Asia Internet EM Asia

27 July 2020

Equities & ESG Asia Internet EM Asia

ESG Integrated: 10 questions

 No perfect solution for ESG. The key is how Asia Internet companies respond and where they stand vs global peers  Social (S) issues like data privacy are top of mind given big penalties for non-compliance and tightening regulations  Governance (G) in focus amid commonly-used VIE and dual-

class structures; Environment (E) impacts sustainable growth

In the latest instalment in our ESG series, we turn to Asia’s booming and evolving Binnie Wong* Head of Internet Research, Asia Pacific Internet sector. As usual, we answer 10 key questions for the sector, but in this report The Hongkong and Shanghai Banking Corporation Limited we also compare Asia Internet companies to their global peers to give added context. [email protected] +852 282 22590 What matters? Wai-Shin Chan, CFA Environmental (E) factors like greenhouse gas emissions and packaging waste are big Head, Climate Change Centre; Co-Head, ESG issues for e-commerce companies as they delivered 64bn parcels in mainland China Research The Hongkong and Shanghai Banking Corporation Limited last year (Japan (9.3bn), Korea (2.9bn), and ASEAN’s Shopee (1.2bn)) and food [email protected] delivery services in mainland China handled 14.5bn orders, +37% y-o-y. Significant +852 2822 4870 power consumption (and in some cases high water usage too) at data centres, Ritchie Sun* Associate, Internet Research warehouses, and office buildings make these issues relevant for cloud computing, The Hongkong and Shanghai Banking Corporation Limited online entertainment, and advertising sectors. But, Social (S) issues like data privacy, [email protected] +852 2822 4392 online game addiction, censorship, and social welfare responsibilities play a bigger role Cleo Zhang* for social media and local services platforms. Governance (G) factors like variable Associate, Internet Research interest entities (VIE, a unique contractual agreement setup), dual-class structures, and The Hongkong and Shanghai Banking Corporation Limited protection of minority shareholder rights are applicable across the sector. [email protected] +852 2914 9935 What surprised us? Carson Lo*, CFA (1) Environment: Global Internet traffic has tripled since 2015, yet data centre energy Analyst, Internet Research The Hongkong and Shanghai Banking Corporation Limited usage has remained flat since 2010, accounting for only 1% of global electricity [email protected] usage/consumption. Plus, they are mostly powered by renewable energy these days. +852 2822 4337

Using solar power at Naver’s data centre saved 97 tonnes of CO2 emissions in 2019. Piyush Choudhary*, CFA Analyst, ASEAN Telecoms We also find 5G is likely to be 10-20 times more energy efficient than 4G by 2025-30e, The Hongkong and Shanghai Banking Corporation as per the IEA. Limited, Singapore Branch [email protected] (2) Social: Internet companies play an important role in using technology and AI to +65 6658 0607 respond to issues like data privacy. We find employers would need to contribute an Will Cho* extra 20-47% of staff salaries for social welfare payments if riders/drivers became Analyst, Korea Hardware and Internet The Hongkong and Shanghai Banking Corporation full-time employees. Women account for just 8% of board members on big Asia Limited, Seoul Securities Branch Internet platforms vs 35% in the US. [email protected] +82 2 3706 8765 (3) Governance: Independent directors in major Asia Internet companies Karen Choi* represented c50% of board seats, less than the 80%+ for major US peers. Head of Consumer and Retail Research, Asia Pacific The Hongkong and Shanghai Banking Corporation An integrated approach: We recommend reading this report in conjunction with Limited, Seoul Securities Branch [email protected] ESG Integrated: Taking ESG analysis in Asia to the next level (1 June 2020), which +82 2 3706 8781 launched the series. It explains our preference for looking at ESG on an integrated basis rather than taking a scoring or rating approach (see Box 1), and also flags the * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is metrics available in HSBC’s new in-house ESG database. not registered/ qualified pursuant to FINRA regulations.

This isthelatest in aseriesof Asia‘ESGIntegrated’ reports View reports

Disclosures & Disclaimer Issuer of report: The Hongkong and Shanghai This report must be read with the disclosures and the analyst certifications in Banking Corporation Limited the Disclosure appendix, and with the Disclaimer, which forms part of it. View HSBC Global Research at: https://www.research.hsbc.com

Equities & ESG ● EM Asia 27 July 2020

ESG Integrated

Taking ESG analysis in Asia to the next level We use an integrated approach to get a deeper understanding of how ESG factors can affect the future of a company or sector

Capture sustainability risks and Financial modelling through Enhance qualitative aspects of a ... and a forward-looking opportunities and incorporate cash flows and discount business beyond financial approach to accommodate for investment analysis rates targets ... varying time horizons

Environmental Social Governance The availability of natural resources such Demographics and education levels The diverse political regimes mean that as minerals and energy varies widely determine the speed of transition from an politics is not as institutionalised or across the region as does arable land and agri-based to a manufacturing-based separated from business and water resources. As a result, the economy, or even to higher-tech development, with many companies under environment may sometimes be ignored in manufacturing and services. Social government ownership. Governance the interest of economic growth considerations may take a back seat issues can sometimes be neglected

Ten ESG and sustainability questions for the internet sector

What are the different types of emissions associated with internet companies?

How does the industry manage How do internet companies reduce censorship and access? their waste footprint?

How do internet companies manage How much power does the their relationships with regulators internet sector consume? and governments?

What are the potential effects of a The internet can have positive and dual-class share structure on negative impacts on society - how minority shareholders? well do internet companies manage this responsibility?

Why is the variable interest entity (VIE) What are the common forms of employment structure common among internet companies contracts used at internet companies and do and what risks does it pose? these differ by worker type? Does the sector effectively manage data privacy issues?

Source: HSBC

China Internet by sub-sector Online penetration (user Online penetration (value More prominent ESG Business model Major companies Market size (USDbn) terms, as % of internet terms) considerations users) Online payment Facilitates contactless payments for transactions Alipay, Tenpay, Baidu, Meituan, JD, 32,963 85% 71% (e-comm); NetEase, Bilibili 48% (PoS) Emissions E-commerce Facilitates online shopping of products/services Alibaba, JD, PDD, Vipshop, Baozun, 1,525 79% 21% and wastage

NetEase’s Yanxuan (E) Data privacy (S), censorship, VIE and VIE (S), privacy censorship,Data Food delivery Connects users’ orders with restaurants and riders Meituan, Alibaba’s Ele.me 94 44% 14%

Online travel Facilitates online bookings of transportation, hotels and tours Trip.com, Tongcheng Elong, 255 41% 41% Emissions (E) Meituan, Alibaba’s Fliggy

Online games Develops and publishes PC, mobile and other games Tencent, NetEase, Bilibili 45 59% n.a. Addiction (S)

Online video Streams licensed and self-produced visual content Tencent Video, iQIYI, Youku, Bilibili 9* 94%* n.a.

Online music Streams songs from labels and musicians Tencent Music, NetEase Cloud Music 11 70% 15% d

ual

- class class

Live streaming Streams gaming and entertainment content from hosts Douyu, Huya, Momo, JOYY, 9 62% n.a. s Kuaishou, Bilibili, Tencent Music (G) tructure

Online advertising Distributes promotions to users and boost sales conversion Alibaba, Tencent, Baidu, Weibo, 75 n.a. 71% Emissions (E) ByteDance, iQIYI, NetEase

Cloud services Offers data storage, bandwidth services and software to AliCloud, Tencent Cloud, Baidu Cloud, 12 40% n.a. enterprises Kingsoft Cloud

K12 after-school Offers tutoring to K12 students TAL, New Oriental, GSX, Youdao 77 47% 12% tutoring

Internet conglomerate Tencent, Alibaba, Meituan, NetEase, Baidu 34,998 n.a. n.a.

Revenue model Fee-based Traffic-based Transaction-based Project/usage-based

Note: *Online video market size excludes video ads. Online video’s users % of total Internet users include both short-form video and long-form video users. Value terms are based on GMV or GTV. GMV = Gross merchandise value. GTV = Gross transaction volume. PoS stands for Point-of-Sale. Source: iResearch, NBS, PBoC, CNG, eMarketer, Bloomberg, Frost & Sullivan, IDC, HSBC estimates

& ESG Equities

27 July 202027

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EM Asia

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4 ASEAN Internet by sub-sector Online penetration (user Online penetration (value More prominent ESG Business model Major companies Market size (USDbn) terms, as % of internet terms) considerations users)

18% (e-comm); dual

Online payment Facilitates contactless payments for transactions SeaMoney, Ascend Money, GoPay, 107 21% and VIE censorship, Data privacy (S), (S), privacy Data

6% (PoS) - Grab, GCash, PayMaya c Emissions lass

and wastage s E-commerce Facilitates online shopping of products/services Sea's Shopee, Lazada, Tokopedia, 50 n.a. 7% (E) tructure(G) Bukalapak, Wish

Online games Develops and publish PC, mobile and other games Sea's Garena, VNG 4.4 n.a. n.a. Addiction (S) Internet conglomerate Sea 161 n.a. n.a.

Revenue model Fee-based Transaction-based

Note: PoS stands for Point-of-Sale. Source: Euromonitor, Google, Temasek, Bain & Company, Worldpay, BCG, Newzoo, Taiwan’s National Development Council, HSBC estimates

Japan and Korea Internet by sub-sector Online penetration (user Online penetration (value More prominent ESG Business model Major companies Market size (USDbn) terms, as % of internet terms) considerations users) Online payment Facilitates contactless payments for transactions LINE Pay, Kakao Pay, Naver Pay, 98 n.a. 10% (e-comm); JCB, Rakuten, Softbank 2% (PoS) Emissions E-commerce Facilitates online shopping of products/services LINE Shopping and SHOPPING GO, 212 n.a. 14% and wastage Kakao Commerce, Naver Shopping, (E)

Amazon, Rakuten, Yahoo (S privacy Data Food delivery Connects users’ orders with restaurants and riders LINE Delima and LINE Pockeo, Rakuten, 13 n.a. n.a. Demae-can, Uber Eats, Sushiro

Online games Develops and publishes PC, mobile and other games Kakao Games, NCSOFT, Nexon, 24 58% n.a. Addiction (S) Dena, Nintendo, Sony censorshipand )

Online video Streams licensed and self-produced visual content Kakao M, Rakuten TV 2.1 n.a. n.a.

Online music Streams songs from labels and musicians LINE Music, Kakao’s Melon and Kakao Music, 1.4 n.a. n.a. (G) Naver NOW and Vibe, Rakuten Music Emissions (E) Online advertising Distributes promotions to users and boost sales conversion LINE, Kakao, Naver, Z Holdings 25 n.a. 33%

Equities & ESG Equities

Cloud services Offers data storage, bandwidth services and software to Naver Cloud, NEC 15 n.a. n.a. enterprises Internet conglomerate LINE, Kakao, Naver, Softbank, Rakuten 390 n.a. n.a.

Revenue model Fee-based Traffic-based Transaction-based Project/usage-based July 202027

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Note: PoS stands for Point-of-Sale. EM Asia Source: Statistics Korea, NPD Japan, Euromonitor, WorldPay, Newzoo, Korea Creative Content Agency, Statista, KOBACO, Dentsu-ho, Gartner, HSBC estimates

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Equities & ESG ● EM Asia 27 July 2020

Contents

ESG Integrated 2 ESG integration 34 ESG disclosure requirements Executive summary 6 across Asia 37 ESG database 37 Ten questions 8 1. What are the different types of Appendix 39 emissions associated with Internet companies? 8 Disclosure appendix 41 2. How do Internet companies reduce their waste footprint? 13 Disclaimer 44 3. How much power does the Internet sector consume? 15 4. The Internet can have positive and negative impacts on society – how well do Internet companies manage this responsibility? 18 5. What are the common forms of employment contracts used at Internet companies and do these differ by worker type? 21 6. Does the sector effectively manage data privacy issues? 24 7. Why is the variable interest entity (VIE) structure common among Internet companies and what risks does it pose? 26 8. What are the potential effects of a dual-class share structure on minority shareholders? 29 9. How do Internet companies manage their relationships with regulators and governments? 31 10. How does the industry manage censorship and access? 32

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Executive summary

 ESG considerations vary across different Internet subsectors in Asia, which explains the different approaches taken by companies…

 …hence, we address 10 key questions investors should ask to gauge the ESG credentials of Internet companies

 We also contrast Asia Internet companies with how overseas major Internet platforms manage ESG

The importance of ESG to the Asia Internet sector

This report is a guide for investors to improve their understanding of the strengths and Internet penetration in Asia is higher than the rest of the weaknesses of Asia Internet companies in terms of ESG practices. It’s an increasingly important world, so sustainable and topic as Internet companies are now deeply entrenched in our daily lives, especially in Asia. The quality growth matters number of Internet users in the region has ballooned to 1.3bn outside of mainland China, 900m in mainland China, and Internet penetration across Asia is ahead of the global average. Hence, sustainable and quality growth matters. Regulatory risks are also bigger as the power of Internet companies has grown with non-compliance leading to significant financial and reputational damage. Plus, the rise of overseas investors has resulted in comparisons to ESG best practice overseas, as well as scrutiny over the unique structure of many Asia Internet companies.

Our reports find that environmental factors like greenhouse gas emissions and packaging waste are We answer the 10 most pressing questions on ESG a much bigger issue for e-commerce companies. Large amounts of water is used to cool data for the Asia Internet sector centres and waste is high for online entertainment and advertising companies. Data privacy is a big concern for social media companies, while the cost of social welfare payments plays a bigger role in food delivery companies. Governance factors like commonly used VIEs, dual-class structures, and whether minority shareholder rights are protected, are broad-based issues across the sector.

