May 17, 2016

China: Technology: Internet

Equity Research Battle of the Internet giants IV: TAM’ing the profit pool

Turning positive on profits and focusing on the ‘Seven Pillars’ For the first time since 2010, we have a high degree of confidence in the BUY-RATED NAMES WITH KEY EXPOSURE TO SEVEN PILLARS long term growth and potential (operating) profit pool for China Internet. Tencent* Baidu Alibaba JD.com This is in contrast to 2010-15 when margins slipped on high competition, Games  Online Ad.  there was a need to acquire customers, and an impetus to tackle new E‐commerce  entrants. As such, we believe now is the right time to examine the 2020E Travel  Local Services  industry profit pool verticals we call the ‘Seven Pillars’ – games, online Internet Finance  advertising, e-commerce, travel, local services, internet finance, and cloud. Cloud Computing  *Denotes stock is on our regional Conviction List Four key takeaways Source: Company information, Goldman Sachs Global Investment Research. On TAM: Mobiles have exploded the overall total addressable market (TAM), with our estimates (ex-fins) suggesting a ~US$10tr opportunity by SEVEN PILLARS OF CHINA INTERNET 2020. We believe the market has underappreciated the stickiness of PC 1. Games: China, living in a virtual world 2. Online advertising: Social, online video and search are gaming and the attraction of mobile games. The next main sector growth growth engines drivers should come from financial services and local services going online. 3. E-commerce: 3x increase to US$1.5tn by 2020E On profit pools: We believe there is immense online profit opportunity 4. Online Travel: A US$200bn opportunity by 2020E 5. Local services O2O: Building a second BABA, US$1.4tn (~US$70bn by 2020E) were these businesses to be run solely to maximize TAM (2020E) profitability, as was the case with Ctrip in 2010, Baidu in 2011 and Alibaba 6. Internet Finance: Tapping the underbanked China in 2013, when operating profit margins were at record levels. consumer; a US$5.4tn opportunity (2020E) 7. Cloud computing: A ~US$20bn opportunity (2020E) On reinvestment: With the profit pool dampened by investment into new businesses, we have started moving towards SOTP valuations to reflect an RELATED RESEARCH Tencent Holdings (0700.HK): Weixin: the north star (2); increasing degree of confidence in synergistic growth. Leveraging current multiple drivers intact; reiterate CL-Buy, April 13, 2016 assets and positioning for the next major opportunities (internet finance, China: Technology: Internet: Upcoming MSCI inclusions: What to own; Tencent to CL-Buy, November 30, 2015 O2O) will be key. NetEase Inc. (NTES) Buy: Games leader and new growth On who is best positioned: Those with social network assets appear best seeker; initiate at Buy, November 25, 2015 China: Technology: Internet: Shopping sans frontières: Buy positioned, due to the growth opportunity, the significant barriers to entry, China online retail – BABA/JD/VIPS, November 6, 2015 the substantial upside to ad-loads, and the time spent on the app. China: Technology: Internet: Planes, Trains, and Hotel Rooms; Buy Ctrip, Qunar, October 26, 2015 Alibaba, Baidu, and Tencent could be major beneficiaries China: Financial Services: Internet Finance Part 1: Clash of the Titans unfolds; Midcap banks face risk of We are positive on Tencent (CL-Buy), Baidu (Buy), and Alibaba (Buy) given marginalization, November 14, 2014 their exposure to the three major growth drivers for the online advertising industry into 2020E – social advertising, online video, and search. Also,

Alibaba dominates e-commerce via its unique monetization proposition, Tencent is the dominant gaming platform in China, and Baidu the default search engine in China. All three have exposure to local services, while Baidu is ramping up its internet finance arm. Of the remaining pillars, Baidu has online travel exposure via Ctrip (Buy) investment, while Alibaba and Tencent lead in cloud computing, one of the fastest growth areas. Piyush Mubayi +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with George Meng, CFA companies covered in its research reports. As a result, +852-2978-0178 [email protected] Goldman Sachs (Asia) L.L.C. investors should be aware that the firm may have a conflict of David Jin, CFA interest that could affect the objectivity of this report. Investors +852-2978-1466 [email protected] Goldman Sachs (Asia) L.L.C. should consider this report as only a single factor in making Fan Liu, CFA +86(10)6627-3192 [email protected] Beijing Gao Hua Securities Company Limited their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S.

The Goldman Sachs Group, Inc. Global Investment Research May 17, 2016 China: Technology: Internet

Table of contents

China Internet Opportunity in Pictures 3 China Internet in Numbers 5 PM Summary: ‘Seven Pillars’ drive a ~US$70bn profit pool in 2020E 6 The Seven Pillars of China Internet 10 1. Games: China, living in a virtual world 11 2. Online advertising: Social, online video and search are growth engines 19 3. E-commerce: 3x increase to US$1.5tn by 2020E 30 4. Online travel: A US$200bn opportunity by 2020E 35 5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E) 38 6. Internet finance: Tapping the underbanked China consumer; a US$5.4tr opportunity (2020E) 42 7. Cloud computing: A ~US$20bn opportunity (2020E) 46 Appendix 1: China internet usage 51 Appendix 2: M&A summary 52 Appendix 3: Valuation and risks 56 Appendix 4: TAM table in details 57 Appendix 5: TAM detail in RMB 59 Disclosure Appendix 60

All prices in this report as of May 13, 2016, unless otherwise noted. The authors would like to thank Jason Huang, Elsie Cheng, Shaphan Ng and Kenneth Bang for their valuable contributions to the report.

Exhibit 1: China Internet Comps

P/E, non-GAAP PE at TP Last Target +/- Mkt CapPerformance diluted EV/Revenue PEG non-GAAP Company Ticker fx Price Price Side Rating (US$mn) 3Mo YTD 2016E 2017E 2016E 2017E 2016E 2016E 2017E China Internet 58.com WUBA $ 50.50 64.0 27% Neutral 5,803 14% -23% NM 27.8x 4.2x 2.9x NM NM 35.2x Alibaba BABA $ 77.16 100.0 30% Buy 196,758 27% -5% 27.0x 21.6x 8.7x 6.8x 1.1x 35.0x 28.1x Autohome ATHM $ 24.80 - - Not Rated 2,904 4% -29% 16.2x 12.6x 2.6x 2.2x 0.6x - - Baidu BIDU $ 159.75 220.0 38% Buy 56,520 5% -15% 26.6x 17.8x 4.2x 3.5x 0.6x 36.7x 24.5x Changyou CYOU $ 17.67 16.9 -4% Sell 934 9% -29% 9.2x 8.4x 0.7x 0.7x 1.1x 8.8x 8.0x Ctrip CTRP $ 43.01 55.0 28% Buy 21,017 16% -7% 80.8x 30.0x 7.1x 5.3x 0.8x 103.3x 38.4x JD.com JD $ 22.64 33.0 46% Buy 31,092 -2% -30% NM 50.5x 0.7x 0.5x NM NM 73.7x Jumei JMEI $ 5.29 9.5 80% Neutral 799 -4% -42% 14.2x 8.8x 0.5x 0.4x 0.3x 25.4x 15.9x NetEase NTES $ 153.40 182.0 19% Buy 20,281 11% -15% 14.0x 14.3x 3.2x 2.5x 1.9x 16.6x 17.0x Qunar QUNR $ 35.75 45.0 26% Neutral 5,272 2% -32% NM 98.5x 6.3x 4.5x NM NM 124.0x Sina SINA $ 45.50 48.0 5% Neutral 2,683 9% -8% 28.1x 21.3x 1.2x 1.0x NM 29.7x 22.5x Sohu SOHU $ 39.52 41.0 4% Sell 1,529 -11% -31% NM 21.5x 0.4x 0.3x NM NM 22.3x SouFun SFUN $ 5.58 6.8 22% Neutral 2,376 15% -24% NM 16.5x 1.3x 0.9x NM NM 20.1x Tencent 0700.HK HK$ 155.10 193.0 24% Buy* 188,386 16% 2% 28.6x 22.5x 8.6x 7.0x 1.2x 35.6x 28.0x Tuniu TOUR $ 8.97 15.0 67% Neutral 1,190 -18% -44% NM NM 0.4x 0.3x NM NM NM VIPShop VIPS $ 12.00 17.5 46% Buy 7,663 10% -21% 18.8x 14.7x 1.0x 0.8x 0.8x 27.4x 21.4x Weibo WB $ 23.30 22.0 -6% Neutral 5,195 93% 19% 43.7x 24.4x 8.0x 5.6x 0.7x 41.3x 23.0x Median (Sum for Mkt cap) 26% 550,401 9% -23% 26.6x 21.4x 2.6x 2.2x 0.8x 32.3x 23.0x

Notes: *Denotes stock is on our regional Conviction List. All target prices are on a 12 month basis.

Source: DataStream, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 2 May 17, 2016 China: Technology: Internet

China Internet Opportunity in Pictures

Exhibit 2: Seven Pillars of China Internet

Notes: TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. CAGR is for 2015-2020E (in USD).Top 2 players is by market share. For RMB version please see Appendix 5.

Source: iResearch, eMarketer, NBS, CNNIC, Analysys, Wind, Sina news, Goldman Sachs Global Investment Research.

Exhibit 3: We expect China’s internet penetration to increase from 50% in 2015 to 60% by 2020 (to 847mn, 97.6% of which would be mobile internet users vs. 90% in 2015)

(mn) 1,000 Total Internet Users(mn) 70% 900 Mobile Internet Users(mn) 60% 800 Internet users penetration %(RHS) 700 50% 600 40% 500 30% 400

300 20% 200 10% 100 - 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Source: CNNIC, iResearch, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 3

May 17, 2016 Goldman Sachs Global Investment Research Exhibit 4: The China internet opportunity in a global context

China Population 1,376mn 13% Internet penetration 50% Japan GDP Population 37% 50% $10,847bn 127mn Internet penetration eComm+Travel+Ads size 45% $721bn - No.1 91% GDP $4,121bn eComm+Travel+Ads size Europe $116bn - No.4 Population 822mn Internet penetration Korea 74% India US Population Population GDP Population 5% 1,252mn 49mn 321mn $16,947bn Internet penetration eComm+Travel+Ads size Internet penetration Internet penetration 92% 34% $383bn - No.3 30% 87% GDP GDP GDP $2,060bn $1,357bn $17,943bn 26% eComm+Travel+Ads size eComm+Travel+Ads size eComm+Travel+Ads size $36bn - No.6 $48bn - No.5 $559bn - No.2 9%

70% 7% Internet Penetration 10% 1% 10%

45% eCommerce 47% 39% 66%

31% 32% 14% Travel 28% 26% Advertising 13% 8%

Note: Data as of 2015.

Source: eMarketer, Phocuswright, InternetWorldStats, Goldman Sachs Global Investment Research. China: Technology: Internet

4

May 17, 2016 China: Technology: Internet

China Internet in Numbers

CHINA INTERNET USER CHINA INTERNET USER DEMOGRAPHICS 75% users between 10-39 years old 620mn mobile internet users = 2x US pop. 72% from urban cities China has 620mn mobile internet users, 90% of the 688mn 54% of internet users total internet users. Internet penetration has surpassed Age: 10‐39 are male, 67% are of 50%, and we expect it to grow to 60% with 847mn internet 75% secondary/high school users in 2020E. educational level. ONLINE ADVERTISING E-COMMERCE ADS Online ad spend as % of total ad spend: Online penetration to reach 22% in 2020E China: 45% vs. US: 33% from 13% in 2015. TAM: Rmb552bn in 2020E, 21% CAGR in 2015-20E. We Category penetration (2014): forecast search ad spend is currently ~33% of the market Books & Magazines: 40% Phones: 19% and social ad spend to grow fastest at 31% CAGR (2015- Apparel: 31% Digital: 17% 20E). Cosmetics: 22% Home appliance: 10% GAMES TRAVEL China surpassed the US as the world's 2014 OTA penetration in China: 28% largest gaming market, Rmb144bn TAM in 2015 vs. 45% in the EU and 43% in the US.

Mobile gaming should exceed PC online gaming in 2016. 1. People booking trips online in China: 260mn  4th most eSport player population to grow at 23% CAGR (2015- populated country: Indonesia.

2018E). 2. Trips booked on mobile platforms 34% as of online.

LOCAL SERVICES/O2O CLOUD COMPUTING China cloud market to grow at 18% CAGR to Online penetration to reach 12% in 2020E Rmb127bn by 2020E

70% of movie tickets booked online in 2015, up from IaaS, PaaS and SaaS in China expected to grow at 45%/25% in 2014/2013. 51% of the bookings on mobile. 20%/23%/22% CAGR till 2020E. We expect AliCloud to The top 3 (Maoyan, Weipiao, Gewara) ~55% market share. capture 28% market share in 2020E vs. 3% in 2015.

INTERNET FINANCE TENCENT (0700.HK) BAT AliPay: 400mn+ real-name registered users $ 55.2% Weixin users open the app >10 TenPay: 300mn users with bankcards linked times/day and time spent is 2x Facebook. MAU (end-2015): 549mn AliPay and TenPay combined is 67.5% of China's total third Average Weixin user age: 26 party online payment transaction volumes. 86.2% of users are between 18-36 years old 90%+ smartphones installed Weixin in China

ALIBABA (BABA)BAT BAIDU (BIDU) BAT No.1 search engine in China. 1,049k SME customers. 407mn active buyers, avg. spend Rmb7,249 per annum Mobiles 60% of 1Q16 rev. 150% Achieved GMV RMB3tn milestone in FY2016. Single's Day Paid Clicks 100% 2015 attracted 115mn buyers, transacted GMV Rmb91bn Cost per click 50% through AliPay; Rural Taobao penetrated over 12,000 of Search rev. 0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 China's 600,000 villages. -50%

Notes: Data as of 2015, unless stated.

Sources: Company data, iResearch, eMarketer, CNNIC, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 5 May 17, 2016 China: Technology: Internet

PM Summary: ‘Seven Pillars’ drive a ~US$70bn profit pool in 2020E

Exploring the ‘Seven Pillars’ that constitute the long term drivers of China Internet – games, digital marketing, e-commerce, online travel, local services O2O, internet finance, and cloud computing – we quantify the market potential to 2020E (revenue/profit pool) and look at the industry leaders in each pillar.

Focus shifting to long term pillars of growth after a year of M&A Following a number of transformative China internet mergers in 2015 and a prudent private equity market, the drag on margins from competition and disruptive companies on the sector’s profit outlook has decreased, in particular for BAT (Baidu, Alibaba, and Tencent).1 In this report our focus is on how the 2020E industry profit pool by vertical looks, driven by the long term pillars (‘Seven Pillars’) of China Internet – games, online advertising, e- commerce, travel, local services O2O (online to offline), internet finance, and cloud. The analysis enhances our confidence on China Internet’s long term growth and the potential (operating) profit pool, with possible margin upside surprise. Key to capitalizing on this opportunity will be individual company strategies pursued for the next phase of growth.

We have moved both the Alibaba and Baidu valuation methodology to SOTP to reflect the growing degree of confidence in synergistic growth and to take a longer term view of the valuation creation in the loss making businesses as they transform into profitable growth drivers.2

Exhibit 5: Categorizing internet verticals by development stages

Survival of the fittest Market concentration M&A in public space, moving Strong firms go public/ to market structure stability Survival of the gain share - Online travel, - E-commerce, - Online gaming, "Richest" - P2P lending, etc. - Online video, etc. M&A in private space - Taxi hailing, etc. Consumer is "King" Heavy discounting - O2O e.g. Online Food Delivery. Start-ups boom Business model recognized, PE capital flows in - Online new car/ used car transaction platforms, - FinTech, etc. To Be or Not To Be Online adoption begins New business ideas, e.g.

Development phase

Source: Goldman Sachs Global Investment Research.

1 For details of the five largest China Internet deals in 2015, Baidu’s investments over the past 11 years, Alibaba’s M&A history since April 2013, and Tencent’s 100+ investments in the past five years, please see Appendix 2.

2 See ‘Alibaba: Above expectation: Switch to SOTP to capture strategic investments’, May 6, 2016 and ‘Baidu: Building BABA for local services; maintain Buy’, July 30, 2015.

Goldman Sachs Global Investment Research 6 May 17, 2016 China: Technology: Internet

Seven Pillars by 2020E: Over US$2tr online market, ~US$70bn profit Over the last two years we have discussed many of the individual growth pillars for China Internet. For the first time we combine research on each of these pillars (the ‘Seven Pillars’), to reach an estimated total addressable market (TAM) ex-financials for China Internet of Rmb65tr (US$10tr) in 2020. We estimate the total size of the online market (ex-fins) could reach Rmb13.4tr (US$2.0tr) by then, implying 21% online penetration (8pp higher than 2015’s 12%). We exclude financials from our market sizing analysis as the TAM is too big for the internet companies to meaningfully penetrate. Our China banks team model ~Rmb1,200tr (~US$180tr) total bankcard transaction value + total social financing (TSF, excl. bonds and equities) by 2020E, with online penetration only expected to be 3.2% and 1.5% respectively by then (Exhibit 6).

Taking our analysis one step further, we expect the total online profit pool (ex-fins) for China Internet to reach Rmb393bn (US$59bn) by 2020. While this figure likely captures the industry’s growth potential, it may also exclude spending on projects for the next phase of growth. Our combined operating profit for BAT by end-2020E is Rmb308bn (vs. Rmb97bn in 2015), equivalent to 78% of the total, which puts the overall pool into context. As shown in Exhibit 7, we expect the top 3 profit contributors to be online adspend (Rmb169bn, 43% of total), online games (Rmb106bn, 27% of total) and e-commerce (Rmb79bn, 20% of total).

For detailed information on each of the Seven Pillars, please see our segment analysis (page 12 onward).

Exhibit 6: China Internet: TAM analysis into the ‘Seven Pillars’ The online opportunity (ex-finance) is potentially >Rmb13tn

Total Addressable Market Latest update David Jin, on March 23, 2016 RMB bn 2014 2015 2016E 2017E 2018E 2019E 2020E Cagr 15-20 Companies with exposure GDP 63,689 67,940 69,428 74,161 79,040 85,067 91,383 6.1% TAM assessment, by category 1. RETAIL 26,239 30,093 33,403 36,744 40,051 43,455 46,931 9% E-Commerce 2,790 3,877 5,079 6,400 7,744 8,983 10,151 21% Alibaba, JD, VIPS, Jumei, Netease

2. ADSPEND 396 467 553 629 699 770 842 13% Alibaba, Baidu, Tencent Online Adspend 154 210 276 345 411 480 552 21%

3. TRAVEL (OTA TGT.) 1,308 1,444 1,590 1,744 1,908 2,089 2,270 9% OTAs 366 527 634 758 901 1,056 1,231 18% Ctrip, Qunar, Alitrip, Tuniu

4. LOCAL SERVICES (O2O) 5,329 5,992 6,641 7,280 7,936 8,571 9,256 9% Online 237 324 438 575 730 900 1,111 28% Meituan, Baidu Nuomi, Koubei

5. ONLINE GAMES 110 144 183 221 251 266 277 14% Tencent, Netease, Changyou Mobile 28 56 91 125 152 164 172 25% PC+browser 83 87 92 96 99 102 105 4%

6. IT SPENDING 3,049 3,593 4,107 4,577 4,995 5,361 5,675 10% Cloud computing 44 56 72 90 100 114 127 18% Alibaba, Baidu, Tencent

Online, ex-finance 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21%

7. FINANCE 6,990 9,713 13,385 18,118 23,611 29,295 36,047 30% Alibaba, Baidu, Tencent, JD a. Total bankcard transaction 495,331 569,631 646,531 730,580 818,250 908,257 1,008,165 12% % online penetration 1.4% 1.7% 2.0% 2.4% 2.7% 3.0% 3.2% 2pp Change in pp, '15-'20E b. TSF excl. bond and equity 110,612 125,461 142,303 159,272 178,264 199,520 223,311 12% % of total bank loans 0.0% 0.1% 0.1% 0.3% 0.7% 1.1% 1.5% 1pp Change in pp, '15-'20E

Total Addressable Mkt. (ex finance) 36,432 41,733 46,477 51,195 55,839 60,511 65,252 9% % of GDP 57.2% 61.4% 66.9% 69.0% 70.6% 71.1% 71.4% Online (ex finance) 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21% % of TAM online 10% 12% 14% 16% 18% 19% 21% 8pp Change in pp, '15-'20E % of TAM online (ex ecomm) 9% 11% 12% 14% 15% 17% 18% 7pp Change in pp, '15-'20E

Source: Company data, iResearch, eMarketer, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 7 May 17, 2016 China: Technology: Internet

Exhibit 7: China internet profit pool estimates Online adspend, online games and e-commerce are the top 3 profit pool contributors by 2020E

2015 2020E Profit pool (Rmb bn) OP/TAM OP Split OP/TAM OP Split Exposure/Comment 1. RETAIL E-Commerce 0.3% 13 17% 0.8% 79 20% Alibaba, JD, VIPS, Jumei, Netease

2. ADSPEND Online Adspend 43.1% 59 80% 46.2% 169 43% Baidu, Tencent, Alibaba

3. TRAVEL (OTA TGT.) OTAs -0.4% (2) -3% 1.0% 12 3% 5% take rate, 20% margin, incl. outbound

4. LOCAL SERVICES (O2O) Online -9.4% (30) -41% 0.6% 7 2% 6% take rate, 10% margin

5. ONLINE GAMES 32.2% 46 63% 38.4% 106 27% Tencent, Netease, Changyou Mobile 11 15% 43 11% PC+browser 35 47% 63 6%

6. Cloud computing -20.0% (11) -15% 15.0% 19 5% Alibaba, Baidu, Tencent

Total, ex finance 1.4% 74 86% 2.9% 393 83%

7. FINANCE 0.1% 12 14% 0.2% 80 17% Alibaba, Baidu, Tencent, JD a. Online payment 0.1% 10 12% 0.1% 33 7% 0.18% take rate, 57% margin b. SME lending 2.3% 2 2% 1.4% 47 10% 9% interest rate, 36% margin (incl. 2.5% credit cost)

TOTAL 86 473

2015 2020E OPM (%) OP Split OPM (%) OP Split Alibaba 607.5% 42 58% 748.4% 141 36% Baidu 19.7% 13 18% 32.8% 55 14% Tencent 40.6% 42 57% 42.1% 112 29% BAT Total 55.2% 97 132% 68.0% 308 78% Source: Company data, Goldman Sachs Global Investment Research.

