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ASEAN: propagating China growth

¾ ASEAN: Indonesia and Vietnam stand to be the main beneficiaries of China- led innovations; we identify four key ASEAN sectors to watch ¾ China Internet: two themes likely to drive growth: 1) from China to Southeast Asia, and 2) from “To C” to “To B” John Choi (852) 2773 8730 ¾ We reaffirm our Positive view on the sector; our top picks are Alibaba, [email protected] Tencent, and JD Robin Leung, CFA

(852) 2848 4435 [email protected]

See important disclosures, including any required research certifications, beginning on page 93

China Information Technology 5 June 2020

China Internet

ASEAN: propagating China growth

¾ ASEAN: Indonesia and Vietnam stand to be the main beneficiaries of China- led innovations; we identify four key ASEAN sectors to watch ¾ China Internet: two themes likely to drive growth: 1) from China to Southeast John Choi Asia, and 2) from “To C” to “To B” (852) 2773 8730 ¾ We reaffirm our Positive view on the sector; our top picks are Alibaba, [email protected] Tencent, and JD Robin Leung, CFA (852) 2848 4435 [email protected]

What's new: Although COVID-19 has caused short-term turbulence in Key stock calls some verticals globally, we believe ASEAN remains one of the most New Prev. attractive regions on a long-term investment horizon. Hence, we have Tencent Holdings (700 HK) Rating Buy Buy teamed up with Golden Gate Ventures, a venture capital firm with highly Target 515.00 515.00 specialised knowledge of ASEAN markets, to highlight the top trends in the Upside p 19% years leading up to 2020, and our expectations for trends through to 2022. Alibaba Group (BABA US) Rating Buy Buy What's the impact: The two key points we would highlight to investors are: Target 265.00 265.00 1) the improving funding environment in ASEAN, helped by the maturing Upside p 21.2% exit landscape and increasing funding from China Internet companies, JD.com (JD US) Rating Buy Buy which should lead to lower liquidity and exit risk, and 2) our view that the Target 65.00 65.00 next investment opportunities lie in adjacent verticals such as logistics, Upside p 14.6%

social-ecommerce, Insurtech, and co-living. While we see a favourable Source: Daiwa forecasts macro backdrop, with Indonesia and Vietnam considered to have the greatest investing potential, we urge investors to be selective among the aforementioned verticals as we factor in the nuances of their demographic fundamentals within ASEAN — key considerations when assessing the sustainability of value creation in these sectors, in our view.

Four ASEAN sectors to watch in 2020. Several innovations from China — e-commerce, ride hailing, Fintech, and entertainment/media — can be readily applied to ASEAN and have attracted significant funding. As such, we believe the next areas of capital inflow will be in these adjacent verticals: logistics, social e-commerce, Insurtech and co-living.

China Internet – dual engines to drive the next growth phase: 1) from China to Southeast Asia, and 2) from “To C” to “To B”. We see the next stage of revenue growth for China Internet companies coming from: 1) expanding their core businesses to overseas markets, among which Southeast Asia is the most sought-after destination given the present geo- political backdrop, and 2) expanding their competitiveness to other verticals that leverage their cloud solutions and payment infrastructures, which we believe would augur well for their user/merchant penetration in ASEAN.

What we recommend: We favour Alibaba and Tencent for their first-mover advantages in penetrating ASEAN through investments and industrial Internet initiatives (ie, cloud, payment), and argue that network effects will allow them to harness sustainable leadership in their core business. We also like JD’s exposure to Indonesia, Thailand, and Vietnam, where it is building long-term foundations to strengthen its e-commerce business.

How we differ: We are among the first to provide an in-depth report on the Southeast Asia tech eco-system with a parallel analysis of China.

See important disclosures, including any required research certifications, beginning on page 93

China Internet: 5 June 2020

Sector stocks: key indicators

EPS (local curr.) Share Rating Target price (local curr.) FY1 FY2 Company Name Stock code Price New Prev. New Prev. % chg New Prev. % chg New Prev. % chg Alibaba Group BABA US 218.60 Buy Buy 265.00 265.00 0.0% 57.441 57.441 0.0% 73.528 73.528 0.0% Alibaba Group - H 9988 HK 209.60 Buy Buy 260.00 260.00 0.0% 7.180 7.180 0.0% 9.191 9.191 0.0% Baidu BIDU US 112.45 Outperform Outperform 120.00 120.00 0.0% 35.130 35.130 0.0% 55.056 55.056 0.0% Baozun BZUN US 34.15 Buy Buy 45.00 45.00 0.0% 10.032 10.032 0.0% 13.065 13.065 0.0% Bilibili BILI US 34.15 Outperform Outperform 36.00 36.00 0.0% (7.077) (7.077) n.a. (5.662) (5.662) n.a. HUYA HUYA US 16.82 Outperform Outperform 21.00 21.00 0.0% 5.094 5.094 0.0% 6.483 6.483 0.0% JD.com JD US 56.73 Buy Buy 65.00 65.00 0.0% 12.861 12.861 0.0% 15.639 15.639 0.0% JOYY YY US 73.11 Buy Buy 85.00 85.00 0.0% 24.195 24.195 0.0% 38.148 38.148 0.0% Kingdee International Software Group 268 HK 14.66 Buy Buy 16.00 16.00 0.0% 0.083 0.083 0.0% 0.114 0.114 0.0% Meituan Dianping 3690 HK 155.30 Buy Buy 155.00 155.00 0.0% 0.890 0.890 0.0% 2.273 2.273 0.0% Momo MOMO US 20.60 Hold Hold 22.00 22.00 0.0% 15.394 15.394 0.0% 21.178 21.178 0.0% NetEase NTES US 414.58 Buy Buy 500.00 500.00 0.0% 124.183 124.183 0.0% 141.263 141.263 0.0% Tencent Holdings 700 HK 432.60 Buy Buy 515.00 515.00 0.0% 12.079 12.079 0.0% 14.604 14.604 0.0% Trip.com Group TCOM US 27.95 Hold Hold 24.50 24.50 0.0% (3.264) (3.264) n.a. 9.077 9.077 0.0% Vipshop VIPS US 17.48 Buy Buy 21.00 21.00 0.0% 8.765 8.765 0.0% 9.822 9.822 0.0% Xiaomi 1810 HK 12.76 Buy Buy 15.00 15.00 0.0% 0.483 0.483 0.0% 0.656 0.656 0.0% Source: Bloomberg, Daiwa forecasts

When a report covers six or more subject companies please access important disclosures for Daiwa Capital Markets Hong Kong Limited at http://www.hk.daiwacm.com/research_disclaimer.html or contact your investment representative or Daiwa Capital Markets Hong Kong Limited at Level 26, One Pacific Place, 88 Queensway, Hong Kong.

Number of ASEAN start-ups seeking funding No. of projected opportunities in ASEAN by stage (2019-22) 3,000 60% 600

2,500 50% 500

2,000 656 40% 400 350 1,500 305 30% 300 268 164 206 1,000 122 20% 200 1,742 160 1,306 124 500 967 1,078 10% 100 102 903 72 86 51 62 0 0% 0 36 43 Year 2015 Year 2016 Year 2017 Year 2018 Year 2019 2019 2020 2021 2022 Deal Originated Follow Up Fund Raising % Change Seed Series A Series B

Source: Golden Gate Ventures Source: Golden Gate Ventures

China Internet: 5 June 2020

Table of contents An introduction to Golden Gate Ventures ...... 5 Executive summary ...... 8 The rise of ASEAN ...... 13 Four ASEAN sectors to watch ...... 27 China seizing a leading position in the Big Data era ...... 47 China Internet stock recommendations ...... 54 Appendix ...... 55

Company Section Alibaba Group ...... 58 Alibaba Group - H ...... 67 Tencent Holdings ...... 76 JD.com ...... 83

China Internet: 5 June 2020

A note on the structure of this joint report

Combining the expertise of Golden Gate Ventures and Daiwa Capital Markets, this report examines the rise of ASEAN markets and verticals, and looks at the role played by China’s Internet giants in these verticals, both historically and going forward. Sections in red reflect the views of Golden Gate Ventures. Sections in blue are contributed by Daiwa Capital Markets. Related investment advice on China’s Internet players is provided by Daiwa analysts alone.

China Internet: 5 June 2020

An introduction to Golden Gate Ventures

Dear investors,

The COVID-19 pandemic has caught global economies and businesses off guard, and the venture capital and start-up space has not gone unscathed. While some start-ups are struggling to navigate the untimely turbulence, others have found that the unprecedented shutdown and isolation have propelled their revenue growth and unlocked new opportunities for their businesses.

Holding a long-term view, we at Golden Gate Ventures see a clear opportunity after the storm. The present economic uncertainty is a cycle we face nearly every decade. Having personally experienced two downturns since working at my first dotcom start-up in 1997, it is evident to me that having the rigor to navigate the current climate will be paramount to a start-up’s success.

As one of the pioneering early-stage venture capital firms in ASEAN, Golden Gate Ventures has witnessed the explosive growth of innovation across the region throughout the past decade and continues to be optimistic – even more so at this time where countries are experiencing heightened reliance on digital platforms which will inevitably become an integral part of their new lifestyle.

With the aim of spotting the most valuable start-ups at their burgeoning stages and to be able to grow alongside them as a meaningful investor, we have studied previous trends and transformations in China, a market that is around 10-15 years ahead in maturity compared with Southeast Asia. This exercise has allowed us to draw inspiration for what will likely come next for Southeast Asia, while also consolidating our insights on the nuances, risks and potential challenges that could lie ahead should start-ups in Southeast Asia attempt to tackle the same industries.

This collaboration and exchange with Daiwa Capital Markets has given us an opportunity to derive additional insights from capital-market activities and late-stage developments of the technology giants in China. Combined with our understanding of local markets, we are better able to chart paths and identify fractures in business models that will likely not be sustainable in the long term.

This collaborative project concludes with a long-term bullish view on truck hailing, co-living, social e- commerce and Insurtech, which we see as rising verticals that will inevitably flourish in the next 5 years, regardless of the present climate. These sectors will almost certainly give rise to new unicorns. We also recognise that many of the proven business models from abroad must be significantly localised to cater to the unique industry dynamics within ASEAN countries. And we highlight the comparative lack of private and public capital in the ASEAN region.

While we see existing ASEAN tech behemoths, which we have named “2G2T” — namely Grab, GoJek, Traveloka and Tokopedia — being a likely source of capital and exit opportunities given their acquisition activities, we have spotted a growth capital gap (Series B to Series D) and are looking to provide value in this area, which we find critical to nurturing successful Southeast Asian companies to their full potential. While the present economic climate may present a short-term challenge for some 2G2T business models (eg, ride hailing and travel), we are confident that these models have long-term value that will flourish post COVID and in the years thereafter.

