Gth (%) 83.5 N/A N/A N/A 27.9
Margins Gross Margins (%) 13.7 14.4 13.6 15.5 13.0 Opg Profit Margins (%) (0.4) 0.9 (0.4) 0.6 (1.4) Net Profit Margins (%) (1.6) 0.4 (0.3) 1.2 (0.8) Source: Company, DBS Vickers
Page 51 Company Guide JD.com Inc
Balance Sheet (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 7,023 12,574 19,798 28,792 39,156 Invts in Associates & JVs 14,629 18,551 16,851 15,151 13,451 Other LT Assets 31,789 37,901 36,571 35,660 37,550 Cash & ST Invts 46,563 38,386 46,832 58,853 76,137 Inventory 28,909 41,700 54,103 66,907 76,611 Debtors 16,141 16,359 21,289 26,508 30,543 Other Current Assets 15,318 18,583 18,583 18,583 18,583 Total Assets 160,374 184,055 214,028 250,454 292,031
ST Debt 11,109 12,885 16,768 20,878 24,057 Creditors 46,036 74,338 96,448 119,273 136,571 Other Current Liab 47,595 31,028 30,905 31,669 33,336 LT Debt 9,149 10,923 10,923 10,923 10,923 Other LT Liabilities 5,264 2,493 4,992 9,821 20,355 Shareholder’s Equity 33,893 52,041 53,646 57,544 66,442 Minority Interests 7,327 348 348 348 348 Total Cap. & Liab. 160,374 184,055 214,028 250,454 292,031
Non-Cash Wkg. Capital (33,262) (28,723) (33,377) (38,944) (44,170) Net Cash/(Debt) 26,304 14,579 19,142 27,052 41,158 Debtors Turn (avg days) 18.1 16.4 14.6 14.9 15.4 Creditors Turn (avg days) 63.4 70.9 77.5 79.1 81.6 Inventory Turn (avg days) 40.8 41.6 43.5 44.3 45.8 Asset Turnover (x) 2.1 2.1 2.4 2.5 2.5 Current Ratio (x) 1.0 1.0 1.0 1.0 1.0 Quick Ratio (x) 0.6 0.5 0.5 0.5 0.6 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 3.9 23.3 26.1 28.3 29.6 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers
Cash Flow Statement (RMB m) FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit (1,882) 121 2,140 5,196 11,863 Dep. & Amort. 1,609 1,778 1,778 1,778 0 Tax Paid (166) (140) (535) (1,299) (2,966) Assoc. & JV Inc/(loss) 2,782 1,927 1,700 1,700 1,700 (Pft)/ Loss on disposal of FAs 0 0 0 1 2 Chg in Wkg.Cap. 3,966 14,845 7,152 10,395 15,760 Other Operating CF 0 0 0 1 2 Net Operating CF 6,309 18,531 12,235 17,772 26,362 Capital Exp.(net) (790) (5,551) (7,224) (8,994) (10,364) Other Invts.(net) (19,784) (7,727) 0 0 0 Invts in Assoc. & JV (8,546) (5,849) 0 0 0 Div from Assoc & JV 0 0 0 1 2 Other Investing CF (2,013) (163) (448) (866) (1,890) Net Investing CF (31,134) (19,289) (7,672) (9,860) (12,251) Div Paid 0 0 0 0 0 Chg in Gross Debt 13,885 3,549 3,883 4,110 3,178 Capital Issues 5,215 18,300 0 0 0 Other Financing CF 7,375 (7,113) 0 1 2 Net Financing CF 26,475 14,736 3,883 4,111 3,180 Currency Adjustments 0 0 0 0 0 Chg in Cash 1,649 13,978 8,446 12,024 17,291 Opg CFPS (RMB) 1.67 2.59 3.57 5.19 7.45 Free CFPS (RMB) 3.94 9.13 3.52 6.17 11.25
Source: Company, DBS Vickers
Page 52 Company Guide JD.com Inc
Target Price & Ratings History
US$ 12-mth Date of Closing S.No. T arget Rating 48.80 Report Price Price 1: 09 May 17 38.53 46.80 BUY 2 6 2: 21 Jul 17 43.08 46.80 BUY 43.80 5 7 3: 15 Aug 17 44.05 60.00 BUY 3 4 4: 15 Dec 17 40.32 60.00 BUY 5: 01 Mar 18 46.21 60.00 BUY 38.80 6: 05 Mar 18 42.99 61.00 BUY 1 7: 09 Mar 18 45.71 61.00 BUY
33.80
28.80 Mar-17 May-17 Jul-17 Sep-17 Nov-17 Jan-18
Note : Share price and Target price are adjusted for corporate actions.
Source: DBSVHK Analyst: Susanna CHUI Tsz Wang TAM CFA,
Page 53 China / Hong Kong Company Guide Kingsoft Corp Version 4 | Bloomberg: 3888 HK EQUITY| Reuters: 3888.hk Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018
BUY The best is yet to come - JX3 Mobile Last Traded Price( 13 Mar 2018):HK$28.35(HSI : 31,601) Price Target 12-mth:HK$34.00 (20% upside) Dual growth engines of online games and Kingsoft Cloud. We have a BUY recommendation on Kingsoft, which is a leading client-end A nalyst game developer in China. We like Kingsoft’s strong PC game Susanna CHUI+852 2820 4611 [email protected] Tsz Wang TAM CFA,+852 2971 1772 [email protected] intellectual property (IP), JX series (劍俠系列), which continues to succeed in mobile versions and is a near-term earnings driver. We What’s New also see strong potential for Kingsoft Cloud, with next round Leading client-end game developer in China financing as a share price catalyst. JX2 Mobile and JX3 Mobile have started closed- beta testing, expect mid-2018 launch Where w e differ. The best is yet to come - JX3 Mobile. We are bullish on online game developers which still have a PC-to-mobile Valuation of Kingsoft’s stake in Kingsoft Cloud in game pipeline in 2018F, such as Kingsoft. We expect JX2 Mobile (劍 series D is 73% higher than series C 俠情緣2手遊) and much-anticipated JX3 Mobile (劍俠情緣3手遊, Reiterate BUY and TP of HK$34 converted from JX3 Online, a top 10 PC game in China) to be launched in mid-2018, as the company had started closed-beta Price Relative testing in December 2017. We expect Kingsoft’s online game HK$ Relative Index 221 revenue to grow 26% in FY18F. 201 31.5 181 161 26.5 141 Other critical factors. Kingsoft Cloud’s next round of financing or 121 21.5 101 turnaround the next share price catalysts. We expect Kingsoft’s 16.5 81 61 revenue from WPS and cloud to grow 44% in FY18F, with market 11.5 41 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 share expanding from 10.0% in FY17F to 12.5% in FY18F. Kingsoft
Kingsoft Corp (LHS) Relative HSI (RHS) Cloud completed its series D financing in December 2017. Kingsoft’s Forecasts and Valuation 52% stake in Kingsoft Cloud was valued at US$987m in series D, FY Dec (RMBm) 2016A 2017F 2018F 2019F which is 73% higher than that in series C financing, and represents Turnover 8,282 5,211 6,901 9,446 c.20% of Kingsoft’s market capitalisation. The next round financing EBITDA 263 1,473 1,783 2,758 Pre-tax Profit (124) 1,046 1,417 2,416 will be a catalyst to Kingsoft’s valuation. Net Profit (271) 929 1,268 2,149 Net Profit Gth (Pre-ex) (%) N/A N/A 36.5 69.4 Valuation: EPS (RMB) (0.21) 0.72 0.98 1.67 Our TP of HK$34 is derived from SOTP valuation: (1) 15x FY18F PE EPS (HK$) (0.26) 0.89 1.22 2.07 for online games (HK$14 per share); (2) 10x FY18F PE for Cheetah Core EPS (HK$) (0.26) 0.89 1.22 2.07 and WPS (HK$5); (3) Valuation from series D financing for Kingsoft Core EPS (RMB) (0.21) 0.72 0.98 1.67 Cloud (HK$6); (4) Market capitalisation for 21Vianet and Xunlei EPS Gth (%) N/A N/A 36.5 69.4 (HK$2); and (5) FY18F net cash (HK$7). Core EPS Gth (%) N/A N/A 36.5 69.4 Diluted EPS (HK$) (0.26) 0.89 1.22 2.07 Key Risks to Our View: DPS (HK$) 0.11 0.11 0.11 0.11 BV Per Share (HK$) 7.40 8.17 9.25 11.16 Competition from other developers’ PC-to-mobile games; PE (X) nm 31.8 23.3 13.7 competition from other leading cloud service providers. CorePE (X) nm 31.8 23.3 13.7 P/Cash Flow (X) 32.7 24.4 22.4 14.5 At A Glance P/Free CF (X) 64.6 31.7 31.1 19.3 Issued Capital (m shrs) 1,374 EV/EBITDA (X) 96.8 16.6 13.0 7.7 Mkt. Cap (HK$m/US$m) 39,000 / 4,972 Net Div Yield (%) 0.4 0.4 0.4 0.4 Major Shareholders P/Book Value (X) 3.8 3.5 3.1 2.5 Lei Jun (%) 27.1 Net Debt/Equity (X) CASH CASH CASH CASH ROAE(%) (3.4) 11.2 13.7 19.8 Kau Pak Kwan (%) 8.3 Earnings Rev (%): Nil Nil Tencent Holdings Limited (%) 8.2 Consensus EPS (RMB) 1.19 1.15 1.54 Free Float (%) 56.4 Other Broker Recs: B: 15 S: 0 H: 2 3m Avg. Daily Val. (US$m) 40.5 Source of all data on this page: Company, DBSV, Thomson Reuters, I CB Industry: Technology / Software & Computer Services HKEX