Exhibit 1: Asia’s Internet penetration (60% Asia ex-mainland China/65% mainland China) is above the 59% global average

1,000 100% 900 800 80% 700 600 60% 500 400 40% 300 200 20% 100 0 0% Mainland India US Japan UK South Korea Indonesia Phillippines Vietnam Thailand Malaysia Taiwan Singapore China ASEAN Internet users (m) Internet penetration (%, RHS) Smart phone penetration (%, RHS) Global internet penetration (%, RHS) Global smart phone penetration (%, RHS)

Note: We assume Asia (ex-mainland China) including India, Japan, South Korea, Indonesia, Philippines, Vietnam, Thailand, Malaysia, Taiwan and Singapore. Source: CNNIC, Worldbank, local census bureau, Datareportal, GSMA, Venturebeat, HSBC

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Exhibit 2: Key takeaways from our 10 questions # Topic Question Summary 1 Environmental What are the different types of Internet companies generate greenhouse (GHG) emissions from their use of office buildings, technology infrastructure emissions associated with and along their supply chain. Data centres also consume large amounts of water because of their water cooling Internet companies? systems. Waste generated by Internet companies not only includes domestic waste and toner cartridges, but also lead- acid accumulators at data centres and packaging materials, especially for food delivery and e-commerce companies. 2 Environmental How do Internet companies Internet companies leverage technology and renewable energy to reduce their carbon emissions. Global companies reduce their waste footprint? have created targets for achieving net zero emissions. For packaging waste, Internet companies seek to use environmentally-friendly material, recycle used materials, and collaborate with other companies to help cut their waste. 3 Environmental How much power does the Data centres consume only 1% of global electricity despite exponential growth in Internet traffic. That’s thanks to Internet sector consume? improved efficiency from shifting to hyperscale data centres and upgrades of mobile networks. Internet companies also use more renewable energy than other sectors with c.50% of global renewables procurement from ICT companies during 2015-19 according to the IEA. 4 Social The Internet can have positive Creating jobs like engineers and entrepreneurs as well as leveraging tech to address a wide range of social issues such and negative impacts on society - as poverty alleviation are some of the prime contributions from the Internet sector. But in other areas – like the how well do Internet companies dominance of the large Internet companies and users becoming addicted to online games – the results are less manage this responsibility? positive. 5 Social What are the common forms of While full-time employment is the norm for internal functions like sales and marketing, some functions such as riders employment contracts used at and drivers are outsourced to a platform-like business model, which raises questions about employment contracts. Internet companies and do these Content creators (e.g. streamers) have revenue-sharing contracts with the platform or agencies, or can be employed differ by worker type? through an agency or even be self-employed. 6 Social Does the sector effectively Data privacy policies and the levels of consumer protection varies across Asia. Although data privacy is regulated in manage data privacy issues? China, violations are detected occasionally by regulators. Lawsuits and fines for privacy breaches in overseas Internet platforms, and the resulting tightening of regulations, suggest user consent needs to be strictly adhered to at all times, particularly for social media platforms and businesses with overseas operations. In South Korea, Naver is committed to “Privacy as a Service” to help protect personal information and was the first Internet company in Korea to publish a transparency report disclosing information on how it protects users’ rights and information. 7 Governance Why is the variable interest entity VIE structures pose three risks to foreign investors: (1) regulatory risks that the structure is deemed void; (2) conflict of (VIE) structure common among interest between management and shareholders of a listed company, which we think can be alleviated by moving non- Internet companies and what restricted businesses to under direct control of foreign investors, and (3) a high tax rate associated with profit extraction risks does it pose? from the VIE structure, which explains why the dividend payout is structurally low for Internet companies. 8 Governance What are the potential effects of Dual-class share structures are common among Internet companies as it allows the founders to retain control of their a dual-class share structure on company, yet the structure could create conflicts of interest between founders/top management, and shareholders. minority shareholders? While a higher mix of independent directors in board seats could serve as a safeguard to balance management power, we acknowledge that it may not eliminate all of the risk related to conflicts of interest. 9 Governance How do Internet companies China’s government has been implementing regulations and/or guidelines to regulate the operations of Internet manage their relationships with companies. Chinese Internet companies have maintained a constant dialogue with regulators to keep abreast of the regulators and governments? latest regulatory movements, and communicated with regulators about any operational difficulties they have faced. Yet, we believe they should also establish additional controls to ensure the independence of their business operations from government influence. 10 Governance How does the industry manage Chinese Internet companies are responsible for managing not only the content they provide but also the content or censorship and access? comments uploaded and published by their users. They use AI technology to help sensor inappropriate content, violent content, and politically-sensitive content. Failure to do so could result in the suspension of being able to distribute content and/or the suspension of the app in app stores.

Source: HSBC

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Source: HSBC Ten questions

 Social (S) issues like data privacy are top of mind given big penalties from non-compliance and tightening regulations

 Governance (G) issues include VIE and dual-class structures; neutrality and censorship receive interest from foreign investors

 Emissions, power consumption at data centres, warehouse and office buildings + how to reduce waste are Environmental (E) issues

1. What are the different types of emissions associated with Internet companies?

1.1 Types of emissions  GHG emissions: Heavy use of technology infrastructure, including data centres and Internet companies generate most carbon emissions from servers, can increase carbon emissions and the use of energy and other resources. data centres and servers… Companies also generate carbon emissions from using electricity in office buildings. There are also indirect emissions associated with the entire value chain and which are known as scope 3 emissions. These accounted for 78% of Amazon’s total carbon emissions in 2019, and include business travel by employees, Amazon-branded product manufacturing, third- party transportation, packaging, and customer trips to Amazon’s physical stores. Google’s scope 3 emission accounted for 95% of its total emission in 2018, and mainly included commuting and emissions from suppliers.

 Water consumption: Internet companies consume a large amount of water at data centres for …use most water at data centres given the water use in the cooling systems. For example, Baidu uses a large-scale chilled water system with a cooling systems… natural cooling module at its self-built data centres. Alibaba has adopted a deep lake water cooling system at its Qiandao Lake data centre, while Google employs cooling techniques by using non-potable water at some of its data centres. In order to save water resources, Tencent’s Binhai Tower office building uses a water reclamation system to reclaim water condensation from the air conditioning system, and drains water from the water filtration system, employee shower area, and server cooling towers. The collected water, after being filtrated and purified, is reused for toilet flush water, irrigating office plants, and cleaning the basement carpark.

 Hazardous and non-hazardous waste: Hazardous waste from Internet companies mainly …and generate waste from servers and hard drives at includes toner cartridges, light tubes, and electronic equipment waste at office buildings as well data centres as lead-acid accumulators (a type of battery) at data centres. Non-hazardous waste mainly includes kitchen waste, domestic waste, and paper at office buildings as well as waste from servers and hard drives at data centres. Tencent employs qualified waste recycling vendors to dispose of its lead-acid accumulators and its waste from servers and hard drives are centralised and recycled by waste recycling vendors. Google targets achieving zero waste for landfill from its global data centres by reducing waste generated and better disposal options. In 2018, Google diverted 87% of its waste from global data centres away from landfills. Amazon donated products from waste to people in need and one of its teams in Poland redesigned a waste segregation process in a fulfilment centre, driving the waste recycling rate up by more than 40%.

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 Packaging waste: By business nature, e-commerce and food delivery companies are By business nature, food delivery and e-commerce heavy users of plastic packaging and boxes, utensils, and other materials that are not companies generate suitable for recycling. Meituan has taken various measures to reduce waste generated packaging waste throughout the lifecycle of food delivery. Both Amazon and Alibaba use environmentally friendly material for packaging, and we see major e-commerce platforms in China (Alibaba, Pinduoduo, JD.com, and Vipshop) adopting measures to recycle used delivery boxes and papers. For more details please refer to Question 2.

1.2 How do Internet companies reduce carbon emissions? The Intergovernmental Panel on Climate Change (IPCC), the UN’s climate science body, stated Global technology leaders have ambitious goals for that the world needs to achieve net zero emissions by 2050, which essentially requires all cutting carbon emissions human activities to be carbon neutral in order to limit climate warming within 1.5°C. Global technology leaders like Microsoft/Amazon target to be carbon negative by 2030 and 2040, respectively. Facebook seeks to reduce 75% of its GHG emissions by 2020 (vs 2017) and Google wants to achieve carbon neutral shipments by 2020.

According to Ericsson, a leading provider of information and communication technology in ICT sector accounts for 1.4% of global emissions, higher Sweden, carbon emissions from the information and communications technology globally (ICT) than the 0.18% for the accounted for 1.4% of overall global emissions and 3.6% of global electricity for its operations semiconductor industry (based on 2015 data, latest available). Despite exponential data growth between 2010 and 2015, the relative carbon emission index has remained largely the same thanks to improving energy efficiency and technology advantages. This seems higher than the overall technology supply chain, which does not generate much carbon emissions as it is estimated that the total semiconductor industry accounts for only 0.18% of total greenhouse gas (GHG) emissions from industrial sources in the U.S. and only 0.063% of all GHG emission sources (based on 2015 data, the latest year available) (Asia Technology ESG Integrated: 10 questions)

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Exhibit 3: Internet companies leverage their technology advantages to reduce carbon emissions while most overseas companies have long-term objectives of net zero emissions Company Emission (tonnes Objectives Ways to reduce emission of CO2e) Overseas companies: Microsoft 2018 total: 18m 1) be carbon negative 1) shift to 100% supply of renewable energy by 2025 - Scope 1: 91k by 2030; 2) electrify its global campus operations vehicle fleet by 2030 - Scope 2: 3m 2) remove all its carbon 3) new USD1bn fund to accelerate global carbon reduction - Scope 3: 14m footprint by 2050 4) make carbon reduction an explicit aspect of its procurement process for its supply chain from 2021 Facebook 2019: 251k (market- 1) 75% operational 1) 75% operational greenhouse gas emission reduction by 2020 (vs 2017) based GHG greenhouse gas 2) 100% of operations powered by renewable energy by 2020 emission) emission reduction by 2020 (vs 2017) 2) Operations 100% powered by renewable energy by 2020 Amazon 2019 total: 51m 1) achieve net zero 1) power fulfilment facilities with 100% clean energy from wind and solar projects - Scope 1: 6m carbon emissions by 2) ship in carbon neutral packages and Frustration-Free Packaging - Scope 2: 5m 2040; 3) optimise shipping materials, invent new recyclable mailers, streamline and innovate product packaging - Scope 3: 40m 2) power its business 4) transport powered by 100% electric batteries or hydrogen-fueled sources, in addition to electric bikes and electric with 100% renewable three-wheelers energy by 2025 5) donate to research looking at reducing carbon emissions and climate change mitigation solutions 6) build wind and solar renewable projects all over the world Google 2018 total: 15m 1) 100% powered by 1) purchase renewable energy - Scope 1: 64k carbon-free energy; 2) efficient data centres with high-performance servers, smart controls for temperature and lighting, advanced - Scope 2: 684k 2) achieve carbon cooling technologies and machine learning - Scope 3: 14m neutral shipments of its 3) apply industry-leading green office building standards products by 2020 4) purchase environmentally-friendly materials and focus on recycling Chinese companies: Alibaba NA NA For data centres: 1) state-of-the-art deep lake water cooling system at Qiandao Lake data centre 2) 100% powered by renewable energy at Zhangbei data centre 3) immersion liquid cooling technology that further enhances the energy efficiency of servers For industry: 1) to replace 50% of packaging materials on Alibaba-related platforms with eco-friendly or biodegradable packaging materials 2) build green logistics parks powered by solar energy, which will avoid over 1m tonnes of carbon emissions annually 3) users can collect “green energy points” through low-carbon options in their daily lives on Alilpay app and donate to planting of trees in Northwest China. As of May 2018, 55m trees have been planted while 350m users participated. Tencent 2019 total: 857k NA For office buildings: (including office 1) optimise air conditioning terminal control system and integrated building management system buildings and data 2) install automated energy monitoring devices centres) 3) use natural ventilation when there’s mild or comfortable weather; smart lighting and water reclamation system - Scope 1: 4k For data centres: - Scope 2: 853k 1) build data centres in low temperature climate areas and evaluate renewable energy availability 2) organise environmental impact assessment documents for all self-build data centres 3) apply T-block energy saving technologies comprising (i) photovoltaic + High Voltage Direct Current (“HVDC”) technology for electrical systems; (ii) indirect evaporative cooling units; (iii) Tnebula smart control systems; and (iv) fully commercialised project delivery solutions Meituan 2019 total: 21k NA For office: (including HQ 1) LED energy-saving lights and inductive water-saving sanitary wares offices, regional 2) install direct drinking water systems to replace bottled water in certain office areas offices and Kuailv’s For data centres: warehouses) 1) 50% clean energy Note: no separate 2) high-efficiency direct natural cooling and indirect evaporative cooling technology disclosure of For industry: different scopes 1) research into environmentally-friendly practices 2) added a “no tableware needed” option in food delivery ordering, and formulated a set of “no cutlery” rules for merchants 3) launched a garbage classification inquiry function and environmentally-friendly practice energy donation for users

Baidu 2019 total: 326k: NA 1) multiple power supply sources including mains electricity + uninterruptible power source (UPS), and mains - Scope 1: 5k electricity + HVDC offline in data centres - Scope 2: 301k 2) large-scale chilled water system with a natural cooling module - Scope 3: 20k 3) testing technologies including: direct fresh air cooling, indirect evaporative cooling, heat pipe backplates, water- cooled backplates, cold-plate liquid cooling, solar photovoltaic and distributed lithium battery backup units (BBU)