We trust that the combined findings of Golden Gate Ventures and Daiwa Capital Markets will help paint a more complete picture of technology trends in Asia and highlight the opportunities unfolding within ASEAN as the region breaks new ground. Vinnie Lauria, Founding Partner, Golden Gate Ventures

https://goldengate.vc

China Internet: 5 June 2020

Golden Gate Ventures contributors

Jeffrey CHUA

Senior Associate, Southeast Asia

: 65 9298 3809 | : [email protected]

Jeffrey Chua was one of the earliest members of the investment team at Golden Gate Ventures. Over 4.5 years, Jeffrey has participated in over 25 transactions and has sourced or led more than 10 of those deals. He remains sector-agnostic and has a wide portfolio of companies across Insurtech, Marketplaces, B2B SaaS, Edutech, Logistics, and Digital Content Platforms. His core duties at Golden Gate Ventures include deal sourcing, fundraising, due diligence and portfolio management. He graduated from Pace University with a Bachelors of the Arts in Economics, IBF level 1 (Treasury) certified.

Michelle HUANG

Associate, Southeast Asia

: 65 9817 3805 | : [email protected]

As part of the investment team at Golden Gate Ventures, Michelle Huang coordinates investment thesis-driven research within the firm to inform and support deal sourcing and execution. She covers several industries with expertise in FinTech, Insurtech and Logistics and has participated in over 10 transactions. Her portfolio of companies includes Ride Hailing, Social e-commerce, Agent Networks and Payment. Prior to Golden Gate Ventures, Michelle was a Co-founder at an EdTech startup in Singapore and worked at a growth-stage Fintech investment firm with a similar focus on Southeast Asia.

Viktoria OUSHATOVA

MBA Intern

: 65 8686 5740

Viktoria Oushatova is an MBA intern at Golden Gate Ventures. Previously she worked for three years as an Equity Research analyst covering the Automotive Sector and for two years as a Wholesale Credit analyst covering Leveraged Finance in the London office of Bank of America Merrill Lynch. She is currently pursuing an MBA with INSEAD. She has a BSc in International Management from the University of Warwick and a Master's in Management from London Business School. She is also a CFA charterholder.

China Internet: 5 June 2020

Daiwa contributors

John CHOI

Head of Hong Kong and China Internet

: (852) 2773 8730 | : [email protected]

John joined Daiwa as an equity analyst covering regional mid/small-cap companies in 2010. He took on additional responsibilities in 2012 by heading up the company’s China Internet coverage, for which he has developed a successful franchise. John is regularly recognised by investors for his high-quality and thought-provoking research. Prior to joining Daiwa, he worked for BNP Paribas and Merrill Lynch covering regional small-cap companies. John received his BA from Korea University Business School, majoring in Business Administration.

Robin LEUNG

Research associate, China Internet

: (852) 2848 4435 | : [email protected]

Robin Leung is a member of Daiwa’s China Internet research team. Prior to joining Daiwa in July 2018, he interned at Citigroup and worked at various sell-side firms covering regional technology and strategy. Robin holds a Bachelor’s degree in Economics from the University of California, Berkeley, and is a CFA charterholder.

China Internet: 5 June 2020

Executive summary The rise of ASEAN Developments in ASEAN: key highlights x Strong economic and demographic fundamentals. ASEAN nominal GDP (combined across 10 countries) almost doubled from USD1.6tn in 2009 to USD3.1tn in 2019, with the region currently being the fifth-largest economy in the world. Indonesia and Vietnam have been the main contributors to the region’s GDP growth, with 2009-19 GDP CAGRs of 12.2% and 9.4%, respectively. x Transition to a service-dependent economy. Over the past 10 years, the services sector has grown at a 6.0% CAGR, surpassing the growth rates of the industrial and agriculture sectors, at 5.2% and 3.5%, respectively. Subsequently, the services sector’s contribution to ASEAN’s overall GDP increased by 3% during the period to 50% in 2019, at the expense of the agriculture sector. x Vietnam witnessing similar trade patterns to China. Indonesia’s economy remains agriculture-driven, while China and Vietnam rely significantly on manufacturing. x ASEAN anticipated to have the second-largest young labour force by 2030. ASEAN will add a further 59m people to its workforce by 2030, according to the International Labour Organisation, making it the second-largest-growing labour force in the world behind India (it is currently the third largest behind India and China). x ASEAN is the third-largest region for FDI inflows. ASEAN recorded substantial FDI growth between 1990 and 2019, becoming the third-largest region in terms of FDI inflows globally as of 2019 and the second-largest destination in Asia after China.

Key macro drivers to sustain growth x Government initiatives supportive of innovation. Similar to the situation in China, the start-up scene in Southeast Asia has been widely driven by supportive initiatives that have helped spur venture capital investments and start-up innovations. x Diverse investor profile. According to Crunchbase, there are about 1,098 active investors in the region that have completed a total of 5,928 investments in start-ups worth USD31.2bn since 1997. x Growing pool of private investors. Currently, there are 944 early-stage investors with investments in Southeast Asia, which have completed 57,207 investments worth USD3.3bn since 2000. x Rising demand for private capital. According to Golden Gate Ventures’ (GGV) proprietary database of start-ups seeking funding since 2015, the number of start-ups raising early-stage venture capital increased from 903 in 2015 to 1,742 in 2019. x Maturing exit landscape. Since 2015, the region has witnessed 68 M&A deals backed by venture-capital funding, raising a total of USD1.1bn. Likewise, since 2015, the region has seen 9 IPOs backed by venture-capital funding, raising a total of USD4.1bn during their lifecycle. Six of the companies that went public were incorporated in Singapore, accounting for 70% of the total funding.

Trends to anticipate in ASEAN x Growth-capital gap – Series B and beyond. Based on GGV’s internal research, only 30% of Series A funded companies in the 2008-14 cohort in Southeast Asia progressed to receive Series B funding. x Room for ASEAN-focused growth funds to fill Series B and C gap. Southeast Asia is experiencing a gap in Series B and C capital, opening up opportunities for international investors and regional-focused growth funds. The situation is similar to the environment in China's ecosystem more than 10 years ago, when it was still fairly nascent. The funding gap in China at that time led to international investors such as Warburg Pincus, General Atlantic and TPG Growth participating. As start-ups in China reached a mature stage, they too became a source of funding for their budding counterparts. We anticipate further exits will be driven by the behemoths of ASEAN – the “2G2T”, namely Grab, GoJek, Traveloka, and Tokopedia.

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x Acquisitions by tech unicorns (2G2T) similar to Alibaba, Tencent and Baidu (BAT) in China. In recent years, ASEAN has seen several highly funded start-ups acquire smaller peers to propel their growth, with all the region’s unicorns to date having made at least one acquisition since achieving unicorn status. GoJek is an exception, having acquired companies even prior to achieving unicorn status, and it is now the most active acquirer among the unicorns.

Sectors to watch China-led innovations in ASEAN Given that ASEAN is showing similar growth patterns to those seen in China a decade ago, it would seem that several innovations from China are more readily applied to ASEAN compared with European- or North America-originated ideas and business models.

The next wave of start-ups that we expect to attract significant capital and bolster the exit environment in ASEAN over the next decade is likely to mirror the major spotlighted verticals in China in recent years. This group would likely comprise truck hailing, social e- commerce, Insurtech, co-living, agriproduce marketplaces, and Super Apps. To successfully tackle the Indonesia and Vietnam markets, start-ups incorporate varying levels of localisation in order to adapt to local nuances.

Truck hailing x Based on overall GDP contribution statistics for 2018-19, we see logistics accounting for a larger proportion of GDP in Indonesia and Vietnam than China, at 24% for Indonesia and 17% for Vietnam, vs. 15% for China. x In ASEAN, truck-hailing start-ups have been burgeoning from 2017, but notable traction has only been observed in Indonesia and Vietnam.

Social e-commerce x Indonesia looks to be witnessing the initial phases of a social e-commerce evolution akin to the one in China during 2010-15. Both countries exhibit similar purchasing habits, in particular: 1) online consumption habits, 2) deeper social-media penetration relative to e-commerce, and 3) the rapid growth of mobile usage (at a YoY change of larger than 8% since 2017). x Tier-1 cities in Indonesia at present fall short of tier-4 cities in China in terms of population density and purchasing power. This implies that there are few cities in Indonesia where the social e-commerce business model can be applied in the short term, limiting the serviceable market for social e-commerce. x Nonetheless, in ASEAN, e-commerce giants Lazada, Shopee, Tokopedia, Bukalapak, Tiki, Sendo and others, have not achieved as much dominance as platforms in China (ecommerce accounts for only 4% of the Indonesia retail market, whereas the figure in China is 25%), leaving more room for social e-commerce start-ups to thrive without intense competition.

Insurtech x There are 3 main players — Pasar Polis, Qoala, and Axinan (aka IglooInsure) — looking to be the Zhong An of Southeast Asia. The nascent space is recording growth, albeit not as rapidly as it is facing the obstacle of educating consumers on the value of insurance. x For Indonesia, the start-up and Insurtech landscapes tend to emulate India more so than China, as the latter has tech giants such as Ping An significantly fuelling and shaping the industry.

Mutual insurance x While mutual insurance appears to be relevant and a clever way of acclimatising consumers to the concept of insuring themselves, it is still a nascent space in ASEAN awaiting disruption.

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Co-living x In China, drivers of co-living include: 1) increasingly mobile society migrating into cities, 2) delayed marriages leading to later ownership, and 3) unaffordable housing ownership. x Unlike China and other markets (the US and the UK) where co-living is synonymous with a community and premium amenities, co-living in Southeast Asia looks to solve practical pain points in the rental market and to aggregate people in a sharing economy in order to maintain affordability for consumers.

Ride hailing and Super Apps x Southeast Asia Super Apps. Founded in 2010, Go Jek has developed very differently from its counterparts, with Indonesia as its home ground. Similarly, Grab, having stemmed from Malaysia, bears more similarities to GoJek than it does to Uber and Didi Chuxing. x Opportunity to expand into industries that have a low reach or digital presence. Ride hailing has revolutionised the logistics space, and consequently developed a digital payment network on the back of its e-wallet. This has enabled ride-hailing platforms to enter industries such as digital banking, telehealth, insurance, video streaming, and on- demand services. Such expansion is even more impactful in the Southeast Asia markets where: 1) consumers are just starting to go online and mostly are engaged via offline means, and 2) products and services are unable to reach these consumers due to geographical or infrastructure barriers.

Decoding the ascendance of Chinese Internet companies Three key listing options for Chinese companies x The US – the primary and most popular destination for ADRs. But geo-political concerns and uncertainties over variable interest entity (VIE) structures that are adopted by many Chinese Internet ADRs add uncertainties to the value proposition of US exchanges to Chinese tech companies. x Hong Kong – a dual-listing destination for ADRs gaining in popularity. The Hong Kong Stock Exchange has introduced additional conditions, such as Chapter 19C and 18A, to attract more Chinese companies to list in Hong Kong. x China – a market-efficient stock exchange still in the making. Although China’s government has been encouraging Chinese Internet companies to list on the China A- share market, the longer lock-up period and lower transparency of the listing process, as well as other listing rules, have deterred some Chinese Internet ADRs from returning to Chinese stock exchanges in the past few years.

For companies in Southeast Asia, the US is the preferred listing destination due to the availability of valuation and comparative analyses, as most technology companies are listed in the US.