ed-JS / sa- CS / AH Company Guide Kingsoft Corp
CRITICAL FACTORS TO WATCH Online game's monthly average paying accounts (APA, m) 5.19 5.25 5.02 4.52 Critical Factors 4.50 4.32
Online games’ APA and ARPU growth 3.75 Average paying accounts (APA) and average revenue per 2.92 3.00 paying user (ARPU) are key indicators of online game revenue. 2.25 Kingsoft’s online games’ monthly APA/ARPU increased 1.50 55%/20% in FY16, after the company successfully converted 0.75 its flagship JX series PC games into JX1 Mobile (劍俠情缘 1 手 0.00 游). We expect its JX2 Mobile (劍俠情緣 2 手遊) and much- 2015A 2016A 2017F 2018F 2019F anticipated JX3 Mobile (劍俠情緣 3 手遊; converted from JX3 Online game's monthly average revenue per paying user Online, a top 10 PC game in China) to be launched in mid- (ARPU, Rmb) 2018, as the company has started closed-beta testing in 91.4 89.6 December 2017. We expect online games’ monthly APA to 73.2 68.3 deliver FY16-19F CAGR of 5%, led by the rapid growing 63.1 number of JX1 mobile gamers, and ARPU to deliver an FY16- 54.9 46.9 19F CAGR of 24%, driven by the much-anticipated launch of 39.1 JX3 Mobile. We expect Kingsoft’s online game revenue to 36.6 deliver FY16-19F CAGR of 30%. 18.3
0.0 Cheetah's revenue per mobile MAU growth 2015A 2016A 2017F 2018F 2019F Cheetah's mobile monthly active users (MAU) is mainly Cheetah's mobile monthly active users (MAU, m) monetised via advertisements. We expect Cheetah's mobile 635.0 MAU to deliver FY16-19F CAGR of -5%, with its transition 648 623.0 557.6 538.0 542.6 from utility apps, such as Clean Master and CM Security, to 518 content apps, such as Live.me, but we forecast Cheetah's revenue per mobile MAU to deliver an FY16-19F CAGR of 389
17%, with ramp-up of Live.me’s monetisation. We expect 259 Cheetah's revenue to deliver FY16-19F CAGR of 12%. 130
Kingsoft Cloud’s market share growth 0 Market share will improve Kingsoft Cloud’s margins from 2015A 2016A 2017F 2018F 2019F economies of scale. Kingsoft Cloud is solidifying its position in Cheetah's revenue per mobile MAU (Rmb) 1 games and videos, and expanding to the healthcare and 0.96 government sectors. We expect Kingsoft’s revenue from WPS 1 0.77 1 and cloud to deliver FY16-19F CAGR of 44%, driven by 1 Kingsoft Cloud’s higher market share in China’s IaaS market, 0.58 0 from 8% in FY16 to 15% in FY19F. 0.38
0.19
0.00 2015A 2016A 2017F 2018F 2019F Kingsoft Cloud's market share (%)
16 15 14 12.5 12 10 10
8 7.5
6 4.5 4
2
0 2015A 2016A 2017F 2018F 2019F Source: Company, DBS Vickers
Page 55 Company Guide Kingsoft Corp
Balance Sheet: Net cash position. As of December 2016, Kingsoft had a net Leverage & Asset Turnover (x) cash position of Rmb6.0bn (Rmb4.0bn debt and Rmb10.0bn 0.6 0.50 cash). This is attributed to its capex of Rmb445m mainly on 0.6 Kingsoft Cloud, versus Rmb902m operating cash inflows in 0.40 0.5 0.5 FY16. 0.30 0.4
0.4 Share Price Drivers: 0.20 0.3 J X3 mobile continues to succeed. We expect Kingsoft’s revenue 0.10 0.3 from online games to deliver FY16-19F CAGR of 28%, mainly 0.00 0.2 driven by both an expanding paying gamer base, and ARPU. Its 2015A 2016A 2017F 2018F 2019F self-developed JX3 Mobile (劍網 3 手游) will provide upside to Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure our forecasts. RMBm 600.0
Kingsoft Cloud’s next round financing or turnaround to be a 500.0 mid-term catalyst. The capital market has a very positive view 400.0 on Kingsoft Cloud. Kingsoft’s 52% stake in Kingsoft Cloud was 300.0 valued at US$987m in series D, which is 73% higher than that 200.0 in series C financing, and represents c.20% of Kingsoft’s 100.0 market capitalisation. Next round financing or turnaround will 0.0 be a catalyst to Kingsoft’s valuation. 2015A 2016A 2017F 2018F 2019F
Capital Expenditure (-) Cheetah rekindles monetisation momentum. We expect ROE
Cheetah's revenue to deliver FY16-19F CAGR of 12%, mainly 18.0% driven by revenue per MAU. Ramp-up of Live.me’s 16.0% monetisation will provide upside to our forecasts. 14.0% 12.0% 10.0% Key Risks: 8.0% J X series mobile games may not be successful. Competition 6.0% from other developers, especially those with strong intellectual 4.0% property (IP), may hinder the success of Kingsoft’s PC-to- 2.0% 0.0% mobile games. 2015A 2016A 2017F 2018F 2019F Forward PE Band Intensifying competition from other leading IaaS providers. x Competition from leading IaaS providers, such as AliCloud, 60 could hinder Kingsoft Cloud from gaining market share to 50 improve margins from economies of scale. 40 30 +1SD: 27.1x 20 Cheetah’s potential failure of strategy. Cheetah is expanding Avg: 16.2x 10 content apps, such as Live.me. Competition from other mobile -1SD: 5.4x apps could result in softening mobile MAU and revenue per 0 mobile MAU. Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18
Company Background PB Band Established in 1988, Kingsoft is an incubator of new Internet x and mobile Internet ventures, with four key assets: (1) WPS, a 7.0 6.0 first mover and a leading office software suite in China, (2) 5.0 online games, one of the first movers and a leading online 4.0 +1SD: 3.5x game developer in China, with flagship PC game - JX Online 3.0 Avg: 2.5x 2.0 3 (劍俠情緣 III), (3) Cheetah, the largest mobile utility app -1SD: 1.5x 1.0 provider in the world, with flagship apps - Clean Master and 0.0 CM Security, and (4) Kingsoft Cloud, China’s fifth largest IaaS 雷軍 provider. Jun Lei ( ), Chairman, is the co-founder of the Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Oct-17 Oct-18 company. Source: Company, DBS Vickers