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JD.com NA NA 1) built photovoltaic power generation system which is installed on the roof of its Shanghai Asia No.1 logistics park 2) upgrade its nationwide fleet of direct-sale delivery trucks to new energy vehicles 3) JD Logistics launched Green Stream Initiative, a joint green supply chain campaign with the goal of improving the utilisation rate of supply chain resources and reducing carbon emissions 4) launched a RMB1bn JD Logistics Green Fund in December 2017 NetEase NA NA 1) encouraged the use of electric vehicles and environmentally-friendly construction materials in office buildings 2) installed smart lighting control systems in office buildings 3) eliminated 20,000 paper files after a paperless working environment was encouraged 4) sourced physical servers from well-known server manufacturers which are compliant with industry energy efficiency standards Momo NA NA 1) Beijing headquarters are located in a building with LEED certification at the silver level 2) encourages employees to be environmentally friendly 3) provides recycling systems in headquarters, including a direct drinking water system in order to reduce bottled water consumption Vipshop 2018 total: 5k NA 1) utilises photovoltaic power stations for its warehouses (Guangzhou 2) promotes the use of eco-friendly packaging materials Headquarters) 3) reduces waste through optimising the packaging of delivery boxes and promoting recycling - Scope 1: 545t 4) optimises transportation routes and uses new-energy vehicles - Scope 2: 5k Baozun NA NA 1) sustainable logistics operations with measures including promoting biodegradable and reusable packaging, optimising packaging to minimise the use of materials, garbage classification and recycling and purchasing electric vehicles 2) encouraging logistic partners to use electric delivery vehicles 3) shortening delivery distances by optimising routing with technology 4) focusing on operational efficiency, outsourcing data centre management and upgrading to a hybrid cloud infrastructure Trip.com 2019 total: 8k: NA 1) applies an intelligent building energy management system and uses solar energy for its headquarters - Scope 1: 45 2) Ctrip Forest provides customers with information regarding their carbon footprint and rewards them with “Sapling - Scope 2: 8k Points” to accumulate and redeem as tree saplings Tongcheng 2019 total: 8k: NA 1) turns off lights during lunch breaks Elong - Scope 1: 70 2) frequently inspects offices to shut down out-of-service devices - Scope 2: 8k 3) smart office temperature management 4) uses LED lighting for office areas and tubular lighting to optimize the use of natural lights 5) uses induction lamps in underground garages 6) supplies heat using solar energy Pinduoduo NA NA NA Weibo NA NA NA Tencent NA NA NA Music Huya NA NA NA Douyu NA NA NA iQiyi NA NA NA Bilibili NA NA NA OneConnect NA NA NA Autohome NA NA NA JOYY NA NA NA Other Asia companies: SEA NA NA NA NAVER 2019 total:72k NA For data centre: Note: no separate 1) uses Air Misting Unit (AMU) filters and NAVER Air Membrane Unit (NAMU) to cool servers disclosure of 2) uses photovoltaic power generation facilities different scopes 2) designs with the surrounding geography in mind, so that the wind can serve as a natural coolant for the servers 3) uses solar energy and energy from the heat of the servers to grow greenhouse plants 4) uses rainwater as a coolant or to extinguish fires For offices: 1) NAVER Green Factory is able to reduce energy consumption by more than 5% each year 2) encourages energy-saving initiatives among employees with staircases that announce the calories burned by taking the stairs and parking spaces that give priority commuters who normally bike 3) 1st corporation in South Korea to use noise reduction equipment during construction of its second headquarters Line NA NA NA NCSOFT NA NA NA Kakao NA NA NA Source: Company data (annual report or ESG disclosure)

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Exhibit 4: Data centres consume more water than office buildings given their water cooling systems…

4,000 Water consumption ('000 tonnes) 3,500 3,000 2,500 2,000 1,500 1,000 500 0 Tencent total Microsoft (2018) Google (2018) Baidu Meituan Tongcheng NAVER Elong Data centre Office Total Warehouse

Note: Data in this exhibit are extracted from available annual report or ESG disclosure among companies as we mentioned in this report; Warehouse refers to Kuailv’s warehouse of Meituan Source: Company data (annual report or ESG disclosure), HSBC

Exhibit 5: …as well as in terms of per employee water consumption tonnes 50 44 Water consumption per employee in 2019 (no. of employees as reported by companies) 45 40 34 35 28 30 25 22 21 20 17 16 15 10 7 5 0 Tencent - Baidu - Microsoft Tencent - NAVER Tongcheng Google (2018) Meituan - office+data office+data (2018) office Elong - mainly office centre centre office

Note: For Microsoft and Google, only 2018 data is available. Data in this exhibit are extracted from available annual report or ESG disclosure among companies as we mentioned in this report Source: Company data (annual report or ESG disclosure)

Exhibit 6: Office buildings generate most waste for Internet companies

60,000 Total waste (tonnes) 51,812 50,000

40,000

30,000

20,000 17,296 7,049 10,000 6,250 5,230 4,514 631 - Google (2018) Microsoft (2018) Tencent (2019) Baidu (2019) Tencent - office Meituan - office Tongcheng (2019) (2019) elong (2019)

Note: Data in this exhibit are extracted from available annual report or ESG disclosure among companies as we mentioned in this report. Source: Company data (annual report or ESG disclosure)

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Exhibit 7: By using solar power at its data centre, NAVER saved 97 tonnes of CO2 emissions in 2019

250 NAVER's solar power generation (MWh) 217

200 182

150

100

50 35

0 2017 2018 2019

Source: Company data

2. How do Internet companies reduce their waste footprint?

E-commerce and food-delivery companies are heavy users of paper and plastic packaging. Amid rising environmental awareness though Chinese Internet players in these areas have been adapting to the use of more environmentally-friendly materials and minimising unnecessary wastage through technology innovation.

 Ecommerce

According to the State Post Bureau, there were 64bn express delivery parcels in China in 2019, There were 64bn express delivery parcels in China in mostly generated by e-commerce. Packaging materials including delivery boxes and courier 2019, mostly generated by e- bags while waybills are printed out for merchants to prepare their parcels. We think practices by commerce companies such as Amazon serve as a useful reference to analyse China players’ efforts in this area. We find Chinese e-commerce giants such as Alibaba and JD.com are actively reducing their waste.

Exhibit 8: E-commerce players’ efforts in minimising their environmental impacts Actions Amazon Alibaba JD.com PDD VIPS Use environmentally friendly materials Yes Yes Yes N.A. Yes Optimise packaging Yes Yes Yes N.A. Yes Recycle used materials Yes Yes Yes N.A. Yes Collaborate with government institutions and enterprises Yes Yes Yes N.A. N.A. Source: Company data

 Using environmental friendly materials: Amazon launched recyclable mailers in Alibaba has a goal to replace 50% of all packing materials 2019, which are made of paper and a water-based cushioning material. Much earlier in with eco-friendly materials 2016, Alibaba started to promote “Green Package (绿色包裹)” made of biodegradable bags or tap-free cartons. Its Cainiao Network is working towards a goal of replacing 50% of all packing materials with eco-friendly materials and targets to realise “Green Logistics 绿色物流” by 2020. JD.com has been promoting its recyclable green boxes and slim tape since early 2014. Since then over 1m reusable delivery bags have been used (as of December 2018). Lastly, VIPShop initiated “Green Recyclable Box” in 2018 and promoted the use of packaging materials that are low pollution.

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Exhibit 9: Alibaba targets to achieve “Green Logistics 绿色物流” by 2020

Replace all plastic delivery bags with eco-friendly bags for Tmall Direct Delivery (天猫直送)

Make eco-friendly delivery bags available in 200+ cities for Taobao/Idle Fish home access services

Lingshou Tong will reuse delivery boxes to serve millions of mon-and-pop stores

Set up recycle boxes in all of its Cainiao service community station

To achieve 100% usage of electronic waybill in all the packages in Cainiao Network

Apply AI algorithms to enable smart routing and shorten delivery journey by 30% in rural areas

Source: China Association of Circular Economy

 Optimising packaging to reduce waste: Starting in 2008, Amazon set up a program Internet companies leverage technology to reduce waste called Frustration-Free Packaging and encourages manufactures to use easy-to-open packaging made of 100% recyclable materials without additional Amazon packaging to ship to consumers, saving over 880,000 tonnes of packaging material since 2015. Cainiao Network reduced packaging materials by c.15% thanks to its packaging optimisation algorithm, which was applied in over 250m delivery boxes and courier bags in the fiscal year ended March 2018. Similarly, JD.com initiated “Green Stream Initiative 青流计划” in June 2017, which included several packaging optimisation programs including simplified packaging and shipments in original containers. VIPShop launched “Green Packaging” in 2018, optimising the structure of packaging containers to reduce material usage and shipment space.

 Recycling packaging materials: Cainiao Network has c.5k green recycling boxes in Recycling boxes is a common practice for Chinese its service terminals in 200 cities in China for consumers to return packaging materials e-commerce companies for recycling, and it plans to add 50k more to cover all of its service terminals. This is expected to save over 100m packaging boxes per year. JD Logistics has recycled its reusable “Green Delivery Boxes” (“青流箱”) over 160m times in 30+ cities since its launch in December 2017. It targets recycling 80% of its packaging materials by 2020. As for VIPShop, it has been promoting recycling used paper boxes and disposable plastic bags, driving a 57% y-o-y decline in packaging paper in 2018.

 Collaboration: Amazon works with top brands to redesign its packaging to reduce waste creation and teams up with companies across the packaging sector to develop new materials for a better environment. In 2016, Cainiao Network established “Green Logistics Alliance” with 32 companies across the logistic industry including courier service providers, warehouse operators, and trucking firms to implement its environment philosophy. Meanwhile, JD.com initiated “Green Stream Initiative 青流计划” in June 2017, which is a joint supply chain campaign with a target to save 10bn disposable packaging boxes by 2020, equivalent to the total number of delivery boxes used in China in 2015.

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 Transforming the industry through digitalisation: Alibaba launched an electronic Promoting electronic waybills saves paper waybill system through cooperation with its logistics partners by shifting data online instead of printing it out in paper. Cainiao’s network has saved 400bn pieces of paper in six years (as of June 2020) thanks to electronic waybill system. JD.com also has similar initiatives, and as a result: (1) 2.8bn electronic invoices have been issued through JD.com during 2012-17, saving 1,820 tonnes of paper; and (2) 5,000+ tonnes of paper were saved in 2017 from electronic signatures being used as a delivery confirmation process.

 Food delivery

For food delivery, utensils, plastic bags, and delivery boxes are heavily consumed. China’s food delivery created 2m tonnes of waste in 2018 According to The New York Times (28 May 2019), the booming food delivery industry in China created 2m tonnes of waste in 2018, over nine times the value in 2015, while a majority of that waste ends up in land fills and incinerators given the marginal economic return to scavengers to collect, clean, and recycle them. As such, it is critical for food delivery companies to reduce waste in the beginning, just as global food delivery player Just Eat Takeaway.com (TKWY NA, EUR92.44, Hold) has removed all plastic packaging for food delivery in December 2019. We see Chinese companies taking measures to reduce waste creation throughout different aspects including:

 Promoting “No Cutlery” option: In 2017, Meituan launched a “no tableware “No Cutlery” reduces waste from the origin needed”/”no cutlery” option in its food delivery app. In the same year, as part of the “Blue Planet 蓝色星球” project, Ele.me (owned by Alibaba) added a “No Cutlery” option in its app, and incentivised customers by giving coupons for orders without cutleries. As of March 2019, Ele.me has sent out more than 74m orders without cutlery (vs 4-6bn annual orders, per our estimate based on its market share and Meituan disclosures), which has saved approximately 1,184 tonnes in carbon emissions.

 Promoting environmentally friendly materials: Meituan encourages its merchants to Chinese players are using more eco-friendly materials use reusable packaging and tableware by lowering their procurement cost through centralised purchasing programs. In 2018, Ele.me cooperated with the Shanghai government to replace petroleum-based packaging materials with paper materials to reduce 75% usage of plastics in pilot districts.

 Developing waste sorting and recycling: Meituan launched a garbage classification Meituan set up 200 garbage recycling points in China inquiry function to help with recycling waste using big data analytics. It also established over 200 garbage recycling points in China in a variety of locations such as stores, campuses, office buildings and communities.

3. How much power does the Internet sector consume?

According to the International Energy Agency (IEA), data centres worldwide consumed Energy consumption at data centres has been flat since c.200TWh in 2019, equivalent to only 1% of global electricity use, despite an exponential growth 2015 despite rapid growth in Internet traffic. Global Internet traffic has tripled since 2015 and data centre workloads more thanks to better efficiency than doubled (Exhibit 10), yet data centre energy usage has remained flat since 2010 – thanks and technology to better efficiency and technology. IEA expects electricity demand from data centres globally to remain flat to 2022 despite a 60% increase in service demand thanks to improving energy efficiency of IT hardware and a major shift to hyper-scale data centres.