Favourable funding environment for Chinese Internet companies x The abundance of financial resources in China has resulted in numerous successful exits. We believe the large number of listings of Chinese start-ups is due to the abundant financial resources available in China from venture capital, private equity and Internet companies, in which Qutoutiao took 27 months and Pinduoduo took 34 months to complete their IPOs, respectively. x Declining number of investments made by BAT (Baidu, Alibaba, Tencent) in China. The BAT companies have been active investors in the primary market, and we believe their investments in the primary market have accounted for a sizeable share of total investments being made in private companies. However, since 2019, the number of investments made by BAT has declined. In 2018, Alibaba invested in over 160 companies with an investment amount of over CNY180bn, Tencent invested in over 170 companies with an investment amount of over CNY90bn, while Baidu invested in over 70 companies with an investment amount of CNY7.5bn. According to IT Juzi and “Deep

China Internet: 5 June 2020

Echo” (Chinese-language link), in 2019 (from 1 January 2019 to 10 December 2019), BAT invested in only 127 companies. The decline is partially explained by the consolidation phase that some verticals have been experiencing. x Rising Internet giants starting to become more active in primary market investments. Despite the lower number of investments made by BAT in 2019 compared with that in 2018, we have seen the rise of Internet giants, namely Meituan, Xiaomi and Bytedance, being active in primary market investments. x BAT has also invested less in the US due to political tensions. The decline in the number of investments made by BAT has also been seen in the US due to heightened US-China trade tensions and scrutiny by the US government. x Companies in Southeast Asia could benefit from increased funding from Chinese investors. Since 2015, we note that major Internet companies in China have expanded their investee portfolios in Southeast Asia, with the goal of branching out of their core competence in China.

Chinese Internet companies: three driving forces x We believe there are three key driving forces that have led to the success of Chinese Internet companies and hence are relevant to the development of Internet companies in Southeast Asia.

Three growth pillars x Well-established infrastructure: logistics and payment infrastructures are key We believe a well-established infrastructure, like logistics and payment, is the pre- requisite to achieving a satisfactory user experience for e-commerce customers. A highly penetrated online digital payment platform also enables early-stage companies to ramp up without spending aggressively on payment infrastructure. x Social element and demand for local services are part of the DNA of effective user acquisitions We believe social-networking apps in China (eg, WeChat, Mini Programs) and demand for local services (food delivery, car hailing) are effective user acquisition channels for Internet companies and can boost the success of a few business models, such as those adopted by leader Pinduoduo and super-app player Meituan. x Lower-tier cities have also played a key role for some Chinese Internet companies as they have been able to capture the pent-up demand from users in these cities. x Data as a fuel to help a company morph into an ecosystem; reversing the copy- paste trend and forming a leading data-driven economy As China has less strict restrictions on users’ data privacy compared with the US, Internet giants can gather data from cameras, sensors, social media feeds and government data, and use AI to provide solutions to various verticals. We believe this lays a strong foundation and a favourable operational backdrop for innovative business models in the future. We believe companies that stand to benefit from this environment include Sensetime and Megvii. x More importantly, data (ie, consumption pattern, digital payment and food delivery orders) is the backbone for an Internet company’s cross-selling capability, which we see as the next key driver of Internet users’ ARPU.

5G technology to drive convergence and evolution in Southeast Asia x Although online penetration and infrastructure development in Southeast Asia still lags behind that in China, upcoming 5G technology could enable a swift shift in consumer behaviour towards higher online penetration in different verticals.

From “To C” to “To B” – the industrial Internet era has arrived x We believe the aforementioned factors are the key pillars that have driven China to become the leader in “consumer” Internet. Meanwhile, the conversion to industrial Internet from consumer Internet is gaining momentum and enhanced efforts by Internet companies will continue to underpin the secular growth of this segment, in our view.

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x We highlight how Internet companies are expanding from their core businesses to various verticals by leveraging their cloud computing capabilities.

Government and regulatory support for tech companies x In recent years, the Chinese government has been supportive of the Internet sector and encouraged Internet companies to further improve the efficiency of the country’s economy (eg, bike sharing and autonomous driving). The relatively lax regulations have allowed many new initiatives and business models to be tested in the domestic market. x While the overall regulatory environment in China is favourable for the Internet sector, there have been some regulatory actions taken in certain verticals. For example, in the game vertical, card games are strictly regulated given their similar nature to gambling, while the suspension of banhao (game monetisation licences) in 2018 impacted small companies such that primary investors’ willingness to invest in online games companies has been adversely impacted. Overall, going forward we see supportive government policies on verticals such as e-commerce, cloud and online education.

Post-IPO performance of Chinese Internet companies since 2018 x More than 35 Internet companies from China have IPO’ed in the US or Hong Kong since 2018. Among them, the top performers among Chinese Internet ADRs have been GSX Technology and Koolearn Technology. Although half of the companies were still loss-making as of June 2020, their share-price performance is not solely dependent on their profitability status, as factors such as a pick-up in market share, and long-term monetisation capability play a key role in driving investors’ expectations, in our view.

Capital markets now more comfortable with unprofitable tech listings so long as sustainable competitive moat is formed x We believe the perception of investing in loss-making companies has changed over the past decade as investors’ comfort level with unprofitable tech listings and the loss- making duration has increased given the successful example of companies such as Amazon. In China, Meituan has turned profitable while Pinduoduo’s share price is still subject to the dynamics of the competitive landscape and its selling and marketing expenses.

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The rise of ASEAN

Since the Global Financial Crisis (GFC) in 2009, the Association of South East Asian Nations (ASEAN1) has become the fastest-growing region in the world in terms of economic and demographic indicators, such as GDP, population growth and FDI investment. A mix of favourable drivers in the public (relaxed monetary policy and infrastructure investment) and private (increased household income driving consumer spending) sectors is likely to sustain regional growth going forward. As a result, the region has attracted an increased amount of invested capital in the private sector over the past 10 years, as investors have drawn parallels between ASEAN and China’s development over 2005-20, with Indonesia and Vietnam likely to be the main beneficiaries of the positive development of the region, in our view.

Strong economic and demographic fundamentals ASEAN is the fifth-largest economy in the world, accounting for 3.6% of the global economy. The region’s nominal GDP (combined across 10 countries) almost doubled from USD1.6tn in 2009 to USD3.1tn in 2019. Indonesia and Vietnam have been the main contributors to the regional GDP growth with a 2009-19 GDP CAGR of 12.2% and 9.4%, respectively. Currently, Indonesia accounts for more than one-third of the total nominal GDP (35.7% of total) at USD1.1tn, while Vietnam accounts for 8.4% of total nominal GDP at USD262bn. According to the International Monetary Fund (IMF), the GDP growth outlook for the region will be stable at 5% for the 2020-25 period. Similarly, China’s nominal GDP grew at a CAGR of 9.9% to USD14.1tn during 2009-19. As of now, China is the second-largest economy in the world after the US, accounting for 16.3% of the world’s nominal GDP (up from 9% in 2009).

Transition to a service-dependent economy. In recent years, there has been a clear regional shift in economic dependence from agriculture to services in ASEAN, similar to the one witnessed in China a couple of decades ago. From 2010-20, the services sector grew by a 6.0% CAGR, surpassing the growth of the industrial and agriculture sectors at 5.2% and 3.5%, respectively. Subsequently, the services sector’s contribution to ASEAN’s overall GDP increased by 3% over the period to 50% in 2019, at the expense of the agriculture sector, while the industry sector remained broadly unchanged (according to the ASEAN Integration Report 2019).

Vietnam has similar trade patterns to China. ASEAN’s multilateral trade with the rest of the world as well as the bilateral trade interdependence between China and ASEAN have been a significant contributor to the economic growth in both regions. Both China and ASEAN have a positive trade balance in net exports. However, there are significant sector differences in the export/import composition for the 2 regions. Indonesia’s economy remains agriculture-driven, while China and Vietnam rely significantly on manufacturing. China’s economy mainly relies on exports of broadcasting equipment and computers (15.7% of total combined), while imports are driven by integrated circuits and crude petroleum (22.4%). Indonesia’s economy differs significantly with exports mainly comprising coal briquettes and palm oil (19.6%), while main imports are refined and crude petroleum (15%). Vietnam’s trade is more similar to China’s with the country remaining one of the key manufacturing hubs in ASEAN. Vietnam’s exports are mainly broadcasting equipment and telephones (20.7%), while imports are led by integrated circuits and telephones (12.6%).

With 670m people, ASEAN is the third most populous region after China and India. There are 3 main demographic trends in ASEAN – a growing population, an increasing workforce share of the total population, and a low median age compared with developed

1 ASEAN member states include Brunei Darussalam, Cambodia, Indonesia, Lao PDR, Malaysia, Myanmar, Philippines, Singapore, Thailand, Vietnam

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countries. Over the past decade, ASEAN’s population has expanded by a steady rate of around 1.2% pa and should reach 669m in 2020.

Anticipated to have the second-largest young labour force by 2030. ASEAN’s workforce consists of about 415m people, accounting for 62% of the total population of the region. It is estimated that over 100m people have joined the region’s workforce over the past 20 years (2000-20) and we expect this trend to follow an upward trajectory over the next 5 years. According to the International Labour Organisation, ASEAN will add a further 59m people to its workforce by 2030, making it the second-largest growing labour force in the world behind India (currently third-largest behind India and China).

ASEAN’s population is significantly younger than most developed economies and China. The median age of the region’s population is 28.9 years as of now (vs. 38.4 years in China), and is expected to rise to only 33.6 years in 2030, according to the International Labour Organisation. Furthermore, the region is seeing a growing middle class with increasing household incomes, which presents a significant opportunity.

ASEAN the third-largest region for FDI inflows Despite global trends of declining FDI inflows across the board (-19% in 2018), ASEAN and China are the 2 main regions still seeing strong FDI growth (5.9% and 19.0% for 2019 in China and ASEAN, respectively). ASEAN recorded substantial FDI growth, which rose from USD13bn in 1990 to USD177bn in 2019, becoming the third- largest region in FDI inflows globally and the second-largest destination in Asia after China. FDI inflows into developing countries in Asia rose by 3.9% to USD512bn for 2018, accounting for one-third of global investment and for the majority of investment growth. FDI inflows into Southeast Asia surpassed those in China by USD40bn for the first time in 2019.

Key macro drivers to sustain growth ASEAN’s recent GDP, which increased at a CAGR of 5.4% over 2010-19, per the IMF, has been supported by a mix of favourable public and private sector factors, which are expected to persist going forward, according to ASEAN. In the public sector, ASEAN governments have significantly increased infrastructure investment as part of the Belt and Road Initiative launched by the Chinese government in 2013, and adopted a relaxed monetary policy to stimulate consumer spending. According to the Asian Development Bank (ADB) infrastructure investment in ASEAN in the period 2016-30 is expected to be USD2.8tn.