Page 56 Company Guide Kingsoft Corp
Kingsoft's share price vs. Kingsoft's online game revenue and China's online game market
Source: Bloomberg Finance L.P., Company, National Bureau of Statistics of China, DBS Vickers
Key assumptions
Rmb m F Y15 F Y16F F Y17F F Y18F F Y19F Rev enue Online games 1,369 2,546 3,272 4,115 5,588 Kingsoft Cloud and WPS 746 1,288 1,939 2,785 3,858 T otal 2,114 3,834 5,211 6,901 9,446
Growth Online games 9.3% 86.0% 28.5% 25.8% 35.8% Kingsoft Cloud and WPS 76.1% 72.7% 50.6% 43.7% 38.5% T otal 26.2% 81.3% 35.9% 32.4% 36.9%
Source: Company, DBS Vickers
Sum-of-the-parts (SOTP) valuation
New F Y18F Normalised V aluation Rev enue Normalised net profit V aluation per share Business segment (Rmb m) NPM (Rmb m) Stak e (Rmb m) (HKD) Valuation method Online games 4,115 35% 1,440 76% 16,421 14.3 15x FY18F PER Cheetah Mobile 5,395 15% 809 47% 3,804 3.3 10x FY18F PER WPS 951 25% 238 69% 1,640 1.4 10x FY18F PER Cloud 52% 6,696 5.8 Implied valuation from D round financing 21Vianet 11% 745 0.6 Market capitalisation Xunlei 11% 1,137 1.0 Market capitalisation Net Cash 8,127 7.1 as at FY18F Total Valuation 34
Source: Company, DBS Vickers
Page 57 Company Guide Kingsoft Corp
Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Online game's monthly average paying accounts 2.9 4.5 4.3 5.0 5.2 (APA, m) Online game's monthly average revenue per 39.1 46.9 63.1 68.3 89.6 paying user (ARPU, Rmb) Cheetah's mobile monthly 635.0 623.0 557.6 538.0 542.6 active users (MAU, m) Cheetah's revenue per 0.5 0.6 0.7 0.8 1.0 mobile MAU (Rmb) Kingsoft Cloud's market 4.5 7.5 10.0 12.5 15.0 share (%) Source: Company, DBS Vickers
Segmental Breakdown (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F R e venues (RMB m) Online games 1,369 2,546 3,272 4,115 5,588 Cheetah Mobile 3,562 4,449 N/A N/A N/A Kingsoft Cloud and WPS 746 1,288 1,939 2,785 3,858 T otal 5, 676 8, 282 5, 211 6, 901 9, 446 O pe rating profit (before una llocated expenses) ( RMB m) Online games 515 1,280 1,636 2,058 2,794 Cheetah Mobile 743 628 477 674 929 Kingsoft Cloud and WPS (3) (77) (296) (584) (959) T otal 1, 255 1, 830 1, 817 2, 148 2, 764 O pe rating profit (before una llocated expenses) M a rgins (%) Online games 37.6 50.3 50.0 50.0 50.0 Cheetah Mobile 20.9 14.1 N/A N/A N/A Kingsoft Cloud and WPS (0.4) (6.0) (15.3) (21.0) (24.9) T otal 22. 1 22. 1 34. 9 31. 1 29. 3 Source: Company, DBS Vickers
Page 58 Company Guide Kingsoft Corp
Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 5,676 8,282 5,211 6,901 9,446 Cost of Goods Sold (1,319) (2,662) (2,148) (3,270) (4,471) Gross Profit 4, 357 5, 620 3, 063 3, 631 4, 975 Other Opng (Exp)/Inc (3,546) (4,363) (2,128) (2,435) (2,920) O pe rating Profit 811 1, 256 934 1, 196 2, 055 Other Non Opg (Exp)/Inc (342) (1,473) (200) (200) (200) Associates & JV Inc (43) 34 225 318 439 Net Interest (Exp)/Inc 116 59 87 102 123 Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) 0 0 0 0 0 Pre -tax Profit 542 ( 124) 1, 046 1, 417 2, 416 Tax (201) (168) (157) (213) (362) Minority Interest 27 22 40 64 95 Preference Dividend 0 0 0 0 0 Ne t Profit 369 ( 271) 929 1, 268 2, 149 Net Profit before Except. 369 (271) 929 1,268 2,149 EBITDA 748 263 1,473 1,783 2,758 Growth Revenue Gth (%) 69.4 45.9 (37.1) 32.4 36.9 EBITDA Gth (%) (22.1) (64.8) 459.4 21.1 54.7 Opg Profit Gth (%) 14.3 55.0 (25.6) 28.0 71.8 Net Profit Gth (%) (52.0) N/A N/A 36.5 69.4 M a rgins & Ratio Gross Margins (%) 76.8 67.9 58.8 52.6 52.7 Opg Profit Margin (%) 14.3 15.2 17.9 17.3 21.8 Net Profit Margin (%) 6.5 (3.3) 17.8 18.4 22.7 ROAE (%) 5.9 (3.4) 11.2 13.7 19.8 ROA (%) 2.9 (1.6) 5.3 6.9 10.6 ROCE (%) 4.7 9.3 5.5 6.6 10.2 Div Payout Ratio (%) 29.2 N/A 12.4 9.1 5.4 Net Interest Cover (x) NM NM NM NM NM Source: Company, DBS Vickers
Page 59 Company Guide Kingsoft Corp
Interim Income Statement (RMB m) FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017
Revenue 2,392 3,285 3,517 4,766 2,498 Cost of Goods Sold (531) (789) (1,030) (1,632) (998) Gross Profit 1, 861 2, 496 2, 486 3, 133 1, 499 Other Oper. (Exp)/Inc (1,523) (2,022) (2,083) (2,280) (1,021) O pe rating Profit 338 473 403 853 479 Other Non Opg (Exp)/Inc (105) (237) (261) 1,331 1,608 Associates & JV Inc (21) (22) (32) 66 230 Net Interest (Exp)/Inc 59 57 35 24 38 Exceptional Gain/(Loss) 0 0 (848) (1,696) (1,696) Pre -tax Profit 271 271 ( 701) 583 668 Tax (61) (139) (83) (85) (94) Minority Interest (1) 29 112 (90) (76) Ne t Profit 209 161 ( 672) 413 507 Net profit bef Except. 209 161 207 1,836 1,942
Growth Revenue Gth (%) 67.7 70.7 47.0 45.1 (29.0) Opg Profit Gth (%) 3.1 23.8 19.4 80.3 18.7 Net Profit Gth (%) (42.8) (60.3) N/A 157.1 N/A
M a rgins Gross Margins (%) 77.8 76.0 70.7 65.8 60.0 Opg Profit Margins (%) 14.1 14.4 11.5 17.9 19.2 Net Profit Margins (%) 8.7 4.9 (19.1) 8.7 20.3 Source: Company, DBS Vickers
Page 60 Company Guide Kingsoft Corp
Quarterly Income Statement (RMB m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 2,227 2,539 1,213 1,284 1,303 Cost of Goods Sold (786) (846) (509) (489) (559) Gross Profit 1, 441 1, 693 704 796 744 Other Oper. (Exp)/Inc (1,109) (1,171) (459) (562) (572) O pe rating Profit 332 522 245 233 172 Other Non Opg (Exp)/Inc 664 666 776 833 831 Associates & JV Inc 37 29 138 91 138 Net Interest (Exp)/Inc 11 13 15 23 24 Exceptional Gain/(Loss) (848) (848) (848) (848) (848) Pre -tax Profit 197 386 330 338 323 Tax (35) (49) (46) (48) (45) Minority Interest (18) (72) (42) (35) (34) Ne t Profit 146 267 246 260 250 Net profit bef Except. 836 1,000 967 975 966 EBITDA 0 0 0 0 0
Growth (QoQ) Revenue Gth (%) 26.2 14.0 (52.2) 5.9 1.4 EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) 110.7 57.4 (53.0) (4.9) (26.2) Net Profit Gth (%) (118.1) 83.5 (7.8) 5.5 (3.7)
Growth (YoY) Revenue Gth (%) 47.8 42.8 (30.7) (27.2) (41.5) EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) 98.6 70.3 (0.2) 48.3 (48.1) Net Profit Gth (%) 206.4 136.3 84.2 N/A 71.9
M a rgins Gross Margins (%) 64.7 66.7 58.0 61.9 57.1 Opg Profit Margins (%) 14.9 20.5 20.2 18.2 13.2 Net Profit Margins (%) 6.5 10.5 20.3 20.2 19.2 Source: Company, DBS Vickers
Page 61 Company Guide Kingsoft Corp
Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 966 1,098 1,021 1,060 1,223 Invts in Associates & JVs 324 572 572 572 572 Other LT Assets 3,552 2,804 2,639 2,542 2,530 Cash & ST Invts 8,833 10,198 11,105 12,295 14,161 Inventory 5 11 9 14 19 Debtors 966 1,774 1,116 1,478 2,024 Other Current Assets 837 1,122 1,122 1,122 1,122 T otal Assets 15, 485 17, 579 17, 585 19, 083 21, 650
ST Debt 147 380 239 316 433 Creditors 185 560 452 688 941 Other Current Liab 2,372 2,791 2,281 2,336 2,486 LT Debt 2,710 3,647 3,647 3,647 3,647 Other LT Liabilities 159 199 191 232 341 Shareholder’s Equity 7,871 7,887 8,701 9,854 11,887 Minority Interests 2,041 2,115 2,074 2,010 1,916 T otal Cap. & Liab. 15, 485 17, 579 17, 585 19, 083 21, 650
Non-Cash Wkg. Capital (749) (444) (486) (411) (263) Net Cash/(Debt) 5,976 6,172 7,220 8,332 10,082 Debtors Turn (avg days) 44.3 60.4 101.2 68.6 67.7 Creditors Turn (avg days) 48.4 61.4 113.0 74.3 74.2 Inventory Turn (avg days) 2.3 1.4 2.2 1.5 1.5 Asset Turnover (x) 0.4 0.5 0.3 0.4 0.5 Current Ratio (x) 3.9 3.5 4.5 4.5 4.5 Quick Ratio (x) 3.6 3.2 4.1 4.1 4.2 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 20.0 11.1 7.2 9.4 12.4 Z-Score (X) NA NA NA NA NA Source: Company, DBS Vickers
Page 62 Company Guide Kingsoft Corp
Cash Flow Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit 542 1,076 1,046 1,417 2,416 Dep. & Amort. 322 446 513 469 464 Tax Paid (201) (168) (157) (213) (362) Assoc. & JV Inc/(loss) 43 (34) (225) (318) (439) (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 469 (419) 33 (35) (38) Other Operating CF 0 0 0 0 0 Ne t Operating CF 1, 176 902 1, 211 1, 320 2, 041 Capital Exp.(net) (570) (445) (280) (371) (508) Other Invts.(net) (2,211) (587) 0 0 0 Invts in Assoc. & JV (219) (214) 225 318 439 Div from Assoc & JV 0 0 0 0 0 Other Investing CF 101 3 8 (40) (107) Ne t Investing CF ( 2,899) ( 1,243) ( 47) ( 92) ( 176) Div Paid (108) (116) (116) (116) (116) Chg in Gross Debt 49 1,169 (141) 77 117 Capital Issues 3,048 403 0 0 0 Other Financing CF 513 95 0 0 0 Ne t Financing CF 3, 502 1, 552 ( 256) ( 38) 1 Currency Adjustments 0 0 0 0 0 Chg in Cash 1,780 1,210 907 1,190 1,866 Opg CFPS (RMB) 0.56 1.02 0.91 1.05 1.61 Free CFPS (RMB) 0.48 0.35 0.72 0.74 1.19
Source: Company, DBS Vickers
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating 30.0 8 Price T arget Price 28.0 2&3 4 5 7 6 1: 22-Mar-17 HK$19.20 HK$26.00 Buy 26.0 2: 29-Mar-17 HK$20.70 HK$26.00 Buy 3: 29-Mar-17 HK$20.70 HK$26.00 Buy 24.0 4: 24-May-17 HK$22.00 HK$26.00 Buy 22.0 5: 20-Jun-17 HK$20.60 HK$26.00 Buy 6: 24-Aug-17 HK$20.65 HK$29.00 Buy 20.0 1 7: 3-Nov-17 HK$20.10 HK$29.00 Buy 18.0 8: 12-Jan-18 HK$28.35 HK$34.00 Buy 16.0 Jul-17 Jan-18 Jun-17 Oct-17 Feb-18 Apr-17 Sep-17 Dec-17 Nov-17 Mar-17 Mar-18 Aug-17 May-17
Source: DBS Vickers
Analyst: Susanna CHUI
Page 63 China / Hong Kong Company Guide NetDragon Websoft Version 4 | Bloomberg: 777 HK EQUITY| Reuters: 0777.HK Refer to important disclosures at the end of this report
DBS Group Research . Equity 15 Mar 2018
BUY The best is yet to come - Eudemons 3D Last Traded Price( 13 Mar 2018):HK$21.65(HSI : 31,601) Mobile Price Target 12-mth:HK$36.00 (66% upside) A nalyst T rack record as a pioneer in Internet and mobile Internet. We have a Susanna CHUI+852 2820 4611 [email protected] BUY call on NetDragon. The company is a leading online game Tsz Wang TAM CFA,+852 2971 1772 [email protected] developer in China, with a successful track record as a pioneer in What’s New Internet and mobile Internet, including 17173.com (China’s first online Leading online game developer in China game portal) and 91 Wireless (China's leading app-store platform). We Despite market concerns over online education’s believe it can replicate its past successes in online education, which profitability, management expects OPM of online could become the new earnings driver. education business to continue to improve in Where we differ. The best is yet to come - Eudemons 3D Mobile. We FY18F are bullish on online game developers with a PC-to-mobile game Eudemons 3D Mobile will be published in 2H18, in pipeline in 2018F, such as NetDragon. There will be three new games partnership with a strong publisher each under Eudemons Online Intellectual Property (IP) and Heroes Reiterate BUY and TP of HK$36 Evolved in FY18F. Management highlighted that Eudemons 3D Mobile will be published in 2H18, in partnership with a strong publisher. We Price Relative
HK$ Relative Index expect its monthly gross billings to be at least double that of Eudemons 221 40.6 201 Mobile. We expect NetDragon’s online game revenue to grow 33% in 35.6 181 FY18F. 30.6 161 141 25.6 121 Other critical factors. High-margin content monetisation will improve 20.6 101 15.6 81 online education’s OPM significantly. Many investors were concerned 10.6 61 Mar-14 Mar-15 Mar-16 Mar-17 Mar-18 about online education’s profitability. Monetisation of high-margin
NetDragon Websoft (LHS) Relative HSI (RHS) content in the international online education market will start from a Forecasts and Valuation 2m teacher base in FY18F and be rolled out to a 30m student base FY Dec (RMBm) 2016A 2017F 2018F 2019F subsequently. We believe increasing monetisation will improve Turnover 2,793 3,875 4,949 5,983 segmental OPM significantly (OPM of -18.1% in 3Q17 versus EBITDA (111) 288 497 654 Pre-tax Profit (209) 18 229 389 normalised OPM of 25.0%). And we expect the OPM of its online Net Profit (203) 13 158 268 education business to continue to improve on a y -o-y basis, even Net Pft (Pre Ex) (core profit) (390) 13 158 268 without taking into account content monetisation, due to operating Net Profit Gth (Pre-ex) (%) (235.4) N/A 1,153.5 69.7 EPS (RMB) (0.41) 0.03 0.32 0.54 leverage. EPS (HK$) (0.51) 0.03 0.39 0.67 Valuation: Core EPS (HK$) (0.98) 0.03 0.39 0.67 Our TP of HK$36 is derived from SOTP valuation: (1) 15x FY18F PE for Core EPS (RMB) (0.79) 0.03 0.32 0.54 online games (HK$24.2 per share); (2) 10x FY17F normalised net profit EPS Gth (%) (41.8) N/A 1,153.5 69.7 from hardware and 20x potential net profit from content and apps for Core EPS Gth (%) (235.5) N/A 1,153.5 69.7 Diluted EPS (HK$) (0.51) 0.03 0.39 0.67 online education (HK$8.3); (3) Transaction values for Cherrypicks and DPS (HK$) 0.22 0.22 0.22 0.22 AHRT (HK$0.7); and (4) Construction value for Haixi Animation BV Per Share (HK$) 9.61 9.42 9.60 10.05 Creativity City (HK$2.5). PE (X) nm 688.5 54.9 32.4 Key Risks to Our View: CorePE (X) nm 688.5 54.9 32.4 P/Cash Flow (X) nm 46.7 15.5 7.3 Competition from other online game developers; slower-than-expected P/Free CF (X) nm nm 23.2 8.7 adoption of online education. EV/EBITDA (X) nm 26.9 15.2 10.2 At A Glance Net Div Yield (%) 1.0 1.0 1.0 1.0 Issued Capital (m shrs) 533 P/Book Value (X) 2.3 2.3 2.3 2.2 11,563 / 1,454 Net Debt/Equity (X) CASH CASH CASH CASH Mkt. Cap (HK$m/US$m) ROAE(%) (5.0) 0.3 4.1 6.8 Major Shareholders Earnings Rev (%): Nil Nil Liu Dejian (%) 51.5 Consensus EPS (RMB) 0.16 0.41 0.56 IDG-Accel China Growth Fund (%) 5.4 Other Broker Recs: B: 10 S: 1 H: 2 Free Float (%) 43.2 Source of all data on this page: Company, DBSV, Thomson Reuters, 3m Avg. Daily Val. (US$m) 3.6 HKEX I CB Industry: Technology / Software & Computer Services