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Exhibit 10: Data centre energy efficiency is improving as reflected by stable energy usage even as Internet traffic has tripled between 2015 and 2019

14 Index (2010=1) Internet traffic 12

8 Data centre workloads

4 Data centre energy 2 usage 0 2010 2015 2016 2017 2018 2019

Source: IEA

According to the IEA, cloud and hyper-scale data centres are more efficient than small data Shift to large-scale data centres and advanced mobile centres with very low power usage effectiveness (PUE). The shift from traditional data centres networks help improve to cloud and hyper-scale data centres, which are more energy efficient should help offset the energy efficiency negative environmental impact from stronger growth in data demand. In addition, a greater use of mobile networks also helps improve the energy efficiency in data transmissions. According to the IEA, traffic from wireless and mobile devices are expected to account for more than 70% of total traffic by 2022e, up from 50% in 2019. By 2022e, 4G and 5G networks are expected to contribute 83% of mobile traffic, vs <1% for 2G while 4G networks are c.5 times more energy efficient than 3G and 5G can be 10-20 times more energy efficient than 4G by 2025-30e according to the IEA.

Exhibit 11: Improving energy efficiency from a shift to cloud and hyper-scale data centres

250 Global data centre energy demand by data centre type (TWh)

200

Hyperscale 150

100 Cloud (non-hyperscale)

50 Traditional 0 2010 2019 2022

Source: IEA

ICT companies can use renewable power in one of two ways: (1) facilities such as data centres can be directly connected to a renewable generation source such as wind or solar and exclusively use the electricity generated; and (2) companies can purchase the renewable energy portion of a grid’s/power producer’s electricity output through ‘power purchase agreements’ (PPAs). If demand exceeds supply, it encourages power producers to build more renewable capacity.

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ICT companies accounted for c.50% of global corporate renewables procurement through ICT companies contribute c.50% of global renewable power purchase agreements (PPAs) during 2015-19, according to the IEA. The top four energy procurement corporate off-takers of renewables in 2019 were all ICT companies, led by Google. In 2019, Google, Microsoft, and one of Alibaba’s data centres were already 100% powered by renewable energy, ahead of 86% for Facebook and c.50% for Meituan and Amazon.

Exhibit 12: ICT companies accounted for Exhibit 13: Internet companies’ data around half of renewable energy centres are mostly powered by renewable purchased globally during 2015-19 energy

100% 100% 100% 20 Global PPA volumes by sector (GW) 100% 86% 90% 80% 70% >50% 60% 10 50% 42% 40% 30% 20% 10% 0 0%

Google Alibaba's Microsoft Facebook Meituan's Amazon

2010 2018 2011 2012 2013 2014 2015 2016 2017 2019 2009 (2018) Zhangbei (2018) (2019) Zhongwei (2019) Technology Communications Data Data centre centre Materials Consumer staples (2018) (2019) Government & university Manufacturing Financial Other % of data centre electricity from renewables

Source: IEA Source: Company data (annual report or ESG disclosure) Note: Data in this exhibit are extracted from available annual report or ESG disclosure among companies as we mentioned in this report

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Exhibit 14: Data centres normally have lower power usage effectiveness (PUE) vs industry average and national average as they use renewable energy and advanced technologies PUE Measures to improve energy efficiency: Overseas Internet companies: Microsoft (2019) NA Target to power data centres with 60% renewable energy by 2020 and reach 70% renewable energy within the next four years Construct new office buildings with 100% carbon free electricity Facebook (2019) 1.11 Embed circularity at every stage of hardware’s lifecycle Amazon (2020) NA Four operations facilities are powered by solar energy through on-site solar installations Control system technology and real-time data analytics to optimise heating and cooling systems Google (2018) 1.11 Customised high performance servers Smart temperature and lighting controls Advanced cooling techniques (evaporative cooling and non-potable water) Machine learning Major overseas companies’ average 1.1 Vs: industry average (2019)* 1.5

Chinese Internet companies: Alibaba (2018) - Qiandao Lake data centre 1.17 Deep lake water cooling system - Zhangbei data centre 1.25 100% powered by renewable energy in a naturally cool region Tencent (2019) T-base campus and T-block technology - Data centres in low-temperature climate 1.25 Large scale data centre to achieve an average of 1.2 - All data centres 1.35 Meituan (2019) - Ningxia Zhongwei data centre 1.1 Large-scale with direct natural cooling and indirect evaporative cooling technology, and wind wall system Baidu (2019) Multiple power supply plans - Most energy-efficient data centre 1.08 Large-scale chilled water system with a natural cooling module - All self-built data centres 1.14 NetEase (2019) NA Installed smart lighting control systems in office buildings

Major Chinese companies’ average 1.2 Vs: National average in China (2018) 1.73 Nationwide target* 1.5 Other Asia companies NAVER (2019) - Gak data centre 1.09 Air Misting Unit (AMU) and NAVER Air Membrane Unit (NAMU) to cool servers photovoltaic power generation facility *Note: Industry average is per Facebook’s 2019 sustainability report. Nationwide target is per Meituan 2019 annual report that National Data Center Application Development Guidelines in China stated a PUE target of 1.5 for data centres under construction nationwide. Source: Company data (annual report or ESG disclosure)

4. The Internet can have positive and negative impacts on society – how well do Internet companies manage this responsibility?

Internet companies change how people and businesses operate – billions of users are connected to each other and to a myriad of opportunities, content, products, and services. Below we highlight some key contributions from Internet companies to society and areas where we believe improvement is needed:

(1) Job creation and talent A variety of new jobs like live streamers, specialist R&D personnel, and delivery riders have Internet platforms create new jobs that never existed before been created by the boom in the Internet. SMEs in both China and the rest of the world have more opportunities to trade and monetise content thanks to better connectivity between Chinese markets and the rest of the world. More diverse talent is also needed, such as engineers, entrepreneurs, and content creators. As a result, companies like JD.com, Alibaba, Tencent, Meituan, Trip.com, Baidu, Sea Ltd, NetEase, and Vipshop have large headcounts.

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Exhibit 15: Major Asia Internet companies are responsible for c700k full-time jobs

250,000 227,730

200,000

150,000 116,519 100,000 62,885 54,580 44,300 37,779 29,800 50,000 20,797 20,442 17,180 8,889 8,602 6,998 5,979 5,828 5,431 4,791 4,126 3,639 3,631 3,610 1,948 1,864

Line

PDD

iQIYI

Huya

Bilibili

Baidu

Naver

Kakao Weibo

Douyu

Music

Alibaba

Baozun

Sea Ltd Sea

Meituan

Tencent Vipshop Tencent

Elong

NetEase

Trip.com

NCSOFT Tongcheng

No. of full-time employees (end of 2019) OneConnect

Note: Meituan do not include its riders as full-time employees. Source: Company data

(2) Resolving social issues Chinese Internet companies devote technology to address social issues: Poverty alleviation Technology enhances connectivity between people can become more effective as more jobs, income generation opportunities, and education to resolve problems become widely available regardless of your background. Charitable causes are more easily supported and funded given their access to high-traffic Internet platforms. The technology divide can be narrowed as Internet connects users from different age groups, regions, and people with disabilities. Finding missing persons is easier given AI, facial recognition, and social media are powerful tools to raise awareness and help searches (Baidu: over 10,000 missing persons found, Alibaba: over 4,300; Tencent: over 1,000). Launch of health code (an ePass that verifies users’ health and travel status, and used by 900m+ since 9 February 2020) reduces virus transmission risk during COVID-19 and helps citizen’s efficient entry and exit into public areas like train stations. Internet companies with a large numbers of users, big R&D teams, and funds for investments have been advocates for some of these initiatives (e.g. Tencent, Alibaba, Meituan, Baidu, NetEase, and JD.com).

In Korea, Kakao operates two major social impact programs: (1) A donation platform named “Kakao value together” and (2) “Kakao makers” which connects small-scale producers to consumers. Kakao also helps teachers and students prepare for the future by introducing them to future technologies. Elsewhere in Korea, NCSOFT established the NC Cultural Foundation in 2012 to help with socially-responsible activities. This includes: (1) Augmentative and Alternative Communication (ACC) to improve communications for people with disabilities and to improve awareness of communication disorders and (2) publishes a variety of fairy tale books and donates them to the public and small libraries across the country.

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Exhibit 16: Internet companies donated over RMB5bn to fight COVID-19

RMBm 2,000 2,000 Donations during COVID-19 1,500 1,600

1,200

800 446 300 400 200 200 100 100 100 100 80 20 10 10 10 10 10 0

Note: *Companies not under coverage. Source: Company data, Sina news, Sohu news, Xinhuanet

Cloud computing can generate (3) Increasing efficiencies in daily life and various industries insights from big data and Internet companies help with daily errands and admin tasks by putting a variety of services make recommendations online, like travel bookings, speeding up computing power, and recommending products and services.

(4) Consumers might have less flexibility or options in some consumption categories While Internet platforms boost the availability of information for consumers in some areas and Subscription-type of consumption are bundled in search engines make it easy to compare costs, in some areas like music and video where scale a way that entices more is needed for profits, a monopoly or duopoly structure is omnipresent. This limits the choices consumption to recoup consumers have and limits their bargaining power. For example, one of the features of paid money spent video subscriptions is no pre-roll advertising, yet consumers might prefer to watch the ads which only take 30 seconds instead of paying more for the subscription. Or consumers might just want to pay to watch a certain variety show, but instead they need to pay the full subscription fee, which comes with other content that has no value to the consumer.

(5) SMEs’ might find it difficult to receive attention from consumers While the Internet provides more business opportunities for merchants as they can access more Local services monopoly in certain cities might drive customers and uncover more monetisation models, not all merchants benefit from it. Some platforms to charge much niche or “long-tail” SMEs/merchants (e.g. a small tailor shop that only sells suits for men in one more in terms of service fees city) might not be able to compete with popular/larger scale merchants (e.g. a large nationwide on small merchants, than a suits brand), as the larger scale merchant might be able to afford prominent advertising slots on competitive market search engines or e-commerce platforms, even if the products from the SME are of higher quality or more suitable for certain users. Thus, larger-scale merchants might take away sales from these niche SMEs. Moreover, in areas like e-commerce where there’s often a monopoly or duopoly structure, some merchants might be asked to form exclusivity with one of the e- commerce platforms or risk not having support from either platform, which lowers their bargaining power, particularly for SME merchants/establishments.

Potential solutions in the industry so far have been:

 “Long-tail” SMEs can work with Software-as-a-Service (SaaS) solution providers to develop their own online stores, self-develop mini programs in WeChat, and launch live streaming to help sell their products outside of the dominant e-commerce apps, create their own membership groups and user base.

 Engage with other SMEs and liaise with industry associations as a group to collectively bargain with large platforms to gain better access to traffic and contract terms.

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(6) Children are vulnerable to addiction Addiction to online games, as well as videos and e-commerce, has arisen as Internet services have become widely accessible, with children especially vulnerable without proper guidance from parents or monitoring from Internet platforms. In light of this, the National Press and Public Administration (NPPA) in November 2019 issued new rules governing time spent playing games and in-game top-up limits for minors. Major players like Tencent and NetEase are compliant and have launched parent guardian platforms to allow parents to monitor and control online game consumption by their children.

Exhibit 17: Major game companies comply with restrictions for minors… ______Age <=12 ______12 < Age < 18 ______Tencent NetEase Industry rule Tencent NetEase Industry rule No gaming period 10pm to 8am 9:30pm to 8:30am 10pm to 8am 10pm to 8am 9:30pm to 8:30am 10pm to 8am Cap with playtime 1.5/day on 1 hour/day on 1.5 hours/day on 1.5/day on 2 hours/day on 1.5 hours/day on weekday; 3 weekday; 2 weekday; 3 weekday; 3 weekday; 3 weekday; 3 hours/day on hours/day on hours/day on hours/day on hours/day on hours/day on holiday holiday holiday holiday holiday holiday Source: Company data, NPPA

Exhibit 18: …as well as top-up limits Age < 8 8 <= Age < 16 16 <= Age < 18 Limit on in-game top-up (RMB) Cannot top-up Each top-up < RMB50 and max. Each top-up < RMB100 and top-up RMB200/month max. top-up RMB400/month Source: NPPA

5. What are the common forms of employment contracts used at Internet companies and do these differ by worker type?

Full-time employment is the norm… Full-time employment is the most common practice for Chinese Internet companies, especially for internal functions like research and development, sales and marketing, general and administrative, and customer services. The Labor Law and Labor Contract Law in China require employers to execute written labor contracts with full-time employees, establish a system for labor safety and sanitation, comply with state rules and standards, and offer workplace safety training to employees. Also, employers are required to contribute to employee benefit plans.

…but drivers and riders might be employed under a contract with third-party partners If delivery staff are full-time employees, then Internet In some labour-intensive sectors like logistics, ride-hailing and food delivery, the type of platforms need to pay social employment depends on an Internet company’s hiring and outsourcing policy. For JD.com and welfare for them Baozun, it includes staff from procurement, warehouse, and delivery functions as full-time employees, similar to other functional staff. Ride hailing platforms partner with individual riders. Food delivery platforms leverage a network of delivery partners which provide riders. These drivers and riders can be full-time employees or contract workers, and hence their employment contract terms and responsibilities can vary depending on the platform’s policy.

Content creators work for themselves or their agencies or studios Live streamers, musicians, and game developers have In areas where IP/content rights belong to a third-party (e.g. live broadcasting, games, music), revenue sharing terms and Internet platforms might: (1) cooperate with talent agencies who recruit and manage are not full-time employees broadcasters in exchange for revenue sharing from the Internet platforms and (2) enter a direct relationship with these content creators and offer revenue sharing terms. In some cases (e.g. iQIYI), the platform has its own content production and operation teams which are treated as full-time employees.

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Non-compete for senior management Moreover, Internet companies typically enter into standard employment contracts with confidentiality and non-compete agreements with senior management and core personnel. Furthermore, Internet companies might occasionally hire temporary employees and contractors.