Exhibit 8: Online advertising has the highest profit pool because of high margin on established business models; internet finance has the highest growth potential due to the lowest online penetration Seven Pillars snapshot, by profit pool size, growth profile, and online penetration 120% Online penetration: 2020E Online Cloud 100% gaming computing

80% Online advertising 60% Online travel 40% Local E-commerce services 20%

0% Online market size Internet CAGR: '15-'20E finance -20% 0% 5% 10% 15% 20% 25% 30% 35%

Note: *Bubble size represents 2020E operating profit pool for each Pillar (see Exhibit 7 for data).

Source: Company data, iResearch, eMarketer, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 8 May 17, 2016 China: Technology: Internet

Who is best placed to benefit? Alibaba, Baidu, and Tencent Online advertising: BAT, via search, social and e-commerce each has a unique ad proposition. For search, Baidu (Buy) demonstrates consistent Paid Click and cost-per-click trends and appears primed for better mobile monetization. With social ad spending in China (Rmb85bn in 2020E) and social mobile monetization, we see Tencent (CL-Buy) as a key beneficiary given its powerful social network asset, Weixin. Merchants place ads on the Alibaba (Buy) platform for traffic acquisition, brand building and customer engagement. What is common across BAT is their exposure to online video, the fastest growing vertical and a major driver of traffic in China. Games: We believe the market may underestimate the overall potential of player vs player games, across PC and mobiles in China, and see growth into 2020E driven by shifting genre and rising ARPU. Tencent remains the market leader in games for its strong distribution capability, IP inventory and control of Weixin. We expect NetEase (Buy) to leverage its strength in game development, while rising uncertainty on game launch plans and increasing competition is likely to negatively impact Changyou (Sell). E-commerce: Alibaba dominates China retail, via a unique monetization proposition that has built up its enormous user base (423mn), and we expect the structural movement from offline to online to continue driving growth in the industry. We believe JD.com (Buy) will remain the second largest e-commerce player given its strong in-house logistics network. Cloud computing: Although we believe cloud computing in China lags the US by four years, we are confident spending on cloud will be one of the fastest growth areas within China internet. Alibaba and Tencent are currently the two largest cloud service providers in China. Online travel: We remain positive on the outlook for China’s online travel market, with resilient travel spending growth and the secular story of rising online penetration. We see Ctrip (Buy) as a key beneficiary given its leadership across business lines and solid margin enhancement along with the ongoing integration with Qunar. Local services: Online local services in China are likely to be better exploited by the internet giants, in contrast to other parts of the world. BAT looks well positioned to capitalize on the changing of user habits, enabling them to: 1) capture the trend of spending online across multiple partners, 2) benefit from traffic to payment gateways, and 3) expand the advertising customer base given the number of small merchants coming online. Internet finance: We believe the role of payment solutions offered by internet companies has been underappreciated by the market due to the low take rates (i.e. the commission rate). However, customers are likely to largely come from the existing user bases of BAT, thus these three could make headway in the underbanked China consumer by adding more financials services online. Exhibit 9: Market share in each of the Seven Pillars (2015)

Ecommerce Online Adspend OTA O2O Alibaba, 9%

VIPS, 2% Other, 11% Baidu, Ctrip, 26% Other, 23% 11% JD, 12% Other, 30% Alibaba, 27%

Tuniu, 1% Alibaba, 76% Other, 73% Sina, 2% Meituan Baidu, 28% Dianping, 57% Sohu, 3% Netease, 1% Tencent, 9%

Online games Cloud Alibaba, 3% Internet Finance Tencent, 2%

Other, 40% Others, 33% Tencent, 45% Alipay, 48%

Other, 95% Tencent, 20% Netease, 13% Changyou, 3% Source: iResearch, Analysys, Company data.

Goldman Sachs Global Investment Research 9 May 17, 2016 China: Technology: Internet

The Seven Pillars of China Internet

The Seven Pillars of China Internet

In this section, we present our seven key pillars for investing in China Internet 1. Games: China, living in a virtual world

2. Online advertising: Social, online video and search are growth engines

3. E-commerce: 3x increase to US$1.5tn by 2020E

4. Online travel: A US$200bn opportunity by 2020E

5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E)

6. Internet finance: Tapping the underbanked China consumer; a US$5.4tr opportunity (2020E)

7. Cloud computing: A ~US$20bn opportunity (2020E)

Exhibit 10: Seven long-term pillars of the China Internet opportunity

Notes: TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. CAGR is for 2015-2020E (in USD). Top 2 players is by market share. For RMB version please see Appendix 5.

Source: iResearch, eMarketer, NBS, CNNIC, Analysys, Wind, Sina news, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 10 May 17, 2016 China: Technology: Internet

1. Games: China, living in a virtual world

Tencent We believe the market has underestimated the overall potential of player vs player games (PVP), across PC and mobiles in China. We stay bullish on the games sector with mobile likely to overtake PC in 2016 and we believe it will drive growth into 2020E on the back of Others shifting game genre and rising ARPU. We see Tencent (CL-Buy) remaining as the market 27% leader given its strong distribution capability, IP inventory and control of the dominant Online Cloud games social network in China. NetEase (Buy) leverages its strength in game development while 1% Online 55% ads we see rising uncertainty for Changyou (Sell) concerning the game launching plan and 17% competition.

Netease Online games were the first major internet vertical to be successfully monetized in China, predating both advertising and e-commerce with the launch of the first online game in

Others 2000. This segment remains the largest revenue contributor for the Chinese internet giants, Online 16% and accounted for 55% of Tencent’s 2015 revenues. ads 8% Online games 76% Console ban and broadband penetration drove mass adoption Around early 2000, online games in China took a turn away from the then prevalent trend in Korea, Japan and the US—the rise of console-based games—due to a combination of Note: Data shown is revenue split in 2015. factors. These included the high price of consoles, government regulations banning Key beneficiaries consoles, and the prevalence of piracy. The lack of consoles led to a greater concentration in China of online-based games than in other markets.  Tencent (CL-Buy): World’s largest online Gamers initially went to internet cafes to play time based games, the access for which was gaming company, with a typically Rmb1/hour in 2005. The rollout of affordable broadband in China brought gaming strong position in mobile games in China back home. Another China-specific dynamic is that the online experience can provide on account of Weixin children with the sought after social experience through playing massively multiplayer online role-playing games (MMORPG).  NetEase (Buy): Leveraging game development strength China, a market where hard core PC games dominate Tencent is currently the largest games publisher in China and one of the largest in the world. Publishers are responsible for marketing and distribution and, in a few instances, the funding of the games. The bigger the publisher, the greater the reach it offers the game developer. Game developers on the other hand come up with the ideas for games, which the design team then implements by working with the artists and the programmers.

In the early stages of the gaming industry in China (early 2000), game titles were sourced from abroad; the most popular included titles from neighboring Korea, such as Legend of Mir and World of Legend. Korea dominated the China Top Ten list in 2003-04. China remains a market with hardcore gamers like Korea, but in contrast to Japan where the story and art are given more weight by the gamer.

To tap into the China mass market, however, cultural nuances need to be factored in, especially for role playing games (RPG). William Ding, founder and CEO of NetEase, said “For Chinese people, home grown games are like tea, imported ones are like coffee” (Source: Asia Times), implying that local Chinese people prefer games which incorporate Chinese cultural aspects. The most popular games in the market growth phase (post 2003) were localized and included Fantasy Westward Journey (FWJ - NetEase), Tian Long Ba Bu (TLBB, Sohu) and ZhuXian (Perfect World). FWJ is based on a 16th century Chinese classic, TLBB finds its inspiration in a martial arts book, and ZhuXian was adapted based on Chinese culture.

Goldman Sachs Global Investment Research 11 May 17, 2016 China: Technology: Internet

During this early period, the freemium gaming models caught on as gaming companies broadened their user base via existing games with monetization through the sale of virtual items offered to enhance game play. This strategy was pioneered by Shanda Games with Legend of Mir 2. The industry witnessed gamers paying via prepaid cards sold by the gaming companies for time-based games as well as for products sold in freemium games.

Since 2012, the most successful PC games have remained well entrenched, and it has become harder to launch new games successfully. Established games such as the world’s most popular game, League of Legends, are complex, with hundreds of characters, each with multiple and changing abilities. The time invested in these socially-engaging games is the reason for their stickiness.

Exhibit 11: Global Gaming Revenue Comparison – Tencent continues to dominate the Top 10 ranking

Gaming revenue (US$mn) % yoy Mkt. share Incr. sh. COMPANY 2013 2014 2015 14/13 15/14 2013 2014 2015 2014 2015

1 Tencent 5,231 8,061 10,270 54% 27% 11% 16% 16% 53.3% 19.1% 2 Microsoft* 4,876 5,029 6,839 3% 36% 11% 10% 11% 0.3% 2.9% 3 Sony* 4,739 5,127 5,793 8% 13% 10% 10% 9% 0.8% 1.1% 4 Activision Blizzard 4,583 4,401 4,665 -4% 6% 10% 9% 7% -0.4% 0.4% 5 Apple* 2,373 3,479 4,384 47% 26% 5% 7% 7% 2.2% 1.4% 6 EA 3,661 4,109 4,273 12% 4% 8% 8% 7% 0.9% 0.3% 7 Google* 1,385 2,369 2,961 71% 25% 3% 5% 5% 1.9% 0.9% 8 NetEase 1,353 1,601 2,876 18% 80% 3% 3% 5% 0.5% 2.0% 9 Warner Bros - 1,593 2,214 NM 39% 0% 3% 4% 3.1% 1.0% 10 King.com - 1,786 2,000 NM 12% 0% 3% 3% 3.5% 0.3%

Note: *Data from Newzoo.

Source: Company data, Newzoo.

The next leg for China gaming: US$41bn market by 2020E China surpassed the US as the largest gaming market in the world for the first time in 2015 (source: Newzoo) and we expect it is on track to double in revenue from Rmb144bn (US$22bn) in 2015 to Rmb277bn (US$41bn) in 2020E, a 14% CAGR. This implies that China could account for 41% of the global gaming market by 2020.

Exhibit 12: US$41bn market potential for China’s online games

2016E US$27bn 2020E US$41bn

Web, Web, 7% 11% PC client, PC 22% client, 35% Mobile, 47% Mobile, 53%

Source: iResearch, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 12 May 17, 2016 China: Technology: Internet

Exhibit 13: Global gaming market Asia-Pacific, and in particular China, is the largest gaming opportunity in the world

EASTERN EUROPE Rev $2.7bn +16%YoY 138mn Players Avg spend $19.6

WESTERN EUROPE Rev $15.6bn +1%YoY 200mn Players NORTH AMERICA Avg spend $78 Rev $23.8bn +7%YoY 195mn Players Avg spend $122

ASIA PACIFIC MIDEAST&AFRICA Rev $43.2bn LATIN AMERICA Rev $1.9bn +18%YoY Rev $3.9bn +35%YoY 826.5mn Players +16%YoY 230mn Players Avg spend $52.3 185mn Players Avg spend $8.3 Avg spend $21.1

Note: Revenue data in US$ as of 2015. Players data as of 2014.

Source: Newzoo, Goldman Sachs Global Investment Research.

Business segments

PC client-based games iResearch expects only single digit growth for PC games in the coming three years in China, with PC-client games a shrinking proportion of overall online games. Despite this tepid rate, we believe PC client-based games still have strong monetization potential, reflecting the highest paying ratio and ARPU for PC client-based games, the longer life cycle of gamers, and higher entry barriers relative to other segments. Multiplayer Online Battle Arena Games (MOBA) has emerged as an important segment of PC games and League of Legend remains the most popular title globally according to Newzoo (February 2016).

Exhibit 14: Revenue of PC client-based games in China Exhibit 15: Market share of PC client-based games by distribution channel (2015)

Rmb bn PC online game % of overall game revenue 90.0 80% 80.2 75.6 77.8 80.0 72.6 70% 69.1 Others, 16% 65.8 Changyou, 70.0 62.2 60% 58.6 4% 60.0 48.5 50% 50.0 40% NetEase, 15% 40.0 Tencent, 65% 30% 30.0 20.0 20% 10.0 10% 0.0 0% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Source: iResearch. Source: Analysys.

Goldman Sachs Global Investment Research 13 May 17, 2016 China: Technology: Internet

Mobile games Mobile games growth is likely to slow down from a high base in China on intense competition due to low entry barriers, in our view. According to TalkingData, the number of mobile game content providers expanded from 13,000 in 1Q14 to 31,800 in 4Q15. Nevertheless, we expect the migration of successful PC genres to mobiles will continue.

In 2015, MMORPG mobile games contributed 29% of new title releases according to TalkingData (see Exhibit 17). Some of the well celebrated PC IPs made successful transitions into mobile, namely: Fantasy Westward Journey (NetEase), Westward Journey Online (NetEase), The Legend of MIR2 (Tencent) and MU Origin (XiaoMi). Media based (internet novel/movies/TV drama) IP titles also gained popularity, especially during the concurrent broadcast period but with an inherently shorter life span. RPG game yields higher pay rates than other genres due to strong engagement (see Exhibit 16 ), and if they are based on prevailing IP then they are likely to have a prevailing audience even though this may not always guarantee success.

Major developers and publishers have announced 2016 new game pipelines focusing on RPGs. At the “Tencent UP 2016” conference on March 25, 2016, the company announced it would be launching more than 30 mobile games this year. Of the 12 unveiled titles, 6 are premium IP-based RPG games: ZhengTu (Giant Interactive, PCU 2mn in May 2008), TLBB Mobile (Changyou), ZhuXian (PerfectWorld) JianXia (Kingsoft), The World of Legend (Shanda) and YuLongZaiTian (In-house). Except for NetEase, all major publishers have stated they are willing to provide Tencent at least one game title.

NetEase plans on bringing more than 10 IP-based new RPG titles to the market in 2016. Changyou is going to release the revamped TLBB mobile game later this year, relying on Tencent for publication. As the competition intensifies, game developers are adopting a more prudent approach rather than rush launching to market like in the past.

Exhibit 16: iOS mobile game pay rate by genre in China Exhibit 17: New mobile game releases by genre in 2015 …steady up trending… …RPG leading the way…

5.5% RPG Board game Action TCG Board game Others 2% 1% 5.0% Casual RPG 4.5% 15% 29%

4.0% Action 15% 3.5%

3.0% Card game Strategy 16% 22% Jul-15 Oct-15 Jan-15 Apr-15 Jan-16 Feb-15 Mar-15 Jun-15 Feb-16 Sep-15 Dec-15 Nov-15 May-15 Aug-15

Source: TalkingData. Source: TalkingData.

Goldman Sachs Global Investment Research 14 May 17, 2016 China: Technology: Internet

Exhibit 18: Mobile game player average monthly Exhibit 19: Mobile game player average playing time spending distribution distribution …higher spending as mid-hard core games rise… …playing longer hours…

50% 40%

45% 2014 2014 35% 2015 2015 40% 30% 35% 25% 30%

25% 20%

20% 15% 15% 10% 10% 5% 5%

0% 0% RMB100 <30mins 30-60mins 60-120mins 120-180mins 180-300mins >300mins

Source: iiMedia Research. Source: iiMedia Research.

Sports genres (FPS – First-Person Shooter, MOBA – Multiplayer Online Battle Arena, TCG – Trading Card Game) were ranked highly on the AppAnnie ranking table throughout the past year. WeMoba, HeroMoba, WeFire, CrossFire, West Arena, HearthStone and FightForFreedom are some of the most popular sport games. iResearch estimates there were 100mn mobile sports gamers in 2015 and that market could reach RMB24bn, representing 16% of mobile game revenue, in 2018E.

Exhibit 20: Mobile sports games market size Exhibit 21: Mobile sports gamers

(Rmb bn) Mobile eSport % of mobile game (mn) Mobile eSport population % YoY growth 30 18% 200 25% 16.0% 16% 180 22% 25 21% 14.4% 14% 160 20% 13.3% 19% 140 20 12.5% 12% 120 15% 10% 15 100 8% 80 10% 10 6% 60 4% 40 5% 5 20 2% 100 122 148 175 7 121824 - 0% - 0% 2015 2016E 2017E 2018E 2015 2016E 2017E 2018E

Source: iResearch. Source: iResearch.

As players are getting more sophisticated, and with the growing MMORPG and the broader sports genres, we see higher ARPU and longer average life-span driving future industry growth. In our view, more traditional PC players will join the arena while many small/medium developers are likely to fall by the wayside given limited resources for R&D and sales & marketing. We expect industry consolidation will be gradual, witnessed in the distribution channels first and then among publishers and game developers.

Goldman Sachs Global Investment Research 15 May 17, 2016 China: Technology: Internet

Exhibit 22: Revenue of mobile games in China Exhibit 23: Market share in China of mobile games by distribution channel (2015)

Rmb bn Mobile games revenue

250.0 63.1% 65.1% 70% % of overall game revenue 60.5% 56.7% 195.7 60% 200.0 49.9% 174.7 50% 151.9 39.2% 150.0 Tencent, 38% 125.2 40% Others, 45%

25.0% 100.0 91.2 30% 16.6% 13.1% 56.3 20% 50.0 27.6 10% NetEase, 8.8 14.8 15% 0.0 0% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Changyou, 2%

Source: iResearch, Goldman Sachs Global Investment Research. Source: Company data, iResearch.

Web games We expect the market position of web games will continue to be marginalized as they are not comparable with PC client-based games in terms of gamer-play experience. In addition, the traffic migration away from PC has magnified the disadvantage of web games to mobile games. The distribution channels are increasingly consolidated while developers are still highly fragmented. The overseas market is the new focus. In 2015, self-developed web games overseas revenue grew 68% to US$1.6bn, according to iResearch.

Exhibit 24: Revenue of web games in China Exhibit 25: Market share in China of web games by distribution channel (2015)

Rmb bn PC browser/web games revenue 35.0 % of overall game revenue 20% 18% 30.0 18.7% 17.7% 16% 15.1% 24.3 24.8 25.0 23.0 23.6 Others, 26% 21.7 22.3 14% Tencent, 30% 14.6% 20.7 QuYou, 2% 20.0 12% 15.8 12.2% 10% BaiduGame, 15.0 10.4% 9.4% 8% 3% 37Game, 17% 9.8 8.8% 8.2% 10.0 6% KaiYing, 3% 4% YY, 3% 5.0 ChuangSi, 2% 3% 0.0 0% YouZu, 4% 4399.com, 5% 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E Qihu360, 4%

Source: iResearch, Goldman Sachs Global Investment Research. Source: Analysys.

Goldman Sachs Global Investment Research 16 May 17, 2016 China: Technology: Internet

Next sweet spots: eSport and VR eSport (a form of sports which involves electronic systems) globally is growing rapidly and it plays a strategically important role in strengthening player engagement and community formation. This is apart from it generating derivative revenues from sideline business (ticket sales, advertising, broadcasting license, toys, etc). Newzoo expects global revenue to grow from US$325mn in 2015 to US$1,072mn in 2019.

To put these numbers in perspective,

 The crowd-funded prize pool of 2015 DOTA 2 championship exceeded US$18mn, up from US$10mn in 2014, and roughly half of the 2015 Wimbledon Championship prize pool.

 Total viewership of the 2014 League of Legends grand final was 27mn, comparable to the 2014 NBA finals viewership of 18mn.

In China, eSport was first recognized as the category no. 99 sport by the General Administration of Sport in 2003 and the Chinese National team was created in 2013. In 2014, YinChuan (in China) was established as the permanent host city for World Cyber Arena (WCA), the successor to World Cyber Games (WCG).

Tencent hosts the Tencent Game Arena Championship series for the 30 games they operate based on its TGA platform and broadcasts through LongZhu.tv channel (one of the top 4 eSport broadcast platforms). In March 15, 2016, Tencent invested RMB400mn in DouYu, another one of the top 4 eSport broadcast platforms. Operating on a smaller scale and lacking the vast social network audience base, NetEase works with Blizzard to host eSport competitions for licensed titles such as Hearthstone and StarCraft.

As the world’s largest game company, Tencent is acting early in order to establish industry standards and ecosystem for virtual reality (VR), which is the potential next game platform generation after PC and smartphone. To attract partner developers, Tencent leverages its Weixin/QQ user account network, distribution channel, and TenPay payment system as a strong monetization solution proposition. It has released VR SDK (Software Development Kit) 1.0 and hardware components (ministration, headsets and PC accessories) for partner developers to facilitate the content development.

Exhibit 26: eSport player population in China In Rmb

(mn) eSport player population % YoY growth 2,000 40%

1,800 35% 35% 1,600 30% 1,400 27% 1,200 25% 25% 22% 1,000 20%

800 15% 600 10% 400 200 5% 730 980 1,250 1,550 1,900 - 0% 2014 2015 2016E 2017E 2018E

Source: iResearch.

Goldman Sachs Global Investment Research 17 May 17, 2016 China: Technology: Internet

Exhibit 27: Worldwide, top mobile games (Mar 2016) Exhibit 28: China, top mobile games (Mar 2016) iOS + Google Play iOS (<25% in China) # By Revenue # By Revenue 1 Clash Royale Supercell 1 Fantasy Westward Jouney Netease/Garena Online 2 Monster Strike Mixi/Tencent 2 Westward Journey Online Netease 3 Clash of Clans Supercell 3 Clash Royale Supercell 4 Game of War ‐ Fire Age Machine Zone 4 Hero Moba Tencent 5 Puzzle & Dragons GungHo Online 5 CrossFire Tencent 6 Fantasy Westward Jouney Netease, Garena Online 6 Naruto Mobile Tencent 7 Clash of Kings Elex Tech 7 We Fly Tencent 8 Candy Crush King, Tencent 8 Legend of Mir 2Tencent 9 Colopl Rune Story Colopl, Morningtec, Sony 9 King of Fighters 98 Ultimate Match Tencent/SmartAlec, OurPalm 10 Disney Tsum Tsum LINE 10 Legend of the Qing Qiu Fox Zilong

Source: App Annie. Source: App Annie. Exhibit 29: Tencent dominates Top 10 mobile games Exhibit 30: ….. as well as Top 21 iOS – Tencent has 6 of Top 10 titles iOS – Tencent has 10 of Top 21 titles

Top 10: Tencent Top 10: Netease Top 21: Tencent Top 21: Netease

9 16

8 14 7 12 6 10 5 8 4

3 6

2 4

1 2 - 5-Mar 5-Apr 5-May 5-Jun 5-Jul 5-Aug 5-Sep 5-Oct 5-Nov 5-Dec 5-Jan 5-Feb 5-Mar 5-Apr 5-May - 5-Mar 5-Apr 5-May 5-Jun 5-Jul 5-Aug 5-Sep 5-Oct 5-Nov 5-Dec 5-Jan 5-Feb 5-Mar 5-Apr 5-May

Source: App Annie. Source: App Annie.