Investments in education are still lagging behind developed economies, but we have seen signs of improvement, with Singapore leading the way in education with funding accounting for c.20% of government spending in 2019. The private sector has been supported by increased consumer spending, driven by improved household incomes. Private consumption expenditure in ASEAN is forecast to increase from USD1.2tn in 2015 to USD1.8tn in 2020, according to Frontera Investment research. We expect macro fundamentals to remain strong over the next 5 years, driven by a healthy trade balance, supportive demographics, and double-digit foreign investment growth.

Strong macro fundamentals coupled with favourable drivers, which we expect to sustain the region’s growth in the near future, have resulted in increased investment activity in the private sector.

Supportive government initiatives towards innovation. Similar to the situation in China, the start-up scene in Southeast Asia has been widely driven by supportive initiatives that have helped spur venture capital investments and start-up innovation. In Singapore, the National Research Foundation founded in 2006 started providing start-up funding from grants to debt to LP investments, ranging from USD400,000 to USD7m. Singapore is also home to 3 of Southeast Asia’s unicorns, namely, Grab, Sea Group and Lazada. In

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Indonesia (also home to 3 of Southeast Asia’s unicorns, Go-Jek, Tokopedia and Traveloka), the government launched the Next Indonesian Unicorn (NextICorn) Foundation in 2017, which provides funding and mentorship to start-ups. Vietnam has among the most supportive government initiatives, such as the Saigon Innovation Hub, SpeedUp (USD520,000 fund investing in start-ups) and Project 844 (funding support for 200 start- ups), and has grown one unicorn in the gaming space, VNG.

Diverse investor profiles. Supportive government initiatives have attracted a diverse mix of active investors, both local and international, and private and institutional. According to Crunchbase, there are about 1,098 active investors in the ASEAN region that have completed 5,928 investments in start-ups worth USD31.2bn since 1997. New investors are attracted by the region’s strong macroeconomic fundamentals, the chance to invest in emerging regional well-performing economies, and a deepening secondary market for deals of all sizes, in our view.

Growing pool of private investors. The pool of both private and institutional investors has expanded significantly over the past 10 years. In the private investment space, there are a total of 226 private equity funds in Southeast Asia that have completed 8,501 investments worth USD9.7bn. Currently, there are 944 early-stage investors in Southeast Asia that have completed a total of 57,207 investments worth USD3.3bn since 2000.

Rising demand for private capital Overall, the region’s increasing demand for capital has dovetailed with rising supply – a sign that company owners across the region are growing more receptive to venture capital and private equity investments.

According to Golden Gate Ventures’ proprietary database of start-ups seeking funding since 2015, the number of start-ups raising early-stage venture capital increased from 903 in 2015 to 1,742 in 2019. Taking into consideration subsequent rounds of fundraising within the early stage, demand for venture capital increased at CAGRs of 24% during 2017-18 and 49% during 2018-19.

Number of ASEAN start-ups seeking funding 3,000 60%

2,500 50%

2,000 656 40%

1,500 305 30% 164 1,000 122 20% 1,742 1,306 500 903 967 1,078 10%

0 0% Year 2015 Year 2016 Year 2017 Year 2018 Year 2019 Deal Originated Follow Up Fund Raising % Change

Source: Golden Gate Ventures

Significant capital raised by the top-funded companies The top-13 funded companies in Southeast Asia have raised a total of USD30bn capital since being founded. Singapore attracted the most capital, with 7 deals worth USD15.2bn. In terms of sectors, there was a great variety across the top-13 deals.

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Top-funded private technology companies in ASEAN (2020) Company Country Industry Amount (USDm) Grab Singapore Transportation 9,900 GoJek Indonesia Transportation 4,500 Lazada Singapore Marketplace 4,200 Tokopedia Indonesia Marketplace 2,400 Traveloka Indonesia Travel, Tourism 920 Trax Image Recognition Singapore Data and Analytics 387 iFlix Malaysia Media & Entertainment 348 PropertyGuru Group Singapore Real Estate 311 Zilingo Singapore B2B Commerce 308 VNPay Vietnam Payments and remittance 300 BIGO Technology Singapore Data and Analytics 272 One Championship Singapore Broadcasting 266 NinjaVan Singapore Logistics 242

Source: Crunchbase Note: Top funded deal tab

Country breakdown of top-15 deals (2020) Country breakdown of total deal value (2020)

Top 15 deals in SEA by country Top 15 deals (USD M) in SEA by country Indonesia 3,490 Indonesia 5 Philippines 215

Singapore 9

Philippines 1 Singapore 16,384 Source: Crunchbase Source: Crunchbase

Sector breakdown of top-15 deals (2020) Top 15 deals in SEA by sector Enterprise Resource Lending, loans, credit Planning Transportation 1 1 2

Payments and remittance Internet technology, games 1 1 Internet marketing 1 Marketplace Image recognition 2 1 B2B e-commerce 1 Travel, Tourism Telecommunications Broadcasting 2 1 1 Source: Crunchbase

Sector breakdown of total deal value (2020) Top 15 deals (USDm) in SEA by sector Internet marketing Image recognition Payments and remittance Lending, loans, credit 215 225 200 170 B2B e-commerce Enterprise Resource 280 Travel, Tourism Planning 420 160 Telecommunications 953 Broadcasting 1966 Marketplace 3,100 Internet technology, games Transportation 3100 9300

Source: Crunchbase

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Maturing exit landscape Strong exit momentum and healthy returns are increasing the pace of investments, due to the quicker recycling of capital. In 2017, exit deal value rose to USD16bn, up 86% from the 2012-16 average. There are 3 main exit routes observed historically in Southeast Asia – IPOs, strategic acquisitions and trade sales. Among potential exits, M&A has proved to be the most popular, followed by IPOs.

M&A Since 2015, the region has recorded 68 M&A deals backed by venture capital funding, raising a total of USD1.1bn. Singapore and Indonesia were the countries that saw the highest activity in M&A deals and capital raised. E-commerce, financial services and media were the sectors that had the highest number of M&A exits (44 out of 68). AI technology, e- commerce, hardware and information technology were the sectors that raised the majority of funding (c. 90% of the total).

There have been 68 M&A deals in Southeast Asia since 2015 with a total funding of USD1.1bn.

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List of M&A activities in ASEAN since 2015 Target Acquirer Country Sector Year Total funding (USDm) Acquisition price (USDm) Tiki Corp Sen Do Technology JSC Vietnam E-commerce 2020 - - BIGO Technology Huanju Group Singapore AI technology 2019 272.0 1,450.0 ezbuy LightInTheBox.com Malaysia E-commerce 2019 37.6 85.6 Coins.ph Gojek Philippines Financial Services 2019 10.0 72.0 MoneySmart Kakaku.com Singapore Financial Services 2019 12.5 - Wavecell 8x8 Singapore Information Technology 2019 9.9 125.0 TradeHero ayondo Singapore Financial Services 2019 10.5 - Heptagon Advanced Micro Optics ams Singapore Hardware 2019 213.8 570.0 Red Dot Payment PayU Singapore E-commerce 2019 5.2 - Vidi (formerly Touristly) Air Asia Malaysia E-commerce 2019 2.6 2.6 GuavaPass ClassPass Singapore Fitness 2019 5.0 - Gushcloud International Yello Mobile Singapore Media 2019 14.0 - Luxola LVMH Singapore E-commerce 2019 16.4 - Duriana Carousell Singapore E-commerce 2019 3.3 - Hermo istyle Inc. Malaysia E-commerce 2019 2.0 13.2 LYKE Jollychic Indonesia AI technology 2019 4.0 - WalletKu TNG Fintech Group Inc. Indonesia Financial Services 2019 33.0 - Capital Match SESAMi Singapore Financial Services 2019 0.7 - RedMart Lazada Group Singapore E-commerce 2019 55.1 - Berry Kitchen Yummy Corp Indonesia E-commerce 2019 1.3 - Pie Google Singapore Information Technology 2019 4.0 - HUBBA TribeHired Thailand Real Estate 2019 0.4 - klinify Zuellig Pharma China Singapore Healthcare 2019 0.6 - FemaleDaily Network CT Corp Indonesia E-commerce 2018 1.0 - Seedly ShopBack Singapore Financial Services 2018 0.0 - Spacemob The We Company Singapore Co-working 2018 5.5 - TrustedCompany Net Reviews Malaysia E-commerce 2018 1.0 - PT Link Net Tbk PT Media Nusantara Citra Tbk. (MNC Media Group) Indonesia Information Technology 2018 275.0 - Jurnal.id Sleekr Indonesia Financial Services 2018 0.1 - Dressabelle iFashion Group Singapore E-commerce 2018 1.0 5.5 Talenta Sleekr Indonesia HR 2018 0.1 - Giosis eBay Singapore E-commerce 2018 82.1 - Collabspot SugarCRM Singapore Software 2018 0.1 - Ascenz Gaztransport & Technigaz Singapore Information Technology 2018 2.9 - UrbanIndo 99.co Indonesia E-commerce 2018 2.0 - Threadsol Coats plc Singapore Software 2018 0.2 12.0 Art of Click Xurpas Singapore Media 2018 0.5 45.0 iTwin Cloudaron Singapore Financial Services 2018 1.3 - DealStreetAsia Nikkei Inc Singapore Media 2018 - - Inzen Studio iCandy Interactive Limited Singapore Media 2018 1.3 4.4 7home ANGI Homeservices Vietnam Real Estate 2017 29.0 - ActSocial Linkfluence Singapore Media 2017 2.6 - Prinzio Gogoprint Pte Ltd Indonesia Media 2017 0.4 - Foody Sea Limited Vietnam E-commerce 2017 - 64.0 Tappy PTE. LTD. Weeby.co Vietnam Lifestyle 2017 0.2 - WiFi Chua Appota Singapore Information Technology 2017 0.2 - Properin Group Newland Indonesia Financial Services 2017 0.1 - Bridestory Tokopedia Indonesia E-commerce 2017 - - Smartly VinaCapital Investment Management Singapore Financial Services 2017 - - CombineSell Shopmatic Singapore E-commerce 2017 - - TicketBox Tiki Corporation Vietnam E-commerce 2017 - - Kyna.vn Navigos Group Vietnam E-learning 2016 - - Jualo Carro Singapore E-commerce 2016 - - Limakilo Warung Pintar Indonesia Agriculture and Farming 2016 - - PT RUMA Gojek Indonesia Hardware 2016 - - LOKET Gojek Indonesia Media 2016 - - Varbs Digital General Technology Indonesia Information Technology 2016 0.2 - VIMO Technology MPOS Vietnam E-commerce 2016 - 30.0 Prelo Bukalapak Indonesia E-commerce 2016 - - Lion & Lion Septeni Malaysia Media 2016 - - Caarly Carousell Singapore Automotive 2016 - - Watch Over Me Carousell Singapore Privacy and Security 2016 - - Kudo Grab Indonesia E-commerce 2016 - 100.0 Canvas Singlife Singapore Financial Services 2016 - - Nirvana Asia CVC Capital Partners Malaysia Real Estate 2015 - - Shopdeca.com migme Indonesia E-commerce 2015 - 0.7 Valuklik Dentsu Aegis Network Indonesia Media 2015 - - MYPAY MySQUAR Myanmar Financial Services 2015 - - bDigital Heroleads Asia Indonesia Media 2015 - -

Source: Crunchbase,

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Breakdown of Southeast Asia M&A activity by country and sector since 2015 Country No. of deals Total funding (USDm) Indonesia 20 317.0 Malaysia 6 43.2 Myanmar 1 0.0 Philippines 1 10.0 Singapore 33 720.6 Thailand 1 0.4 Vietnam 6 29.2 Total 68 1,120.3

Sector No. of deals Total funding (USDm) Agriculture and Farming 1 0.0 AI technology 2 276.0 Automotive 1 0.0 Co-working 1 5.5 E-commerce 22 210.6 E-learning 1 0.0 Financial Services 12 68.1 Fitness 1 5.0 Hardware 2 213.8 Healthcare 1 0.6 HR 1 0.1 Information Technology 6 292.1 Lifestyle 1 0.2 Media 10 18.7 Privacy and Security 1 0.0 Real Estate 3 29.4 Software 2 0.3 Total 68 1,120.3

Source: Crunchbase

IPO activities Since 2015, the region has recorded 9 IPOs backed by venture-capital funding, raising a total of USD4.1bn during their lifecycle. Six of the companies that went public were incorporated in Singapore, accounting for 70% of the total funding. The sectors that recorded the most IPO exits in terms of the number of deals were media and software, while technology and financial services attracted the majority of the funding.