If employees aren’t full-time, they may not be eligible for welfare scheme contributions “Five insurance, one fund” 社保五险一金 are mandatory contributions The social welfare scheme ( ) in China includes “five insurance, one fund” ( ) which is by full-time employees and detailed below. Both employers and employees need to contribute to it each month, based on employers in China requirements set by each city’s social security bureau. Take Beijing and Guangzhou as examples:

 1) endowment/pension insurance (16%/14% of employee’s salary in Beijing/Guangzhou)

 2) medical insurance (10%/5.5% in Beijing/Guangzhou)

 3) unemployment insurance (0.8%/0.6% in Beijing/Guangzhou)

 4) work injury insurance (0.2%-1.9%)

 5) maternity leave insurance (0.8%/0.85% in Beijing/Guangzhou)

 6) housing fund (5-12% in Beijing/Guangzhou)

Our checks across c50 cities in China indicate that each city has its own contribution requirement (as a % of employee’s salary). We estimate an extra 20-47% of staff salaries for social welfare payments are required for companies, depending on cities. There are minimum and maximum contribution limits subject to each city’s average salary level.

To assess the impact of social welfare if it was strictly imposed on companies that have outsourced part of their operations, assume a local services platform hire riders through a third party partner and has say, 4m riders who earn income from its platform and assume 800k daily active riders. If we conservatively assume 30% of the 800k daily active riders are considered full-time employees for calculations of social welfare, and further assume each active rider earns an average of RMB4,275/month, then we estimate that such a platform would need to contribute an extra RMB2.5bn-5.8bn in social welfare.

Exhibit 19: Assessing the impact of social welfare Annual (2019) Assume no. of riders obtaining income 4,000,000 No. of daily active riders 800,000 % of active riders 20% Assume 30% of daily active riders to become full-time employees: Monthly income for each active rider (RMB) 4,275

Min Max Average Min Max Average Insurance type (Chinese) Insurance type (English) Employer contribution (% of salary) Employer annual contribution (RMBm) 养老保险 Endowment/pension insurance 12.0% 20.0% 16% 1,477 2,462 1,920 医疗保险 Medical insurance 3.0% 10.5% 8% 369 1,293 935 失业保险 Unemployment insurance 0.2% 0.8% 1% 25 98 68 工伤保险 Work injury insurance 0.1% 1.9% 1% 12 234 123 生育保险 Maternity leave insurance 0.0% 1.5% 1% 0 185 83 住房公积金 Housing fund 5.0% 12.0% 9% 616 1,477 1,047 Total 20% 47% 34% 2,499 5,750 4,175

Source: Company data of one food delivery platform, Municipal human resources and social security bureau of various cities, HSBC estimates

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Exhibit 20: Employees by function – JD.com has the most employees as it includes delivery staff as employees No. of full-time Warehouse / Customer service / Sales and R&D / technology / General and employees Procurement fulfilment Delivery operations marketing product development administrative Others Asia Internet JD.com 227,730 8,128 43,736 132,218 16,570 8,288 14,047 4,743 n.a. Alibaba 116,519 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tencent 62,885 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Meituan 54,580 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Trip.com 44,300 n.a. n.a. n.a. 12,900 5,700 21,700 4,000 n.a. Baidu 37,779 n.a. n.a. n.a. 4,056 9,727 21,626 2,370 n.a. Sea Ltd. 29,800 n.a. n.a. n.a. n.a. 5,700 2,800 2,400 18,900 NetEase 20,797 n.a. n.a. n.a. n.a. n.a. 10,279 n.a. n.a. Vipshop 20,442 1,369 13,856 n.a. 1,163 188 1,658 485 1,723 Naver 17,180 n.a. n.a. n.a. n.a. n.a. 5,817 n.a. n.a. JOYY 9,273 n.a. n.a. n.a. 4,210 446 3,946 671 n.a. iQIYI 8,889 n.a. n.a. n.a. 2,424 1,850 4,064 551 n.a. Kakao 8,602 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Line 6,998 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Baozun 5,979 n.a. 661 n.a. 4,161 803 354 n.a. PDD 5,828 n.a. n.a. n.a. 879 826 3,613 510 n.a. Tongcheng Elong 5,431 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Bilibili 4,791 n.a. n.a. n.a. 2,404 n.a. 2,043 344 n.a. Autohome 4,198 n.a. n.a. n.a. 501 1,721 1,790 186 n.a. Weibo 4,126 n.a. n.a. n.a. 561 1,118 2,364 83 n.a. NCSOFT 3,639 n.a. n.a. n.a. n.a. n.a. 2,471 1,168 n.a. OneConnect 3,631 n.a. n.a. n.a. 613 835 1,893 290 n.a. Tencent Music 3,610 n.a. n.a. n.a. 641 361 2,021 587 n.a. Momo 2,350 n.a. n.a. n.a. 332 391 1,356 271 n.a. Douyu 1,948 n.a. n.a. n.a. 439 125 744 640 n.a. Huya 1,864 n.a. n.a. n.a. 672 147 860 185 n.a. Global Internet Facebook 44,942 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Amazon 798,000* n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Alphabet 118,899 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Microsoft 144,000 n.a. n.a. n.a. 47,000 38,000 47,000 12,000 n.a. Netflix 8,600 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Note: Data as of end 2019. *Amazon’s employee’s number include both full-time and part-time employees. Source: Company data

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Exhibit 21: Employees by function (%) ______% full-time employees mix ______No. of full-time Procurement Warehouse / Delivery Customer service / Sales and R&D / technology / General and Others employees fulfilment operations marketing product development administrative Asia Internet JD.com 227,730 4% 19% 58% 7% 4% 6% 2% n.a. Alibaba 116,519 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Tencent 62,885 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Meituan 54,580 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Trip.com 44,300 n.a. n.a. n.a. 29% 13% 49% 9% n.a. Baidu 37,779 n.a. n.a. n.a. 11% 26% 57% 6% n.a. Sea Ltd. 29,800 n.a. n.a. n.a. n.a. 19% 9% 8% 63% NetEase 20,797 n.a. n.a. n.a. n.a. n.a. 49% n.a. n.a. Vipshop 20,442 7% 68% n.a. 6% 1% 8% 2% 8% Naver 17,180 n.a. n.a. n.a. n.a. n.a. 34% n.a. n.a. JOYY 9,273 n.a. n.a. n.a. 45% 5% 43% 7% n.a. iQIYI 8,889 n.a. n.a. n.a. 27% 21% 46% 6% n.a. Kakao 8,602 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Line 6,998 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Baozun 5,979 n.a. 11% n.a. 70% 0% 13% 6% PDD 5,828 n.a. n.a. n.a. 15% 14% 62% 9% n.a. Tongcheng Elong 5,431 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Bilibili 4,791 n.a. n.a. n.a. 50% n.a. 43% 7% n.a. Autohome 4,198 n.a. n.a. n.a. 12% 41% 43% 4% n.a. Weibo 4,126 n.a. n.a. n.a. 14% 27% 57% 2% n.a. NCSOFT 3,639 n.a. n.a. n.a. n.a. n.a. 68% 32% n.a. OneConnect 3,631 n.a. n.a. n.a. 17% 23% 52% 8% n.a. Tencent Music 3,610 n.a. n.a. n.a. 18% 10% 56% 16% n.a. Momo 2,350 n.a. n.a. n.a. 14% 17% 58% 12% n.a. Douyu 1,948 n.a. n.a. n.a. 23% 6% 38% 33% n.a. Huya 1,864 n.a. n.a. n.a. 36% 8% 46% 10% n.a. Global Internet Facebook 44,942 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Amazon 798,000* n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Alphabet 118,899 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Microsoft 144,000 n.a. n.a. n.a. 33% 26% 33% 8% n.a. Netflix 8,600 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Note: Data as of end 2019. *Amazon’s employee’s number include both full-time and part-time employees. Source: Company data

6. Does the sector effectively manage data privacy issues?

Internet platforms are required by law to protect data privacy Across major Chinese Internet companies, data privacy is of paramount importance to meet the rules and regulations in mainland China (e.g. Cybersecurity Law of the People’s Republic of China, Provisions on Protecting the Personal Information of Telecommunications and Internet Users, Provisions on the Cyber Protection of Children’s Personal Information, etc. (see the Appendix for more details). The 3Cs – Consent, Clarity, and Choice – are the bare minimum of what most of these companies highlight in their best practice or principles on data privacy.

 Consent: Platform must obtain user’s consent before collecting and using user data.

 Clarity: Clearly explain in simple language what and how data is collected and used, and make such disclosure easily accessible.

 Choice: Users can opt-in and opt-out of data collection and privacy settings.

Other principles that are often adopted: (1) Protection of data using internal control systems (e.g. data can only by accessed by designated personnel). (2) Minimising data collection and retention. (3) Ensuring users have channels to file requests or complaints.

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Data privacy policies are largely similar across sub-sectors, even higher for cloud services In China, in terms of what data is collected, how it is collected and how data is used and shared, Payment and Cloud service providers are subject to and what users can do to protect their data, data privacy policies are similar across sub-sectors. higher data privacy and However, for cloud services, the terms mentioned above are not entirely applicable to the data security standards uploaded and stored on the cloud, as this data still belongs to the enterprise and these enterprises need to form their own privacy policy with their own customers. We also note that social media might be under more regulatory scrutiny given that: (1) unwanted advertising and recommendations might be viewed by some users as an intrusion of their privacy; (2) information can be exchanged in and out of mainland China; and (3) data privacy breaches in social media in overseas markets generally increases awareness of user consent and data privacy protection. Overall, online payment platforms and cloud service providers with access to areas like enterprise data and trade secrets data etc. are generally subject to higher data privacy and security standards, followed by e- commerce and online entertainment.

In Korea, data privacy is also an important focus for large Internet players. Naver is committed to “Privacy as a Service” and hence opened the “NAVER Privacy Center” to protect users’ personal information (e.g. explaining to users its actions to ensure data privacy, running blog and social media platforms dedicated to data privacy protection). Naver was the first Internet company in South Korea to publish a transparency report disclosing information on how it protects users’ rights and information. It also publishes the “NAVER Privacy White Paper” annually to share information about experts’ research on protections.

Companies with overseas businesses need to uphold higher standards For major Internet companies with overseas businesses (e.g. Alibaba’s Alipay, AliExpress, and Overseas regulations on privacy might complicate the Lazada, Tencent’s payment business, Tencent and NetEase’s overseas games business, expansion plans of Chinese Bytedance, Trip.com, YY, and Huya), they are subject to a wide range of regulatory regimes Internet platforms (e.g. GDPR (EU General Data Protection Regulation), Federal Law on Personal Data of Russia). These regulations might make data collection, storage, transfer, disclosure, protection, and privacy more complex and expose the company to significant penalties for non-compliance. A recent example is India Information Technology Ministry asking Tiktok’s owner ByteDance to address issues like its privacy policy and content censorship.

Cases of violation still appears To enhance data privacy protection, China’s Ministry of Industry and Information Technology (MIIT, Regulators in China publicise 中华人民共和国工业和信息化部 the punishment of apps that ) launched a campaign in November 2019 to investigate app violate data privacy providers and distributors in privacy issues such as: (1) illegally collecting user information, (2) illegally using user information, (3) unreasonably requesting user permissions, and (4) assessing the difficulty level for deleting accounts. It also demands those apps that violate users’ interests to address issues by certain deadlines, or face the risk of being removed from the app store.

Exhibit 22: MIIT started to conduct checks on app’s potential violations of user privacy Date No. of apps App examples Deadline to comply No. of apps removed 19-Dec-19 41 Sina Sports, Xiaomi Finance, Sohu News, 36kr 31-Dec-19 3 (Renren video, Chunyu passometer, WeSing) 9-Jan-20 15 Luckin Coffee, Greentown 17-Jan-20 n.a. 15-May-20 16 Dangdang, Qianqian Music 25-May-20 n.a. 3-Jul-20 15 ClassIn, TutorABC 14-Jul-20 n.a. Source: MIIT

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Consent matters There have been many data privacy issues around the world in recent years. Facebook faced a Global Internet platforms are in the spotlight over consent USD5bn fine by the Federal Trade Commission following the Cambridge Analytica privacy breach. For details, please refer to Facebook’s initiation: Initiate at Reduce: Digital Dignity Deficit Disorder?, dated 4 December 2019.

Beyond social media, Bloomberg reported (17 January 2020) that European Union privacy watchdogs are preparing for guidelines to handle privacy issues for smart speakers (or digital assistants), given that Internet companies might have workers listening in. Amazon is being sued over its digital assistant’s recordings of children, according the BBC News on 13 June 2019.

Moreover, regarding user’s location-based information, there can be controversies arising for platforms which have user location data. On 14 August 2018, Associated Press stated it noted Google services on Android devices and iPhones store user’s location data even if the user has disabled that in the privacy setting.

In China, Internet platforms have privacy policies detailing: (1) what data is collected, (2) how to collect data, (3) how the data is used and shared, (4) how the platforms protect data privacy, and (5) how the users can manage their data, and ask for user’s consent. These platforms also state that they might use cookies (or browsing history) inside the app/website to gauge user interest and demographics and advertise products/services. Some Internet platforms also clarified that even if users’ consent is obtained, data collection from cameras and microphone is only enabled when users actively click the related functions when using the apps/website.

We also provide examples from companies’ disclosure on how they handle data issues in the Appendix.