China IP going global The Chinese gaming companies’ past strategy was to bring global titles to China. With the recent success of domestically produced mobile games, companies are looking at international opportunities for their ‘made in China’ games. Tencent also acquired a 14.6% stake in San Francisco-based game developer Glu Mobile in April 2015 for US$126mn. In December 2015, Tencent announced a partnership with Glu Games to distribute its successful Chinese games to the rest of the world. Tencent’s other investments in US game developers include Riot Games, Activision Blizzard (which acquired King Digital) and Epic Games - the creator of Unreal Engine, a popular game engine for VR games.

Exhibit 31: Overseas market size for Chinese online games

(US$mn) China developed online game overseas sales % YoY growth 6,000 250%

219% 5,000 200%

4,000 150% 3,000 100% 2,000 69% 72% 58% 50% 1,000

570 1,820 3,080 5,310 - 0% 2012 2013 2014 2015 Source: iResearch

Goldman Sachs Global Investment Research 18 May 17, 2016 China: Technology: Internet

2. Online advertising: Social, online video and search are growth engines

Baidu We believe social advertising, online video, and search are the three growth drivers for Online the online advertising industry into 2020E. For search, Baidu has demonstrated consistent video Paid Click and cost-per-click trends with market leaders Google and Yandex. Baidu looks 8% primed for better mobile monetization as the gap between mobile and desktop cost-per- O2O Online 6% click narrows. Given China’s large social media user base, we expect social ad spending ad to reach RMB85bn in 2020 with mobile ad spending becoming an important theme in 86% advertising. Applying Facebook’s successful social mobile monetization, we believe Tencent could benefit most given its powerful social asset, Weixin. Lastly, online video is the fastest growing vertical and major driver of traffic in China. iQiyi (Baidu owned), Youku (Alibaba owned) and Tencent are the top three players in mobile online video. Alibaba Overall, we are positive on Tencent (CL-Buy), Baidu (Buy), and Alibaba (Buy), given their exposure to aforementioned growth engines. Others 19% Cloud Online 3% ad Commis 48% Advertising spend migrates to the internet and now mobiles sion & others Consistent with the rest of the world, online advertising continues to take a growing share 30% of total media ad spend. This category surpassed TV in 2014. China total online ad spending was Rmb210bn (US$33bn) in 2015, or 45% of total media spending, and as shown in Exhibit 33 is on track to exceed more than half of total ad spend in China in 2017. Note: Data shown is revenue split in 2015. Baidu ad revenue is net of intersegment The declining nature of advertising spending on traditional media gives us confidence that elimination. advertising spend on digital will continue to rise.

Key beneficiaries Within digital, the fastest growing segment is mobile ad spending. We forecast this  BAT (all rated Buy): Via segment will grow 62% in 2016E to Rmb153bn (US$23bn), and will be captured by ad search, social and spend on search/display and social. By end 2016, we expect mobile will capture more than ecommerce, each has a half the total online advertising spend, overtaking TV as a standalone category. unique ad proposition. What is common is their exposure to video.

Exhibit 32: State of the Nation – China’s economy and internet spending We forecast China online shopping GMV to reach 11% of GDP in 2020E

Rmb bn 2013 2014 2015 2016E 2017E 2018E 2019E 2020E China GDP, nominal (RMB bn) 58,530 63,689 67,940 69,428 74,161 79,040 85,067 91,383 9.8% 8.8% 6.7% 2.2% 6.8% 6.6% 7.6% 7.4% Total retail sales 23,781 26,239 30,093 33,403 36,744 40,051 43,455 46,931 %yoy 13.1% 10.3% 14.7% 11.0% 10.0% 9.0% 8.5% 8.0% as % of GDP 40.6% 41.2% 44.3% 48.1% 49.5% 50.7% 51.1% 51.4% Online shopping GMV 1,893 2,790 3,877 5,079 6,400 7,744 8,983 10,151 %yoy 59.4% 47.4% 39.0% 31.0% 26.0% 21.0% 16.0% 13.0% as % of retail sales 8.0% 10.6% 12.9% 15.2% 17.4% 19.3% 20.7% 21.6% as % of GDP 3.2% 4.4% 5.7% 7.3% 8.6% 9.8% 10.6% 11.1%

Source: CEIC, CNNIC, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 19 May 17, 2016 China: Technology: Internet

Exhibit 33: China advertising spending forecasts

RMB bn 2014 2015 2016E 2017E 2018E 2019E 2020E Total Advertising Market 396 467 553 629 699 770 842 Television 126 133 142 146 147 148 149 Internet advertising 154 210 276 345 411 480 552 Mobile Internet 51 94 153 215 277 340 402 Newspaper 37 35 34 33 31 29 28 Magazine 6 6 6 6 5 5 5 Radio 25 29 33 36 38 39 39 Out of Home 48 54 61 64 67 68 69

YoY growth 17% 18% 18% 14% 11% 10% 9% Television 6% 6% 7% 2% 1% 1% 1% Internet 40% 36% 31% 25% 19% 17% 15% Mobile Internet 346% 85% 62% 40% 29% 23% 18% Newspaper -11% -6% -3% -4% -6% -5% -5% Magazine -6% 1% 1% -8% -2% -4% -4% Radio 14% 15% 15% 9% 5% 3% 1% Out of Home 21% 14% 13% 5% 4% 2% 1%

% of Total Advertising Market Television 32% 29% 26% 23% 21% 19% 18% Internet 39% 45% 50% 55% 59% 62% 66% Mobile Internet 13% 20% 28% 34% 40% 44% 48% Newspaper 9%8%6%5%4%4%3% Magazine 1% 1% 1% 1% 1% 1% 1% Radio 6%6%6%6%5%5%5% Out of Home 12% 12% 11% 10% 10% 9% 8%

Source: eMarketer, iResearch, Goldman Sachs Global Investment Research.

Exhibit 34: China split of online spending forecasts

Total online advertising 2014 2015 2016E 2017E 2018E 2019E 2020E Total internet advertising spend 154.0 209.7 275.6 344.8 410.5 480.3 552.3 % yoy change 40% 36% 31% 25% 19% 17% 15%

Breakdown Ecommerce ads 40.0 59.1 78.8 102.1 123.2 145.5 168.5 Keywords search 52.5 70.9 92.3 114.5 135.9 158.5 181.7 Brand ads 27.4 32.1 40.5 46.2 50.1 55.2 60.8 Video clips 12.3 17.2 23.2 29.7 35.7 42.7 50.3 Rich media 5.1 5.0 5.5 6.6 7.4 8.2 8.8 Text link & email ads 1.2 2.3 1.4 1.0 1.2 1.4 1.7 Classified 3.4 5.2 9.9 13.4 16.4 20.2 24.3 Others 11.9 17.8 24.0 31.4 40.6 48.5 56.3

Breakdown, % of total Ecommerce ads 26.0% 28.2% 28.6% 29.6% 30.0% 30.3% 30.5% Keywords search 34.1% 33.8% 33.5% 33.2% 33.1% 33.0% 32.9% Brand ads 17.8% 15.3% 14.7% 13.4% 12.2% 11.5% 11.0% Video clips 8.0% 8.2% 8.4% 8.6% 8.7% 8.9% 9.1% Rich media 3.3% 2.4% 2.0% 1.9% 1.8% 1.7% 1.6% Text link & email ads 0.8% 1.1% 0.5% 0.3% 0.3% 0.3% 0.3% Classified 2.2% 2.5% 3.6% 3.9% 4.0% 4.2% 4.4% Others 7.7% 8.5% 8.7% 9.1% 9.9% 10.1% 10.2%

Breakdown, % yoy change Ecommerce ads 34% 48% 33% 29% 21% 18% 16% Keywords search 52% 35% 30% 24% 19% 17% 15% Brand ads 18% 17% 26% 14% 8% 10% 10% Video clips 56% 40% 35% 28% 20% 20% 18% Rich media 0% -1% 10% 19% 13% 11% 8% Text link & email ads 40% 87% -40% -25% 19% 17% 15% Classified 81% 55% 89% 36% 22% 23% 20% Others 77% 50% 35% 31% 30% 19% 16%

Source: iResearch, Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 20 May 17, 2016 China: Technology: Internet

Improved mobile infrastructure enabling connected smartphones as China is weaned away from its Wi-Fi dependence China’s internet sector is at an inflection point in terms of user behavior due to the strong growth in 4G subscribers, in our view. The 4G penetration is leading to:

 Smartphones that are connected to the internet all the time, unlike Wi-Fi which requires the user to be near a hotspot.  Smartphones with larger screens.  iOS gaining market share as the high end of China Mobile users shift to iPhones, now available on TD-LTE. China Mobile ended 2015 with 1.1k TD-LTE base stations. Its 377mn 4G subs represent 45% penetration of its total mobile subscribers. By the end of the March 2016 quarter, the run rate of 4G additions had accelerated from 520k/day. According to Donald Lu, our Chinese telcos analyst, the company is on track to meet the GS mid-2016 50% penetration target3. Donald expects data tariffs will continue to decline following Premier Li’s recommendation for tariff cuts, a trend that mirrors what we observed with Chinese telecom voice tariffs a decade ago. We expect lower tariffs and cheaper smartphones will drive data usage higher.

Exhibit 35: 4G drives connected smartphone growth Exhibit 36: 4G subscriber additions in China China’s 4G data consumption 5x-10x higher than Wi-Fi, and still a fraction of what is consumed in developed Asia

400 50% ('000) China Mob, 4G cumm. (k) China Mobile 4G 375 30,000 350 (LHS) 45% China Mob. - % LTE (RHS) 325 40% 300 25,000 275 China - % LTE (RHS) 35% 250 30% 20,000 225 200 25% 175 15,000 150 20% 125 15% 10,000 100 75 10% 5,000 50 5% 25 0 0% 0 Nov-14 Nov-15 Jan-14 Mar-14 May-14 Jul-14 Sep-14 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Jan-16 Mar-16 Feb-14 Jun-14 Oct-14 Dec-14 Feb-15 Jun-15 Oct-15 Dec-15 Feb-16 Apr-14 Aug-14 Apr-15 Aug-15

Source: Company data. Source: Company data.

With the LTE rollouts in China, network speeds have surged from 1.4 Mbps and 0.8 Mbps for the uplink and downlink, respectively, to 91 Mbps and 8.3 Mbps. Meanwhile, outdoor speeds have increased by a factor of 50x.

As time spent on smartphones continues to rise, we believe businesses that have a proven ability to generate revenues and profits from smartphone usage will be principal beneficiaries. These include both ad based and subscription based models:

 Paid clicks of search companies gain on the margin in the form of higher amount paid per click, which we believe mostly benefits Baidu.  We expect social networks to gain mobile advertising market share in China, consistent with trends observed globally.  Online video was one of the growth drivers of Google’s traffic growth in 2015, which showcases the growth potential for the online video based advertising revenue of Baidu and Alibaba.  E-commerce companies should gain, in particular those selling apparel as device connectivity is necessary.

3 See ‘China Mobile: Reinstate rating at Buy (CL); still in the sweet spot of 4G adoption’, December 3, 2015.

Goldman Sachs Global Investment Research 21 May 17, 2016 China: Technology: Internet

Social, search, video and classified are driving advertising spend In the section below, we explore the three key areas driving ad spend, i.e., search, social and online video:

1. Search: Baidu’s trends consistent with Google and Yandex The major disconnect in time spent vs. advertising spending is between internet (desktop and mobile) and TV. While internet and mobiles combined account for two-fifths of the general time spent by users in China, these segments account for a seventh of the advertising revenue collected in the country, according to eMarketer.

At Baidu, mobile has been successful, accounting for 52.7% of total revenues in 2015. The gap between mobile and desktop cost-per-click (CPC) continues to narrow, and we expect will be the driver of further improvement in the click through rate (CTR). Management confirmed that mobile monetization continues to improve, narrowing the gap with PCs.

While mobile usage cannibalizes desktop traffic, we believe a search engine’s revenue growth is a function of several factors including: a) commercial coverage, b) CTR, and c) CPC. A useful benchmark is Korea where the number of clicks on mobile and desktop are similar, but the CTR for mobile search is much lower than that of desktop.

We also consider the impact of verticals on CPC trends. We estimate that verticals with the highest CPCs ex-China are finance, insurance and retail, based on the value of the traffic to these segments. In China, the major verticals for ad spend are medical & healthcare, tourism & ticketing, education, and online game. The top five industries contribute approximately 49% of total online marketing revenues in 2015, according to Baidu. The transformation of China to a consumer-based economy and the emergence of internet finance, a high CPC vertical, should benefit search ad spend, in our view.

Exhibit 37: Smartphones drove the acceleration in CPC; Exhibit 38: Baidu’s CPC likely to improve on narrowing of the next stage in China is connected smartphones mobile discount (to desktop) and improved CTR Search Paid Click (PC) growth trends Search Cost Per Click (CPC) trend

Baidu Yandex Google Baidu Yandex Google 60% 20.0%

50% 15.0% 10.0% 40% 5.0% 30% 0.0% 20% -5.0%

10% -10.0%

0% -15.0% 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Source: Company data, Goldman Sachs Global Investment Research. Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 22 May 17, 2016 China: Technology: Internet

2. Social: Applying the powerful Facebook/Google mobile dynamic implies a US$6-7bn advertising revenue opportunity in China Social media in China has more than 500mn users nationwide. Over 40% of under 21 year old users share personal opinions; for those over 21, the percentage drops 5bps. The sharing of photographs is the second most common item shared, followed by dining and travel experiences.

Exhibit 39: China: Content shared via social media by internet users, by age October 2015

45.0% <21 21+ 40.0% 35.0% 30.0% 25.0%

20.0% 15.0% 10.0%

5.0% 0.0% Personal Photographs Dining/travel Humor General Gaming Media article Celebrity Other thoughts knowledge

Source: eMarketer.

With the large user base and broad content coverage, mobile ad spend moving to social platforms has been one of the most powerful themes in advertising. According to eMarketer, social network advertising spend were estimated at US$25.1bn globally in 2015, 15% of which was spent in China (US$3.4bn or Rmb22bn). This represents 10% of total China digital budgets based on our analysis of online advertising market. By the end of 2020, we estimate total social ad spending to reach Rmb85bn in China, or 15.4% of digital budgets, based on ~900mn social network users and ad spend per user of Rmb95 (US$14) in 2020E.

The powerful Facebook/Google mobile dynamic Facebook’s social mobile monetization continues to gain market share in mobile advertising. The company’s December 2015 quarter revenue grew 52% yoy, driven almost entirely by mobile Newsfeed (+82% yoy). Mobile accounted for 80% of the December 2015 quarter advertising revenue vs. 69% a year ago and 53% two years ago. Also, usage intensity continues to inch upward, with a DAU/MAU ratio of 65.2% vs. 63.9% same period a year ago.

In our view, social advertising has the same potential in China. Looking at GS forecasts for the social/search split in the US (i.e. Facebook/Google), we expect Tencent could benefit the most with its powerful social asset, Weixin (a social networking tool that allows smartphone users to send messages and share news, photos, videos and web links). Among the other social assets it owns, Weixin stands out in terms of depth as well as the time spent on it by users. Although we estimate the time spent by user to be as twice that of Facebook, ad loads on Weixin are still a small fraction of Facebook, especially when adjusted for user coverage.4 As the company expects to improve its targeting on Weixin, we expect Tencent to take meaningful share in social advertising.

4 For more detail see ‘Tencent: Weixin: the north star (2); multiple drivers intact; reiterate CL-Buy’ April 13, 2016.

Goldman Sachs Global Investment Research 23 May 17, 2016 China: Technology: Internet

Exhibit 40: The shift of ad spend on mobile to social Exhibit 41: Facebook’s newsfeed vs. Google’s mobile networks is one major theme we see in China internet search revenue Tracking Facebook’s ad revenue vs. Google Facebook vs. Google (in US$bn)

FB Nwsfd./(FB Nssfd + Google Mob. Search) FB - Newsfeed FB / Google 5,000 100% 90% 84% 4,000 77% 80% 63% 66% 62% 66% 57% 3,000 60% 47% 42% 36% 2,000 40% 47% 22% 44% 46% 36% 39% 40% 38% 40% 20% 32% 1,000 26% 29% 18% 0% 0 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15

Source: Company data. Source: Company data.

Exhibit 42: Weixin revenue potential: Benchmarking to Facebook and Google

Rmb mn 1Q15 2Q15 3Q15 4Q15 1Q16E 2Q16E 3Q16E 4Q16E 2017E Mobile search (Baidu) 5,422 7,004 8,262 8,887 7,847 10,508 11,770 12,334 56,913 % yoy 74% 118% 88% 71% 45% 50% 42% 39% 34% Social/Search ad spend based on FB/GOOG 66% 77% 84% 90% 84% 86% 90% 90% 92% Implied Weixin advertising potential 3,573 5,399 6,927 7,976 6,567 9,065 10,576 11,159 52,225 in US$ mn 558 844 1,082 1,246 980 1,353 1,578 1,666 7,795 Annual (US$mn) 3,730 5,577 7,795 @ 50% ad load 1,865 2,788 3,897 @ 25% ad load 933 1,394 1,949

Source: Company data, Goldman Sachs Investment Research.

The Facebook risk Facebook’s December 2015 advertising revenue growth reflected 14% higher MAU and 37% higher ARPU on higher relevancy, the result of successful use of targeting tools and video. The US advertising ARPU for Facebook grew 56% yoy in the three months ending December 2015 and is gaining market share from other media.

For China in particular, we believe the strength of Facebook’s respective business models might be moderately disruptive and the landscape would change to some degree if the Great Firewall of China (GFW) is lowered. WeChat, the dominant social network in China, is currently insulated to some extent from international competitors like Facebook which would need to have its content reviewed by the government to gain access to the sizable China market.

We believe a risk to the Chinese incumbents would be any potential entry of Facebook into China, even in a highly regulated fashion, given the large number of students abroad, the Chinese diaspora worldwide, and their respective local-global social networks. According to WSJ, the Chinese diaspora numbers 40-50mn people in 2014. Conversely, this large diaspora could also work in promoting Chinese companies as they expand internationally, as has been seen by WeChat/Weixin.

Goldman Sachs Global Investment Research 24 May 17, 2016 China: Technology: Internet

Exhibit 43: Chinese diaspora can be leveraged by companies to enter new markets Diaspora is estimated at 40-50mn in 2014

Canada Russia 1.3mn EU 1.0mn 1.4m Japan 0.7mn US 3.4m

Africa ASEAN ~1.0mn 33mn Peru 1.3mn Aus 0.9mn

Source: WSJ.

3. Online video: The quickest growing vertical and major traffic draw In China, online video is a large source of traffic due to the popularity of games and the quality of TV networks. According to Analysys.cn, Youku (Alibaba owned), iQiyi, Sohu and online video app of Tencent ranked No.1, No.2, No3, and No.5 in terms of PC active users in September 2015. Mobile contributed ~50% of the online video ad revenues, and the top three players in mobile (based on 2015 market share) are iQiyi, Youku, and Tencent. In terms of financial performances, Baidu reported iQiyi 2015 revenue at Rmb5.3bn, +84% yoy, yet non-GAAP operating margin widened to negative 45.0% from negative 38.6% a year ago. We believe that while there’s solid growth in revenue, losses will continue in the near to median-term due to fierce competition and heavy investments in content.

In the US, online video has emerged as the driver of traffic. According to Google’s CFO on the quarterly earnings calls in FY2015, YouTube’s robust revenue growth is mainly attributed to its strong video advertising. YouTube’s time watch accelerated 60% yoy in 2Q15, the quickest pace in recent years. While time spent watching YouTube in the living room has doubled in 2015, watch time on YouTube mobile increased by more than 50% yoy in 2Q15, with the average time spent at 40 min/session. Further, YouTube on mobile now reaches more 18-49 year olds in the US than any cable network, according to Google, which we believe explains the 40% yoy growth in advertisers running video ads and the per advertiser spend rising +60% yoy for the top 100 videos in 2Q15.

The monetization model for video is unlikely to change dramatically, in our view, and will remain principally advertising based, with subscriptions continuing to account for less than 10% of revenue. The heavy spending on content suggests that this segment will remain loss making, potentially awaiting industry rationalization.

Online video content strategy The great push to acquire content: Tencent’s overall strategy is to use its hubs (i.e., social and communications) to target and grow spokes. Hubs provide tremendous traffic, which has made Tencent a partner of choice for online vertical companies. Tencent typically identifies a spoke based on a broader user need, including content – online video, literature, online music and publishing – which we think bodes well for both content and app store owners in the longer term as it brings traffic.