Southeast Asia IPOs since 2015 Company Country Sector Ticker Year Total funding (USDm) ASLAN Pharmaceuticals Singapore Healthcare NASDAQ: ASLN 2018 118.0 Geniee Singapore Media TYO: 6562 2017 20.2 Sea Limited Singapore Technology NYSE: SE 2017 2,647.0 Reebonz Singapore Consumer retail NasdaqGM: RBZ 2017 64.0 BDO Unibank Philippines Financial services Other OTC: BDOUY 2017 1,200.0 DropSuite Singapore Software ASX: DSE 2016 5.0 Anacle Systems Singapore Software HKSE: 8353.HK 2016 6.5 FLEXIROAM Malaysia Hardware ASX: FRX.AX 2015 0.4 Plan B Media Thailand Media Other OTC: PLANB 2015 0.5

Source: Crunchbase

Breakdown of Southeast Asia IPOs by country and sector (since 2015) Country No. of deals Total funding (USDm) Malaysia 1 0.4 Philippines 1 1,200.0 Singapore 6 2,860.6 Thailand 1 0.5 Total 9 4,061.5

Sector No. of deals Total funding (USDm) Consumer retail 1 64.0 Financial services 1 1,200.0 Hardware 1 0.4 Healthcare 1 118.0 Media 2 20.7 Software 2 11.5 Technology 1 2,647.0 Total 9 4,061.5

Source: Crunchbase

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China at a glance: listing options for Chinese companies Given the government restrictions on foreign investments in sensitive industries such as Internet and online education, Chinese high-growth technology companies typically look for international listing destinations. According to the China Internet Network Information Centre (CNNIC), as of December 2019, there were 54 Chinese Internet companies listed in the US, accounting for 40% of the listed China Internet companies by listing destination, and 42% of the listed China Internet companies by market capitalisation.

China Internet companies: listings by geography (2019) China Internet companies: geographic distribution by market capitalisation (2019)

China 6% China 37% United States 40%

United States 42% Hong Kong 53%

Hong Kong 23%

Source: CNNIC Source: CNNIC

US – the primary and most popular destination for ADRs The US is the primary and preferred listing destination for many Chinese Internet companies given most tech companies are listed in the US, making comparative analyses easier. First, the US has access to international investors. Second, investors seem to have a greater tolerance for loss-making companies listed in the US than those listed in Hong Kong. However, geopolitical concerns and uncertainties over VIE structures that many Chinese Internet ADRs adopt add uncertainties to the value proposition of US exchanges to Chinese tech companies. And since the Luckin Coffee scandal in April 2020, we believe the US’s scrutiny of Chinese companies will be further tightened.

Hong Kong – a dual-listing destination for ADRs gaining in popularity Benefiting from a diversified institutional investor base and well-established capital market, Hong Kong is one of the primary listing destinations for home-grown new technology companies in China. The geographic proximity and minimal language barrier in Hong Kong also incentivise Chinese companies to list in Hong Kong. Although some Chinese companies in the past may not have been eligible to list on the Hong Kong Stock Exchange due to regulatory concerns, on 30 April 2018, Hong Kong Stock Exchange’s new listing regime came into effect when it introduced Chapter 19C secondary listing rules, which allow weighted voting rights and looser profitability requirements.

Meituan Dianping and Xiaomi were among the first few Chinese Internet companies with weighted voting rights to go public on the Hong Kong Stock Exchange in 2018. In November 2019, Alibaba also completed its secondary listing in Hong Kong. We believe the introduction of weighted voting rights has paved the way for more Chinese high growth technology companies to be listed in Hong Kong in the coming years.

On 1 June 2020, NetEase announced the launch of its secondary Hong Kong Public Offering, and it is looking to raise around USD3bn. Besides, JD filed a draft prospectus for its Hong Kong IPO on 5 June. According to Reuters, JD plans to raise around USD3bn and to list as soon as June.

In 2018, the Hong Kong Stock Exchange set out additional listing conditions (Chapter 18A) for biotech companies that do not meet the profit, market capitalisation, revenue, or cash flow tests, with the goal of incentivising Chinese biotech companies to list in Hong Kong.

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China – market-efficient stock exchange still in the making Back in 2015, China’s government became more proactive in incentivising ADRs to return to China. In the following few years, some China ADRs, such as Focus Media, Qihoo 360, Perfect World, and CMGE, delisted from US stock exchanges and relisted in China either through a re-submission of their IPO or a backdoor listing in order the reap the benefits of higher valuation multiples assigned by domestic investors. However, due to the longer lock-up period and lower transparency of the listing process, as well as other listing rules, not many Chinese Internet ADRs have returned to China’s stock exchanges in recent years.

Listing options for ASEAN companies For companies in Southeast Asia, the US is the preferred destination for valuation and comparative analyses reasons, as most technology companies are listed in the US.

Future funding trends in ASEAN

% of Series A-funded start-ups that received Series B funding No. of projected opportunities in ASEAN by stage (2019-22) (2008-14 cohort) 60 600 51 50 49 50 500

40 400 35 350 30 300 30 268 206 200 160 20 124 100 102 72 86 10 51 62 0 36 43 2019 2020 2021 2022 0 Seed Series A Series B CA UK US India SEA Source: Golden Gate Ventures Source: Golden Gate Ventures

Growth-capital gap – Series B and beyond Based on Golden Gate Ventures’ internal research, only 30% of Series A funded companies of the 2008-14 cohort in Southeast Asia progressed to receive Series B funding. This is a result of a lack of dedicated funds, in contrast to seed funding and Series A funding.

In comparison, for more developed capital markets, such as the US and UK, around 50% of Series A start-ups continue to receive funding at the Series B stage.

Also, further corroborated by research published in the Asia Partners 2019 Southeast Asia Report, there were 511 USD1-20m investments made in Southeast Asia for the period from 2014 to October 2019 that will require significant growth capital in the coming years. Historically, only around 20% of these early stage start-ups have received a USD20-100m follow-up capital investment to further propel their expansion.

The region’s maturing bench of start-ups is another powerful catalyst that is contributing to the growth-capital gap. More than 1,300 companies in Southeast Asia have received seed funding, or Series A financing, since 2011, including 261 in 2017 – 5 times the level in 2011.

Room for ASEAN-focused growth funds to fill the Series B and C gap Analysis on historical investments made at the Series B and Series C stages across Southeast Asia over 2015-19 suggests that ASEAN-focused investors participated in only around 35% of the funding rounds – which would translate into an estimated USD750m committed by foreign investors assuming cheque sizes were relatively equal.

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Looking forward, a combined 229 companies that received USD2-10m (Series A) funding in 2018 and 2019 will be due to raise growth capital this year. Given an average cheque size of USD11m for Series B, that would constitute at least USD1.25bn worth of capital to be deployed, of which 65% could be further capitalised by region-focused funds in place of global investors.

Investment activity in ASEAN (2013-19) 300 255 250 207 200 147 142 150 126 108 90 85 87 100 71 60 61 39 40 50 33 26 26 36 19 13 20 16 6 2 11 6 7 8 0 2013 2014 2015 2016 2017 2018 2019 $0.5m or smaller deals $0.5m to $2m deals $2m to $10m deals $10 to $50m deals $50m + deals

Source: Cento Ventures: https://www.cento.vc/wp-content/uploads/2020/02/Cento-Ventures-SE-Asia-Tech-Investment-FY2019.pdf

Southeast Asia is experiencing a gap in Series B and C capital, opening up opportunities for international investors and regional-focused growth funds. This situation is similar to the environment in China's ecosystem more than 10 years ago, when it was still fairly nascent. The funding gap in China at that time led to international investors such as Warburg Pincus, General Atlantic and TPG Growth participating. Sizeable local funds in China soon emerged, such as Qiming Ventures, Legend Capital, ShunWei Capital, which supported both early- and growth-stage start-ups.

As start-ups in China approached the mature stage, they too became a source of funding for their budding counterparts.

The rise in acquisitions by ASEAN tech unicorns since 2015 highlights how the unicorns have emerged as potentially the biggest drivers of exits in the region. We anticipate that further exits will be driven by the behemoths of the region – the “2G2T”, namely Grab, GoJek, Traveloka and Tokopedia.

Acquisitions by tech unicorns (2G2T) similar to BAT in China The prospect of IPO exits for venture-backed firms within Southeast Asia is lacklustre compared with other regions, pointing to strategic acquisitions as a much more likely exit option. In recent years, ASEAN has observed several highly funded start-ups acquiring other start-ups to propel their growth, with all the region’s unicorns to date having made at least one acquisition since they achieved their unicorn status. GoJek is a little different, having acquired companies even prior to achieving unicorn status and is now the most active acquirer among them.

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Acquisitions by ASEAN tech unicorns Unicorn Year of Unicorn Status No. of Acquisitions Acquisitions (Year) AirCTO ('19), Coins.ph ('19), Promogo ('18), Pianta ('16), Go-Jek 2018 11 Midtrans ('17), PT Ruma ('17), C42 ('16), MVCommerce ('16), Leftshift Tech ('16), Kartuku ('17), LOKET ('17)

Trax 2019 4 Planorama ('19), Shopkick ('19), LenzTech ('19), Quri ('18)

Razer 2015 4 OUYA ('15), MOL ('18), THX ('16), Nextbit ('17)

Traveloka 2017 3 Mytour ('18), Pegipegi ('18), Travel Book ('18)

Grab 2018 2 Kudo ('17), iKaaz ('18)

Sea 2015 1 Foody ('17)

Tokopedia 2018 1 Bridestory ('19)

Bukalapak 2017 1 Prelo ('18)

Lazada 2014 1 Red Mart ('16)

Source: Golden Gate Ventures

China at a glance: favourable funding backdrop for Internet companies in China Funding environment We believe the large number of listings of Chinese start-ups is attributable to the abundant financial resources in China from venture capital (VC), to private equity (PE), and Internet companies. For example, Qutoutiao took 27 months and Pinduoduo took 34 months to complete their IPOs, respectively.