ed-JS / sa- CS / AH Company Guide NetDragon Websoft
CRITICAL FACTORS TO WATCH Online game's average concurrent users (ACU, k) 700 707
Critical Factors 606 550 Grow th in online games’ ACU and ARPU 505 Average paying accounts (APA) and average revenue per 400 404 paying user (ARPU) are key indicators of online game revenue. 317 336 303 We expect NetDragon’s revenue from online games to deliver 202 FY16-19F CAGR of 33%. Thanks to the Heroes Evolved Mobile 101 (英魂之刃手遊) and the Eudemons Mobile (魔域手遊), we 0 expect online games’ average concurrent users (ACU) to post 2015A 2016A 2017F 2018F 2019F an FY16-19F CAGR of 27.7%. Monthly average revenue per Online game's monthly average revenue per paying user paying user (ARPU) is expected to decrease 3.3%/4.6% in (ARPU, Rmb)
FY18F/19F, because of increasing contribution from Eudemons 363.8 371 351.8 3D Mobile (魔域 3D 手遊), whose gross billings has to be 335.6 300.1 297 shared with its publisher. 259.1
223 Grow th in online education’s revenue We expect NetDragon’s revenue in online education to deliver 148 an FY16-19F CAGR of 26%, supported by hardware orders 74 and monetisation of high-margin content. 0 2015A 2016A 2017F 2018F 2019F (1) Potential online education hardware orders from Russia Online education's revenue (Rmb m) (Phase II) and Turkey. The company sees significant 3,066.1 opportunities in emerging countries, particularly in Russia, 3,127 2,546.6 Turkey, and Malaysia. 2,502 2,062.3 1,876 (2) Monetisation of high-margin content in the international 1,526.3
education market in FY18F, starting from teacher base to 1,251 student base. 625 (i) Its Content Store for the international education 242.8 market will open in FY18F, allowing its 2m teacher 0 base to buy and sell original teacher-created content. 2015A 2016A 2017F 2018F 2019F NetDragon will share revenue with sellers. Source: Company, DBS Vickers (ii) Besides the 2m teacher base, the company would be able to reach its 30m student base as well. The company will accumulate and analyse student data and sell to parents customised content tailored to students’ specific strengths and weaknesses. NetDragon will share revenue with third-party content providers.
With international online education’s strong sales momentum and cost rationalisation underway, the international online education business should have turned profitable in FY17F. And increasing monetisation of high-margin content will improve segmental OPM significantly (OPM of -18.1% in 3Q17 versus normalised OPM of 25.0%).
Page 65 Company Guide NetDragon Websoft
Balance Sheet: Net cash position. As of December 2016, NetDragon had a net Leverage & Asset Turnover (x) 1.2 cash position of Rmb951m (Rmb133bn debt and Rmb1,084bn 0.14 cash). Its net capex was Rmb186m, mainly on Haixi Animation 0.12 1.0
Creativity City, with Rmb229m operating cash outflows in 0.10 0.8 FY16. 0.08
0.06 0.6 Share Price Drivers: 0.04 Eudemons Mobile (魔域手遊) continues Eudemons Online’s (魔 0.4 0.02 域 ) success. NetDragon has converted its flagship PC game 0.00 0.2 Eudemons Online (魔域) to Eudemons Mobile (魔域手遊) and 2015A 2016A 2017F 2018F 2019F Eudemons 3D Mobile (魔域 3D 手遊). We expect NetDragon’s Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure revenue from online games to deliver FY16-19F CAGR of 33%. RMBm 600.0
Monetisation of online education via sale of high-margin 500.0 content. Hardware currently contributes the majority of 400.0
NetDragon's online education revenue. Monetisation of high- 300.0 margin content in the international online education market 200.0 will start from its 2m teacher base in FY18F and be rolled out 100.0 to its 30m student base subsequently. We believe this will 0.0 improve segmental OPM significantly (OPM of -18.1% in 3Q17 2015A 2016A 2017F 2018F 2019F versus normalised OPM of 25.0%). Capital Expenditure (-) ROE Key Risks: 6.0% Intensifying competition from other online game developers. NetDragon has converted its flagship PC game Eudemons 5.0% Online (魔域) to Eudemons Mobile (魔域手遊) and Eudemons 4.0%
3D Mobile (魔域 3D 手遊). Competition from other 3.0% developers, especially those with strong intellectual properties 2.0% (IPs), may hinder the success of NetDragon’s PC-to-mobile 1.0% games. 0.0% 2015A 2016A 2017F 2018F 2019F Online education may not replicate its past successes in Forward PE Band 17173.com and 91 Wireless. This may result from slower- x than-expected adoption of online education, as well as 800 competition from traditional publishers and other online 700 600 education platforms. 500 400 +1SD: 106.6x 300 Avg: 38.8x Company Background 200 100 Established in 1999, NetDragon is a leading online game -1SD: -28.9x 0 developer in China, with a highly successful track record as a -100 pioneer in Internet and mobile Internet, including 17173.com Jan-13 Apr-14 Dec-16
(the first online game portal in China) and 91 Wireless Mar-18 Aug-15 (China's leading app-store platform), which were sold to Sohu PB Band for US$20.5m in 2003 and to Baidu for US$1.9bn in 2013 x respectively. Online education will be its next business to 4.5 boom. (1) Online games, (2) education, and (3) mobile 4.0 3.5 solutions and mobile marketing accounted for 43%, 55%, 3.0 and 2% of FY16 revenue respectively. Liu Dejian (劉德建), 2.5 +1SD: 2.3x 2.0 Chairman, is the founder of the company. 1.5 Avg: 1.5x 1.0 -1SD: 0.7x 0.5 0.0 Jul-11 Oct-18 Sep-09 Dec-16 Nov-07 Mar-15 May-13 Source: Company, DBS Vickers
Page 66 Company Guide NetDragon Websoft
NetDragon's share price vs. NetDragon's online game revenue and China's online game market