Goldman Sachs Global Investment Research 25 May 17, 2016 China: Technology: Internet

Tencent has been ramping up content with channel providers. For content providers, the usage stats on Tencent video may make it far more compelling for them to work with China’s largest social network, and may challenge revenue share deals with independent producers for the rest of the industry, in our view. Also, Tencent’s relatively stronger position in variety shows has worked to its advantage even as Baidu’s iQiyi has been gaining in animated content. User-generated content (UGC) still appears to be difficult to monetize. We highlight that Tencent has expanded its content offering to include sports streaming, with the headline-making 5-year NBA partnership at a cost of US$500mn commencing 2H15. According to the NBA, basketball is one of China’s most popular team sports. iQiyi prioritizes PGC (professionally generated content, including TV shows, movies, etc.), which differs from Youku Tudou which targets an open platform to expand both its PGC and UGC base. iQiyi aims for "high value, high impact" content according to its CEO Gong Yu, as it could attract more traffic to the iQiyi platform. At the same time, both companies have been striving to increase self-produced content. Popular content includes Qi Pa Shuo (talk show) and Xin Li Zui (crime & thriller TV drama) for iQiyi and "Surprise!", Youku's comedy TV drama. Youku Tudou now has over 50% traffic to PGC and UGC; Youku's top 10 independent channels earned monthly advertising revenue sharing ranging from Rmb95k to Rmb746k in June 2015. Exhibit 44: Bringing Hollywood to China: 2015 witnessed a rush to sign up content Chinese deals with Western media content providers Chinese video Western media content platforms • NBA digital partnership, including the rights to live NBA games, and the content surrounding the games. The two companies will jointly manage NBA.com/China. In our model we have built in a cost of US$500mn over the five year period. • The Hollywood Reporter has a multi-year deal with the company across syndicated videos and features. Tencent • Exclusive provider of HBO series • Deal with Warner Music • Deal with Sony • Deal with Fox on videos of National Geographic Channel • Alibaba Pictures i. Licenses content from Lionsgate ii. Partnership with Paramount for Mission Impossible •Youku: Alibaba i. Paramount Pictures: 100 movies from their library to Youku's subscription service ii. Disney: Marvel movies and TV series under an exclusive marketing partnership iii. Adapting western shows including Yes Boss! iv. Deal with Sony • American Film Market to distribute 1000+ movie titles on iQiyi Baidu • Deal to distribute 90 Korean movies on iQiyi • Oriental DreamWorks is a venture with DreamWorks Animation China Media • Global content investment fund with Warner Brothers Capital • CMC also has a JV with TVB - listed HK free-to-air channel which tends to dominate TV ratings in Hong Kong

Fosun Group • Invested in Studio 9 1 of the 2 state-owned film distributors in China (the other is Huaxia Film Distribution) China Film • To retain distribution rights in China for 17 action / animation movies over the next 6 years (total cost Group US$900mn). First film to be produced will be 3D film - Beast of Burden - at a cost of US$20mn and released in 2017 • Deal with Fox • Deal with BBC Sohu • The company with highest number of exclusive play rights of American dramas (76 seasons as of Sep 8, vs. #2 Tencent having 50 seasons) Buy rights of foreign variety shows (especially Korean) and introduce the China version Provincial TV • Zhejiang TV: "Running Man" from Korea, "Voice of China" from Holland stations • Hunan TV: "I Am a Singer" from Korea, etc.

Source: Company data.

Goldman Sachs Global Investment Research 26 May 17, 2016 China: Technology: Internet

The State Administration of Press, Publication, Radio, Film and Television (SAPPRFT) issued new 2015 regulations for streaming foreign TV series and movies under which a screening or distribution license for each foreign TV show or film has to be obtained before airing the program. The applicant has to submit foreign films to SAPPRT for approval. Approval should take about 30 days from submission date. If approved, the applicant will obtain the license and the movie has to display a certification logo at the start of the film (a green screen with a dragon). Movies that are not licensed are prohibited from distribution or broadcasting. The quota for the number of total foreign movies screened in China per year is 34, which has been in place since 2012.

Independent content production on the rise: A growing number of successful content professionals are leaving video companies to set up their own businesses, a recent example being iQiyi’s ex-Chief Content Officer, Ma Dong, who led the production of Qi Pa Shuo. iQiyi’s CEO, Gong Yu, commented that the company had reached an agreement with Ma Dong’s team to purchase future Qi Pa Shuo content. Similarly, we note that Youku announced on August 6, 2015 that it plans to invest Rmb10bn over the next three years to promote independent content production. This is a similar model to YouTube’s Content ID initiative which has 8,000 partners through which Google promotes various genres of popular content with independent content producers. According to Google, the number of such channels earning over Rmb600k/yr is growing quickly. Content is equally fragmented in China, as the verticals have become sufficiently deep.

Online classifieds: US$3.6bn opportunity by 2020E We estimate the market size of China’s online classified sector, and forecast that:

 China’s online classified market will grow to US$3.6bn in 2020E, a 36% 2015-2020E CAGR, which is a superior growth rate compared to most of the established markets like France (5%) and developing markets like Brazil (11%).

 We estimate classified spending as a percentage of private consumption will account for 5bps of the total population and 9bps of the internet population in 2020E. If we include autos, jobs and property, classified spending as a % of private consumption would be 8bps for the total population and 14bps for the internet population in 2020E. For comparison, the range in selected markets (including both established and developing markets) was 6bps-13bps in 2014.

Exhibit 45: Market sizing of online classifieds in China A bottom-up approach: US$3.6bn market size for China’s classified sector in 2020E

Online Classified Market (USD mn) 2015 2016E 2017E 2018E 2019E 2020E 1. General classifiend spending 819 1,481 2,007 2,451 3,011 3,627 %yoy WubaGanji 406 731 1,149 1,676 2,206 2,649 Other 413 750 858 775 805 978 Classified spend / Capita (USD) 0.60 1.07 1.45 1.76 2.15 2.59 Classified spending / Consumer expense 0.02% 0.03% 0.04% 0.04% 0.05% 0.05% Adjusted for internet penetration 0.03% 0.06% 0.07% 0.07% 0.08% 0.09%

2. Autos 367 462 540 618 693 729 3.Jobs 312 352 399 446 459 473 4. Property 672 722 797 872 900 927 Classifieds, incl. Autos+Jobs+Property 2,169 3,016 3,743 4,386 5,063 5,756

Classified spend / Capita (USD) 1.58 2.18 2.70 3.15 3.62 4.10 Classified spending / Consumer expense 0.05% 0.06% 0.07% 0.07% 0.08% 0.08% Adjusted for internet penetration 0.09% 0.12% 0.12% 0.13% 0.13% 0.14%

Source: Company data, Euromonitor, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 27 May 17, 2016 China: Technology: Internet

Exhibit 46: Market sizing of online classifieds in selected markets, 2014 Classified spending as % of private consumption stands at 6bps-13bps

Norway Sweden UK France Brazil Australia New Zealand

Private Consumption per capita, US$ 37,285 26,688 28,925 25,224 6,311 33,834 24,533 Internet penetration 95% 96% 92% 82% 54% 87% 83% Population, mn 5 106564203245 Classified monetization* 11 bps 7 bps 7 bps 7 bps 6 bps 13 bps 13 bps General 1.0 bps 1.1 bps 0.6 bps 0.5 bps 0.4 bps 0.4 bps 0.2 bps Vehicles 3.0 bps 1.9 bps 1.9 bps 1.2 bps 1.2 bps 2.9 bps 5.1 bps Real Estate 2.7 bps 1.6 bps 1.5 bps 2.5 bps 1.0 bps 5.6 bps 3.8 bps Jobs 2.9 bps 1.6 bps 2.1 bps 2.0 bps 2.6 bps 3.4 bps 4.0 bps Other 1.5 bps 1.1 bps 0.6 bps 1.0 bps 0.6 bps 0.6 bps 0.1 bps

Note: *Classified spending as % of private consumption of internet population.

Source: Company data, IMF, ITU, Goldman Sachs Global Investment Research.

Exhibit 47: Classified market We expect classified spend to rise to US$4.5/user for the sample of countries below, vs. US$4.1 for China

Established

France Italy Russia Spain Norway Sweden Poland 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E

Population, mn 64 66 60 61 144 144 46 46 5 5 10 10 39 38 PC per capita (US$) 20,128 21,108 16,800 16,822 3,762 5,585 14,879 16,239 29,525 32,115 21,898 25,097 7,113 8,570 Internet penetration 83% 84% 63% 71% 66% 83% 75% 80% 96% 97% 98% 100% 64% 66% Classified spending per internet user, US$ 15.7 19.2 7.1 10.2 1.9 4.0 6.8 10.3 31.5 36.1 15.6 21.1 3.3 5.8 Classified market, US$ mn 834 1,062 270 445 181 474 234 377 157 192 149 214 82 147

Investment phase Total Brazil Mexico India Indonesia Malaysia Other 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E 2015E 2020E

Population, mn 204 212 121 127 1,276 1,361 255 273 31 34 503 531 2,758 2,908 PC per capita (US$) 4,978 5,693 6,344 7,836 1,115 1,684 1,859 2,506 4,765 6,500 3,303 3,983 3,505 4,208 Internet penetration 57% 66% 50% 61% 19% 27% 19% 29% 69% 72% 41% 46% 35% 42% Classified spending per internet user, US$ 3.0 4.1 4.3 6.4 0.5 1.1 0.8 1.4 2.0 4.4 2.1 3.5 3.3 4.5 Classified market, US$ mn 348 578 256 496 119 420 38 111 44 108 446 868 3,159 5,492

Source: IMF, ITU, Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 28 May 17, 2016 China: Technology: Internet

Exhibit 48: China is one of the largest online classified markets in the world Comparing classified markets

120%

100% Sweden Norway

France 80% Spain Internet penetration, 2015E Russia Poland China 60% Italy Brazil

Mexico

40%

20% India Indonesia

0% 2.0 bps 4.0 bps 6.0 bps 8.0 bps 10.0 bps 12.0 bps 14.0 bps 16.0 bps 18.0 bps 20.0 bps Classified monetization, 2015E

Source: ICT, IMF, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 29 May 17, 2016 China: Technology: Internet

3. E-commerce: 3x increase to US$1.5tn by 2020E

Alibaba China has the largest e-commerce market in the world, and we expect the structural movement from shopping offline to online will continue to drive growth in the industry. Others Within the product categories that have the highest online penetration, we expect online Cloud14% 3% GMV growth to slow down (e.g. apparel), upgrade to take place, B2C business model to obtain a larger market share, and branded products to be preferred.

Ecommerce According to NBS, China’s online retail sales reached Rmb3.88tn in 2015, up 33.3% yoy and 83% represented 12.9% of total retail sales, up from 10.6% in 2014. The number of online shoppers grew 14% yoy to 413m in 2015, reaching 60% of internet users and 30% of the

JD China population, according to CNNIC. Others Despite the headwinds faced by offline retailers in China YTD in 2016, we believe China’s 7% online retail sales are on track to hit Rmb10tn by 2020E, representing a CAGR of 21% from 2015 to 2020.

Among different categories, we believe those with relatively higher online penetrations already will likely see a slowdown in online GMV growth (such as apparel), but the Ecommerce structural change from offline to online will continue, although at a slower pace. In 2015, 93% online apparel sales were up 21.4%, compared with 40.8% yoy growth for online food & beverage sales, according to NBS. Note: Data shown is revenue split in 2015.

Key beneficiaries We believe B2C will continue to outgrow C2C in the next few years and brands will gain market share over non-branded products. In women’s apparel for example, Tao brands  Alibaba (Buy): (those brands originated from Taobao marketplace) dominated Singles’ Day sales on Dominates China retail, via a unique Alibaba in 2013, capturing the first 4 of the Top 5 positions. Two years later in 2015, only monetization one Tao brand was still among Top 5 on the Singles Day. proposition that has built an enormous user base.

 JD.com (Buy): The Exhibit 49: Top Tmall Women's Apparel Store Ranking on Singles’ Day largest direct sales Ranking by store sales on Single’s Day, Tao brands are shaded retailer in China with industry-leading Ranking 2015 2014 2013 logistics capabilities. No.1 Uniqlo Hstyles (韩都衣舍)Inman (茵曼) 韩都衣舍 韩都衣舍  VIPS (Buy): Operates a No.2 Hstyles ( ) Uniqlo Hstyles ( ) unique flash sales No.3 La Chapelle Fashion(拉夏贝尔)Artka Artka 茵曼 裂帛 discount model with No.4 Only Inman ( )Liebo () No.5 Ochirly Bosideng Ochirly strong foothold in the No.6 Vero Moda Ochirly Bosideng (波司登) online discount retail No.7 Liebo (裂帛) To Youth (初语)ONLY space. No.8 Le Teen (乐町) Elf Sack (妖精的口袋) Goelia (歌莉娅) No.9 Inman (茵曼) ONLY Vero Moda No.10 Artka Liebo (裂帛) To Youth (初语)

Source: Ebrun, Company data.

However, we don’t think that the rising brand recognition online will result in the downfall of online retail platforms like Alibaba and JD. Most brands will still need to rely on the major online platforms to compete with other brands. In the mobile era, the likelihood for consumers to install a dedicated App for any given brand is even lower than visiting a brand’s own website, in our view.

Goldman Sachs Global Investment Research 30 May 17, 2016 China: Technology: Internet

Due to the consumption upgrade, we believe more consumers will assign a higher weight on factors other than price when making purchasing decisions. Even for younger consumers that cannot afford established brands yet, the importance of pricing is also decreasing, in our view. Instead, we believe content marketing is becoming more important for lower priced products. In particular, internet celebrities, also known as internet KOLs (Key Opinion Leaders), are becoming very influential when their fans are making purchasing decisions. For example, 5 out of the Top 10 women’s apparel sellers on Taobao marketplace in 2015 were internet celebrities. During the 18 June promotion in 2015, these internet celebrity sellers took up 7 out of the Top 10 spots.

Exhibit 50: 2015 Top Taobao Women's Apparel Store Ranking Ranking by store sales, internet celebrities’ stores are shaded

Rank Store Internet celebrity No.1 Rumere (戎美) No.2 Jupevendue (吾欢喜的衣橱) Zhang DaYI (张大奕) No.3 Mao Gu Xiao Xiang (毛菇小象) No.4 CC Studio (CC Studios 家皮草)CC No.5 Tone Elegancy (小米虫子) No.6 Zhao Da Xi (大喜自制独立复古女装) Zhao Daxi (赵大喜) No.7 Yu MOMO (于momo潮流女装) Yu Mengjiao (于梦娇) No.8 dimplehsu No.9 LIN EDITION LIMIT Zhang Chaolin (张超林) No.10 MIUCO

Source: Ebrun, Company data.

For 2016, the focus for Taobao Marketplace’s development will be community, content and local lifestyle, according to Alibaba’s CEO Daniel Zhang. He also acknowledged the power of internet celebrities on Taobao’s platform.

China’s online retail market to reach Rmb10tn by 2020, 24% CAGR We estimate that China’s online retail market will more than double to Rmb10tn by 2020E from Rmb3.9tn in 2015, representing a CAGR of 21%. Online accounted for 12.9% of total retail in China in 2015, or >14% excluding categories that can’t be sold online, such as fuel and dining. This penetration has been achieved despite only a quarter of the population buying goods online, whereas in the US the figure is currently 52% (active buyers), according to eMarketer. Online retail sales of Rmb10tn in 2020 would account for 22% of estimated total retail sales (or c.30% of addressable categories), and we expect half the population will be shopping online by 2025, on par with the US.

Goldman Sachs Global Investment Research 31 May 17, 2016 China: Technology: Internet

Geographical and category expansion driving growth The increased reach of online retail is being driven by geographical expansion, while category expansion is increasing spending per capita. Internet finance and O2O could help further lower the hurdles. As a result, previously underpenetrated regions (such as lower tier cities and rural areas in China) and product categories (such as Food & Beverage) offer new areas for growth.

 We view BABA and JD as long-term beneficiaries of both geographical and category expansion because they target the general population. BABA and JD together accounted for 88% of the online retail GMV in 2015 and each has unique advantages that create value for both consumers and merchants/suppliers. While we believe others/new entrants could gain traction in niches, we do not believe this will disrupt BABA and JD across product categories.

 VIPS, as the online discount retail leader focused on female customers, appears attractively positioned in a growing niche.

On a global basis, China has the world’s largest e-commerce market. China online GMV reached Rmb3,877bn (US$606bn) in 2015, followed by the US as the second largest market at US$349bn (Exhibit 55). By 2018, the market size of e-commerce in China will be even larger than the sum of the US, UK, Japan and Germany combined.

Exhibit 51: China consumer expenditure increasing… Exhibit 52: …but still low as a percentage of GDP China online consumer expenditure as % of GDP China online consumer expenditure as % of GDP

(RMB tn) Consumer Expenditure % yoy (RHS) China Consumer Expenditure as % of GDP Change yoy (pp) (RHS) 45.00 50.0% 39.0% 38.6% 4.0 39.36 38.2% 38.0% 38.2% 40.00 38.0% 36.04 37.3% 3.0 40.0% 35.00 33.08 36.7% 30.67 37.0% 36.4% 30.00 28.05 2.0 36.0% 35.8% 25.60 30.0% 35.4% 25.00 23.36 21.02 35.0% 34.7% 1.0 18.90 20.00 34.3% 16.78 20.0% 0.9 0.9 0.9 14.03 34.0% 0.7 15.00 20% 0.4 0.4 0.4 - 0.2 33.0% 10.00 (0.3) (0.2) 14% 13% 10.0% 11% 11% (1.0) 10% 10% 9% 9% 32.0% 5.00 8% 9% (1.4) - 0.0% 31.0% (2.0) 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E

Source: Euromonitor. Source: Euromonitor.

Exhibit 53: 413mn people in China shopped online Exhibit 54: …contributing c.13% to total retail sales; (2015)… estimated to reach c.22% (Rmb10tn) by 2020 China online shoppers and as % of internet users Online shopping GMV

Online Shopper (mn) %yoy as % of Internet User (RMB bn) Online shopping GMV as % of retail sales (RHS) 700 78.0% 15,000 21.6% 23.0% 69.5% 70.9% 20.7% 66.0% 68.0% 63.5% 600 19.3% 600 572 68.0% 13,000 60.0% 540 17.4% 55.7% 18.0% 503 58.0% 500 48.9% 461 11,000 15.2% 10,151 413 48.0% 12.9% 8,983 9,000 400 361 7,744 13.0% 10.6% 38.0% 302 7,000 6,400 300 8.0% 24.4% 28.0% 5,079 19.7% 8.0% 5,000 3,877 200 14.3% 11.5% 18.0% 2,790 9.2% 7.3% 3,000 5.9% 5.0% 1,893 100 8.0% 3.0% 1,000 - -2.0% (1,000) -2.0% 2013 2014 2015 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2016E 2017E 2018E 2019E 2020E

Source: CNNIC, iResearch. Source: NBS, iResearch, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 32 May 17, 2016 China: Technology: Internet

Exhibit 55: China is the world largest online retail Exhibit 56: …and is likely to have the highest online market… shopping penetration (as % of total retail) in 2016-18E Comparison of online retail market size globally (US$bn) Online shopping penetration comparison globally - 200 400 600 800 1,000 1,200 1,400 US$ bn 20.0% 19.3% 313 China 264 18.0% 17.4% 2013 70 China 62 52 16.0% 15.2% US 450 306 US 2014 82 14.0% 71 12.9% UK 63 UK 606 12.0% 349 10.6% 2015E 94 Japan Japan 79 10.0% 73 8.0% 758 Germany 394 8.0% Germany 2016E 104 88 83 6.0% 955 Brazil 443 2017E 115 4.0% 97 92 India 1,156 2.0% 494 2018E 125 106 0.0% 99 2013 2014 2015E 2016E 2017E 2018E Notes: Data for China in 2015 is actual. Notes: Data for China in 2015 is actual.

Source: NBS, eMarketer, Goldman Sachs Global Investment Research. Source: NBS, eMarketer, Goldman Sachs Global Investment Research.

We compare and contrast the business of the four online retail companies under our coverage in the table below.

Exhibit 57: Comparison of the four e-commerce companies under our coverage

Alibaba JD VIPShop Jumei

E-Commerce Model 3P 1P+3P 1P+3P 3P->1P

Calendar 3Q15 3P GMV as % of total GMV 100% 1P+3P 10-15% 17% (49% a year ago)

2015 GMV (China) as % of China online 76.10% 11.93% 1.64% 0.29% shopping GMV

Commercial real estate T.J.Maxx Sasa (HK) Offline analogy Wal-Mart e.g. Manhattan Mall Ross Boots (UK)

Logistics Centers/warehouses 48% ownership in Cainiao Lease and self-own Lease and self-own Mainly lease

Last mile delivery 3P partners, Asset-light In-house + 3P In-house + 3P 3P partners

Largest category Apparel 3C Apparel Cosmetics

Cross Border B2C Import + Export Import Import Import

Notes: 1P = Direct sales, 3P = Marketplace.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 33

May 17, 2016 Goldman Sachs Global Investment Research Exhibit 58: From net GMV to non-GAAP net profit How Rmb100 spent by a consumer flows to the bottom line (calendar 2015, net GMV indexed to 100)

Actual Alibaba JD Vipshop Jumei GSe Tmall Taobao 1P 3P GMV 55.46 77.87 70.46 57.75 (Net GMV indexed to 100) Total GMV = 133.38 Total GMV = 128.21 - 25% unpaid orders & return items - 22% unpaid orders & return items Tmall Taobao 1P 3P 1P 3P 1P 3P 41.60 58.40 54.96 45.04 94.00 6.00 85.02 14.98 Net GMV - VAT & surcharges @ 9.3% take rate - VAT & surcharges @ 23.5% take rate - VAT & surcharges @ 13.6% take rate (indexed to 100) China Retail - Allowance & surcharges 100 @ 4% take rate

China Retail Revenue Other Revenue 1P Revenue 3P Revenue 1P Revenue 3P Revenue 1P Revenue 3P Revenue = 3.97 = 0.81 = 44.69 = 4.2 = 78.84 = 1.41 = 71.31 = 2.03

Revenue & Gross Profit (Net GMV indexed to 100) Revenue = 4.78 Revenue = 48.89 Revenue = 80.25 Revenue = 73.34

Gross profit = 3.47 Gross profit = 6.99 Gross profit = 19.33 Gross profit = 19.2

----

Sales & Marketing 0.44 Fulfillment 4.00 Fulfillment 7.26 Fulfillment 10.91

---- Product 0.30 Sales & Marketing 2.09 Sales & Marketing 4.08 Sales & Marketing 7.50 Development SG&A ---- (Net GMV indexed to 100) General & 0.23 Technology & Content 0.88 Technology & Content 1.66 Technology & Content 1.58 Administrative --- General & General & General & 0.60 2.18 1.30 Administrative Administrative Administrative

Non-GAAP OP = 2.5 Non-GAAP OP = -3.21 Non-GAAP OP = 5.3 Non-GAAP OP = -2.1 Profits (Net GMV indexed to 100) Non-GAAP NP = 2.26 Non-GAAP NP = -0.59 Non-GAAP NP = 4.27 Non-GAAP NP = -2.77

Gross Profit ex fulfillment 3.47 2.99 12.07 8.28 (Net GMV indexed to 100) China: Technology: Internet

Note: All data as of 4Q15, except Jumei which is as of 3Q15.

Source: Company data, Goldman Sachs Global Investment Research.

34

May 17, 2016 China: Technology: Internet

4. Online travel: A US$200bn opportunity by 2020E

Ctrip The transformation in the travel industry in 2015 was the most dramatic with competition abating post the Ctrip-Qunar integration. We maintain our positive view on China’s online travel market, on the resilient travel spending growth and secular story of rising online penetration. We have a Buy on Ctrip in our China online travel coverage, as we expect it OTA 100% to maintain leadership across business lines, with solid margin enhancement along with the ongoing integration with Qunar.