7. Why is the variable interest entity (VIE) structure common among Internet companies and what risks does it pose?

In order to protect the domestic players in strategically important industries, the National Internet is one of the restricted sectors for foreign ownership, Development and Reform Commission (NDRC) and the Ministry of Commerce (MoC) have giving rise to the VIE structure identified a list of 40 sectors in which foreign investment is either prohibited or restricted, and the Internet sector is one of the sectors on the list. Other sectors include aviation, telecommunications, finance, education, and healthcare (refer to the full list in Chinese here).

It is under this background where Internet companies have utilised the VIE structure to obtain The question is whether shareholders’ rights are offshore funding. The VIE structure allows foreign investors to acquire a stake in a Chinese protected under the company, but offers no direct equity ownership. Foreign investors own a stake in an offshore contractual agreements? listed company, which is entitled to the profits or losses of the Chinese operating company (OpCo) through a series of contractual arrangements between the onshore WFOE (wholly foreign-owned enterprise) subsidiary of the listed company and OpCo. In Vietnam, foreign ownership restrictions apply to online gaming businesses and e-payment businesses.

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Exhibit 23: A snapshot of a typical VIE structure

Source: Company data

For the risks associated with the VIE structure, our Equity Strategy team has identified three key risks on regulatory, operational and profit extraction fronts. Please refer to China’s Variable Interest Entities: Assessing the risks, published 16 April 2020, for more details.

Exhibit 24: Overview of risks in the VIE structure Risk type Details Regulatory Contracts that hold the structures together can be unenforceable or deemed void. Operational Misalignment between management and shareholders could lead to issues highly dependent on the level of contracts’ enforceability. Profit extraction High tax rates and OpCos need for cash to operate induce the OpCos to hold onto profits Source: HSBC

In term of operational risks, debates often arise if there is governance risk from the potential One key risk is the misalignment of management misalignment between management actions and shareholders’ interest. To better protect and shareholders’ interest, shareholders’ interest, some Internet companies have moved some of their businesses under which can be allievated by the direct equity control of foreign investors, and only hold the core restricted part of the moving non-restricted business in the VIE. By giving foreign investors actual equity, companies better align businesses under the direct governance with shareholder interests. Risks of any regulatory fallout, loss of control of the control of foreign investors money-making VIE, or asset misappropriation can be mitigated this way.

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Exhibit 25: Internet companies are moving revenue-generating assets under direct equity control of foreign investors

80% 70% New Oriental 60% Pinduoduo OneConnect TAL

50% in Op Co Op in 40% iQiy i Joy y 30% Bilibili ASSETS Tongcheng Youdao Tencent Music Meituan Weibo Huy a Baidu % of of % 20% JD Trip.com Douy u NetEase 10% Autohome Sea Ltd Alibaba Tencent Momo Baozun 0% 0% 20% 40% 60% 80% 100% 120% % of REVENUES in Op Co

Note: Tencent represents % of net assets in OpCo.. Source: Company data based on latest annual report

Conversely, dividend payouts are generally low for Internet companies as they prioritise growth over earnings in some cases. Hence, investments are needed to drive faster and more sustainable growth. High tax rates are also associated with the VIE structure. Extracting cash from the OpCo to the WFOE and then to the offshore listed company can be prone to hefty tax burdens, including value-added tax, individual dividend tax, corporate enterprise tax, and withholding tax. This could explain why China Internet companies in general do not declare regular dividends, with the exception of Tencent and NetEase. We note Tencent has had a stable regular dividend payout of 10-13% of net profit over the past few years, while NetEase’s regular dividend payout has increased to 29% in 2019 (from c.25% in previous years). For Internet companies in Korea, Naver has had a regular dividend ratio of 5-10% over the past five years, while the dividend payout ratios for Kakao and NCSOFT are quite volatile.

Exhibit 26: Regular dividend payout ratio of Asia Internet companies

40% Dividend payout ratio 35% 30% 25% 20% 15% 10% 5% 0% 2015 2016 2017 2018 2019 NetEase* Tencent Naver NCSOFT Kakao^

Note: *NetEase’s dividend payout ratio excluded the special dividend in 2019; ^Kakao’s 2019 payout ratio is not meaningful as it incurred loss in 2019. Source: Company data, HSBC

Major Internet companies in the US are also not keen on declaring dividends. While Microsoft has regularly declared a dividend every year, instead of maintaining a stable dividend payout ratio, it has maintained a steady dividend per share growth of c10% y-o-y over the past few years, vs its earnings growth of 36% y-o-y.

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Exhibit 27: Dividend payout ratio of Exhibit 28: …while the y-o-y growth in Microsoft seems volatile… dividend per share is steady at c.10% y-o-y

90% 18% 80% 16% 70% 14% 60% 12% 50% 10% 40% 8% 30% 6% 20% 4% 10% 2% 0% 0% 2016 2017 2018 2019 2015 2016 2017 2018 2019 Dividend yoy growth of Microsoft Dividend payout ratio of Microsoft

Source: Company data Source: Company data

8. What are the potential effects of a dual-class share structure on minority shareholders?

Some Internet companies have a dual-class share structure, founders or top management Super voting rights – what are the risks behind? executives retain the majority voting rights, despite changes in shareholder ownership. In this way, founders of the Internet companies can maintain control over the business even though their stakes are not high, as many Internet companies have gone through multiple fundraisings before IPO and thus the shareholding of the founders are greatly diluted. Such a dual-class share structure can potentially create a conflict of interests between founders/top management and shareholders when decisions are not made in the best interests of common shareholders.

Exhibit 29: Dual-class share structures create super voting rights which makes the voting rights disproportionate to shareholdings Voting right per high-vote Voting right per normal Company Ticker % of high-vote share class share share Asia Internet JD.com JD US 15.4% 20 1 Tencent Music TME US 60.0% 15 1 Huya HUYA US 69.4% 10 1 iQiyi IQ US 56.0% 10 1 Pinduoduo PDD US 43.3% 10 1 TAL Education TAL US 33.5% 10 1 Bilibili BILI US 26.0% 10 1 Baidu BIDU US 20.8% 10 1 Joyy YY US 20.7% 10 1 Momo MOMO US 19.3% 10 1 Meituan Dianping 3690 HK 12.7% 10 1 Vipshop VIPS US 12.3% 10 1 Baozun BZUN US 7.0% 10 1 Yaodao DAO US 79.7% 3 1 Weibo WB US 44.9% 3 1 Sea SE US 32.7% 3 1 Global Internet Facebook FB US 15.6% 10 1 Alphabet GOOGL US 13.4% 10 1 Note: Alibaba, Tencent, NetEase, Douyu, Trip.com, Tongcheng Elong, OneConnect, Autohome and New Oriental in China do not have dual-class share structure in place, same for Naver, Line, Kakao, NCSOFT in Japan/Korea, and Amazon, Netflix and Microsoft in the US. Source: Company data based on their latest annual report

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Exhibit 30: Super voting rights in general control over half of the voting rights

100% 96% 96% 93% 92% 88% 90% 83% 80% 78% 78% 80% 69% 72% 72% 71% 70% 65% 70% 60% 61% 56% 59% 59% 58% 60% 50% 43% 45% 43% 40% 33% 33% 26% 30% 21% 21% 19% 20% 15% 13% 12% 16% 13% 7% 10% 0% Huya Tencent iQiyi Yaodao Pinduoduo TAL JD.com Bilibili Baidu Joyy Weibo Momo Meituan Sea Vipshop Baozun Facebook Alphabet Music Education Dianping Global internet % of high-vote share class in issued shares % of voting rights controlled by the high-vote share class

Note: Alibaba, Tencent, NetEase, Douyu, Trip.com, Tongcheng Elong, OneConnect, Autohome and New Oriental in China do not have dual-class share structure in place, same for Naver, Line, Kakao, NCSOFT in Japan/Korea, and Amazon, Netflix and Microsoft in the US. Source: Company data based on their latest annual report.

An independent board of To alleviate the concern over conflict of interests, an independent board of directors can help directors can help balance balance management power over the company and uphold the interests of the shareholders. management power While Asia Internet companies have been increasing the proportion of independent directors in their boards, accounting for c50% of the board composition on average, we still see room for further board independence. Independent directors account for over 80% of board members in leading US Internet and tech companies. While the effective independent board of directors is an important counterweight the dual-class share structure, we acknowledge that such safeguards might not entirely mitigate the risks of conflicts of interests.

Exhibit 31: Asia Internet companies have room to further expand board independence Average board Female Board Company Ticker Board size Tenure (Years) representation independence Asia Internet Alibaba BABA US 10 8.8 10% 50% Tencent 700 HK 9 12.8 11% 56% Baidu BIDU US 5 9.2 0% 80% Meituan Dianping 3690 HK 8 5.6 0% 38% Pinduoduo PDD US 6 2.5 0% 67% JD.com JD US 5 8.6 0% 60% Vipshop VIPS US 9 8.3 11% 56% Baozun BZUN US 9 5.7 22% 56% NetEase NTES US 7 17.6 14% 71% Bilibili BILI US 7 4.4 14% 57% Weibo WB US 5 6.5 0% 40% Tenent Music TME US 9 4.4 0% 33% Joyy YY US 5 7.6 0% 80% Momo MOMO US 7 5.8 0% 57% Huya HUYA US 9 1.3 0% 22% Douyu DOYU US 10 3.1 10% 40% iQiyi IQ US 8 5.0 13% 25% Trip.com TCOM US 9 14.0 11% 44% Tongcheng Elong 780 HK 9 1.8 11% 33% OneConnect OCFT US 9 2.1 22% 33% Autohome ATHM US 7 3.9 14% 43% New Oriental EDU US 6 13.8 0% 50% TAL Education TAL US 5 7.9 20% 60% Youdao DAO US 4 2.3 0% 50% Sea SE US 6 6.0 0% 33% Line 3938 JP 8 7.6 0% 38% Naver 035420 KS 7 3.9 14% 71% Kakao 035720 KS 7 4.4 29% 57% NCSOFT 036570 KS 7 8.4 14% 71% Average 7 6.7 8% 51% Global Internet Facebook FB US 9 6.0 33% 78% Alphabet GOOGL US 11 12.1 18% 73% Microsoft MCFT US 13 7.7 38% 85% Amazon AMZN US 10 10.2 50% 90% Netflix NFLX US 11 11.2 36% 91% Average 11 9.4 35% 83% Source: Company data based on latest annual report of Asia Internet companies and proxy statement of global peers.

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Apart from the dual-class share structure, some Internet companies adopt a partnership structure to promote the continuity of business culture and long-term vision, while limiting the concentration of control over a few founding members. For example, Alibaba launched Alibaba Partnership in 2010, in which a group of senior management leaders can vote on a one partner, one vote basis to support leadership succession, as the Alibaba Partnership can nominate up to a simple majority the members of Alibaba’s board of directors. For partner admission, rigorous criteria (e.g., conduct, tenure, etc.) are considered; also, admission requires approval from at least 75% of existing partners. Each partner has a share of ownership and must retain a significant level of share ownership that aligns their interests with shareholders.

Other companies like Pinduoduo also adopts a similar approach to ensure business continuity and to balance shareholders’ interests. Pinduoduo Partnership will be entitled to nominate two or three executive directors and the CEO candidate for the company. The election of new partners requires the affirmative vote of at least 75% of all the partners, and the candidates must meet certain quality standards such as integrity, conduct, and tenure. Partners are required to maintain a meaningful level of equity interest in Pinduoduo to better align with shareholders’ interests.

9. How do Internet companies manage their relationships with regulators and governments?

As the Internet sector has gained importance, the Chinese government implemented regulations and Tight measures guidelines to regulate the operations of them. Over the past few years, regulators have stepped in, in response to monopolistic practices, copyright issues among music streaming platforms (where government-directed music streaming platforms sub-license 99% of their music library), and the restrictions of production over dramas and variety shows by video platforms (to limit the number of episodes and salaries of leading artists and production costs).

Exhibit 32: Examples of government regulations/interventions in China’s Internet sector Sector Government regulations/interventions on  monopolistic practice (二选一) Ecommerce  -imposition of tax responsibilities relating to merchants on the ecommerce platforms  protection of minor players Gaming  -game content oversight Advertising  - content and display format oversight  cross-selling practices relating to value-added services Travel  -price discrimination practices Online music  - copyright issues among music streaming platforms  video content oversight Online video  -production cost of the video and/or salaries of the top artists  central clearing of third-party payment channels Third-party payment  -segregation of customer monies in designated accounts Source: HSBC

Take the regulations on music streaming platforms as an example. The National Copyright Administration (NCAC) has looked after music piracy issues in China starting from 2015, and leading players such as Tencent Music, Ali Music, and NetEase Cloud Music have already started to acquire music streaming copyright in China from different music labels. Tencent Music has been leading in term of copyright secured, and the exclusive streaming rights from the large music labels (such as Sony Music, Warner Music, and Universal Music).

With multiple negotiations coordinated by the NCAC, the top three music streaming platforms have agreed to sublicense 99% of their music library to each other, so that each platform can compete in terms of product innovation and user experience.

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Exhibit 33: Music streaming platforms reached a cooperation agreement under the coordination of NCAC Date Cooperation details September 2017 Tencent Music and Ali Music have reached copyright cooperation with millions of songs February 2018 Tencent Music and NetEase Cloud Music have agreed to sublicense 99% of their exclusive music library March 2018 Ali Music and NetEase Cloud Music have agreed to sublicense their exclusive music library Source: QQ News

Another example is the regulations on long-form video platforms. The Chinese authorities (National Radio and Television Administration 国家广播电视总局) have introduced measures to enforce strict controls on the remuneration of leading artists and production costs in the entertainment industry. To comply with regulations and the government’s crackdown on tax evasion in the film industry, in August 2018, iQIYI, Tencent Video, and Youku along with six top film and TV production companies in China – Daylight Entertainment, Huace Group, Linmon Pictures, Ciwen Media, Youhug Media, and New Classics Media – made a joint announcement about enforcing strict remuneration controls. Highlights included:

 Financial remuneration for all actor/actress combined shall not exceed 40% of the overall budget of any of their future productions.