Rebased 01 Jan 12 = 100 NetDragon's 78% stake in online education was valued 1,400 Online education 600 at US$372m in Series A profitability improved in finacing, which was about 1,200 2Q17 91 Wireless was sold to 40% of NetDragon's 500 Baidu for US$2bn in 2013 market capitalisation at that 1,000 moment in 2015 400 800 300 600 200 400
200 100
0 0 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Jul-17 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17 Sep-12 Sep-13 Sep-14 Sep-15 Sep-16 Sep-17 Nov-12 Nov-13 Nov-14 Nov-15 Nov-16 Nov-17 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 Mar-17 May-12 May-13 May-14 May-15 May-16 May-17
NetDragon (LHS) NetDragon's online game revenue (RHS) China's online game market (RHS)
Source: Bloomberg Finance L.P., Company, National Bureau of Statistics of China, DBS Vickers
Page 67 Company Guide NetDragon Websoft
Key assumptions
Rmb m F Y15 F Y16F F Y17F F Y18F F Y19F Rev enue Online game 985 1,210 1,744 2,321 2,819 Education 243 1,526 2,062 2,547 3,066 Elernity (華漁教育) 84 168 500 750 1,000 Promethean 159 1,358 1,562 1,797 2,066 Mobile solutions and mobile marketing 44 57 68 82 98 T otal 1,272 2,793 3,875 4,949 5,983
Growth Online game 11.5% 22.8% 44.2% 33.1% 21.5% Education 639.4% 528.6% 35.1% 23.5% 20.4% Elernity (華漁教育) 155.5% 100.0% 198.0% 50.0% 33.3% Promethean 754.9% 15.0% 15.0% 15.0% Mobile solutions and mobile marketing -5.4% 29.1% 20.0% 20.0% 20.0% T otal 32.1% 119.5% 38.7% 27.7% 20.9%
GPM Online game 91.3% 93.2% 93.2% 93.2% 93.2% Education 24.3% 29.8% 27.9% 27.0% 26.5% Elernity (華漁教育) 13.4% 12.3% 15.0% 15.0% 15.0% Promethean 30.0% 32.0% 32.0% 32.0% 32.0% Mobile solutions and mobile marketing -1.5% 11.6% 11.6% 11.6% 11.6% T otal 75.3% 56.9% 56.8% 57.6% 57.5%
Source: Company, DBS Vickers
Sum-of-the-parts (SOTP) valuation
Rev enue Normalised Normalised V aluation V aluation (Rmb m) NPM net profit Stak e (Rmb m) per share Valuation method Online game 2,321 30% 696 100% 10,444.64 24.2 15x FY18F PER Education Promethean (Hardware) 1,797 10% 180 78% 1,404 3.3 10x FY18F PER Content and apps 549 25% 137 78% 2,143 5.0 20x potential net profit from content and apps Cherrypicks 100% 238 0.6 USD35.16m of transaction value AHRT Media 20% 24 0.1 CAD4.82m of transaction value Haixi Animation Creativity City 100% 1,085 2.5 USD160m of construction value Total Valuation 15,338 36
Source: Company, DBS Vickers
Page 68 Company Guide NetDragon Websoft
Key Assumptions FY Dec 2015A 2016A 2017F 2018F 2019F Online game's average 317.0 336.0 399.6 549.8 700.0 concurrent users (ACU, k) Online game's monthly average revenue per 259.1 300.1 363.8 351.8 335.6 paying user (ARPU, Rmb) Online education's 242.8 1,526.3 2,062.3 2,546.6 3,066.1 revenue (Rmb m) Source: Company, DBS Vickers
Segmental Breakdown (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F R e venues (RMB m) Online game 985 1,210 1,744 2,321 2,819 Education 243 1,526 2,062 2,547 3,066 Mobile solutions and 44 57 68 82 98 mobile marketing T otal 1, 272 2, 793 3, 875 4, 949 5, 983 Gross profit (RMB m) Online game 900 1,128 1,626 2,163 2,628 Education 59 455 575 687 811 Mobile solutions and (1) 7 8 9 11 mobile marketing T otal 958 1, 590 2, 209 2, 860 3, 450 Gross profit Margins (%) Online game 91.3 93.2 93.2 93.2 93.2 Education 24.3 29.8 27.9 27.0 26.5 Mobile solutions and (1.5) 11.6 11.6 11.6 11.6 mobile marketing T otal 75. 3 56. 9 57. 0 57. 8 57. 7 Source: Company, DBS Vickers
Page 69 Company Guide NetDragon Websoft
Income Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F Revenue 1,272 2,793 3,875 4,949 5,983 Cost of Goods Sold (314) (1,203) (1,674) (2,099) (2,545) Gross Profit 958 1, 590 2, 201 2, 851 3, 439 Other Opng (Exp)/Inc (1,173) (2,001) (2,169) (2,604) (3,029) O pe rating Profit ( 215) ( 411) 32 246 410 Other Non Opg (Exp)/Inc 164 24 0 0 0 Associates & JV Inc (10) (1) (1) (2) (2) Net Interest (Exp)/Inc 1 (9) (12) (15) (19) Dividend Income 0 0 0 0 0 Exceptional Gain/(Loss) (27) 187 0 0 0 Pre -tax Profit ( 87) ( 209) 18 229 389 Tax (101) (28) (3) (34) (58) Minority Interest 45 34 (3) (37) (64) Preference Dividend 0 0 0 0 0 Ne t Profit ( 143) ( 203) 13 158 268 Net Profit before Except. (116) (390) 13 158 268 EBITDA 88 (111) 288 497 654 Growth Revenue Gth (%) 32.1 119.5 38.7 27.7 20.9 EBITDA Gth (%) (73.3) N/A N/A 72.1 31.7 Opg Profit Gth (%) (263.8) 91.0 (107.7) 682.0 66.4 Net Profit Gth (%) N/A (41.8) N/A 1,153.5 69.7 M a rgins & Ratio Gross Margins (%) 75.3 56.9 56.8 57.6 57.5 Opg Profit Margin (%) (16.9) (14.7) 0.8 5.0 6.8 Net Profit Margin (%) (11.2) (7.3) 0.3 3.2 4.5 ROAE (%) (3.2) (5.0) 0.3 4.1 6.8 ROA (%) (2.7) (3.9) 0.3 3.2 5.0 ROCE (%) (4.5) (9.3) 0.7 5.1 7.8 Div Payout Ratio (%) N/A N/A 690.7 55.1 32.5 Net Interest Cover (x) NM (47.5) 2.6 16.1 22.1 Source: Company, DBS Vickers
Interim Income Statement (RMB m) FY Dec 1H2015 2H2015 1H2016 2H2016 1H2017
Revenue 512 760 1,359 1,435 1,775 Cost of Goods Sold (82) (232) (575) (629) (742) Gross Profit 430 528 784 806 1, 033 Other Oper. (Exp)/Inc (479) (694) (981) (1,043) (1,034) O pe rating Profit ( 49) ( 166) ( 197) ( 237) 0 Other Non Opg (Exp)/Inc 48 116 78 (31) 20 Associates & JV Inc (5) (5) (1) 5 0 Net Interest (Exp)/Inc 2 (1) (5) (4) (4) Exceptional Gain/(Loss) (9) (18) 93 89 9 Pre -tax Profit ( 14) ( 74) ( 31) ( 178) 24 Tax (12) (89) (13) (15) (32) Minority Interest 7 38 1 33 33 Ne t Profit ( 18) ( 125) ( 43) ( 160) 26 Net profit bef Except. (10) (107) (136) (249) 17
Growth Revenue Gth (%) 14.5 47.4 165.2 88.8 30.7 Opg Profit Gth (%) (140.7) (1,623.3) 301.8 42.5 (99.8) Net Profit Gth (%) N/A N/A (133.4) (28.3) N/A
M a rgins Gross Margins (%) 84.0 69.4 57.7 56.2 58.2 Opg Profit Margins (%) (9.6) (21.9) (14.5) (16.5) 0.0 Net Profit Margins (%) (3.6) (16.4) (3.2) (11.1) 1.5 Source: Company, DBS Vickers
Page 70 Company Guide NetDragon Websoft
Quarterly Income Statement (RMB m) FY Dec 3Q2016 4Q2016 1Q2017 2Q2017 3Q2017
Revenue 695 740 713 1,062 1,061 Cost of Goods Sold (310) (319) (268) (474) (476) Gross Profit 385 421 446 587 585 Other Oper. (Exp)/Inc (487) (556) (512) (521) (574) O pe rating Profit ( 102) ( 135) ( 66) 66 10 Other Non Opg (Exp)/Inc (4) (28) 6 14 (11) Associates & JV Inc 5 0 0 0 0 Net Interest (Exp)/Inc (2) (2) (2) (2) (2) Exceptional Gain/(Loss) 32 57 6 3 5 Pre -tax Profit ( 70) ( 107) ( 57) 82 3 Tax (4) (11) (16) (16) (13) Minority Interest 9 24 27 5 16 Ne t Profit ( 65) ( 94) ( 46) 71 5 Net profit bef Except. (97) (152) (51) 68 0 EBITDA 0 0 0 0 0