China’s travel market: outbound is the fastest-growing segment Qunar According to the China National Tourism Administration, China’s total travel market was worth Rmb5.1tr in 20155, with 67% domestic travel, 8% inbound travel and 25% outbound travel (Exhibit 59).

OTA 1. Domestic travel contributed 94% of the total traffic but 67% of the total expenditure 100% because of the low travel spending per trip (US$138) as many trips were short-distance. 2. Outbound travel has the highest average spending (US$1,677 per trip) which includes long-distance transportation costs (e.g. air tickets) and local expenditures. As a result,

Note: Data shown is revenue split in 2015. its expenditure contribution (25%) is significantly higher than its traffic contribution (3%). Besides, we expect China’s outbound travel to grow at the fastest pace in terms Key beneficiaries of total spending among the three segments (20% total spending CAGR in 2015-20E).  Ctrip (Buy): Well 3. Inbound travel contributed 3% to total traffic, 8% to total expenditure in 2015. We positioned in China following sector M&A expect inbound travel to have the lowest revenue growth (3% CAGR in 2015-20E).

Exhibit 59: Domestic travel remains the biggest segment but we see outbound travel growing at the fastest pace China’s travel market at a glance, all data are 2015 unless otherwise stated

Traffic (mn trips) Spending (Rmb bn) Inbound, ASP (US$/trip) Outbound, Inbound, 122, 3% 134, 3% Outbound travel 380, 8% 2,000 1,677 122mn leisure trips, Rmb1.3 trillion spending in 2015 1,600 Average spending at US$1,677/trip in 2015 20% spending CAGR in 2015-20E, according to GSe 1,200 Outbound, ~35% arranged by travel agents 1,266, 25% 800 Domestic, 458 Domestic, Top ten cities (by traffic, 2015): 4,000, 94% 3,420, 67% 400 138 Hong Kong, Seoul, Tokyo, Phuket, Bangkok, Singapore, 0 Taipei, Chiang Mai, Bali, Jeju Island. Domestic Outbound Inbound HK + Macau + Taiwan reprensented 71% of total traffic. Revenue CAGR 25% (2015-20E) 20% 20%

15% 12% 10% Inbound travel Domestic travel 5% 3% 134mn trips, Rmb0.4 trillion spending in 2015 4.0bn trips, Rmb3.4 trillion spending in 2015 0% Average spending at US$458/trip in 2015 Average spending at US$138/trip in 2015 Domestic Outbound Inbound 3% revenue CAGR in 2015-20E, according to GSe 12% revenue CAGR in 2015-20E, according to GSe ~30% arranged by travel agents

Domestic travel trends: Top destinations (traffic, 2014): More local tours, higher diversification. Beijing, Xi'An, Shanghai, Guilin, Guangzhou, Eastern 80% of domestic tours are self-guided. China, Yangtze Gorges, etc. Top destinations: Beijing, Xiamen, Sanya, Shanghai, 81% are Hong Kong/Macau/Taiwan travellers. Kunming, Harbin, Lijiang, Xi'An, Guangzhou, Guilin. Source: China National Tourism Administration, Goldman Sachs Global Investment Research.

5 Includes domestic, inbound, and outbound travel, and covers transportation, accommodation, restaurants, shopping, etc.

Goldman Sachs Global Investment Research 35 May 17, 2016 China: Technology: Internet

Following the below-expectation guidance for both Tuniu (release on February 29 guided 1Q16 revenue to grow 60% yoy at mid-point, 17% below the previous GSe) and Ctrip (release on March 16 guided 1Q16 consolidated revenue at Rmb4.1bn vs. the previous GSe of Rmb4.7bn), the softer-than-expected year-to-date outbound traffic to Europe has caught investors' attention. However, we believe 1Q softness is a one-off, with growth likely to re- accelerate from 2Q.6

Online travel transactions to see 18% CAGR to 2020E Online travel, which includes air ticketing, hotel accommodation, attraction tickets and packaged tours, is the second largest segment in China’s internet sector, with total transactions of Rmb527bn (US$85bn) in 2015. While that is below e-commerce (Rmb3.9tn/US$625bn) total transactions, according to iResearch, it is larger than online advertising (Rmb209bn/US$34bn) and online gaming (Rmb132bn/US$21bn).

We believe China’s online travel market penetration was 37% in 2014 and expect this to rise to 54% (90% for air ticketing, 76% for hotel bookings, 26% for tour, etc.) by 2020E, driving total transactions to more than double to Rmb1.23tr (~US$200bn).

Exhibit 60: Breakdown of China’s online travel market

Online travel Air Hotel Leisure Attraction Total (Rmb bn) Ticketing Booking Packaged Tour Ticketing TAM analysis TAM: 2015 447 314 538 145 1,444

TAM: 2020E 720 416 964 170 2,270

TAM split%: 2015 31% 22% 37% 10% 100%

TAM split%: 2020E 32% 18% 42% 7% 100% Online penetration Online transaction: 2015 343 114 63 7 527

Online transaction: 2020E 648 318 248 16 1,231

Penetration% (2015) 77% 36% 12% 5% 37%

Penetration% (2020E) 90% 76% 26% 10% 54% Growth profile 2015-20E TAM CAGR 10% 6% 12% 3% 9%

2015-20E online transaction CAGR 14% 23% 32% 20% 18%

Average commission rate% 3.0% 12.0% 7.0% 8.0% 5.5%

Incremental revenue 92413147 pie: 2020E-2015 * * Theoretical long-term average gross commission rate, GSe

Source: Jinlv, iResearch, Goldman Sachs Global Investment Research.

We expect the ongoing trend of travel bookings moving online in China should continue due to:

 Rising mobile penetration, driven by 4G subscriber growth raising the number of connected smartphones in the country. For example, we estimate that ~80% of Ctrip’s 4Q15 bookings came from mobile, vs. only ~30% in 4Q13.  Benefits from booking travel online include a broader range of products, more attractive pricing, and online reviews as a useful resource for decision making.  Rising purchasing power of the millennials, who transact online more frequently and currently account for 77% of China’s online travelers, according to CNNIC’s report on the Online Travel Booking Market of China in 2014.

6 See ‘China online travel: Outbound travel to Europe: 1Q miss appears one-off, growth likely to re-accelerate into 2Q’, March 21, 2016.

Goldman Sachs Global Investment Research 36 May 17, 2016 China: Technology: Internet

We summarize the business models of Ctrip, Qunar, and Tuniu, the three Chinese online travel companies’ business models in the chart below.

Exhibit 61: Snapshot of Ctrip/Qunar/Tuniu businesses

Category Business Ctrip (standalone) Qunar Tuniu Revenue mix Hotel * 39% 41% 0% 2015 Air-ticketing 38% 49% 0% Package tour 12% 4% 98% Others 12% 6% 2% Hotel #1 #3 N/A Market share among online competitors Air-ticketing #2 #1 N/A

Package tour Tied #1 Top 5 Tied #1 Total Bookings Rmb bn 233 144 11 2015

OTA (1P), commission; OTA (1P), commission; Hotel N/A Platform (3P), cross-sale Platform (3P), P4P advertising

OTA (1P), commission; Platform, P4P advertising; Business model Air-ticketing N/A Platform (3P), cross-sale OTA (1P), commission

OTA (1P), commission; Package tour Platform, P4P advertising Merchant (1P), commission Platform (3P), cross-sale

Outbound% revenue Value terms 24% <10% 65% contribution, 4Q15 Key financials GP as of GMV 3.4% 1.9% 3.5% 2015 (as of GMV%) Non-GAAP OP as of GMV 0.4% -1.3% -13.0% Non-GAAP NP as of GMV ** 1.4% -1.5% -12.5% * Qunar started merchant-model hotel booking from 3Q15, where they book GMV as hotel revenues ** Ctrip recorded a one-off gain from Tujia deconsolidation in 2015, which is included in non-GAAP net profit

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 37 May 17, 2016 China: Technology: Internet

5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E)

Baidu We first laid out the local services O2O market sizing analysis in Baidu’s 2Q15 earnings review7 when they announced the plan to invest Rmb20bn in O2O; the O2O market Online landscape has changed since then, with one change being the merger between Meituan video and Dianping. Thus we update our thesis of the O2O market in the below section and 8% O2O highlight the associated investment opportunities. 6% Online ad BAT to capitalize on changing user habits, driving local services 86% We believe online local services in China are likely to be better exploited by the internet giants, in contrast to other parts of the world. We see the big three (BAT) as well positioned to capitalize on the changing user habits, which should enable them to:

Meituan Dianping  Capture the trend of spending online across multiple partners, bringing domain expertise. However, the approach varies between Tencent, which partners with the companies it has invested in (e.g. WUBA, Didi), and Baidu which tends to consolidate the invested entities that fulfill the services (e.g. Nuomi, Baidu Food Delivery).

 Benefit from traffic to payment gateways given millions of these high-frequency O2O O2O 100% transactions taking place on a daily basis. Baba, Tencent and Baidu each have Alipay, Weixin Pay/QQ Wallet and Baidu Wallet, respectively, all of which are well positioned to exploit the secular trend of online payment.

 Expand the advertising customer base, as millions of small merchants that are brought

online should over time translate into potential advertising partners.

Note: Data shown is revenue split in 2015. Source: Company data. Overall the O2O vertical could potentially evolve in a manner similar to the e-commerce industry and defy predictions in exceeding global benchmarks, in our view. From the Key beneficiaries industry’s perspective, online demand will effectively enhance asset utilization – in this  BAT (all rated Buy): Well case restaurants, cinemas, spas, food deliverymen, etc – thus improving efficiency for the positioned to capitalize on changing user habits. broader economy due to the relatively inefficient bricks and mortar infrastructure in China, Online local services which is the similar case we saw for e-commerce previously. likely to remain competitive until We forecast China’s total local services spend (offline + online) will double to penetration rises and ~Rmb9.25tn (US$1.4tn) in 2020E from Rmb6tn in 2015, implying 10% of GDP in 2020E. clear winners emerge. Of this Rmb9.25tn, we expect ~57% of the transaction to come from restaurant, food delivery and hotel bookings. We also expect local services online penetration to rise from ~5% (or Rmb324bn (US$52bn)) in 2015 to ~12% by the decade’s end.

Exhibit 62: Local services to be a Rmb9.25tn market by 2020E, or 10% of GDP Food delivery/restaurants form the backbone of local services

2020E Total transaction value, in Rmb bn 2013 2015E 2020E split % Restaurants + food delivery 2,539 3,092 4,866 53% Beauty 335 398 630 7% Hotels 179 245 379 4% Wedding 595 705 1,088 12% Parenting 473 551 852 9% Entertainment/Cinema/Leisure 560 649 1,003 11% Other/Medical/etc. 0 351 438 5%

TOTAL 4,681 5,992 9,256

Source: Goldman Sachs Global Investment Research, iResearch.

7 See ‘Baidu: Building BABA for local services; maintain Buy’, July 30, 2015

Goldman Sachs Global Investment Research 38 May 17, 2016 China: Technology: Internet

The sizable market potential in local services has attracted a large number of players, including both established leaders and start-ups motivated by entrepreneurial spirit. At the same time, equity investors and venture capitalists have also seen the potential of this market and have moved in to support the start-ups. However, we saw a clear distinction in investor sentiment into O2O private companies, before and after July 2015:

1. Stage 1, the “O2O mania”, before July 2015: According to Eastmoney.com, there were 40 projects that gained more than Rmb100mn financing each in 2014, including Jiuxian.com and Koudai.com. In 2014, Baidu/Alibaba/Tencent invested in 94 start-ups, of which 14 companies were in local services, making this the leading sector favored by BAT.

2. Stage 2: the “O2O cool down”, from 2H2015: Financing for private O2O projects saw a significant cool down in part due to the correction in China’s A-share market. Without funding support, many O2O start-ups shut down, which in turn reinforced the competitiveness for established leaders backed by internet giants.

Key players in the industry include:

 Tencent, which can leverage its 200mn users that have bank cards linked to Weixin Pay/QQ Wallet and its broad investments incl Didi in transport, 58.com in classifieds, 58 Home and eJiaJie to home services, MaoYan and WeiYing in cinema, Guahao.com and DingXiangYuan in medical services, etc.

 Baidu, according to Analysys International, Nuomi (Baidu’s subsidiary) had 20% market share in China’s GroupBuy market in 3Q15. According to Sina News on January 25, 2016, Baidu Food Delivery had 13% market share in China’s online food delivery services market in 2015, following E Le Me’s 27%.

 Koubei is Alibaba’s foray into the local services segment, and is a JV with Alipay, the payment company that had 400mn active users as of 2015. Working with Alibaba’s ~300mn mobile MAUs, Koubei targets the fast food segment, restaurants, cafes, food takeout and deliveries from groceries, supermarkets and convenience stores. According to Sina news (January 25, 2016), Koubei ranked No.4 in China’s online food delivery services market in 2015, with 8% market share.

Goldman Sachs Global Investment Research 39 May 17, 2016 China: Technology: Internet

Heavy subsidies will pass, in our view Consumers in China are on the lookout for the best deals across platforms. O2O, in its early stage of growth, is using coupons/subsidies to attract new users and build user habits. This, in our view, is likely to keep the industry landscape fragmented in the medium term. However, we note that competition and primary market financing in this area appeared to turn more rational as previously discussed; as a result, companies are becoming more tactical with couponing/rebates to cultivate the user habits and improve retention thus we believe that over time either the customers will prove to be sticky and need less subsidies, or won't return thus the platforms would stop couponing as a result. Either way, as O2O platforms’ algorithms are able to predict/track user behavior (especially BAT who have leading engineering capabilities), the current subsidies on a per unit basis ought to ease, in our view.

Local services more likely to succeed in China In principle, business models are able to succeed when both parties are better off. The broad local services segment has yet to prove to be successful in the US, as a) it is highly fragmented, b) sales leverage has been low in the past, c) it has been reliant on a large sales force and/or a call center, and d) customer loyalty has yet to be firmly established. Nevertheless, we are seeing pockets of success with food delivery, as seen with JUST EAT (JE.L, CL-Buy, 406.6p as of close on May 13, 2016, covered by Carl Hazeley) which has a broader footprint across Europe, Canada and Australia. Carl Hazeley points out in his recent report that although Western Europe online penetration for takeaways and deliveries is only 7%, penetration exceeds 60% in Denmark, 35% in Canada, 39% in UK (assume 14% take rate, or commission rate), and 22% in Australia8. His view on JUST EAT is predicated on the success that chains have had with going online (Domino’s Pizza UK is already at c.78% based on GSe) and a mid-teens take rate.

Exhibit 63: China lags developed market trends Online food takeout/pickup (% online, 2015)

90%

80% 78%

70%

60% 60%

50%

39% 40% 35%

30% 22% 22% 20% 15%

10% <5%

0% Domino's Denmark UK Canada Australia France Brazil China UK

Source: Company data, Goldman Sachs Global Investment Research.

8 See ‘JUST EAT: JUST too cheap? Raising estimates and price target; reiterate CL-Buy’, March 10, 2016.

Goldman Sachs Global Investment Research 40 May 17, 2016 China: Technology: Internet

We believe prospects for the broader O2O segment in China could surprise the market on the upside given the broad skepticism which we believe was shown by Baidu’s soft stock performance post its 2Q15 announcement of O2O investment (it fell more than 30% between 30 June and 23 September 2015), as well as venture capital investors’ hesitation to invest into O2O start-ups. This is because BAT, as platforms, have large user bases as well as established payment relationships with merchants in several instances. These platforms have a broad reach and a deep understanding of the users as well as their preferences, a seasoned marketing team, and are data driven in target marketing, which raises the probability of transacting with the merchants.

Within local services, we are less enthusiastic about the long-term attractiveness of discount based models, which may bring in more customers in a concentrated period to merchants. This does generate short-term business, but the long term stickiness is not warranted. Also, the risk is that full paying regular customers are highly likely to switch to the discounted product. Last, there is limited value in data when it’s not sticky.

Subsidies offered across the platform to change user behavior have proven to work in the broader internet space, as we witnessed when app developers were paying for preinstalls, for example. Baidu’s algorithms detect stickiness, and we have begun to observe, across a small sample, lower subsidies for optimal utilization of resources across a plethora of local services.

Goldman Sachs Global Investment Research 41 May 17, 2016 China: Technology: Internet

6. Internet finance: Tapping the underbanked China consumer; a US$5.4tr opportunity (2020E)

Alipay The role of payment solutions offered by internet companies has been underappreciated by the market, in our view, due to the low take rates. However, it is the large user base of these services from Alibaba, Tencent and Baidu who are the customers we expect the three companies to target as more and more financials services are offered online to an underbanked China Consumer. Internet finance 100% Creation of world-leading online payment platforms Solutions such as Alipay have been at the core of China’s widespread adoption of e- commerce as they have overcome the trust issues that prevail when transacting online. These symbiotic relationships between the transactions and payments in China have Tencent resulted in the creation of some of the most successful online payment platforms in the world. Cloud 9% Others Online 15% Despite a recent crackdown on improper P2P lending, we believe the platform created by ads Internet the internet giants has been built using solid technology advances and that it could serve 17% finance 4% to meet unfulfilled borrowing demand. In our view this has been done to create the mechanisms to serve the SMEs and consumer banking, segments of the market that have Online been under banked. games 55%

Note: Data shown is revenue split in 2015.

Key beneficiaries  BAT (all rated Buy): Ability to leverage the large user base and omnipresent BAT ecosystem.

Exhibit 64: Consumer leverage much lower than that of Exhibit 65: Smaller bankcard share in China corporate leverage in China Internet players have a closed ecosystem to complete Big growth potential for consumer banking transactions and payment functions in China (as % of GDP) 274 Internet shopping payment volume's share by payment 263 270 Total debts 249 as % of GDP tools in 2013 240 230 220 Bankcard Third-party 211 Corporate leverage 210 197 196 182 164 15% 180 159 161 154 155 156 155 154154 149 142 150 138 139 135 136 LGFV leverage(loan, 122 120124 bond, trust) 114 110 120 101 76% 114 105 97 99 94 95 107 25 90 103 28 109 31 85% 34 Govt. Leverage 11 3 28 31 41 60 107 24 24 26 36 100 13 15 15 16 29 11 12 23 9 29 27 25 24 23 30 7 32 28 30 28 24 25 26 44 22 22 30 35 40 24% 19 23 23 25 27 1 6 8 12 12 14 13 15 15 Household leverage 0 0 1 2 4 6 9

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 US China 2016E 2017E

Source: PBOC, Wind, Gao Hua Securities Research. Source: CEIC, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Goldman Sachs Global Investment Research 42 May 17, 2016 China: Technology: Internet

Exhibit 64 shows that lending by the China’s banks appear to have ignored the consumer, as the government guarantees 75% L/D ratio cap for loans to SOEs. As a result, the credit system for smaller borrowers is still underdeveloped, making money ~10% more expensive for the SME segment.

It is this vast opportunity which technology firms could solve using data mining and analysis expertise, which leverages transaction and/or social behavioral data, for both customer acquisition and better credit analysis. As a result, our banks team estimates the overall loan book could grow to Rmb3.3tn in 2020, representing 1.5% of total social financing, ex-bonds and equities. We forecast consumer and SME loans/payment-related business of the internet companies could generate Rmb47bn (US$7bn)/Rmb33bn (US$5bn) net profits by 2020E.

Two of the most important areas of internet finance are payments and consumer/SME lending.

 Payments: Established payment tools, Tenpay and Alipay, act as high frequency gateways, provide transaction information, and act as a distribution channel. A plethora of transactions provide the basis for credit risk management.

 Lending: BAT leverage their retail and SME client base, strong datamining capability via online transactions, and their established transactions driven ecosystem. Alibaba/Ant Finance and JD both offer SME loans to their merchants and/or suppliers as well as consumer loans to their clients.

Insurance, an emerging area An emerging opportunity for the online giants is online insurance. According to the Insurance Association of China, insurance premiums in 1H15 amounted to Rmb1.75tn, of which online accounted for 4.7%, or Rmb82bn (2014: Rmb86bn). These digital insurance products are offered by 96 insurance companies in China.

BAT’s position in financial services  Alibaba: Alipay is the market leader in online payments based on revenues in 2015 and has strong data mining and risk management capabilities. The company has successfully developed products and platforms.

 Tencent: Gathering retail social information, we think Tencent has the potential to develop O2O payments and financial service for consumers and SMEs in the longer run. Its users can apply for un-collateralized loans of up to Rmb200k, at an interest rate of 0.05% per day. Tencent determines the size of the loan based on customer creditworthiness, which, in turn, is linked to hundreds of points of user data that the company gathers across its multiple platforms. While the credit scores have not been rolled out yet, Tencent uses the unique QQ ID, user behavior and third party data.

 Baidu: While Baidu is relatively weaker in e-commerce transaction/payment functions, its strong search capability could build platforms. An aggressive stance on O2O/local services has resulted in Baidu Wallet’s user numbers exceed 200mn. According to recent press articles, Baidu has also applied for both an internet banking license for Baixin Bank (SCMP, November 19, 2015), a venture with Citic Bank (Sina news, April 21, 2015), and an insurance license with Allianz (SCMP, November 26, 2015).