 Payments to leading actors and actresses should not exceed 70% of the total wages paid to the cast.

 A salary cap of RMB50m for an entire TV series with no more than RMB1m for each episode.

Moreover, on 15 April 2020, China TV Drama Production Industry Association (中国电视剧制作产业协会) and the Capital Radio & TV program Producers Association jointly urged content producers to cut content costs by: (1) following the international practice of a salary cap of 20% of total production cost for the leading actor and actress (10% each) vs a 28% salary cap per the regulator; (2) enacting a 30% salary cut for camera crew; and (3) a cap on production costs of RMB4m per episode for both TV and online dramas.

We believe the measures not only help online video platforms reduce their losses, but the industry also benefits as content creators will be able to focus on production quality as more budget can be used in script creation and post production.

To cope with the regulatory environment, most Internet companies have maintained a constant dialogue with the relevant regulators to keep abreast of the latest regulatory movements, and lobbied regulators over any operational difficulties they have faced. Chinese Internet companies have also obtained the necessary licenses to carry out their businesses.

10. How does the industry manage censorship and access?

What is Internet censorship? Technology and AI play a crucial role in monitoring Internet censorship is the control or suppression of certain types of content on the Internet and content can be enacted by regulators, Internet platforms or even individuals (i.e. self-censorship). How can access be blocked? Blocking websites and domain names, search result removal (e.g. search engines remove certain keywords), and the use of commercial filtering software (e.g. banks installing software to ban personal messaging systems for compliance reasons) are some of the examples of how access can be blocked. Internet platforms often deploy AI algorithms to help detect keywords and scan images and videos for inappropriate content or violent content. This type of software can then immediately remove such content.

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Which countries apply censorship? It depends on each country’s specific laws. Companies must follow the local laws and rules or cease operations.

What are the consequences for not doing it?  Inappropriate content might be spread: Types of information that is sometimes censored includes hate speech, racism, abuse, rumours, and other harmful content.

 Children are not protected from inappropriate content: Adults might be able to filter out inappropriate content but children may lack the capability and could be exposed.

Chinese regulators such as the Cyberspace Administration of China have been focusing on Internet content to censor inappropriate content, violent content, and politically-sensitive content. Due to the increasing popularity of social media, Chinese Internet companies are responsible for managing not just the content they provide, but also the content or comments that are uploaded and published by their users. This is especially true for social media platforms, online entertainment, and live streaming platforms, which rely heavily on user- generated content to drive user engagement and retention within their platforms.

Users of social media and video platforms are required to complete real-name registration in China, and thus platform operators can trace content and comments back to individuals. If someone publishes inappropriate content, a platform operator needs to immediately delete the content from the platform. They may also limit access for that user too, like suspending or even deleting an account in serious cases. If Internet companies fail to censor sensitive material, the regulator may suspend their ability to distribute new content or even suspend their app from app stores.

33 Equities & ESG ● EM Asia 27 July 2020

ESG integration

We recommend reading this report in conjunction with ESG Integrated: Taking ESG analysis in Asia to the next level (1 June 2020), which considers the following ESG and sustainability issues:

 Where disclosures are mandatory, comply or explain and future development timelines.

 Key debates across Asia as one cannot simply aggregate ESG information or examine it collectively across the region given its diversity on multiple levels.

 Our preference for ESG integration over a scoring and rating approach. We believe ESG integration aids a deeper analysis of how ESG may affect the company over the longer- term rather than providing a snapshot of where it is now. Moreover, the number of factors considered and weightings applied are likely to vary materially depending on fund mandates, institutional preferences and values, as well as geography – see Box 1.

 The difference between ESG Disclosure rules, Corporate Governance codes, and Stewardship codes – see Error! Reference source not found. and Box 2.

Exhibit 34: Sustainable investment strategies are now very sizeable

16 (USD trn) 70% 14 63% 60% 12

Thousands 49% 50% (Canada) 50% 10 40% 8 Note: it is very difficult to find aggregate data 30% 6 25% (US) for Asia as a whole. 20% 4 18% 2 10% 0 0% Europe North America Australia/New Zealand Japan

2016 AUM 2018 AUM Sustainable as % of total managed (RHS)

Note: AUM=Assets Under Management. Source: 2018 Global Sustainable Investment Review

34 Equities & ESG ● EM Asia 27 July 2020

Box 1: Why HSBC advocates ESG integration vs scoring and rating At HSBC, we do not assign ESG scores or ratings to companies because we believe that:  different ESG issues are more / less material to different sectors;

 the availability of information is hugely varied across markets and sectors;

 the quality of data for specific ESG issues is inconsistent, leading to problems with comparability;

 reducing ESG to a score or rating detracts from the qualitative analysis of how ESG issues can affect the risks and opportunities facing a company; and

 investment analysis should be more forward looking, and data tends to be a snapshot of the past.

Instead, we advocate for ESG integration which we believe:  allows more focus on which issues are more material to a sector / company;

 can better capture the sustainability risks and opportunities holistically;

 can be effectively incorporated into existing investment analysis;

 can be included into financial modelling through cash flows and discount rates;

 encourages understanding of qualitative aspects of a business, particularly its raison d’être (beyond purely financial objectives/targets); and

 lends itself to a more forward-looking approach which can accommodate varying time horizons.

Note: We believe that scores can be a useful starting point to help identify those areas that require more attention and deeper analysis.

Exhibit 35: The interplay between various disclosures and codes

ESG Applies to: Listed Issuers disclosure Main benefit: Investors Investors use disclosures to conduct analysis and engagement, with a view to improving returns alongside sustainability Stewardship Applies to: Institutional investors codes Main benefit: Markets, society Investors engage with issuers to improve long-term value and societal contribution Applies to: Listed Issuers Main benefit: Stakeholders Corporate Issuers (boards) use this system to Governance provide oversight and direction to codes ensure no single stakeholder benefits to the detriment of others

Source: HSBC

35 Equities & ESG ● EM Asia 27 July 2020

Box 2: ESG disclosure vs Corporate Governance and Stewardship codes We highlight that ESG disclosure rules for listed companies are different and distinct from Corporate Governance codes and Stewardship codes. There is some overlap in these, however, the rules and requirements across most exchanges are not the same. Indeed, some exchanges may have all three rules, others two, others one or none depending on the extent of market participation. We briefly highlight the differences below:

 ESG Disclosure rules – the disclosure of any information and data pertaining to sustainability / ESG issues. For markets, these usually apply to listed issuers. ESG disclosure is wide and varied, with the level of disclosure by an issuer determined after conducting some form or materiality test. The ESG disclosures are then used by investors as part of their investment analysis. Although it has had many iterations, ESG disclosure began to appear formally in listing rules over the past decade or so.

 Corporate Governance codes (CG codes) – these apply to listed issuers, with a view to encouraging and enhancing principles of good governance. Codes provide guidance on the structure of the board, its responsibilities, and how it exercises those responsibilities to provide appropriate oversight as to how a company is managed. The direction and control of a company should result in balanced benefits across stakeholders. Many exchanges introduced governance codes in the 1990s and 2000s after the ‘Cadbury report’ on The Financial Aspects of Corporate Governance in 1992.

 Stewardship codes – these are designed mainly for asset managers and asset owners in their role as institutional investors. It provides a set of guidelines on their fiduciary duties, rights and responsibilities as investors, and encourages engagement and dialogue with listed companies. Stewardship codes essentially guide investors on how to keep companies “in check” by providing longer term value across economies, society, and investor beneficiaries. The UK introduced the first Stewardship Code in 2010 and updated it in January 2020. Other countries followed suit this past decade.

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ESG disclosure requirements across Asia

Exhibit 36: Summary of ESG disclosure rules across Asian stock exchanges Market ESG SSE ESG Details rule member guidance Hong Kong Yes Yes Yes The Hong Kong Stock Exchange has a mainly “comply or explain” approach to ESG information disclosure. A 2019 update requires new applicants to disclose gender diversity in their listing documents. For financial years commencing July 2020, issuers must publish an ESG report, within five months of year end, with two levels of disclosures – a board oversight statement (mandatory) and various common ESG issues (comply or explain). Singapore Yes Yes Yes Every listed company must produce a sustainability report using a “comply or explain” approach within five months of financial year end. A separate corporate governance code was updated in 2018. Mainland No Yes Yes The CSRC has said that ESG disclosure will be mandated by 2020. Mainland China has been preparing for this for a number of China years and many companies already produce ESG reports. There are currently no further details on the timetable for mandatory ESG disclosure or what it will entail. Japan No Yes Yes Although not mandatory, Japan has had environmental reporting guidelines since 2003 and updated its corporate governance code in 2018. The Japan Exchange Group published a ‘Practical Handbook for ESG Disclosure’ on 31 March 2020 to offer guidance to listed companies choosing to disclose ESG information. South No Yes No Although an SSE member, KRX does not mandate broad ESG disclosures. Corporate governance disclosures are required for large Korea members of the KOSPI index and will become mandatory for all KOSPI constituents from 2021. Taiwan Yes No No The Taiwan Stock Exchange made modest amendments to listing rules in January 2020 to guide companies to be more aware of climate change and associated risks and opportunities. For broader ESG, a set of best practice guidelines are offered which cover materiality, employee benefits and supply chains. India Yes Yes Yes The Securities and Exchange Board of India (SEBI) requires the largest 500 listed companies to publish a business responsibility report (BRR), however, this is not necessarily an ESG report. The Bombay Stock Exchange (BSE) has issued a guidance document on ESG disclosures but emphasises that this is voluntary. SEBI has proposed that the BRR be extended to the largest 1,000 companies. Malaysia Yes Yes Yes All listed issuers are required to disclose a Sustainability Statement in line with a Sustainability Reporting Guide. There are exceptions for issuers that report in accordance with GRI guidelines. Thailand Yes Yes Yes Sustainability reporting is generally considered good in Thailand. The Stock Exchange of Thailand (SET) has issued a Sustainability Reporting Guide which assists listed companies with information on disclosure. In June 2019, the Securities and Exchange Commission and the SET agreed to further improve both the regulations which protect the rights of shareholders as well as implement ESG practices across listed companies. Philippines Yes Yes Yes Launched guidance on sustainability reporting in April 2019 which utilises external reporting frameworks. It covers economic, environmental and societal impacts. Listed companies must disclose for the FY19 report (i.e. in 2020) on a ‘comply or explain” basis. There is a penalty for companies which do not attach sustainability reports to annual reports. Vietnam Yes Yes Yes The Vietnam Ministry of Finance issued a circular (Circular 155/2015/TT-BTC) in 2015, of which section 6 encourages some disclosure for companies in certain sectors. Both the Hanoi and Ho Chi Minh stock exchanges published a joint Environmental and Social Disclosure Guide in 2016. This covers a range of issues including: materials, energy, water, employment, and local community. Indonesia Yes Yes Yes The Indonesia Financial Services Authority mandates sustainability reporting. All banking corporations are to report on their sustainability initiatives from 2019, and listed companies from 2020. Sri Lanka No Yes Yes Sustainability disclosure is encouraged but not mandated. A guide to “Communicating Sustainability” recommends disclosures which focus on: leadership, stakeholder interests, and material ESG issues. Bangladesh No Yes Yes Neither the Chittagong nor Dhaka exchanges mandate ESG disclosure, although listed companies have to report according to the Corporate Governance Guidelines of the Bangladesh Securities and Exchange Commission. The Dhaka Stock Exchange did, however, issue a Guidance on Sustainability Reporting, with assistance from GRI, in 2019. Source: Sustainable Stock Exchange Initiative, news reports, Stock Exchange websites

ESG database

We introduce the HSBC ESG database, a proprietary database of key ESG metrics for companies under HSBC coverage.

 The database currently covers around 1,900 companies globally, about half of them in Asia.

 It has a three-year history from 2016-18; we updated data for 2019 for most companies.

 Data collection is based on publicly available information but undergoes a normalisation process to ensure a high degree of consistency across regions / sectors.

 The database is not designed to assess quality of ESG information hence it is not a platform to provide ESG scores or ratings.