Funding from PE/VC We note that PE/VC went through a frantic phase of investment prior to 2019, when user growth was the key parameter while the monetisation model had not yet proven to be successful (eg, shared bikes). We note that the funding environment in China has become more cautious since 2019.

For example, in December 2019, e-commerce player Taojiji filed for bankruptcy. Although Taojiji was able to grow its registered user base to more than 130m since its launch in August 2018 and secured USD200m in the last Series B funding round in June 2019, its strategy to acquire users through massive subsidies weighed on its cash flow. In the past few years, some PE/VC investors have been willing to invest in start-ups as long as they could deliver rapid monthly active user (MAU)/daily active user (DAU) growth, regardless of clarity on the company’s monetisation path. Although investments from PE/VC will continue to be major investment channels for start-ups, they have started to place more focus on companies’ monetisation capabilities and cash flows, in addition to user growth, in our view. Also, investors are now more focused on the sustainable competitive moat that a company can deliver in the long run and their cash flow, in our view.

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Funding from Internet giants The BAT companies have been active investors in the primary market over the past 5 years, and we believe their investment in the primary market accounted for a sizeable share of total investments being made in private companies. However, since 2019, the number of investments made by BAT has declined compared with 2018, according to IT Juzi and “Deep Echo”.

In 2018, Alibaba invested in over 160 companies with an investment amount of over CNY180bn, Tencent invested in over 170 companies with an investment amount of over CNY90bn, while Baidu invested in over 70 companies with an investment amount of CNY7.5bn. According to IT Juzi and “Deep Echo” (Chinese-language link), from 1 January 2019 to 10 December 2019, BAT invested in 127 companies, JD in 14 companies, Bytedance in 13 companies, and Meituan in 3 companies, with enterprise solution companies being the most sought-after areas for major Internet companies as they aim to be first-movers in the industrial Internet space.

In 2019, Tencent focused on investment in media and entertainment and enterprise solutions, which is in line with its strategic focus on Industrial Internet.

According to Sohu, Tencent management disclosed at the company’s annual Insight and Forecast (IF) conference in Beijing in January 2020 that Tencent had invested in more than 800 companies to enrich its IP portfolio, of which more than 70 have undergone IPOs and more than 160 have become unicorns.

Number of investments made by major China Internet Number of investments made by Tencent (2019) companies (2019)

80 16 14 14 13 70 12 60 10 7 8 6 6 50 5 6 4 4 3 3 40 4 2 2 2 2 30 0 20 Travel Games FinTech 10 Property Hardware Education Healthcare Advertising Automotive Media and Media E-commerce entertainment

0 Local services Tencent Alibaba Baidu JD Bytedance Meituan Enterprisesolution Source: IT Juzi and “Deep Echo Source: IT Juzi and “Deep Echo Note: Data corresponding to 1/1/2019 – 12/10/2019 Note: Data corresponding to 1/1/2019 – 12/10/2019

In 2019, the areas that Alibaba invested in most heavily were logistics, enterprise solutions and media and entertainment. Likewise, Baidu focused on enterprise solutions as it is likely to broaden its exposure in industrial Internet and AI initiatives.

Number of investments made by Alibaba (2019) Number of investments made by Baidu (2019) 4.5 4 10 9 4.0 9 3.5 3 3 3 8 3.0 7 2.5 2 2 2 2 6 5 4 2.0 4 3 3 3 3 1.5 1 1 1 3 2 1.0 2 1 1 1 1 1 0.5 1 0.0 0 Travel Games Games FinTech FinTech Logistic Property Hardware Hardware Education Education Healthcare Healthcare Automotive Automotive Agricultural Media and Media Media and Media E-commerce entertainment entertainment Local services Social network Enterprisesolution solution Enterprise Source: IT Juzi and “Deep Echo Source: IT Juzi and “Deep Echo Note: Data corresponding to 1/1/2019 – 12/10/2019 Note: Data corresponding to 1/1/2019 – 12/10/2019

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Despite the lower number of investments made by BAT in 2019 compared with 2018, we are seeing a number of rising Internet giants, namely Meituan, Xiaomi and Bytedance, being more active in primary market investments. For these younger companies, their investment portfolios are not as well diversified as those of BAT; therefore they may be more open to invest in all types of companies to broaden their exposure. For example, Xiaopeng Automotive’s Series C investment was led by Xiaomi, while Lixiang Automotive’s Series C investment was led by Meituan and Bytedance.

Number of investments made by JD (2019) Number of investments made by Bytedance (2019)

3.5 3 3.5 3 3 3.0 3.0 2.5 2 2 2 2.5 2 2 2.0 2.0 1.5 1 1 1 1 1 1.5 1 1 1 1.0 1.0 0.5 0.5 0.0 0.0 Utility Sports Games Logistic Hardware Hardware Education Advertising Agricultural Automotive Automotive Media and Media E-commerce entertainment Local Local services Enterprisesolution solution Enterprise Source: IT Juzi and “Deep Echo Source: IT Juzi and “Deep Echo Note: Data corresponding to 1/1/2019 – 12/10/2019 Note: Data corresponding to 1/1/2019 – 12/10/2019

Overseas investments The decline in the number of investments by BAT has also been seen in the US due to escalating US-China tensions and heightened scrutiny by the US government. According to the Financial Times’ Pitchbook data, publicly disclosed investments made by BAT in US start-ups fell by 84% for 2019 compared with 2018, of which, the 12 publicly disclosed investments totalled less than USD560m in 2019, a sharp decline from USD4.7bn in 2015.

Investment in Southeast Asia Given the macro concerns in China and geo-political concerns in the US, the number of investments made by Internet giants in China has declined in both China and the US, and thus Internet companies in Southeast Asia could potentially receive more funding in the future. In fact, since 2015, we note that major Internet companies in China have expanded their investee portfolios in Southeast Asia, with a goal to branch out from their core competence in China.

Alibaba: Since 2015, Alibaba has mainly focused on e-commerce and logistics investment in Southeast Asia, while Ant Financial has been active in investing in payment-related companies. Alibaba has made 3 major investments in Singapore, which are Lazada, Singapore Post and Quantium Solutions, while it has also invested in Tokopedia in Indonesia. In the payment verticals, Ant Financial invested in DANA (Indonesia), Ascend Money (Thailand), Mynt (Phillippines) and TNG Digital (Malaysia).

Tencent: Since 2008, Tencent has mainly focused on games, Fintech and entertainment investments in Southeast Asia. Tencent has invested in GoJek (Indonesia), Sea Group (Singapore), Ookbee U (Thailand), Sanook (Thailand), Voyager Innovations (Philippines) and VNG (Vietnam)

JD: JD has mainly focused on e-commerce and local services investments in Southeast Asia, investing in JD.ID (Indonesia), JD Central (Thailand), Tiki (Vietnam), Traveloka (Indonesia) and Gojek (Indonesia) and the Asian parent (Singapore). We believe JD’s investment in ASEAN countries has paved the path for its cross-border capability.

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Overall, we believe the investment trend for China Internet companies will continue in the coming years. Furthermore, Bytedance, Meituan, Didi Chuxing and others are likely to expand their core competencies into Southeast Asia. Internet leaders such as Alibaba and Tencent are likely to expand beyond their core competence to various verticals to strengthen their network effect, in our opinion.

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Four ASEAN sectors to watch

As ASEAN is experiencing its first wave of venture-backed investments approaching the end of their cycle, we are also seeing a greater amount of capital pouring into budding early-stage start-ups across the region. Inspired by the success of technology giants such as the “2G2T”, recent start-up founders have been more aggressive in raising larger funding rounds and often take inspiration from more mature start-up ecosystems in developing markets such as India and China.

With e-commerce, ride hailing, Fintech and entertainment/media having attracted significant funding already, we believe that adjacent verticals that will grow on the back of these main trends are the next areas for growth. We see logistics, social e-commerce, Insurtech, co-living as up-and-coming sectors.

China-led innovations in ASEAN Given that ASEAN is experiencing similar growth patterns to those China showed a decade ago, it appears that several innovations from China are more readily applied to ASEAN as compared with European- or North American-originated ideas and business models.

The next wave of start-ups that we expect to attract significant capital and bolster the exit environment in ASEAN over the next decade is likely to mirror the major spotlighted verticals in China in recent years. These would include truck hailing, social e-commerce, Insurtech, co-living, agriproduce marketplaces and Super Apps. To successfully tackle the Indonesia and Vietnam markets, start-ups incorporate varied levels of localisation in order to adapt to local nuances.

Truck hailing With ride hailing becoming a global phenomenon, other areas of logistics appear to have replicated the same proven business model. One area which has done so with notable success is the trucking industry, commonly referring to the delivery of goods from port to warehouse in heavy duty trucks such as containers.

Established in the early days of the start-up boom in 2008, Huo Che Bang is one such truck-hailing company that rose to become one of the largest on-demand platforms in China, alongside its close competitor, Yunmanman. Post the merger of both firms in November 2017 to become Full Truck Alliance, both firms combined were reported to be counting over 5.2m of the 7m total freight trucks and 1.25m of the 1.5m logistics enterprises in China.

By the end of 2019, the company’s delivery network covered 339 cities and 110,000 routes and generated an annual GMV of CNY800bn (USD115bn). According to the USD6.4bn valuation reported after its latest funding round in April 2018, Full Truck Alliance is significantly more sizeable than its US comparable, Convoy, which was valued at USD2.75bn as at November 2019.

What is unique to China that made truck hailing so relevant? 1. Largest logistics market globally: Although the US remains a distinctly larger consumer market than China, China’s logistics market is marginally larger at USD1.75tn vs. USD1.71tn in the US. It is commonly found across countries that logistics costs are indirectly correlated with the level of economic development2.

2 https://transportgeography.org/?page_id=4413

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2. Fragmented market: China’s highly fragmented trucking industry has around 7m firms operating an average of 2 trucks each3. The majority of these businesses are family-run and reliant on personal connections with shippers. 3. Traditional industry: Drivers are contacted manually or via intermediary companies using chalkboards to broadcast the delivery projects on the market.

Will truck hailing be a success in Indonesia or Vietnam? Our investigation of the local landscapes within Indonesia and Vietnam finds similar trends of fragmentation, manual processes and relationship-driven inefficiencies. The drivers for innovation to achieve greater profitability amongst players are common between Southeast Asia and China.

Greater value for disruption in logistics in Indonesia. On the other hand, we find Indonesia and Vietnam have an even larger proportion of GDP contributed by logistics as compared with China, at 24% for Indonesia and 17% for Vietnam in 2019. This coincides with the infrastructure scores assigned by the World Bank for 2018 where Indonesia (2.89) is behind Vietnam (3.01) and China (3.75).

Logistics as a sector in Indonesia also has greater room for improvement, being less established than others at a competence score of 3.1 (see table below).