Goldman Sachs Global Investment Research 43 May 17, 2016 China: Technology: Internet

Exhibit 66: Detailed long-term projects of banks, internet giants’ credit products and payments Predominantly BAT + JD

RMB, bn 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E TSF excl bonds and equity 81,673 96,313 110,612 125,461 142,303 159,272 178,264 199,520 223,311 yoy growth 17.9% 14.9% 13.4% 11.9% 11.9% 11.9% 11.9% 11.9% Bank P/L Bank earnings assets est. 100,500 113,348 130,265 147,752 165,370 185,089 207,160 231,862 259,510 NIM 2.75% 2.68% 2.59% 2.50% 2.41% 2.36% 2.31% 2.26% 2.21% Non-NII income as % of revenue 19.83% 21.2% 22.2% 23.2% 23.2% 23.2% 23.2% 23.2% 23.2% CIR 39.4% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% 38.8% Credit cost 0.61% 0.64% 0.65% 0.73% 0.78% 0.83% 0.88% 0.93% 0.98% Profit 1,239 1,418 1,565 1,692 1,789 1,911 2,036 2,164 2,294 ROAE 19% 19% 18% 17% 16% 16% 15% 14% ROAA 1.35% 1.31% 1.24% 1.17% 1.11% 1.06% 1.01% 0.95% Internet credit products P2P 6 27 83 233 465 698 816 954 1,116 yoy growth 368% 210% 180% 100% 50% 17% 17% 17% as % of TSF excl bonds, equities 0.0% 0.1% 0.2% 0.4% 0.6% 0.6% 0.6% 0.7% Internet giants (mainly BAT, JD) 2 7 23 73 211 550 1,215 2,199 3,321 yoy growth 255% 230% 210% 190% 161% 121% 81% 51% as % of TSF excl bonds, equities 0.0% 0.0% 0.1% 0.1% 0.3% 0.7% 1.1% 1.5% Margin 11% 11% 11% 11% 10% 10% 9% 9% Cost-income ratio 46% 46% 46% 46% 44% 42% 40% 38% Credit cost 0.8% 0.8% 0.9% 1.5% 2.0% 2.5% 2.5% 2.5% Profit 0 1 2 4 8 14 28 47 yoy growth 237% 211% 118% 111% 77% 104% 68% Capital needed 2 7 21 55 121 220 332 as % of bank profit 0.0% 0.0% 0.1% 0.2% 0.4% 0.7% 1.3% 2.0% ROE 23% 35% 26% 20% 16% 16% 17%

Payment Bankcard transaction payment 346,212 423,360 495,331 569,631 646,531 730,580 818,250 908,257 1,008,165 yoy growth 22% 17% 15% 14% 13% 12% 11% 11% Unionpay's POS revenue 76 93 109 125 142 161 180 200 222 Unionpay's profits 31 38 45 51 58 66 74 82 91 Third-party payment 12,900 17,200 23,300 31,200 41,300 52,600 64,172 74,440 86,350 33% 32% 32% 32% 26% 22% 16% 16% As % of total bank card volume 3.7% 4.1% 4.7% 5.5% 6.4% 7.2% 7.8% 8.2% 8.6% Internet giants 4,971 6,967 9,641 13,175 17,568 22,396 27,096 32,727 Relative to bankcard payment 1.2% 1.4% 1.7% 2.0% 2.4% 2.7% 3.0% 3.2% yoy growth 40% 38% 37% 33% 27% 21% 21% Payment fees and idle funds' interest income 10 14 19 25 33 41 49 59 Take rate 0.20% 0.20% 0.19% 0.19% 0.19% 0.19% 0.18% 0.18% Cost-income ratio 30.0% 29.5% 29.0% 28.5% 28.0% 27.5% 27.2% 26.9% Internet giants' payment NPAT 5 8 10 14 19 23 28 33 yoy growth 39% 37% 35% 32% 26% 20% 19% Relative to Unionpay profits 14.2% 16.9% 20.2% 24.1% 28.1% 31.7% 34.2% 36.7%

Source: Company data, PBOC, CBRC, Gao Hua Securities Research, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 44 May 17, 2016 China: Technology: Internet

Exhibit 67: We expect online and mobile payment to grow substantially with higher bank cards penetration Bankcard penetration and online/mobile payment trends

Unit 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Bankcard system Bank card Transaction Amount RMB bn 127,157 165,991 246,763 323,825 346,212 423,360 449,900 517,385 587,232 663,572 Bank card Consumption Volume RMB bn 3,947 6,861 10,430 15,212 20,826 31,830 42,380 52,975 63,570 73,741 -Transfer RMB bn 57,508 87,455 140,487 195,912 206,312 254,120 262,460 299,204 341,093 385,435 -Cash Deposits and Withdraw RMB bn 65,701 71,676 95,846 112,702 119,075 137,410 145,050 165,206 182,569 204,396 yoy 32% 74% 52% 46% 37% 53% 33% 25% 20% 16% POS machine -No. of POS Mn 1.85 2.41 3.33 4.83 7.12 10.63 15.94 18 20 21 yoy 56% 31% 38% 45% 47% 49% 50% 15% 10% 6% Merchant penetration -No. of merchants accepting bankcard payment Mn 1.2 1.6 2.2 3.2 4.8 7.6 12.0 14.2 15.8 16.9 yoy 59% 33% 39% 46% 52% 58% 58% 18% 11% 7% -As % of total merchants % 11.3% 13.7% 17.6% 23.4% 32.8% 46.9% 67.9% 73.8% 75.9% 75.9%

Online payment system 0.20 22% Internet retail shopping RMB bn 128 263 461 785 1,303 1,983 2,817 3,957 5,164 6,043 yoy 129% 105% 75% 70% 66% 52% 42% 40% 30% 17% - Mobile shopping RMB bn 12 69 274 930 1,809 2,835 3,729 yoy 490% 297% 239% 95% 57% 32% - PC shopping RMB bn 773 1,234 1,709 1,888 2,149 2,329 2,314 yoy 60% 38% 10% 14% 8% -1%

Penetration ratio by various consumption channels Bank card consumption as % of retail % 24% 32% 35% 39% 44% 47% 48% 50% 53% 55% sales(excl. property/auto/wholesale) Mobile shopping as % of retail sales % 0.1% 0.3% 1.2% 3.5% 6.3% 9.0% 10.8% PC shopping as % of retail sales % 4.2% 5.9% 7.2% 7.2% 7.4% 7.4% 6.7% Rmb bn, transaction volume 2008 2009 2010 2011 2012 2013 2014 2015E 2016E 2017E Third party players RMB tn 3.00 5.1 8.4 12.9 17.2 23.3 31.2 41.3 52.6 Bankcard merchant acquirer RMB tn 2.40 3.9 6.0 8.9 10.3 12.5 15.0 18.0 21.4 PC payment RMB tn 0.51 1.0 2.2 3.7 5.4 7.4 10.4 14.2 18.5 Mobile payment RMB tn 0.04 0.1 0.1 0.2 1.2 2.9 5.2 8.5 11.9 Others RMB tn 0.06 0.1 0.2 0.2 0.3 0.4 0.6 0.7 0.8

Source: Analysys, PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research.

Exhibit 68: Contrasting the strength and weaknesses of banks vs. Baidu, Alibaba and Tencent (Dec 2015) Traditional banks vs. BAT

Banks Alibaba Tencent Baidu Payment users Alipay 400mn registered users Tenpay/Weipay 300mn+ Baidu Wallet 53mn Other users 407mn active annual shoppers WeChat >600m, Qzone SP MAU 573mn 643mn mobile search active users ecommerce, payments, video, etc. Sticky, Gaming, social, messaging, payments. transaction oriented user base, proven data- Sticky user base, dominant time spent, Search, video, O2O. Behavioral data base, data Traffic based mining skills proven data-mining skills mining capability

Strong B2B, offline B2C, C2C, Economic transactions Strong online B2B, B2C,C2C Some online e-commerce via JD, C2C, O2O Online exposure the smallest of BAT large tickets, investments

Strength: Security, convenience Strong C2C small ticket, convenience, Dominant online, offline transition Payments for big ticket, offline. Weak significant users linked to bank cards. Weak Convenient online payment, but a late entrant successful online B2B Some efforts in O2O, NFC Change in O2O strategy in 2015 O2O push may accelerate following M&A Accelerated O2O spend in 2015

Large data sets (ID, financial, Multi-dimensional data (ID, behavior) across Large data sets (ID, financial, transacitons, Large data sets (ID, financial, transacitons, B2B). Data source/utilization transacitons, B2B). Little on consumer and SME B2B). Little on customer behavior Little on customer behavior customer behavior Search engine with proven data mining skills, but Strong data mining, targeted marketing and Wechat/QQ captures behavior, retail Very limited data mining ID/transaction information missing - ex travel and risk managment presence growing, well positioned in O2O recently O2O

SM E loans, WM P (3rd party), w ith M yBank Financials a key search vertical with potentially WM P (3rd party), some SM E/consumer Deposits, WMP, 3rd parthy to launch more products. Ant Financial owns high CPC. Applied: Internet bank license for Baixin loans. Own 30% of Webank. Zhong An Financial product sale WMP, credit cards, consumer 30% of MyBank. Zhong An Online Property, Bank, in cooperation with Citic Bank. Formed: Bai Online Property, a venture with Ping An and loans, SM E/corp. loans a venture with Ping An and Tencent, An, a digital insurance venture with Allianz and Tencent, announced a year ago. announced a year ago. Hillhouse.

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 45 May 17, 2016 China: Technology: Internet

7. Cloud computing: A ~US$20bn opportunity (2020E)

Alibaba China is the world’s second largest market for IT hardware spending, but is only #7 for software. While we estimate cloud computing in China lags the US by four years, we are Cloud confident that spending on cloud will be the fastest growth area within the China Internet 2% sector. Others Online 38% ad 37% China’s cloud spending growing at a fast pace as it catches up Commis sion & Cloud services are an efficient and economical computing solution that can be scaled up others for a quick time to market, and potentially a way to deliver more innovative solutions. 23% Cloud computing is the on-demand delivery of IT resources and applications via the internet, usually on a ‘pay as you go’ pricing model. Applications range from the simple Tencent sharing of a photograph to business critical solutions. Cloud services allow businesses to scale as they gain access to IT resources in a flexible manner, and at a cost point Cloud determined by usage, and pricing which gains from the sharing of the common 1% Others infrastructure. 27% Cloud computing is the fastest growing segment of IT spending globally, growing at 15% Online CAGR from 2015 to 2020E vs. 1% CAGR in total services IT spending and 2.5% per annum Online games ads 55% in total IT spending (including hardware). The growth in spending on cloud services is due 17% to industries shifting to cloud based services from legacy IT services. Within cloud services, we expect application and infrastructure based cloud services growth rates will be quicker than the overall growth in cloud spending, consistent with recent trends. Note: Data shown is revenue split in 2015. We forecast cloud spending growth to be quickest in China, where we expect 17% CAGR in Key beneficiaries US$ terms over the next five years (Exhibit 69). China growth rates are higher, off a low  Alibaba (Buy): One of base, with switching supported by a major government support for the segment, as well as the largest cloud service providers in China and the lack of legacy systems that tend to slow down the move to cloud in the rest of the is expanding its Aliyun world. cloud service abroad.

 Tencent (CL-Buy): One of the largest cloud service providers in China and plans to operate its Weiyun cloud storage service in the US.

Exhibit 69: Public cloud user spend (in US$ mn) China has the fastest growing cloud spending

15-18E 15-20E In US$ mn 2013 2014 2015 2016E 2017E 2018E 2019E 2020E CAGR CAGR US 69,901 83,000 98,954 116,442 136,910 159,691 182,755 204,685 17% 16% China 5,325 7,039 8,778 10,733 13,468 14,984 16,969 19,005 20% 17% Japan 6,204 6,846 7,388 8,355 9,469 11,174 13,024 14,977 15% 15% France 3,536 4,102 4,240 4,869 5,593 6,436 7,345 8,300 15% 14% Germany 5,387 6,247 6,534 7,445 8,482 9,710 11,093 12,646 14% 14% UK 13,204 15,038 15,914 17,854 20,061 22,595 25,314 28,225 12% 12% Global 131,271 153,911 175,055 203,891 239,260 277,510 317,956 359,291 17% 15%

Source: Gartner, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 46 May 17, 2016 China: Technology: Internet

Cloud computing is a focus area of the government in China (i.e. in the 2016-20 Five Year Plan) and is one of 11 priority technology sectors for the government. The cloud opportunity in China is still nascent, and accounted for only 9% of the US public cloud market in 2015. The driver of growth in cloud services is enterprise demand, and the sharp growth in 4G smartphone take up. By 2019, cloud apps will account for 90% of mobile data traffic, vs. 81% in 2014, according to Gartner.

Exhibit 70: China’s public cloud spending as % of GDP is Exhibit 71: China’s public cloud spending as % of total IT among the lowest globally, at 0.08% in 2015E spending is among the lowest globally, at 2.5% in 2015E China public cloud spending as % GDP China public cloud spending as % of IT spending

US China Japan France Germany UK US China Japan France Germany United Kingdom 0.90% 14.00%

0.80% 12.00%

0.70% 10.00% 0.60%

0.50% 8.00%

0.40% 6.00%

0.30% 4.00% 0.20%

2.00% 0.10%

0.00% 0.00% 2013 2014 2015E 2016E 2017E 2018E 2013 2014 2015E 2016E 2017E 2018E

Source: Gartner. Source: Gartner.

Cloud delivery models There are three different types of cloud services/delivery models, depending on whether the service provisioning includes infrastructure, platforms and software (see Exhibit 72):

 IaaS: Infrastructure as a Service – as customers move to a common infrastructure, IaaS provides access to computing hardware, networking features, computers (virtual or on dedicated hardware), and data storage space. IaaS provides customers with the highest level of flexibility, gives management control over IT resources and is most similar to existing IT departments as well as what developers are familiar with.

– IaaS was a US$16bn market globally in 2015, expected to grow at 28% pa to US$56.3bn by 2020, according to Gartner.

– In China, the market in 2015 was US$103mn, and is expected to grow to US$257mn by 2020, according to Gartner.

 PaaS: Platform as a Service - is designed for agility and provides the total infrastructure required, i.e., both the hardware and the operating system, encompassing resource procurement, capacity planning, and software maintenance. This leaves the customer to focus on the application.

– PaaS was a US$3.8bn market globally in 2015, expected to grow at 16% pa to US$8.1bn by 2020, according to Gartner.

– In China, this segment was US$188mn in 2015, with growth to US$538mn expected by 2020, according to Gartner.

Goldman Sachs Global Investment Research 47 May 17, 2016 China: Technology: Internet

 SaaS: Software as a Service – capitalizes on the move from on-premises licenses- based world to a cloud based offering, where user-end applications are managed and run by the service provider. This in effect is the simplest form of a web-based application. Globally, ERP (enterprise resource planning) and CRM (customer relationship management) dominate the cloud solution offerings.

– SaaS is set to remain as the largest public IT cloud category with revenue projected to grow at 17% pa from US$31.3bn in 2015 to US$69bn in 2018 globally, according to Gartner.

– In China, SaaS revenue is forecast to grow to US$881mn in 2020, from US$321mn in 2015, according to Gartner.

Exhibit 72: Cloud services segmentation demonstration

Infrastructure as a Platform as a Software as a On Premises Service Service Service

Applications Applications Applications Applications

Data Data Data Data

Runtime Runtime Runtime Runtime

Middleware Middleware Middleware Middleware

O/S O/S O/S O/S

Virtualization Virtualization Virtualization Virtualization

Servers Servers Servers Servers

Storage Storage Storage Storage

Networking Networking Networking Networking

Managed by Cloud Vendor

Managed by User

Source: Microsoft Azure.

Goldman Sachs Global Investment Research 48 May 17, 2016 China: Technology: Internet

Exhibit 73: China, US, and Global cloud revenue breakdown

In US$mn China 2013 2014 2015 2016 2017 2018 2019 2020E 15-20E BPaaS 91 95 104 114 128 143 161 180 12% PaaS 95 140 188 246 316 396 480 538 23% SaaS 180 241 321 413 526 657 787 881 22% Cloud Mgmt, Security 100 140 191 255 329 412 512 573 25% IaaS 73 85 103 125 153 188 230 257 20% Cloud Advt 4,786 6,337 7,872 9,581 12,015 13,188 14,800 16,576 16%

US 2013 2014 2015 2016 2017 2018 2019 2020E 15-20E BPaaS 17,874 19,811 22,137 24,707 27,278 30,277 33,441 37,454 11% PaaS 1,091 1,456 1,799 2,166 2,545 2,925 3,337 3,737 16% SaaS 13,025 16,036 19,387 23,159 27,258 31,740 35,818 40,116 16% Cloud Mgmt, Security 1,418 1,852 2,379 2,970 3,578 4,238 4,842 5,423 18% IaaS 4,723 6,630 9,754 14,117 19,360 25,425 31,858 35,681 30% Cloud Advt 31,770 37,214 43,499 49,324 56,892 65,087 73,459 82,274 14%

World 2013 2014 2015 2016 2017 2018 2019 2020E 15-20E BPaaS 35,245 38,180 39,196 42,596 46,486 50,955 55,749 62,997 10% PaaS 2,492 3,293 3,824 4,629 5,468 6,345 7,206 8,142 16% SaaS 22,102 27,172 31,385 37,750 45,077 53,326 61,117 69,062 17% Cloud Mgmt, Security 3,210 4,152 5,011 6,248 7,565 8,983 10,453 11,812 19% IaaS 9,228 12,276 16,191 22,410 30,147 39,381 49,866 56,348 28% Cloud Advt 58,994 68,838 79,449 90,257 104,516 118,520 133,566 150,929 14%

Note: 2013-2019 data is from Gartner, 2020 is GSe.

Source: Gartner, Goldman Sachs Global Investment Research.

The China cloud market currently generates revenues of US$9bn, which we expect to grow to US$19bn by 2020E. We believe this is an opportunity for the Chinese companies to exploit as non-Chinese companies, according to the ITA, may be required to hand over proprietary source code, while by 2020 the government plans to remove foreign vendors of both hardware and software from SOEs. Nevertheless, this doesn’t rule out partnerships, such as the announced Microsoft’s partnership and 21Vianet, HP with Beijing UnionRead Information Technology, and IBM with 21Vianet.

 Alibaba’s Aliyun (AliCloud) service is the market leader in the fastest growing segment of the internet, servicing 1.4mn cloud customers directly and 0.45mn indirectly. China Mobile, China Unicom, China Telecom, Baidu, Tencent, and ZTE are among the other large, well-resourced, and technically-savvy Chinese companies offering (or preparing to offer) some sort of cloud service. Alibaba has signed cloud agreements ranging from developing cloud storage solutions to helping provinces gather and crunch data to optimize its traffic lights. These agreements cover more than a dozen Chinese provinces and cities including Hainan, Guangdong, Tianjin and Shanghai. It also works with China Meteorological Administration, China Central Government Procurement Centre, and the State Railway Service Centre.

 Aliyun in April 2015 announced a deal with state oil and gas giant China Petroleum & Chemical Corporation, known as Sinopec, to create a cloud system to track its production and emissions (Source: Reuters, April 17, 2015). The company also has an agreement with the City of Dalian to build a cloud computing center and provide online government services.

 Tencent is the 2nd-largest cloud computing company in China, behind the early mover, Alibaba. Tencent continues to be aggressive in investing in data center and bandwidth, and the company’s need to own fiber capacity to cater to new game peak download demand has led the company to own fiber capacity.

Goldman Sachs Global Investment Research 49 May 17, 2016 China: Technology: Internet

 21Vianet (VNET, Not Covered) has partnerships with Microsoft and IBM for public and private cloud services respectively. 21Vianet helps Microsoft expand its commercial public cloud services in China until 2018. This includes Microsoft office applications, business email, file sharing and HD video conference. Vianet also works with IBM’s private cloud infrastructure service and brings high-value managed private and hybrid cloud services to China. IBM will provide the physical point of distribution (POD) and service, while 21Vianet hosts the POD facility at their Beijing data centers. Private cloud services are offered to multi-national corporations and include database management services, firewall services, server load balancing, data backup recovery services, server management and virtual private networks (VPN). According to Vianet’s 2015 20F, the company has 85 data centers and 113k servers.

 Although Chinese companies may currently lack some of the larger U.S. firms’ key advantages (e.g., scale, technical skill, innovative services), we believe these gaps will close to varying degrees over the next several years.

Exhibit 74: Major domestic cloud vendors in China

Company Offerings Clients Traditional IDC operators 21Vianet IaaS Tencent, KingSoft, Jiayuan.com, YouKu, Vancl Capital Online Data Services IaaS+PaaS VIPShop, 1HaoDian, Jumei, Mogujie, LongTu Game, The 9, Cannon, iQiyi Sinnet IaaS Gome, Jumei, Vancel, DangDang, HomeLink, Nestle, Huaxia Bank, McDonald's Specialised Cloud providers Ucloud IaaS+PaaS Tarena, KuaiQian, Lilith QingCloud IaaS+PaaS TAL Education, 91Finance, YongYou, 36Kr Big 3 ISPs China Mobile Cloud IaaS+PaaS+SaaS MMAE, GuoKing Bingo China Unicom WoCloud IaaS+PaaS+SaaS Ericsson, Mei Ah Entertainment, CSSWEB China Telecom eCloud IaaS+PaaS+SaaS NBS, China Merchant Bank, Baidu, Sohu, LeTV, Gree Internet companies AliYun IaaS+PaaS+SaaS Tmall, Mybank, PPTV, Vanke, Philips Tencent Qcloud IaaS+PaaS+SaaS WeBank, GF Securities, TaiKang Life, Jumei, 58.com, Ctrip Baidu IaaS+PaaS+SaaS Air China, GF Securities, iQiyi, Nuomi, CSDN KSYun IaaS+PaaS+SaaS XiaoMi, BitAuto, Skyworth, CCTV, CRCC, YongYou Sina Cloud IaaS+PaaS+SaaS Renmin University, PerfectWorld, YOU+ Traditional hardware company Huawei Cloud IaaS+PaaS+SaaS CPIC, QianHaiP2P, YouGuo.com

Source: Analysys, Company data

The international cloud opportunity for Chinese cloud providers In 2014, Tencent revealed plans to operate its Weiyun cloud storage service in the US, while in July 2015 Alibaba began expanding its Aliyun cloud service abroad, investing US$1bn in the project and announcing plans to build data centers in the US, Europe, the Middle East, Singapore and Japan. Other companies such as Ucloud and QingCloud’s have announced similar plans, further reinforcing China’s intent to create a larger overseas cloud computing presence.

Goldman Sachs Global Investment Research 50

May 17, 2016 Goldman Sachs Global Investment Research Appendix 1: China internet usage

Exhibit 75: Daily life for a ‘typical’07:30 China internet user 08:00 08:30 11:00 12:00

Meituan Lunch TAXI Wechat Didi ele.me + Nuomi Moments Order Lunch $ Alipay/Tenpay delivered 13:00 Taxi Mobile Food O2O SNS hailing payment 24:00 Weibo Place Didi Alipay Merchant Order 1.43bn trips Settle ~75% of BABA’s GMV 4Q15 MAU ads On Taobao 490mn driving hrs Tenpay Wechat: 697mn 12.8bn km 2015 +7x yoy in MAU in 4Q15 Weibo: 236mn Online 14:00 music 2015.12 GMV: Rmb7.1bn 4Q15 user base: 440mn streamin. ‐ ele.me 34.1% App Popularity Ranking : ‐ Meituan 32.8% QQ music 1. Kugou E‐comm ‐ Baidu 18.7% Netease cloud music 2. QQ Music JD Kugou/Kuwo/Xiami 3. Kuwo 2015 GMV (Rmb bn) Same day Taobao: 1.809 Delivery 23:00 Online 2015 MAU(mn) yoy% # of Games among Top Tmall: 1,141 Tencent 108 90% video 10 in 2016 JD: 457: 16:00 Youku 106 69% Tencent: ~6 Drama iQiyi 96 184% Netease: ~2 58.com 964k paying Restaurant merchants in 4Q15 reservation Mobile Classified Grp buy Games Local svc. Local svc. + 50% Youku, iQiyi, Meituan Buy discount Tencent video Dianping coupon Gaming: Discussion Ant issue in kitchen on weekend travel Clan activities Booked 2hrs Add 58.com Dinner comment on China: Technology: Internet Wechat to‐door @ home, JD Dianping Group Booked tickets cleaning Ctrip Fantasy Westwood delivery arrived & hotels Journey services on Saturday New discount coupon awarded 22:00 21:00 20:00 19:00 18:00

Source: Company data, 163.com, Iimedia, Analysys.cn, Goldman Sachs Global Investment Research.