Growth (QoQ) Revenue Gth (%) (11.7) 6.5 (3.6) 48.8 (0.1) EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) 68.3 32.7 (50.9) (199.5) (84.2) Net Profit Gth (%) (192.6) 44.3 (51.6) (256.4) (92.9)
Growth (YoY) Revenue Gth (%) 167.7 47.8 24.8 34.9 52.7 EBITDA Gth (%) N/A N/A N/A N/A N/A Opg Profit Gth (%) 49.0 38.0 (51.4) (209.2) (110.2) Net Profit Gth (%) (146.6) 3.7 59.8 1.1 N/A
M a rgins Gross Margins (%) 55.4 56.9 62.5 55.3 55.1 Opg Profit Margins (%) (14.6) (18.2) (9.3) 6.2 1.0 Net Profit Margins (%) (9.4) (12.8) (6.4) 6.7 0.5 Source: Company, DBS Vickers
Page 71 Company Guide NetDragon Websoft
Balance Sheet (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Net Fixed Assets 1,246 1,284 1,318 1,348 1,374 Invts in Associates & JVs 19 17 17 17 17 Other LT Assets 1,851 1,696 1,587 1,496 1,413 Cash & ST Invts 1,881 1,084 1,050 1,382 2,336 Inventory 118 125 174 219 265 Debtors 235 352 350 441 0 Other Current Assets 153 221 221 221 221 T otal Assets 5, 502 4, 779 4, 717 5, 123 5, 626
ST Debt 304 133 185 236 285 Creditors 198 216 300 376 456 Other Current Liab 532 471 456 487 511 LT Debt 0 0 0 0 0 Other LT Liabilities 165 131 19 159 264 Shareholder’s Equity 4,294 3,854 3,780 3,850 4,031 Minority Interests 10 (26) (23) 15 78 T otal Cap. & Liab. 5, 502 4, 779 4, 717 5, 123 5, 626
Non-Cash Wkg. Capital (225) 11 (11) 17 (482) Net Cash/(Debt) 1,577 951 865 1,146 2,051 Debtors Turn (avg days) 41.0 38.3 33.0 29.2 13.5 Creditors Turn (avg days) 228.6 81.5 66.5 66.9 66.1 Inventory Turn (avg days) 130.0 47.8 38.6 38.8 38.4 Asset Turnover (x) 0.2 0.5 0.8 1.0 1.1 Current Ratio (x) 2.3 2.2 1.9 2.1 2.3 Quick Ratio (x) 2.0 1.8 1.5 1.7 1.9 Net Debt/Equity (X) CASH CASH CASH CASH CASH Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH Capex to Debt (%) 176.9 140.1 101.0 79.0 65.4 Z-Score (X) 0.0 NA NA NA NA Source: Company, DBS Vickers
Cash Flow Statement (RMB m) FY Dec 2015A 2016A 2017F 2018F 2019F
Pre-Tax Profit (87) (209) 18 229 389 Dep. & Amort. 149 276 258 252 246 Tax Paid (101) (28) (3) (34) (58) Assoc. & JV Inc/(loss) 10 1 1 2 2 (Pft)/ Loss on disposal of FAs 0 0 0 0 0 Chg in Wkg.Cap. 288 (270) (89) 112 604 Other Operating CF 0 0 0 0 0 Ne t Operating CF 259 ( 229) 185 560 1, 183 Capital Exp.(net) (537) (186) (186) (186) (186) Other Invts.(net) (1,198) 84 0 0 0 Invts in Assoc. & JV 0 1 (1) (2) (2) Div from Assoc & JV 0 0 0 0 0 Other Investing CF (69) (57) 3 (4) (3) Ne t Investing CF ( 1,804) ( 158) ( 185) ( 192) ( 191) Div Paid (81) (87) (87) (87) (87) Chg in Gross Debt 67 (171) 52 51 49 Capital Issues (49) (150) 0 0 0 Other Financing CF 4 (1) 0 0 0 Ne t Financing CF ( 59) ( 409) ( 35) ( 36) ( 38) Currency Adjustments 0 0 0 0 0 Chg in Cash (1,604) (796) (34) 332 954 Opg CFPS (RMB) (0.06) 0.08 0.56 0.90 1.17 Free CFPS (RMB) (0.56) (0.84) 0.00 0.75 2.01 Source: Company, DBS Vickers
Page 72 Company Guide NetDragon Websoft
Target Price & Ratings History
HK$ S.No. Date Closing 12-mth Rating Price T arget 33.0 6 7 Price 31.0 1 3 1: 24-Mar-17 HK$24.60 HK$34.00 Buy 4 8 9 29.0 2 5 2: 28-Mar-17 HK$24.60 HK$34.00 Buy 27.0 3: 29-Mar-17 HK$23.80 HK$34.00 Buy 4: 14-Jun-17 HK$20.95 HK$34.00 Buy 25.0 5: 5-Jul-17 HK$20.40 HK$34.00 Buy 23.0 6: 31-Aug-17 HK$26.00 HK$34.00 Buy 21.0 7: 13-Oct-17 HK$27.95 HK$34.00 Buy 19.0 8: 7-Dec-17 HK$21.25 HK$36.00 Buy 17.0 9: 11-Dec-17 HK$21.30 HK$36.00 Buy Jul-17 Jan-18 Jun-17 Oct-17 Feb-18 Apr-17 Sep-17 Dec-17 Nov-17 Mar-17 Mar-18 Aug-17 May-17
Source: DBS Vickers
Analyst: Susanna CHUI
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DBSVHK recommendations are based an Absolute Total Return* Rating system, defined as follows:
S TRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
B U Y (>15% total return over the next 12 months for small caps, >10% for large caps) H O LD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps) FU LLY VALUED (negative total return i.e. > -10% over the next 12 months) S ELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
Share price appreciation + dividends
Completed Date: 15 Mar 2018 15:29:38 (HKT) Dissemination Date: 15 Mar 2018 16:18:36 (HKT) Sources for all charts and tables are DBS Vickers unless otherwise specified. GENERAL DISCLOSURE/DISCLAIMER This report is prepared by DBS Vickers (Hong Kong) Limited (“DBSV HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS Bank (Hong Kong) Limited (DBS HK), DBSV HK, and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated i n any form or by any means or (ii) redistributed without the prior written consent of DBSV HK. The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers, employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research . Accordingly, we do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, wh o should obtain separate independent legal or financial advice. The DBS Group accepts no liability whatsoever for any direct, indirect and/or consequential loss (including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document. The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform broking, investment banking and other banking services for these companies. Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can be no assurance that future results or events will be consistent with any such valuations, opinions, esti mates, forecasts, ratings or risk assessments. The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to update the information in this report. This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned schedule or frequency for updating research publication relating to any issuer. The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will var y significantly from actual results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that: (a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and (b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments stated therein. Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets. Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies) mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the commodity referred to in this report. DBSVUSA, a US-registered broker-dealer, does not have its own investment banking or research department, has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months and does not engage in market-making.