Logistics market – country comparison US China Indonesia Vietnam GDP (2019), Trillion USD 21.44 14.3 1.016 0.26 Logistics % of GDP (2019) 8% 15% 24% 17% Logistics Total Market, Trillion USD 1.71 1.75 0.24 0.04 Number of Shipping Ports (Total) 360 2034 1811 320 Major Ports Not Available 34 111 44 Minor Ports Not Available 2000 1700 276 Infrastructure Score (2018) 4.05 3.75 2.89 3.01 Logistics Competence Score (2018) 3.87 3.59 3.1 3.4

Source: World Bank

Larger proportion of land-based shipments in Vietnam. Though Indonesia appears to be a larger logistics market on the whole, Vietnam has a larger proportion of land based- shipments as compared with Indonesia due to the geographical layout of both countries. Indonesia being an archipelagic country that comprises over 17,500 islands will often require ships to deliver goods across islands. This is reflected by the number of shipping ports in Indonesia, both major and minor, being around 6 times that of Vietnam, while China, a much larger consumer market, has only around 7 times the number of ports as Vietnam.

Truck-hailing start-ups and challenges Within ASEAN, truck-hailing start-ups have been burgeoning since 2017 but notable traction has only been observed in Indonesia and Vietnam. A Jakarta-headquartered start- up, Ritase, is navigating the trucking industry through an ecosystem approach where the platform offers a myriad of services including financing, bulk purchase and aftermarket services outside the matching of shippers with truckers.

Similar to ride hailing, a “Super App” strategy appears necessary for this region where the per capita spend on transportation remains comparatively much lower than in developed markets, and is furthermore combined with the thin-margin nature of logistics. Ritase, one of the leading trucking marketplaces in Jakarta, exemplifies this nature – providing financing, bulk purchase and relevant services to shippers and truckers onboard the platform.

3 https://www.mckinsey.com/industries/travel-transport-and-logistics/our-insights/long-haul-china

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Social e-commerce Since Pinduoduo’s inception in 2015, the company took merely 3 years to list on the NASDAQ, raising USD1.6bn and putting the company at a USD24bn valuation post the IPO in 2018. The firm has successfully garnered global interest and eclipsed Taobao and JD.com in its speed of growth, with merchandise volume reaching USD14.7bn in just 2 years, whereas Taobao and JD.Com took 5 and 10 years, respectively, to reach this mark, according to reports from TechCrunch.

Pinduoduo is akin to the poster child of social e-commerce in China, one of the hottest sectors to receive private funding from institutions and venture capitalists. In 2018 alone when Pinduoduo was listed, there were 28 successful fundraising rounds that amounted to over USD2.2bn of capital being deployed into the sector.

China social e-commerce start-ups 2018 funding activities Year 2018 Month Company Name Series Fund Raising Fund Raise (USD) March LOOK A 22m March Men Ya B Undisclosed April Hua Sheng Ri Ji A 30m April Pin Duo D 1400m April Li Wu Shuo C 14m April Gen Wo Mai Angel <1m April Wei Meng D1 140m April Yun Ji B 120m April Song Li Shen Qi Angel <1m April Xi Tao Seed <1m May OOK Pre-A <1m June Xiao Hong Shu D 300m June Hao Yu Ku A 14m June Xiao Qu Le A Undisclosed July Ai Ku Cun B 83m July You Zan IPO 150m July Shang Shi Tech Angel 1m July Xiao You A Undisclosed July Hao Yu Ku B >15m August Lan Jing Tao A Undisclosed August Plum Hong Bu Lin B 15m September Beike You Pin A >1m September Mei Shi Hui Xian Angel Undisclosed September WhatsMode B <1m September Nian Gao Mama B+ Undisclosed October Zai Jia A >15m November Xiao Qu Le A Undisclosed November Mei Ling Mei She Qu Angel >1m

Source: Golden Gate Ventures

China at a glance: social e-commerce While traditional e-commerce platforms are facing increasing customer acquisition costs, social e-commerce platforms have started to emerge. These new platforms offer a seamless shopping experience, such that customers can browse, promote, share, purchase and complete online transactions, by leveraging the user’s social network and sharing initiatives. Advantages of social e-commerce platform include the ability to achieve high GMV in a short period, backed by an effective user acquisition strategy. Along with Pinduoduo, another example of social e-commerce platforms is Yunji, a membership- based model that leverages the power of social interaction.

We are starting to see the emergence of more e-commerce business models that aim to bring down user acquisition cost through social networks (eg, KOLs and team purchases) and innovative advertising formats such as short-form videos. On the merchant side, e- commerce platforms are trying to build a complete ecosystem in supply-chain management, logistics, and payment services using whichever long-tail merchant can do business.

We think Pinduoduo’s team purchase model was a successful strategy to cope with rising user acquisition costs in the initial stages of e-commerce platforms, while its C2M model will help merchants in rural areas to sell products to online users.

China Internet: 5 June 2020

Emergence of social e-commerce platforms Trends in e-commerce business models User acquisition strategies with Comprehensive services

B2C social element provided to merchants B2C S2B2C Live streaming/KOL C2M/ S2B2C Team purchase/ Online discount retailer C2M Short video Logistic service S2B2C

C2B Team purchase Payment service Luxury goods online retailer Membership based Marketing service/ feeds

Content sharing Supply chain management

1998 1999 2008 2011 2013 2015 2016

Source: Daiwa Source: Daiwa

Within social e-commerce, there are three main business models, according to Yunji’s prospectus. 1) Team purchase model: users can team up with friends, social contacts, or strangers to place a large order that qualifies for a deep discount 2) Membership-based model: customers can enjoy discounts or member-exclusive rights if they become a member of the platform 3) Content-sharing model: customers rely on reviews or recommendations to make their purchase

Pinduoduo Pinduoduo is the clear leader in China’s social e-commerce segment. It surpassed JD in terms of number of annual active users in 2018, which has underpinned the momentum in its transaction volume and GMV. Pinduoduo’s innovative “team purchase” model encouraged customers to share product information via social networks such as Weixin and QQ, allowing users to invite their friends, family and social contacts to form a shopping team that would be eligible for deep discounts on merchandise.

Pinduoduo: unlocking discounts by sharing with friends

Source: Company data, Daiwa

Is the social element critical to online commerce in China? Lack of confidence in purchasing via e-commerce. Across lower-tier cities where consumers (especially in tier-2 and tier-3 cities) are less literate and tech savvy, the majority of consumers lack confidence in searching and browsing catalogues to make an informed purchase online.

China Internet: 5 June 2020

On the flip side, in such cities, the opinion of a neighbour and the wider community is more trusted and consumers are distinguished by their acute price sensitivity. By having agents that refer products in a “group buy” fashion on social e-commerce platforms, consumers can depend on the trusted reviews of others they know on top of enjoying discounts only possible when purchasing alongside others. By purchasing via PDD.com, users can get discounts of up to 90%4.

Higher penetration of social media vs. e-commerce. Unsurprisingly, WeChat’s penetration has far preceded that of e-commerce since 2013. E-commerce only reached a penetration of 25.7% in 2019, whereas WeChat’s penetration was already 26% back in 2013. With e-commerce still establishing itself and competing against traditional retail, Pinduoduo was positioned to reach a more sizable audience by nature of the platform it decided to operate on.

WeChat penetration rate 2013 2014 2015 2016 2017 2018 2019 2020E WeChat MAU (mn) 355 500 697 889 989 1,098 1,165 1,223 China total population (mn) 1,361 1,368 1,375 1,383 1,390 1,395 1,400 1,407 WeChat as % of China population 26% 37% 51% 64% 71% 79% 83% 87%

Source: CEIC, Daiwa estimates

Penetration of social e-commerce vs. e-commerce 2016 2017 2018 2019 2020E Social e-commerce users as % of mobile e-commerce users 36% 47% 52% 61% 73% Social e-commerce users (m) 1.52 2.23 3.16 4.32 5.77 Mobile e-commerce users (m) 4.18 4.73 6.08 7.13 7.88 E-commerce penetration 15.7% 19.7% 23.6% 25.7%

Source: iiMedia Note: 2019 Social e-commerce users as % of mobile e-commerce users is calculated as social e-commerce users (2019 actual) divided by mobile e- commerce users (2019E)

What other factors have been integral to the growth of social e- commerce? Presence of the WeChat ecosystem for Mini Apps. The role of the WeChat in Pinduoduo’s unprecedented trajectory cannot be overstated — an ecosystem accompanied by WeChat’s MAUs of 1.165bn allowed for an efficient cost of acquisition of users. Netizens in China’s rural areas who have just started to use the mobile Internet found it much easier to navigate on Pinduoduo and make payments directly through WeChat.

China at a glance: popularity of social networking apps fostering a disruptive force The massive user bases of WeChat and other Mini Programs such as AliPay serve as an effective user acquisition channel. More importantly, business models with a strong social element can ride on the highly penetrated user base of WeChat, eg, social ecommerce.

Level-2 access is found in WeChat wallet and provides easy access for users to nine affiliated apps, including Elong Tongcheng, Meituan Delivery, Didi Chuxing, and JD. For some companies, WeChat wallet is the major user acquisition channel. In the year ended 31 December 2019, 62.4% of Elong TongCheng’s newly acquired paying users on Weixin were from tier-3 or below cities. To illustrate, Weixin users can access their Weixin-based Mini Program within the Weixin ecosystem mainly through the Weixin Payment (Wallet) portal and a drop-down list of users’ favourite or most frequently used Mini Programs. Such user traffic contributed 83.3% of Elong Tongcheng’s total average MAUs on its Tencent- based platforms in 1Q20. On Elong Tongcheng’s 4Q19 earnings call, management stated that the GMV generated from Elong Tongcheng on Weixin’s Mini Program platform exceeded over CNY100bn, which accounts for c.15% of total Mini Program GMV on Weixin (CNY800bn).

4 https://www.applicoinc.com/blog/how-pinduoduo-became-the-2-ecommerce-marketplace-in-china/

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WeChat level 2 access

Source: Daiwa

Likewise, Alibaba’s Alipay provides user traffic to Ele.me. As of 4Q19, Ele.me acquired 48% of its new customers via the Alipay app.

The massive user base for social networking app WeChat, together with the consumption upgrade and demand from lower-tier cities, have given rise to new business models such as social e-commerce.

Mini Programs WeChat Mini Programs. Within WeChat, Tencent rolled out its Mini Programs in January 2017 to allow Internet users to use third-party apps without downloading the full version on their smartphones. This ecosystem allows users to access many apps without having to spend time downloading apps or having phones’ storage space taken up. For app owners, the obvious benefit is being able to leverage the huge user base on WeChat. At the same time, app developers can tailor their apps so they are more suited to the Mini Program ecosystem. More importantly, we believe this closed-loop ecosystem bodes well for user retention and engagement. The number of daily transactions generated within Mini Programs more than doubled year-on-year in 2019.

Mini Program – Trip.com

Source: Daiwa

China Internet: 5 June 2020

Although Mini Programs were launched less than 3 years ago, they generated a GMV of more than CNY800bn in 2019 alone. Mini Programs give Internet companies a marketing channel with relatively low user acquisition costs, which we believe is a major factor in the ramp-up of companies’ developments on the WeChat ecosystem.