51

May 17, 2016 China: Technology: Internet

Appendix 2: M&A summary

Exhibit 76: China internet M&A in 2015: Five largest deals

Date Sector Companies involved Details Price change

Two largest taxi-booking apps in China, Alibaba-invested Kuaidi Dache and Tencent-invested Didi Dache, announced their merger in 14-Feb-15 Taxi hailing app Didi & Kuadi Merger N/A, both are private cos Feb 2015. Two companies together are valued at about US$6 billion post-deal, according to Sina news. 58.com (WUBA) to acquire a strategic stake, 43.2% on a fully diluted WUBA: US$67.57 (16 Apr 2015 close) to basis, in Ganji.com, a leading online local services marketplace 17-Apr-15 Classified 58.com & Ganji.com US$ 70.50 (17 Apr 2015 close), 4.3% platform in China. Please refer to published comment: WUBA to increase acquire 43.2% of Ganji.com, April 17, 2015 Two biggest online-to-offline (O2O) service providers in China, Meituan (backed by Alibaba) and Dianping (backed by Tencent) 8-Oct-15 Group-Buy/O2O Meituan & Dianping announced a merger to thrive together in a highly competitive N/A, both are private cos market. The merged company could be valued at $15 billion or more, according to Sina news. BABA submitted a non-binding proposal to the board of directors of Youku Tudou (YOKU) to acquire all outstanding shares of YOKU for YOKU: US$ 20.43 ( 15 Oct 2015 close) to 16-Oct-15 Online video Alibaba & Youku US$26.60 per ADS in cash. Please refer to published comment: US$24.91 (16 Oct 2015 close), 21.9% BABA announced non-binding privatization proposal to YOKU, increase October 17, 2015 Baidu exchanged 48% of Qunar’s ordinary shares with Ctrip for CTRP: US$74.34 (23 Oct 2015 close) to newly-issued Ctrip shares with 25% voting interest post deal. Please 26-Oct-15 Online travel Ctrip & Qunar US$90.78 (26 Oct 2015 close), 22.1% refer to published report: Buy Ctrip: Consolidating online travel, increase raising TP to US$130, November 4, 2015

Notes: Price change is closing price on day prior to announcement to closing price on day of announcement.

Source: Bloomberg, Company data.

Exhibit 77: Baidu: Investments over the past 11 years

Date Names Nature of business Rounds % Stake 1 2015/6 Stellar International Cineplex Cinema Strategic invesment 2% 2 2014/12 Pixellot Video recording technology Seed angel 3 2014/12 Uber Taxi-hailling E round 4 2014/11 oTMS Logistic system A round 5 2014/10 Indoor Atlas Indoor navigation A round 6 2014/10 Peixe Urbano eCommerce Acquisition 7 2014/9 Zhi Ke Wang Education A round 8 2014/9 Shanghai High-Flying Hardware technology A round 9 2014/7 Chuan Ke Education Acquisition 100% 10 2014/5 Line Kong Mobile game D round 11 2014/4 Cheetah Mobile internet Pre-IPO 12 2014/4 Hu Jiang Education C round 13 2014/1 Nuomi Group buy Acquisition 100% 14 2014/1 Le Cai Lottery Acquisition 100% 15 2013/7 91 Wireless Mobile app store Acquisition 100% 16 2013/5 iQiyi + PPS Online video Acquisition 91% 17 2011/7 Qunar Online travel 51% 18 2004/8 Hao123 Search engine Acquisition 100%

Note: A, C, E refer to funding round that Baidu acquired stock in.

Source: Company data

Goldman Sachs Global Investment Research 52 May 17, 2016 China: Technology: Internet

Exhibit 78: Alibaba: M&A history since April 2013

Valuation Date Company Name Nature of business Rounds % Stake Investment, US$ mn US$ mn 1 2016/4 E Le Me Food Takeout Delivery services 28% 4,513 1,250 2 2016/4 Lazada Online shopping 67% 1,500 1,000 3 2016/2 YiGuo Fresh fruit eCommerce C Round 4 2016/2 SM Entertainment K-POP agent Investment 4% 752 30 5 2016/2 Magic Leap Cinematic reality device C Round 18% 4,500 794 6 2015/12 South China Morning Post News agency 100% 266 266 7 2015/12 BONA Movie producer Go private 10% 860 86 8 2015/11 Youku Tudou Online video Go private 100% 4,500 4,500 9 2015/11 Tutor Group Online education platform C round 10 2015/10 CMC Holdings Entertainment Co-founder 11 2015/10 58 Home LBS O2O A round 12 2015/9 One97(PayTM) Payment system in India 40% 1,700 680 13 2015/8 Snapdeal eCommerce in India 10% 5,000 500 14 2015/8 Suning eCommerce 20% 22,823 4,565 15 2015/7 MEI.com Luxury goods flash sale eCommerce Hundred millions of $ 16 2015/6 First Financial Media 37% 527 194 17 2015/6 Micromax Smartphone (India) 25% 2,800 700 18 2015/6 Han Hai Yuan China's equivalent of FireEye (FEYE) Cyber security 100% Hundred millions of $ 19 2015/5 Zulily Baby maternity eCommerce in US 9% 6,022 560 20 2015/3 Enlight Media Entertainment 9% 4,399 387 21 2015/3 Snapchat Social app 2% 13,333 200 22 2015/2 Meizu Smartphone 29% 2,034 590 23 2014/12 Tedou Innovative camera 24 2014/12 hk515.com Doctor booking C round Millions of $ 25 2014/11 KTPlay Social gaming platform 26 2014/11 V-Key Mobile security sofware marker B round 27 2014/11 MOMO Dating app 21% 242 50 28 2014/11 Huayi Brother Entertainment 8% NA 29 2014/10 Liu Liu Pet dating A round Millions of $ 30 2014/10 TimeHut Note recording A round Millions of $ 31 2014/9 Shiji Information Tech Hotel technology 15% 3,022 453 32 2014/9 Peel TV remote app D round 50 33 2014/9 Moman Camera Camera app A round 10 34 2014/8 bale.cn Online video -original content C round 35 2014/8 iTown WiFi marketing system Millions of $ 36 2014/7 hk515.com Online medical appointment B round Millions of $ 37 2014/7 Kabam Game developer E round 10% 1,200 120 38 2014/6 UCWeb Web browser 100% 1,775 1,775 39 2014/6 Evergrande Football Club Soccer club 50% NA 40 2014/6 Super class timetable Class timetable tool Millions of $ 41 2014/5 Ka Xing Tian Xia Road transport supply chain 42 2014/5 Youku Tudou Online video 17% 6,606 1,090 43 2014/5 OneTouch eCommerce custom services 100% 335 335 44 2014/5 Mei Tuan O2O 45 2014/5 Singapore Post Postage 10% 2,497 250 46 2014/5 China Smart Logistics Logistics 48% 560 269 47 2014/5 cfly.com Online travel 48 2014/4 Autonavi Navigation system 100% 1,292 1,292 49 2014/4 Weibo Social network 30% 3,728 1,118 50 2014/4 Alihealth Internet healthcare 53% 753 399 51 2014/4 Wasu Media Media 20% 5,242 1,048 52 2014/4 Vmovier Media 53 2014/4 Lyft Taxi-hailling D round 54 2014/4 Hengsheng Electronics Computer software 100% 532 532 55 2014/3 ByeCity Online travel B round 56 2014/3 Haier Electronics + Goodaymart House appliances 2% 6,153 123 57 2014/3 Cai Niao Logistic system 48% 722 347 58 2014/3 ShopRunner eCommerce 39% 59 2014/3 TangoMe Mobile messaging 20% 60 2014/3 Intime Retail Commercial property manager 33% 2,116 688 61 2014/3 Alibaba Picture Entertainment 50% 1,615 799 62 2014/2 INMAN Apparel Millions of $ 63 2014/2 Tutor Group Online education platform B round 64 2014/1 FirstDibs Luxury eCommerce 15 65 2013/10 Tian Hong Fund Mutual fund manager 51% 66 2013/6 Qyer Online travel 67 2013/4 Didi Kuaidi Taxi-hailling ~10% 68 2013/4 XiaMi Online music 95% 69 2013/4 Umeng App development platform Note: A-E refer to the funding round that Alibaba acquired stock in.

Source: Company data, Sina News, Yahoo News,

Goldman Sachs Global Investment Research 53

May 17, 2016 Goldman Sachs Global Investment Research Exhibit 79: Tencent: Over 100 investments in the past five years

Date Names Nature of business Rounds Date Names Nature of business Rounds 1 2015/8 Kik Interactive Messaging D round 51 2014/3 Whisper SNS C round 2 2015/8 Ren Ren Car Used car C2C eCommeC round 52 2014/3 CJ Games Game developer Strategic In 3 2015/7 ly.com Online travel service provider 53 2014/2 Brush Masters / mushroom cloud B round 4 2015/4 Dian Ping Mei Tuan Group buy F round -Pre IPO 54 2014/2 The same way network C round 5 2015/3 Cyanogen Tech. C round 55 2014/1 Didi Kuaidi Taxi-hailing app 6 2015/2 Beautiful flowers eCommerce Seed, Angel 56 2014/1 Everyone loan Finance A round 7 2015/2 e home clean House cleanning B round 57 2014/1 Star Year of the Internet / national hero / art dynamic entertainment B round 8 2015/2 Miniclip SA Online games website A round 58 2014/1 China South City Strategic In 9 2015/2 M4JAM Free lancing A round 59 2014/1 Section Ling Hang Core Spatial Info. Tech. Purchase 10 2015/2 Robot Entertainment Video game A round 60 2013/12 Good buy fund network / good fortune to buy B round 11 2015/1 Cheng Mi Wang City guid A round 61 2013/11 Rose only special love Florist B round 12 2015/1 Nanjing Zero Line Take away platform B round 62 2013/11 iDreamSky Game developer C round 13 2015/1 Easy Exam / easy to think should learn A round 63 2013/9 e home clean Seeds Ange 14 2015/1 BitAuto Car verticle Strategic Inv. 64 2013/6 Snapchat B round 15 2015/1 E Le Me Take away platform E round 65 2013/6 Kinsoft Software 16 2014/12 WiWide WIFI services provider C round 66 2013/4 Thailand Sage Software Togic / Taijie video A round 17 2014/12 Kamcord Mobile game developer B round 67 2013/3 Maple browser ChromePlus Purchase 18 2014/12 Aiming Mobile game developer C round 68 2013/2 JiaThis screening B round 19 2014/12 Playdots Mobile game developer A round 69 2013/1 Church-play Seeds Ange 20 2014/12 Bread Travel Online travel C round 70 2013/1 Jinghe think of moving BlingStorm A round 21 2014/11 Everyone Express Network Logistics A round 71 2013/1 365 Calendar Network / ask Japan Science and Tech. B round 22 2014/11 Huayi Brothers Entertainment Strategic Inv. 72 2013/1 Shadowcraft Network Prayaya/Shadowcraft desktop Purchase 23 2014/11 4:33 Creative Lab Mobile game developer A round 73 2013/1 Security Manager /Security Management Best Tech. Purchase 24 2014/11 heirloom SNS Seeds Angel 74 2012/8 Brush Elf /Bottle Tech. Purchase 25 2014/11 Blink quick look SNS A round 75 2012/7 Soma Tech. A round 26 2014/11 Registered Network / Micro Medical Doctor booking C round 76 2012/7 Philharmonic Tour game A round 27 2014/11 China LotSynergy (CLS) Appointment booking IPO+beyond 77 2012/6 Le Frog Tech. A round 28 2014/11 Pocket Shopping eCommerce C round 78 2012/5 The same way network / with the way Tourism B round 29 2014/11 Tile Tech. hardware A round 79 2012/3 Le brush / Shift Card Tech. A round 30 2014/11 58.com Classified IPO market + beyond 80 2012/3 Brush Masters /Mushroom Cloud A round 31 2014/9 Ding Xiang Yuan Online healthcare C round 81 2012/2 Hot Cool Rekoo 32 2014/9 e home clean House cleanning A round 82 2012/11 Year-know B round 33 2014/9 Wo Qu Lv Xing Online travel B round 83 2012/11 Beautiful says D round 34 2014/9 Red Dot live / Red Dot Tech. Live broadcast A round 84 2012/11 Quack video / octave Internet Tech. A round 35 2014/9 AltspaceVR Tech. hardware Seeds Angel 85 2012/11 Cheetah secure browser /Cheetah Mobile Mobile app developer B round 36 2014/9 PATIGames Game developer Strategic Inv. 86 2011/11 HangZhou ShunWang Internet entertainment platform 37 2014/8 Kua Kao Education Education B round 87 2011/11 Workec CRM 38 2014/7 Rongchang e wash bag LBS Seeds Angel 88 2011/10 Kaixin001 White collar social network 39 2014/7 Scaled Inference Tech. hardware Seeds Angel 89 2012/9 Everyme Social address book 40 2014/7 Excellent A / micro school tomorrow A round 90 2012/1 Valley was the game A round 41 2014/6 PICOOC Bin engraved Prius / Latin Health care B round 91 2012/1 Cubic Network B round 42 2014/6 TapZen Game developer A round 92 2012/1 Trading treasure Purchase 43 2014/5 Optimus Prime / play games network Game B round 93 2011/6 Kela Online jewelry retailer 44 2014/5 Same / RunStudio buns Tech. A round 94 2011/6 Mamacn.com Online maternity services portal 45 2014/5 Navinfo Inv. 95 2011/6 Innovation Works Kai-Fu Lee's early stage Inv. co. 46 2014/4 Weebly Corporate services C round 96 2011/6 Okbuy.com Online shoe retailer 47 2014/3 JD.com eCommerce F round -PreIPO 97 2011/4 YouXiGu SEVEN developer 48 2014/3 Trading treasure F round -PreIPO 98 2011/1 In Lung Ching A round 49 2014/3 Locke / E-House China IPO market and beyond 99 2011/1 MyTT Live / Pollex Network Purchase 50 2014/3 Fu Tu Securities Stock broker A round 100 2010/8 Comsenz Community platform dev. (Discusz)

Note: A-F refer to the funding round that Tencent acquired stock in. China: Technology: Internet Source: Company data.

54

May 17, 2016 Goldman Sachs Global Investment Research Exhibit 80: Chinese internet companies have much deeper vertical exploitation than global peers

In US$ mn Amazon Facebook Google BAIDU ALIBABA TENCENT JD.COM XIAOMI NETEASE QIHOO Revenue, 2015 $107,007 $17,927 $60,646 $10,562 $14,242 $16,539 $28,846 $3,596 EBITDA, 2015 $10,805 $11,216 $29,626 $2,876 $7,414 $7,294 -$117 $1,284 Net Income 2015 $596 $3,689 $13,560 $5,577 $6,447 $5,211 -$135 $1,170

Core traffic drivers Ecommerce Social Search, video Search, video Ecommerce Social, gaming Ecommerce Smartphone, OS Gaming Gaming, security

1 App store Appstore Google Play MobileAsst. Yingyongbao MIUI App Sore 360 Mob. Asst. 2 Autos Ali Autos BITA (~6.75%, 3.3% dir) BITA (25%) 3 Browser Chrome Baidu UC Web QQ 360 Broswer Koubei, Meituan, 58.com (25%), ele.me, 4 Classified/local svc O2O Nuomi ele.me, Intime Meituan Google Cloud 5 Cloud computing AWS Baidu Cloud Ali Cloud Wei Cloud MiCloud Platform Tmall, Taobao, 6 Ecommerce Amazon Google Express Baidu Mall JD.com (18%) MiMall Kaola Juhuasuan Oculus Story 360 Mob. Asst. 7 Games 91-W, B-gamecenter Across PC, mobile MIUI Appstore PC, Mobile Studio Webgame Kindle, Fire, 8 Hardware Oculus VR Nexus Meizu (~18%) Mi range Coolpad Echo DingXiangYuan, 9 Healthcare Baidu Doctor Ali Health JD Pharma GuaHao.com Whatsapp, 10 IM Dingding QQ IM MiLiao YiChat Messenger

Baidu Wallet (Baixin Bank, Citic WeBank (30%), Ant Fin. (37% profit Amazon JV pending approval), WePay, TenPay, Citic 11 Internet finance share), MYBANK JD Finance MiWallet Payments Bai An (Digital insurance-Baidu, Cap. (23%), Webank (~12%) Allianz, Hillhouse) (30%)

12 Literature Audible Baidu Reading China Reading (66%) Cainiao, Haier Log, 13 Logistics Amazon JD Sing Post (10%) 14 Lottery Taobao Lottery Weixin Lottery Lede 360 Lottery 15 Maps Google Maps Baidu Map Autonavi Navinfo (11%) 360 Security 16 Mobile OS Fire OS Android YunOS TOS+ OS OS 17 Real Estate Baidu Property Leju (16%) 18 Search Graph Search Google Baidu.com etao Sogou Qihoo 19 Security Baidu Security QQ Doctor 360 Safeguard 20 Social FB, IG Google + Weibo (30%) Weixin, Qzone MIUI App Sore Yixin Gaming 21 Transport apps Uber (inv.) Didikuadi (na) Didikuadi (na) 22 Travel Ctrip (~25%) Alitrip eLong (15%) Tuniu 23 Video/content Prime Video UGC Youtube iQiYi/PPS YOKU, Alipic QQ Video Shoprunner, Zulily, 24 International, major Game: Riot Games, CJ Aliexpress South China Morning 25 Media Baidu News App Tencent News Post China: Technology: Internet

Source: Company data, Goldman Sachs Global Investment Research

55

May 17, 2016 China: Technology: Internet

Appendix 3: Valuation and risks

Exhibit 81: China Internet – Summary valuation methodology and key risks

Company name Ticker TP method Key risks

Alibaba BABA SOTP Slower GMV growth, lower monetization, competition.

Baidu BIDU SOTP Search growth slowing, higher O2O spend.

Slower-than-expected economy pressuring advertising revenues, more intense competition from Alibaba Tencent 0700.HK 28x CY17 PE Group/NetEase etc. (+/-): Faster/slower-than-expected cost saving and revenue synergies, higher/ lower-than-expected contribution 58.com WUBA 35x CY17 PE from Tencent partnership and new businesses.

Changyou.com CYOU 8x CY17 PE Mobile games stronger-than-expected, better-than-expected marketing spending.

Ctrip.com Int'l CTRP SOTP Lower-than-expected air ticket/hotel volume growth/margins, fiercer-than-expected competition.

JD.com JD DCF Slower-than-expected GMV and revenue growth due to weak macro.

Jumei JMEI 16x CY17 PE (+): Lowering of Passenger Parcel tax for cosmetics. (-) Tougher-than-expected competition.

NetEase NTES 17x CY17 PE Weaker performance of legacy games, lower margin.

(+/-): Improved/deteriorated business relationship with airlines/collaboration execution, and better/worse-than- Qunar.com QUNR DCF expected cost control. (+/-): Stronger/softer-than-expected Weibo/Portal performance, higher/lower-than-expected margins, further SINA Corp. SINA SOTP, 50% disc. collaboration with Alibaba (upside).

Sohu.com SOHU SOTP Stronger macro economy recovery and less intensive competition in online video.

(+) Better-than-expected China property market, faster-than-expected market share gain. (-) Fiercer SouFun Holdings SFUN 20x CY17 PE competition, unsuccessful business transition.

Tuniu TOUR DCF (+/-): Better-/worse-than-expected revenue growth, margins, competition.

Vipshop VIPS 22x CY17 PE Faster-than-expected revenue slowdown on lower user growth, margin compression.

Weibo WB 23x CY17 PE Better/worse-than-expected SME revenue growth/video-related costs.

Source: Goldman Sachs Global Research Investment.