37 Equities & ESG ● EM Asia 27 July 2020

The ten key metrics were selected to give a broad indication of the status of ESG information disclosure at companies covered by HSBC Global Research. The metrics are not sector specific, but are designed to be broad enough to give an indication of the overall focus on environmental, social, and governance issues. The metrics are:

1. Greenhouse gas emissions intensity

2. Total energy intensity

3. Carbon reduction policy

4. Employee turnover

5. Employee cost as % of sales

6. Diversity policy

7. Board size

8. Average board tenure

9. Female representation on the board

10. Board independence

Exhibit 37: ESG data summary across covered Global and Asia Internet companies Board CO2 member GHG intensity Energy intensity Reduction Employee costs Diversity No. of board Average board Female board independence Company name Ticker (kg/’000 USD) (kWh/’000 USD) Policy (Y/N) as % of sales policy (Y/N) members tenure (years) members (%) (%) Asia Internet Alibaba BABA US Y Y 10 8.8 10% 50% Tencent 700 HK 15.8 27.9 Y 14% Y 9 12.8 11% 56% Baidu BIDU US 19.8 Y Y 5 9.2 0% 80% Meituan Dianping 3690 HK 1.1 1.7 Y 18% Y 8 5.6 0% 38% Pinduoduo PDD US N Y 6 2.5 0% 67% JD.com JD US Y Y 5 8.6 0% 60% Vipshop VIPS US Y Y 9 8.3 11% 56% Baozun BZUN US Y Y 9 5.7 22% 56% NetEase NTES US Y Y 7 17.6 14% 71% Weibo WB US N N 5 6.5 0% 40% Tenent Music TME US N 10% N 9 4.4 0% 33% Huya HUYA US N Y 9 1.3 0% 22% Douyu DOYU US N Y 10 3.1 10% 40% iQiyi IQ US N 14% N 8 5.0 13% 25% Trip.com TCOM US 1.6 2.3 Y Y 9 14.0 11% 44% Tongcheng Elong 780 HK 7.8 11.0 Y 29% Y 9 1.8 11% 33% OneConnect OCFT US N 64% Y 9 2.1 22% 33% New Oriental EDU US N N 6 13.8 0% 50% TAL Education TAL US Y Y 5 7.9 20% 60% Youdao DAO US N N 4 2.3 0% 50% Sea SE US N N 6 6.0 0% 33% Line 3938 JP N N 8 7.6 0% 38% Naver 035420 KS 12.8 Y 5% Y 7 3.9 14% 71% Kakao 035720 KS Y 7% N 7 4.4 29% 57% NCSOFT 036570 KS Y 19% N 7 8.4 14% 71% Global Internet Facebook FB US 72.7 Y Y 9 6.0 33% 78% Alphabet GOOGL US 109.8 77.3 Y Y 11 12.1 18% 73% Microsoft MCFT US 159.6 63.2 Y Y 13 7.7 38% 85% Amazon AMZN US 182.4 Y Y 10 10.2 50% 90% Netflix NFLX US Y Y 11 11.2 36% 91% Source: Company data

38 Equities & ESG ● EM Asia 27 July 2020

Appendix

Large Asia Internet companies typically hold data security and user privacy to a very high standard and data is used for agreed purposes, within an agreed and relevant scope to protect individual user data. Pursuant to the Cybersecurity Law of the People’s Republic of China, the Cryptography Law of the People’s Republic of China, Provisions on the Administration of Mobile Internet Applications Information Services, the Provisions on the Technical Measures for the Protection of the Security of the Internet, and other relevant laws and regulations, as well as the national standard requirements stated in the Basic Requirements for Network Security Graded Protection Regarding Information Security Technology, there are various internal procedures and controls to protect user data and reduce the risk of data leakage in China.

Examples below from a few companies’ disclosures on how they handle data privacy:

Alibaba:

Data must be used for agreed objectives or purposes, in a relevant way, and within an agreed scope. Analysis of personally identifiable data is done on an aggregated, anonymised basis. The company is committed to best practices such as limiting access to data only to designated personnel and minimising data collection and retention. Operation logs are kept, and disaster recovery and backup mechanisms have been established to help guarantee data integrity. Its Chief Risk Officer oversees both cybersecurity and data protection. The company has a large team dedicated to developing its data protection policies and procedures, and is engaged with data privacy experts worldwide, constantly learning from leading industry practices.

Tencent:

To ensure that its users understand how the company protect their personal information and enhance the transparency of how the company collect and process the data, Tencent promotes the concept of “Technology is deployed for social good and data is put in manageable use”. The company published the Tencent Privacy Protection Whitepaper and launched the Tencent Privacy Protection Platform (https://privacy.qq.com) to give its users a comprehensive understanding of the privacy protection measures taken by the Group. The company also makes its privacy protection policies available on its product websites and in-app products and provide communication channels for its users to file complaints and raise enquiries whenever they are in doubt.

Meituan:

The company developed the Meituan Dianping Privacy Policy, which clarifies regulations on the collection and use of personal information, the use of cookies and similar technologies, the storage and protection of personal information, information sharing and public disclosure, and the protection of personal information of minors. The policy is posted on its official website for public reference. Meituan has a dedicated team to enforce its privacy policies and set up coordination mechanisms with third parties to deal with various information security threats in a timely manner. The company complies with the industry standards for information security and user privacy protection, and its main operating system has obtained the ISO 27001 certification and passed the National Information System Security Level 3 Testing.

39 Equities & ESG ● EM Asia 27 July 2020

HSBC Asia Internet team

Binnie Wong*  Asia internet coverage Head of Internet Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2822 2590

Piyush Choudhary*, CFA  ASEAN telecom Analyst, ASEAN Telecoms coverage The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch  ASEAN internet [email protected] +65 6658 0607

Will Cho*  Korea tech coverage Analyst, Korea Hardware and Internet  Hardware The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities  Korea Internet Branch [email protected] +82 2 3706 8765

Ritchie Sun*  Asia internet coverage Associate, Internet Research The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2822 4392

Cleo Zhang*  Asia internet coverage Associate, Internet Research The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2914 9935

Carson Lo*  Asia internet coverage Analyst, Internet Research The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2822 4337

Charlotte Wei*  Asia internet coverage Associate, Internet Research The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 2996 6539

Peishang Wang*  Asia internet coverage Associate, Internet Research The Hongkong and Shanghai Banking Corporation Limited [email protected] +852 3941 7008

 s*Employed by a non-US affiliate of HSBC Securities (USA) Inc. and not registered/qualified pursuant to FINRA regulations

40 Equities & ESG ● EM Asia 27 July 2020

Disclosure appendix

Analyst Certification The following analyst(s), economist(s), or strategist(s) who is(are) primarily responsible for this report, including any analyst(s) whose name(s) appear(s) as author of an individual section or sections of the report and any analyst(s) named as the covering analyst(s) of a subsidiary company in a sum-of-the-parts valuation certifies(y) that the opinion(s) on the subject security(ies) or issuer(s), any views or forecasts expressed in the section(s) of which such individual(s) is(are) named as author(s), and any other views or forecasts expressed herein, including any views expressed on the back page of the research report, accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Binnie Wong, Wai-Shin Chan, CFA, Piyush Choudhary, CFA, Will Cho, Karen Choi, Ritchie Sun, Cleo Zhang, Carson Lo, CFA, Charlotte Wei and Peishan Wang

Important disclosures Equities: Stock ratings and basis for financial analysis HSBC and its affiliates, including the issuer of this report (“HSBC”) believes an investor’s decision to buy or sell a stock should depend on individual circumstances such as the investor’s existing holdings, risk tolerance and other considerations and that investors utilise various disciplines and investment horizons when making investment decisions. Ratings should not be used or relied on in isolation as investment advice. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations and therefore investors should carefully read the definitions of the ratings used in each research report. Further, investors should carefully read the entire research report and not infer its contents from the rating because research reports contain more complete information concerning the analysts’ views and the basis for the rating.

From 23rd March 2015 HSBC has assigned ratings on the following basis: The target price is based on the analyst’s assessment of the stock’s actual current value, although we expect it to take six to 12 months for the market price to reflect this. When the target price is more than 20% above the current share price, the stock will be classified as a Buy; when it is between 5% and 20% above the current share price, the stock may be classified as a Buy or a Hold; when it is between 5% below and 5% above the current share price, the stock will be classified as a Hold; when it is between 5% and 20% below the current share price, the stock may be classified as a Hold or a Reduce; and when it is more than 20% below the current share price, the stock will be classified as a Reduce.

Our ratings are re-calibrated against these bands at the time of any ‘material change’ (initiation or resumption of coverage, change in target price or estimates).

Upside/Downside is the percentage difference between the target price and the share price.

Prior to this date, HSBC’s rating structure was applied on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stock’s domestic or, as appropriate, regional market established by our strategy team. The target price for a stock represented the value the analyst expected the stock to reach over our performance horizon. The performance horizon was 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, had to exceed the required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock was expected to underperform its required return by at least 5 percentage points over the succeeding 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands were classified as Neutral.

*A stock was classified as volatile if its historical volatility had exceeded 40%, if the stock had been listed for less than 12 months (unless it was in an industry or sector where volatility is low) or if the analyst expected significant volatility. However, stocks which we did not consider volatile may in fact also have behaved in such a way. Historical volatility was defined as the past month’s average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility had to move 2.5 percentage points past the 40% benchmark in either direction for a stock’s status to change.

41 Equities & ESG ● EM Asia 27 July 2020

Rating distribution for long-term investment opportunities As of 24 July 2020, the distribution of all independent ratings published by HSBC is as follows: Buy 54% ( 31% of these provided with Investment Banking Services ) Hold 37% ( 32% of these provided with Investment Banking Services ) Sell 9% ( 22% of these provided with Investment Banking Services )

For the purposes of the distribution above the following mapping structure is used during the transition from the previous to current rating models: under our previous model, Overweight = Buy, Neutral = Hold and Underweight = Sell; under our current model Buy = Buy, Hold = Hold and Reduce = Sell. For rating definitions under both models, please see “Stock ratings and basis for financial analysis” above.

For the distribution of non-independent ratings published by HSBC, please see the disclosure page available at http://www.hsbcnet.com/gbm/financial-regulation/investment-recommendations-disclosures.

To view a list of all the independent fundamental ratings disseminated by HSBC during the preceding 12-month period, please use the following links to access the disclosure page:

Clients of Global Research and Global Banking and Markets: www.research.hsbc.com/A/Disclosures

Clients of HSBC Private Banking: www.research.privatebank.hsbc.com/Disclosures

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments, both equity and debt (including derivatives) of companies covered in HSBC Research on a principal or agency basis or act as a market maker or liquidity provider in the securities/instruments mentioned in this report.

Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking, sales & trading, and principal trading revenues.

Whether, or in what time frame, an update of this analysis will be published is not determined in advance.

Non-U.S. analysts may not be associated persons of HSBC Securities (USA) Inc, and therefore may not be subject to FINRA Rule 2241 or FINRA Rule 2242 restrictions on communications with the subject company, public appearances and trading securities held by the analysts.

Economic sanctions imposed by the EU and OFAC prohibit transacting or dealing in new debt or equity of Russian SSI entities. This report does not constitute advice in relation to any securities issued by Russian SSI entities on or after July 16 2014 and as such, this report should not be construed as an inducement to transact in any sanctioned securities.

For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. HSBC Private Banking clients should contact their Relationship Manager for queries regarding other research reports. In order to find out more about the proprietary models used to produce this report, please contact the authoring analyst.

Additional disclosures 1 This report is dated as at 27 July 2020. 2 All market data included in this report are dated as at close 23 July 2020, unless a different date and/or a specific time of day is indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC’s analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC’s Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. 4 You are not permitted to use, for reference, any data in this document for the purpose of (i) determining the interest payable, or other sums due, under loan agreements or under other financial contracts or instruments, (ii) determining the price at which a financial instrument may be bought or sold or traded or redeemed, or the value of a financial instrument, and/or (iii) measuring the performance of a financial instrument or of an investment fund.

42 Equities & ESG ● EM Asia 27 July 2020

Production & distribution disclosures 1. This report was produced and signed off by the author on 24 Jul 2020 12:32 GMT.

2. In order to see when this report was first disseminated please see the disclosure page available at https://www.research.hsbc.com/R/34/qwHCmhm

43 Equities & ESG ● EM Asia 27 July 2020

Disclaimer

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Global Telecoms, Media & Technology Research Team

Specialist Sales Europe Asia Analyst Head of Internet Research, Asia Pacific James Britton +44 207 991 5503 Nicolas Cote-Colisson +44 20 7991 6826 Binnie Wong +852 2822 2590 [email protected] [email protected] [email protected] Head of Telecoms Research, Asia Pacific Analyst Neale Anderson +852 2996 6716 Antonin Baudry +33 1 56 52 43 25 [email protected] [email protected] Head of Technology Research, Asia Pacific Analyst Frank Lee +852 2996 6916 Christian Fangmann +49 211 910 2002 [email protected] [email protected] Head of Research, India Senior Analyst, Telecoms Services & Yogesh Aggarwal +91 22 2268 1246 Infrastructure [email protected] Luigi Minerva +44 20 7991 6928 Analyst [email protected] Vivek Gedda +91 22 6164 0693 [email protected] Analyst Olivier Moral +33 1 5652 4322 Analyst [email protected] Abhishek Pathak +91 22 6164 0690 [email protected] Analyst Adam Fox-Rumley, CFA +44 20 7991 6819 Head of Research, Korea [email protected] Ricky Seo +822 37068777 [email protected]

Americas Analyst Darpan Thakkar +91 22 6164 0695 Analyst [email protected] Christopher A Recouso +1 212 525 2279 [email protected] Analyst Piyush Choudhary, CFA +65 6658 0607 Analyst [email protected] Sunil Rajgopal +1 212 525 0267 [email protected] Analyst Wei Sim +852 2996 6602 [email protected] Global Emerging Markets (GEMs) Analyst Analyst Will Cho +822 3706 8765 Hervé Drouet +44 20 7991 6827 [email protected] [email protected] Analyst Carol Juan +886 2 6631 2862 [email protected] Associate Angus Lin +852 2996 6584 [email protected] Associate Charlotte Wei +852 2996 6539 [email protected] Associate Ritchie Sun +852 28224392 [email protected] Associate Peishan Wang +852 3941 7008 [email protected] Analyst, Internet Research Carson Lo, CFA +852 2822 4337 [email protected]

Associate Cleo Zhang +852 2914 9935 [email protected]

Associate Carol Hu +8862 6631 2869 [email protected] Associate Chris Lee +8862 6631 2865 [email protected]

Associate Junhyun Kim +822 3706 8763 [email protected]