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A N ALYST CERTIFICATION The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that th e views about the companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s) primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate 1 does not serve as an officer of the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the real estate investment trust; and in the case of any other entity, an officer or its equivalent counterparty of the entity wh o is responsible for the management of the issuer or the new listing applicant) and the research analyst(s) primarily responsible for the content of this research report or his associate does not have financial interests2 in relation to an issuer or a new listing applicant that the analyst reviews. DBS Group has procedures in place to eliminate, avoid and manage any potential conflicts of interests that may arise in connection with the production of research reports. The research analyst(s) responsible for this report operates as part of a s eparate and independent team to the investment banking function of the DBS Group and procedures are in place to ensure that confidential information held by either the research or investment banking function is handled appropriately. There is no direct li nk of DBS Group's compensation to any specific investment banking function of the DBS Group.
C O MPANY-SPECIFIC / REGULATORY DISCLOSURES 1. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK or their subsidiaries and/or other affiliates have proprietary positions in Tencent Holdings Limited (700 HK) and Kingsoft Corporation Limited (3888 HK) recommended in this report as of 12 Mar 2018.
2. Neither DBS Bank Ltd, DBS HK nor DBSV HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research Report.
3. C o mpensation for investment banking services: DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA have received compensation, within the past 12 months for investment banking services from Alibaba (BABA US) and Baidu (BIDU US) as of 28 Feb 2018.
4. DBS Bank Ltd, DBS HK, DBSVS, DBSV HK, their subsidiaries and/or other affiliates of DBSVUSA h ave managed or co-managed a public offering of securities for Alibaba (BABA US) and Baidu (BIDU US) in the past 12 months, as of 28 Feb 2018.
DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past twelve months. Any US persons wishing to obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security discussed in this document should contact DBSVUSA exclusively.
5. D isclosure of previous investment recommendation produced: DBS Bank Ltd, DBSVS, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment recommendations in respect of the same securities / instruments recommended in this research report during the preceding 12 months. Please contact the primary analyst listed in the first page of this report to view previous investment recommendations published by DBS Bank Ltd, DBSVHK, their subsidiaries and/or other affiliates of DBSVUSA in the preceding 12 months.
1 An associate is defined as (i) the spouse, or any minor child (natural or adopted) or minor step-child, of the analyst; (ii) the trustee of a trust of which the analyst, his spouse, minor child (natural or adopted) or minor step-child, is a beneficiary or discretionary object; or (iii) another person accustomed or obliged to act in accordance with the directions or instructions of the analyst. 2 Financial interest is defined as interests that are commonly known financial interest, such as investment in th e securities in respect of an issuer or a new listing applicant, or financial accommodation arrangement between the issuer or the new listing applicant and the firm or analysis. This term does not include commercial lending conducted at arm's length, or i nvestments in any collective investment scheme other than an issuer or new listing applicant notwithstanding the fact that the scheme has investments in securities in respect of an issuer or a new lis ting applicant.
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Wong Ming Tek, Executive Director, ADBSR S ingapore This report is distributed in Singapore by DBS Bank Ltd (Company Regn. No. 196800306E) or DBSVS (Company Regn No. 198600294G), both of which are Exempt Financial Advisers as defined in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. DBS Bank Ltd and/or DBSVS, may distribute reports produced by its respective foreign entities, affiliates or other foreign research houses pursuant to an arrangement under Regulation 32C of the Financial Advisers Regulations. Where the report is distributed in Singapore to a person who is not an Accredited Investor, Expert Investor or an Institutional Investor, DBS Bank Ltd accepts legal responsibility for the contents of the report to such persons only to the extent required by law. Singapore recipients should contact DBS Bank Ltd at 6327 2288 for matters arising from, or in connection with the report. Th ailand This report is being distributed in Thailand by DBS Vickers Securities (Thailand) Co Ltd. U nited This report is produced by DBSVHK which is regulated by the Hong Kong Securities and Futures Commission Ki ngdom This report is disseminated in the United Kingdom by DBS Vickers Securities (UK) Ltd (“DBSVUK”). DBSVUK is authorised and regulated by the Financial Conduct Authority in the United Kingdom. In respect of the United Kingdom, this report is solely intended for the clients of DBSVUK, its respective connected and associated corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii) redistributed without the prior written consent of DBSVUK. This communication is directed at persons having professional experience in matters relating to investments. Any investment activity following from this communication will only be engaged in with such persons. Persons who do not have professional experience in matters relating to investments should not rely on this communication. D u bai This research report is being distributed by DBS Bank Ltd., (DIFC Branch) having its office at PO Box 506538, 3 rd Floor, I n ternational Building 3, East Wing, Gate Precinct, Dubai International Financial Centre (DIFC), Dubai, United Arab Emirates. DBS Bank Fi nancial Ltd., (DIFC Branch) is regulated by The Dubai Financial Services Authority. This research report is intended only for C entre professional clients (as defined in the DFSA rulebook) and no other person may act upon it.
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U nited Arab This report is provided by DBS Bank Ltd (Company Regn. No. 196800306E) which is an Exempt Financial Adviser as defined Em irates in the Financial Advisers Act and regulated by the Monetary Authority of Singapore. This report is for information purposes only and should not be relied upon or acted on by the recipient or considered as a solicitation or inducement to buy or sell any financial product. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situation, or needs of individual clients. You should contact your relationship manager or investment adviser if you need advice on the merits of buying, selling or holding a particular investment. You should note that the information in this report may be out of date and it is not represented or warranted to be accurate, timely or complete. This report or any portion thereof may not be reprinted, sold or redistributed without our written consent. U nited States This report was prepared by DBSVHK. DBSVUSA did not participate in its preparation. The research analyst(s) named on this report are not registered as research analysts with FINRA and are not associated persons of DBSVUSA. The research analyst(s) are not subject to FINRA Rule 2241 restricti ons on analyst compensation, communications with a subject company, public appearances and trading securities held by a research analyst. This report is being distributed in the United States by DBSVUSA, which accepts responsibility for its contents. This report may only be distributed to Major U.S. Institutional Investors (as defined in SEC Rule 15a-6) and to such other institutional investors and qualified persons as DBSVUSA may authorize. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact DBSVUSA directly and not its affiliate. O ther In any other jurisdictions, except if otherwise restricted by laws or regulations, this report is intended only for qualified, j urisdictions professional, institutional or sophisticated investors as defined in the laws and regulations of such jurisdictions. D BS Vickers (Hong Kong) Limited 18th Floor Man Yee building, 68 Des Voeux Road Central, Central, Hong Kong Tel: (852) 2820-4888, Fax: (852) 2868-1523 Company Regn. No. 31758
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H O NG KONG MA LAYSIA S INGAPORE D BS Vickers (Hong Kong) Ltd A llianceDBS Research Sdn Bhd D BS Bank Ltd C o ntact: Carol Wu C o ntact: Wong Ming Tek (128540 U) C o ntact: Janice Chua 18th Floor Man Yee Building 19th Floor, Menara Multi-Purpose, 12 Marina Boulevard, 68 Des Voeux Road Central Capital Square, Marina Bay Financial Centre Tower 3 Central, Hong Kong 8 Jalan Munshi Abdullah 50100 Singapore 018982 Tel: 852 2820 4888 Kuala Lumpur, Malaysia. Tel: 65 6878 8888 Fax: 852 2863 1523 Tel.: 603 2604 3333 Fax: 65 65353 418 e-mail: [email protected] Fax: 603 2604 3921 e-mail: [email protected] Participant of the Stock Exchange of Hong Kong Ltd e-mail: [email protected] Company Regn. No. 196800306E
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