Goldman Sachs Global Investment Research 56 May 17, 2016 China: Technology: Internet

Appendix 4: TAM table in details

Exhibit 82: China Internet: TAM analysis into the ‘Seven Pillars’ The online opportunity (ex-finance) is potentially >Rmb13tn

RMB bn 2014 2015 2016E 2017E 2018E 2019E 2020E Cagr 15-20 Companies with exposure GDP 63,689 67,940 69,428 74,161 79,040 85,067 91,383 6.1% TAM assessment, by category 1. RETAIL 26,239 30,093 33,403 36,744 40,051 43,455 46,931 9% E-Commerce 2,790 3,877 5,079 6,400 7,744 8,983 10,151 21% Alibaba, JD, VIPS, Jumei, Netease % online penetration 11% 13% 15% 17% 19% 21% 22% 9pp Change in pp, '15-'20E BABA (China retail) 2,274 2,951 3,555 4,166 4,819 5,495 6,149 16% JD 260 447 665 904 1,173 1,460 1,739 31% VIPS 37 64 84 106 124 139 151 19% Others 219 417 776 1,224 1,628 1,890 2,112 38%

2. ADSPEND 396 467 553 629 699 770 842 13% Alibaba, Baidu, Tencent Online Adspend 154 210 276 345 411 480 552 21% % online penetration 39% 45% 50% 55% 59% 62% 66% 21pp Change in pp, '15-'20E Among: Search adspend 53 71 92 114 136 158 182 21% Baidu, Qihoo, Sogou, Google China Brand adspend 415267809110411718%Alibaba, Sina, Sohu, NetEase, Alibaba, Tencent Video adspend 32 47 63 81 97 116 134 24% Youku, iQiyi, Tencent, Sohu, LeTV Classified adspend 3 5 10 13 16 20 24 36% 58.com, Autohome, SouFun Social adspend 1422314355698531%Tencent, Weibo Others 11 13 13 13 15 13 10 -6% BAIDU 46 59 71 82 97 113 131 17% - Core search 43 54 64 74 88 102 118 17% - Video 3 5 7 8 10 11 13 20% Alibaba 40 56 77 97 115 130 143 21% - China retail 36 49 66 83 96 108 118 19% - Video 4 7 10 14 18 22 25 30% Tencent 8 18 29 44 58 73 87 36% - Brand 5 9 13 18 24 30 36 32% - P4P 3 10 17 26 34 43 52 40% Netease - advertising 2 2 3 3 4 4 5 18%

3. TRAVEL (OTA TGT.) 1,308 1,444 1,590 1,744 1,908 2,089 2,270 9% OTAs 366 527 634 758 901 1,056 1,231 18% Ctrip, Qunar, Alitrip, Tuniu % online penetration 28% 37% 40% 43% 47% 51% 54% 18pp Change in pp, '15-'20E Ctrip (incl. Qunar) 235 377 491 651 827 1,013 1,204 26% Tuniu 5 11 18 28 42 57 73 47%

4. LOCAL SERVICES (O2O) 5,329 5,992 6,641 7,280 7,936 8,571 9,256 9% Online 237 324 438 575 730 900 1,111 28% Meituan, Baidu Nuomi, Koubei % online penetration 4% 5% 8% 10% 12% 12% 12% 7pp Change in pp, '15-'20E Baidu - O2O 7 36 75 131 196 255 293 52% Meituan (incl. Dianping) 68 185 241 311 387 468 566 25% On a consolidated basis

5. ONLINE GAMES 110 144 183 221 251 266 277 14% Tencent, Netease, Changyou Mobile 28 56 91 125 152 164 172 25% PC+browser 83 87 92 96 99 102 105 4% Tencent 4964779010011112013% - Mobile 11 21 30 38 45 51 57 22% - PC 38 43 47 52 55 59 63 8% Netease 1018252833363916% - Mobile 1 8 16 20 23 26 29 28% - PC 9109999100% Changyou 4433333 -6% Other - mobile 16 27 45 68 84 86 87 27% Other - PC 32 30 33 32 32 30 29 -1% PC - coverage total 51 57 59 63 67 72 76 6% Mobile - coverage total 12 30 46 58 68 78 86 24% PC- non-covered 32 30 33 32 32 30 29 Mobile-non-covered 16 27 45 68 84 86 87 Tencent - mobile (% total) 41% 38% 33% 30% 30% 31% 33% Tencent - PC (% total) 46% 49% 51% 54% 56% 58% 60%

6. IT SPENDING 3,049 3,593 4,107 4,577 4,995 5,361 5,675 10% Cloud computing 44 56 72 90 100 114 127 18% Alibaba, Baidu, Tencent Ali Cloud 125914233580% Tencent 1358142389%

Online, ex-finance 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21%

7. FINANCE 6,990 9,713 13,385 18,118 23,611 29,295 36,047 30% Alibaba, Baidu, Tencent, JD a. Total bankcard transaction 495,331 569,631 646,531 730,580 818,250 908,257 1,008,165 12% % online penetration 1.4% 1.7% 2.0% 2.4% 2.7% 3.0% 3.2% 2pp Change in pp, '15-'20E Online transaction 6,967 9,641 13,175 17,568 22,396 27,096 32,727 28%

b. TSF excl. bond and equity 110,612 125,461 142,303 159,272 178,264 199,520 223,311 12% % of total bank loans 0.0% 0.1% 0.1% 0.3% 0.7% 1.1% 1.5% 1pp Change in pp, '15-'20E Online bank loans 23 73 211 550 1,215 2,199 3,321 115% Alibaba, Baidu, Tencent, JD

Total Addressable Mkt. (ex finance) 36,432 41,733 46,477 51,195 55,839 60,511 65,252 9% % of GDP 57.2% 61.4% 66.9% 69.0% 70.6% 71.1% 71.4% Online (ex finance) 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21% % of TAM online 10% 12% 14% 16% 18% 19% 21% 8pp Change in pp, '15-'20E % of TAM online (ex ecomm) 9% 11% 12% 14% 15% 17% 18% 7pp Change in pp, '15-'20E Source: Company data, iResearch, eMarketer, Wind, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 57 May 17, 2016 China: Technology: Internet

Exhibit 83: China internet profit pool estimates Online adspend, online games and e-commerce are the top 3 profit pool contributors by 2020E

2015 2020E Profit pool (Rmb bn) OP/TAM OP Split OP/TAM OP Split Exposure/Comment 1. RETAIL E-Commerce 0.3% 13 17% 0.8% 79 20% Alibaba, JD, VIPS, Jumei, Netease BABA (China Retail Commission) 0.5% 13 16% 0.7% 43 54% Sustainable dominance in marketplace JD -1.0% (4) -5% 1.3% 23 29% Long-term market share gainer VIPS 4.1% 3 3% 4.4% 7 8% Leader in flash sales model Others 0.3% 1 1% 0.3% 6 8% Other emerging categories/companies

2. ADSPEND Online Adspend 43.1% 59 80% 46.2% 169 43% Baidu, Tencent, Alibaba BAIDU 42.5% 25 29% 46.6% 61 36% - Core search 50.5% 27 32% 50.0% 59 35% No.1 in China's search market - Video -45.0% (2) -3% 15.0% 2 1% iQiyi Alibaba 41.8% 23 27% 43.9% 63 37% - China retail 50.0% 25 29% 50.0% 59 35% - Video -19.8% (1) -2% 15.0% 4 2% YouKu Tencent 50.0% 9 11% 50.0% 44 26% - Brand 50.0% 4 5% 50.0% 18 11% Tencent video and Tencent news - P4P 50.0% 5 6% 50.0% 26 15% Weixin and Qzone Netease - advertising 35.0% 1 1% 35.0% 2 1% Portal, news, mailbox, etc.

3. TRAVEL (OTA TGT.) OTAs -0.4% (2) -3% 1.0% 12 3% 5% take rate, 20% margin, incl. outbound Ctrip 0.3% 1 1% 0.9% 11 86% No.1 OTA in China Tuniu -13.0% (1) -2% -0.8% -1 -5% Niche player focusing on packages Others 0.9% 2 19%

4. LOCAL SERVICES (O2O) Online -9.4% (30) -41% 0.6% 7 2% 6% take rate, 10% margin % online penetration Baidu - O2O NM (12) -13% 1.5% 3 1% Koubei (2015 annualized) (8) -9% Meituan (17) -20%

5. ONLINE GAMES 32.2% 46 63% 38.4% 106 27% Tencent, Netease, Changyou Mobile 11 15% 43 11% PC+browser 35 47% 63 6% Tencent 30 35% 70 15% - Mobile 9 10% 26 5% - PC 21 25% 44 9% Netease 8 10% 15 3% - Mobile 2 2% 8 2% - PC 6 7% 7 1% Changyou 2 2% 1 0% Other - mobile 1 1% 9 2% Other - PC 5 6% 11 2% PC - coverage total 29 34% 52 11% Mobile - coverage total 11 12% 34 7% PC- non-covered 5 6% 11 2% Mobile-non-covered 1 1% 9 2%

6. Cloud computing -20.0% (11) -15% 15.0% 19 5% Alibaba, Baidu, Tencent Ali Cloud -40.0% (0) 0% 20.0% 7 1% Tencent -40.0% (0) 0% 20.0% 5 1%

Total, ex finance 1.4% 74 86% 2.9% 393 83%

7. FINANCE 0.1% 12 14% 0.2% 80 17% Alibaba, Baidu, Tencent, JD a. Online payment 0.1% 10 12% 0.1% 33 7% 0.18% take rate, 57% margin b. SME lending 2.3% 2 2% 1.4% 47 10% 9% interest rate, 36% margin (incl. 2.5% credit cost)

TOTAL 86 473

2015 2020E OPM (%) OP Split OPM (%) OP Split Alibaba 607.5% 42 58% 748.4% 141 36% Baidu 19.7% 13 18% 32.8% 55 14% Tencent 40.6% 42 57% 42.1% 112 29% BAT Total 55.2% 97 132% 68.0% 308 78%

Source: Company data, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 58 May 17, 2016 China: Technology: Internet

Appendix 5: TAM detail in RMB

Exhibit 84: Seven Pillars of China Internet

TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. Top 2 players is by market share. CAGR is for 2015-2020E (in RMB).

Source: iResearch, eMarketer, NBS, CNNIC, Analysys, Wind, Sina news, Goldman Sachs Global Investment Research.

Goldman Sachs Global Investment Research 59 May 17, 2016 China: Technology: Internet

Disclosure Appendix Reg AC We, Piyush Mubayi, George Meng, CFA, David Jin, CFA and Fan Liu, CFA, hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Unless otherwise stated, the individuals listed on the cover page of this report are analysts in Goldman Sachs' Global Investment Research division. Investment Profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs' proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. GS SUSTAIN GS SUSTAIN is a global investment strategy aimed at long-term, long-only performance with a low turnover of ideas. The GS SUSTAIN focus list includes leaders our analysis shows to be well positioned to deliver long term outperformance through sustained competitive advantage and superior returns on capital relative to their global industry peers. Leaders are identified based on quantifiable analysis of three aspects of corporate performance: cash return on cash invested, industry positioning and management quality (the effectiveness of companies' management of the environmental, social and governance issues facing their industry). Disclosures Coverage group(s) of stocks by primary analyst(s) Piyush Mubayi: Asia Pacific Media, Asia Pacific Telecoms. George Meng, CFA: Asia Pacific Media. David Jin, CFA: Asia Pacific Media. Fan Liu, CFA: Asia Pacific Media. Asia Pacific Media: 58.com Inc., Alibaba Group Holding, Astro Malaysia Holdings, Autohome Inc., Baidu.com Inc., Changyou.com, China Distance Education Ltd., Ctrip.com International, Info Edge India Ltd., JD.com Inc., Jumei International Holding, Just Dial Ltd., Kakao Corp., Makemytrip Ltd., Naver Corp., NCSOFT Corp., NetEase Inc., New Oriental Education & Technology, Qunar.com, SINA Corp., Sohu.com, SouFun Holdings, TAL Education Group, Tarena International Inc., Tencent Holdings, Tuniu Corp., Vipshop Holdings, Weibo Corp., Zee Entertainment Enterprises. Asia Pacific Telecoms: Axiata Group, Bharti Airtel, Bharti Infratel Ltd., Chunghwa Telecom, Digi.com, Dish TV India, Far EasTone, HKT Trust, Hong Kong Broadband Network Ltd., Hutchison Telecommunications HK, Idea Cellular, Indosat, KT Corp., KT Corp. (ADR), LG UPlus, M1 Ltd., Maxis Bhd, PCCW Ltd., PT Link Net Tbk, PT Sarana Menara Nusantara, PT XL Axiata, Reliance Communications, Singapore Telecommunications, SK Telecom, SK Telecom (ADR), SmarTone, StarHub, Taiwan Mobile, Telekom Malaysia, Telekomunikasi Indonesia, Tower Bersama Infrastructure Tbk. Company-specific regulatory disclosures Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Distribution of ratings/investment banking relationships Goldman Sachs Investment Research global Equity coverage universe

Rating Distribution Investment Banking Relationships Buy Hold Sell Buy Hold Sell Global 32% 53% 15% 65% 58% 51% As of April 1, 2016, Goldman Sachs Global Investment Research had investment ratings on 3,029 equity securities. Goldman Sachs assigns stocks as Buys and Sells on various regional Investment Lists; stocks not so assigned are deemed Neutral. Such assignments equate to Buy, Hold and Sell for the purposes of the above disclosure required by the FINRA Rules. See 'Ratings, Coverage groups and views and related definitions' below. The Investment Banking Relationships chart reflects the percentage of subject companies within each rating category for whom Goldman Sachs has provided investment banking services within the previous twelve months. Price target and rating history chart(s) Compendium report: please see disclosures at http://www.gs.com/research/hedge.html. Disclosures applicable to the companies included in this compendium can be found in the latest relevant published research Regulatory disclosures Disclosures required by United States laws and regulations See company-specific regulatory disclosures above for any of the following disclosures required as to companies referred to in this report: manager or co-manager in a pending transaction; 1% or other ownership; compensation for certain services; types of client relationships; managed/co-

Goldman Sachs Global Investment Research 60 May 17, 2016 China: Technology: Internet

managed public offerings in prior periods; directorships; for equity securities, market making and/or specialist role. Goldman Sachs trades or may trade as a principal in debt securities (or in related derivatives) of issuers discussed in this report. The following are additional required disclosures: Ownership and material conflicts of interest: Goldman Sachs policy prohibits its analysts, professionals reporting to analysts and members of their households from owning securities of any company in the analyst's area of coverage. Analyst compensation: Analysts are paid in part based on the profitability of Goldman Sachs, which includes investment banking revenues. Analyst as officer or director: Goldman Sachs policy prohibits its analysts, persons reporting to analysts or members of their households from serving as an officer, director, advisory board member or employee of any company in the analyst's area of coverage. Non-U.S. Analysts: Non-U.S. analysts may not be associated persons of Goldman, Sachs & Co. and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with subject company, public appearances and trading securities held by the analysts. Distribution of ratings: See the distribution of ratings disclosure above. Price chart: See the price chart, with changes of ratings and price targets in prior periods, above, or, if electronic format or if with respect to multiple companies which are the subject of this report, on the Goldman Sachs website at http://www.gs.com/research/hedge.html. Additional disclosures required under the laws and regulations of jurisdictions other than the United States The following disclosures are those required by the jurisdiction indicated, except to the extent already made above pursuant to United States laws and regulations. Australia: Goldman Sachs Australia Pty Ltd and its affiliates are not authorised deposit-taking institutions (as that term is defined in the Banking Act 1959 (Cth)) in Australia and do not provide banking services, nor carry on a banking business, in Australia. This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act, unless otherwise agreed by Goldman Sachs. In producing research reports, members of the Global Investment Research Division of Goldman Sachs Australia may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Goldman Sachs Australia considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. Brazil: Disclosure information in relation to CVM Instruction 483 is available at http://www.gs.com/worldwide/brazil/area/gir/index.html. Where applicable, the Brazil-registered analyst primarily responsible for the content of this research report, as defined in Article 16 of CVM Instruction 483, is the first author named at the beginning of this report, unless indicated otherwise at the end of the text. Canada: Goldman Sachs Canada Inc. is an affiliate of The Goldman Sachs Group Inc. and therefore is included in the company specific disclosures relating to Goldman Sachs (as defined above). Goldman Sachs Canada Inc. has approved of, and agreed to take responsibility for, this research report in Canada if and to the extent that Goldman Sachs Canada Inc. disseminates this research report to its clients. Hong Kong: Further information on the securities of covered companies referred to in this research may be obtained on request from Goldman Sachs (Asia) L.L.C. India: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (India) Securities Private Limited, Research Analyst - SEBI Registration Number INH000001493, 951-A, Rational House, Appasaheb Marathe Marg, Prabhadevi, Mumbai 400 025, India, Corporate Identity Number U74140MH2006FTC160634, Phone +91 22 6616 9000, Fax +91 22 6616 9001. Goldman Sachs may beneficially own 1% or more of the securities (as such term is defined in clause 2 (h) the Indian Securities Contracts (Regulation) Act, 1956) of the subject company or companies referred to in this research report. Japan: See below. Korea: Further information on the subject company or companies referred to in this research may be obtained from Goldman Sachs (Asia) L.L.C., Seoul Branch. New Zealand: Goldman Sachs New Zealand Limited and its affiliates are neither "registered banks" nor "deposit takers" (as defined in the Reserve Bank of New Zealand Act 1989) in New Zealand. This research, and any access to it, is intended for "wholesale clients" (as defined in the Financial Advisers Act 2008) unless otherwise agreed by Goldman Sachs. Russia: Research reports distributed in the Russian Federation are not advertising as defined in the Russian legislation, but are information and analysis not having product promotion as their main purpose and do not provide appraisal within the meaning of the Russian legislation on appraisal activity. Singapore: Further information on the covered companies referred to in this research may be obtained from Goldman Sachs (Singapore) Pte. (Company Number: 198602165W). Taiwan: This material is for reference only and must not be reprinted without permission. Investors should carefully consider their own investment risk. Investment results are the responsibility of the individual investor. United Kingdom: Persons who would be categorized as retail clients in the United Kingdom, as such term is defined in the rules of the Financial Conduct Authority, should read this research in conjunction with prior Goldman Sachs research on the covered companies referred to herein and should refer to the risk warnings that have been sent to them by Goldman Sachs International. A copy of these risks warnings, and a glossary of certain financial terms used in this report, are available from Goldman Sachs International on request. European Union: Disclosure information in relation to Article 4 (1) (d) and Article 6 (2) of the European Commission Directive 2003/125/EC is available at http://www.gs.com/disclosures/europeanpolicy.html which states the European Policy for Managing Conflicts of Interest in Connection with Investment Research. Japan: Goldman Sachs Japan Co., Ltd. is a Financial Instrument Dealer registered with the Kanto Financial Bureau under registration number Kinsho 69, and a member of Japan Securities Dealers Association, Financial Futures Association of Japan and Type II Financial Instruments Firms Association. Sales and purchase of equities are subject to commission pre-determined with clients plus consumption tax. See company-specific disclosures as to any applicable disclosures required by Japanese stock exchanges, the Japanese Securities Dealers Association or the Japanese Securities Finance Company. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at http://www.gs.com/research/hedge.html. The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price have been removed pursuant to Goldman Sachs policy when Goldman Sachs is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating Suspended (RS). Goldman Sachs Research has suspended the investment rating and price target for this stock, because there is not a sufficient fundamental basis for

Goldman Sachs Global Investment Research 61 May 17, 2016 China: Technology: Internet

determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). Goldman Sachs has suspended coverage of this company. Not Covered (NC). Goldman Sachs does not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Global product; distributing entities The Global Investment Research Division of Goldman Sachs produces and distributes research products for clients of Goldman Sachs on a global basis. Analysts based in Goldman Sachs offices around the world produce equity research on industries and companies, and research on macroeconomics, currencies, commodities and portfolio strategy. This research is disseminated in Australia by Goldman Sachs Australia Pty Ltd (ABN 21 006 797 897); in Brazil by Goldman Sachs do Brasil Corretora de Títulos e Valores Mobiliários S.A.; in Canada by either Goldman Sachs Canada Inc. or Goldman, Sachs & Co.; in Hong Kong by Goldman Sachs (Asia) L.L.C.; in India by Goldman Sachs (India) Securities Private Ltd.; in Japan by Goldman Sachs Japan Co., Ltd.; in the Republic of Korea by Goldman Sachs (Asia) L.L.C., Seoul Branch; in New Zealand by Goldman Sachs New Zealand Limited; in Russia by OOO Goldman Sachs; in Singapore by Goldman Sachs (Singapore) Pte. (Company Number: 198602165W); and in the United States of America by Goldman, Sachs & Co. Goldman Sachs International has approved this research in connection with its distribution in the United Kingdom and European Union. European Union: Goldman Sachs International authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority, has approved this research in connection with its distribution in the European Union and United Kingdom; Goldman Sachs AG and Goldman Sachs International Zweigniederlassung Frankfurt, regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht, may also distribute research in Germany. General disclosures This research is for our clients only. Other than disclosures relating to Goldman Sachs, this research is based on current public information that we consider reliable, but we do not represent it is accurate or complete, and it should not be relied on as such. The information, opinions, estimates and forecasts contained herein are as of the date hereof and are subject to change without prior notification. We seek to update our research as appropriate, but various regulations may prevent us from doing so. Other than certain industry reports published on a periodic basis, the large majority of reports are published at irregular intervals as appropriate in the analyst's judgment. Goldman Sachs conducts a global full-service, integrated investment banking, investment management, and brokerage business. We have investment banking and other business relationships with a substantial percentage of the companies covered by our Global Investment Research Division. Goldman, Sachs & Co., the United States broker dealer, is a member of SIPC (http://www.sipc.org). Our salespeople, traders, and other professionals may provide oral or written market commentary or trading strategies to our clients and principal trading desks that reflect opinions that are contrary to the opinions expressed in this research. Our asset management area, principal trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this research. The analysts named in this report may have from time to time discussed with our clients, including Goldman Sachs salespersons and traders, or may discuss in this report, trading strategies that reference catalysts or events that may have a near-term impact on the market price of the equity securities discussed in this report, which impact may be directionally counter to the analyst's published price target expectations for such stocks. Any such trading strategies are distinct from and do not affect the analyst's fundamental equity rating for such stocks, which rating reflects a stock's return potential relative to its coverage group as described herein. We and our affiliates, officers, directors, and employees, excluding equity and credit analysts, will from time to time have long or short positions in, act as principal in, and buy or sell, the securities or derivatives, if any, referred to in this research. The views attributed to third party presenters at Goldman Sachs arranged conferences, including individuals from other parts of Goldman Sachs, do not necessarily reflect those of Global Investment Research and are not an official view of Goldman Sachs. Any third party referenced herein, including any salespeople, traders and other professionals or members of their household, may have positions in the products mentioned that are inconsistent with the views expressed by analysts named in this report. This research is not an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Clients should consider whether any advice or recommendation in this research is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. The price and value of investments referred to in this research and the income from them may fluctuate. Past performance is not a guide to future performance, future returns are not guaranteed, and a loss of original capital may occur. Fluctuations in exchange rates could have adverse effects on the value or price of, or income derived from, certain investments. Certain transactions, including those involving futures, options, and other derivatives, give rise to substantial risk and are not suitable for all investors. Investors should review current options disclosure documents which are available from Goldman Sachs sales representatives or at http://www.theocc.com/about/publications/character-risks.jsp. Transaction costs may be significant in option strategies calling for multiple purchase and sales of options such as spreads. Supporting documentation will be supplied upon request. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client websites. Not all research content is redistributed to our clients or available to third-party aggregators, nor is Goldman Sachs responsible for the redistribution of our research by third party aggregators. For research, models or other data available on a particular security, please contact your sales representative or go to http://360.gs.com. Disclosure information is also available at http://www.gs.com/research/hedge.html or from Research Compliance, 200 West Street, New York, NY 10282. © 2016 Goldman Sachs. No part of this material may be (i) copied, photocopied or duplicated in any form by any means or (ii) redistributed without the prior written consent of The Goldman Sachs Group, Inc.

Goldman Sachs Global Investment Research 62