WeChat Mini Programs: operating metrics (2019) (2019) (8M19) (1Q20) (2019) Average number of Average number of Number of mini (8M19) DAU GMV mini program visited mini program used program User stickiness per user per user

48.7% of users > 400m 236m use mini program >CNY800bn +45% YoY +98% YoY for more than 5 (+160% YoY) times a day

Source: Company data, Jisuapp, iResearch Note: 2019 data according to Weixin official report; 1H19 data according to Jisuapp.com, 8M19 data according to iResearch

Alipay Mini Programs. Baidu and Alipay each have their own Mini Program ecosystems. In August 2018, Alibaba’s Alipay rolled out Mini Programs allowing users to access other social media platforms, Ele.me, Koubei, Tmall, DingTalk, and AutoNavi, as well as third- party Mini Programs.

Alipay’s Mini Programs: Starbucks

星巴克

Source: Daiwa

China Internet: 5 June 2020

Alipay’s Mini Programs: operating metrics

(May 2020) (1H19) (May 2020) Number of mini Alipay’s mini Alipay’s MAU programs program DAU

1.7 600m+ 230m million+

Source: ALDZS, Sohu

What is happening in Southeast Asia in social e-commerce vs. China? Indonesia is showing signs of experiencing the initial phases of the social e-commerce evolution that China went through between 2010 and 2015. Both countries show similar purchasing habits, in particular: 1) online consumption habits, 2) deeper social media penetration relative to e-commerce, and 3) rapid growth in mobile usage.

Limited addressable market of lower-tier cities. Only Jakarta can be strictly categorised as a tier-1 city in Indonesia on the basis of GDP per capita and population. Notably, tier-1 cities in Indonesia today fall short of tier-4 cities in China in terms of population density and purchasing power. This may imply that there are only a few cities in Indonesia where the business model can be applied successfully in the short term, thereby limiting the serviceable market for social e-commerce.

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Indonesia vs India: city tiers and population density China: city tiers and population density Southeast Asia Populations India Populations Southeast Asia China Countries / City (millions) City (millions) Countries / City Populations (millions) City Population (millions) Indonesia Mumbai 11.98 Shanghai 22.32 Zhongshan 3.12 Jakarta 1st Tier 8.39 Delhi 9.88 Beijing 11.72 Changsha 3.09 Surabaya 2nd Tier 2.59 Bangalore 4.3 Tianjin 11.09 Urumqi 3.03 Bandung 2.14 Kolkata 4.57 Guangzhou 11.07 Shijiazhuang 2.83 Medan 1.79 Chennai 4.34 Shenzhen 10.36 Lanzhou 2.63

Palembang 1.44 Hyderabad 3.64 Wuhan 9.79 Yunfu 2.61 Semarang 1.35 Ahmedabad 3.52 Dongguan 8 Nanchang 2.36 Malaysia Pune 2.54 Chongqing 7.46 Dadonghai 2 Kuala Lumpur 1.46 Surat 2.43 Chengdu 7.42 Ordos 1.94 Subang Jaya 1.18 Kanpur 2.55 Nanjing 7.17 Jilin 1.88 Klang 1.00 Jaipur 2.32 Nanchong 7.15 Bayan Nur 1.76 The Philippines Lucknow 2.19 Xi'an 6.5 Kunshan 1.6 Metro Manila 11.55 Nagpur 2.05 Shenyang 6.26 Xinyang 1.59 Quezon City 2.68 Patna 1.37 Hangzhou 6.24 Fushun 1.4 Manila 1.66 Indore 1.47 Harbin 5.88 Luoyang 1.39 Kalookan 1.38 Thane 1.26 Tai'an 5.5 Guankou 1.38 Davao 1.36 Bhopal 1.44 Suzhou 5.35 Handan 1.36 Thailand Ludhiana 1.4 Shantou 5.33 Baotou 1.3 Bangkok 5.68 Agra 1.28 Jinan 4.34 Xuchang 1.27 Chiang Mai 1.59 Pimpri-Chinchwad 1.01 Zhengzhou 4.25 Yueyang 1.2 Nakhon Ratchasima 2.54 Nashik 1.08 Changchun 4.19 Anshan 1.2 Ubon Ratchathani 1.77 Vadodara 1.31 Dalian 4.09 Tongshan 1.2 Nakorn Srithammarat 1.52 Faridabad 1.06 Kunming 3.86 Fuzhou 1.18 Udon Thani 1.52 Meerut 1.07 Qingdao 3.72 Guiyang 1.17 Vietnam Kalyan-Dombivali 1.19 Foshan 3.6 Lijiang 1.14 Ho Chi Minh City 6.35 Varanasi 1.09 Puyang 3.59 Datong 1.05 Hanoi 3.29 Howrah 1.01 Wuxi 3.54 Changshu City 1.05 Haiphong 1.83 Xiamen 3.53 Xianyang 1.03

Tianshui 3.5 Huainan 1.03 Ningbo 3.49 Jieyang 1 Shiyan 3.46 Zhu Cheng City 1 Taiyuan 3.43 Tangshan 3.37 Hefei 3.31 Zibo 3.13

Source: Spire Research and Consulting Source: worldpopulationreview

China at a glance: buoyant purchasing power in less developed areas Lower-tier cities play an important role in driving user growth for the aforementioned business models, such as social e-commerce and food delivery, which has led to the successful IPO exits of Meituan, Pinduoduo, and Qutoutiao in recent years.

x Ample upside in expenditure in users from less developed areas. According to CNNIC, the Internet penetration rate in China’s rural areas expanded by 7.8pp YoY (the fastest pace so far) to 46.2% as of March 2020, compared with a rate of 76.5% in urban areas. We believe that Internet penetration in rural areas will continue to increase on the back of improving telecommunications infrastructure. Besides, NBS data show that disposable incomes in urban areas grew by 8% to CNY42,359 in 2019, or 2.6x the CNY16,201 figure for rural areas. Hence, we see ample upside in consumer spending from rural areas.

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China: population density (2018) China: Internet penetration – urban vs. rural areas 90% 74.6% 76.5% 80% 69.1% 71.0% Tier 1 and 2 65.8% 70% 62.8% Tier 5 cities cities 60.3% 17% 33% 60% 46.2% 50% 35.4% 38.4% 40% 31.6% 33.1% 28.1% 28.8% 30% Tier 4 cities 20% 26% 10% 0% 12.2013 12.2014 12.2015 12.2016 12.2017 12.2018 03.2020 Tier 3 cities Urban internet penetration Rural internet penetration 24% Source: TalkingData Source: CNNIC

China: average household expenditure (CNY’000) – urban vs. China: disposable income (CNY’000) – urban vs. rural areas rural areas 30 15% 60 15%

12% 42.359 11% 39.251 11% 36.396 20 10% 10% 10% 10% 40 33.616 10% 10% 31.195 9% 9% 8% 26.467 28.844 8% 9% 8% 8% 7% 7% 7% 6% 16.021 10 5% 20 12.363 13.432 14.617 5% 9.430 10.489 11.422

0 0% 0 0% 2013 2014 2015 2016 2017 2018 2019 2013 2014 2015 2016 2017 2018 2019 Average expenditure - urban area Disposable income - urban area Average expenditure - rural area Disposable income - rural area Average expenditure (YoY %) - urban area Disposable income - urban area (YoY growth) Average expenditure (YoY %)- rural area Disposable income - rural area (YoY growth) Source: NBS Source: NBS.

x Purchasing power in less developed cities is not significantly lower. According to data disclosed at Alibaba’s investor day in 2019, average spending in less developed areas in FY19 was not significantly lower than the blended average spending disclosed in 2018. The suggestion is that Alibaba has been effective in offering products that meet consumers’ needs. Moreover, purchasing power in less developed areas is not significantly lower than in other parts of the country and looks poised to increase along with rising disposable incomes in lower-tier cities, in our view.

x To illustrate the upside potential in purchasing power in less developed areas, there are limited numbers of offline retail stores offering electronic products/appliance products, such that the online retail marketplace gives users more options and greater price transparency. Therefore, we believe the purchasing power of less developed cities could be unleashed if demand in specific categories can be met and purchase frequency could even exceed that of higher-tier cities ultimately.

China: average spending – 2019 less developed areas (CNY) vs. 2018 blended average (CNY) 14,000 12,000 12,000

10,000 7,500 8,000 10,600 6,000 3,000 4,000 6,700

2,000 2,300 0 1 Year 2 Years 3 Years 4 Years 5 Years Avg. annual spending per consumer (as of 2018) Avg. annual spending per consumer (less developed areas in 2019)

Source: Alibaba 2019 Investor Day presentation, Daiwa Note: Only data for Years 1, 3 and 5 disclosed; other data calculated through extrapolation

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E-commerce has yet to establish dominance. In ASEAN, e-commerce giants Lazada, Shopee, Tokopedia, Bukalapak, Tiki, Sendo and others have not achieved the kind of dominance enjoyed by platforms in China (e-commerce accounts for only 4% of Indonesia’s retail market compared with 25% in China5). In other words, social e- commerce start-ups have room to thrive without being subject to intense competition.

What challenges are start-ups facing? Shipping costs compressing margins. Whereas online commerce in China is growing on the back of a relatively mature logistics ecosystem, higher logistics costs in Indonesia and Vietnam result in more challenging direct-to-doorstep delivery. Companies have to work around a more effective model of distribution.

Low digital payments penetration. Credit-card penetration in China is as low as 1.6%, and only 36% of citizens have digital bank accounts. This lack of bank account holders may also make it challenging to reach customers in rural or remote areas.

China at a glance: decoding the rise of Chinese Internet companies We believe there are three key driving forces behind the success of Chinese Internet companies that are relevant to their development in Southeast Asia. Although online penetration and infrastructure development in Southeast Asia both still trail China’s, the region’s market has its own characteristics and dynamics. Plus, we think the advent of 5G technology could propel a rapid evolution in the near future.

Established infrastructure: logistics and payments We believed the well-established infrastructures like logistics and payment are the pre- requisites to achieve a satisfactory user experience for e-commerce customers.

Logistics China’s major logistics service providers are Alibaba’s Cainiao, JD, SF Holding, ZTO, YTO, STO, Yunda and Best. Alibaba’s Cainiao has an asset-light asset model, where it owns the system and hardware of its logistics network but does not have its own carriers. It has digitally connected warehouses rather than wholly owned warehouses, which give it the flexibility to expand in a short period of time. By investing in 5 of the 6 express companies (ZTO, YTO, STO, Yunda and Best), Cainiao can realise synergies with other express companies and broaden its coverage in urban and rural areas, in our opinion.

Like Amazon, JD has spent aggressively on 1P logistics to build its warehouse infrastructure and operate its own carrier network with the goal of providing the best user experience in last-mile delivery. Considering JD’s established in-house logistics network, we think the company has an advantage in last-mile delivery in rural areas. Compared with another insourcing express delivery company, SF Holdings, we believe JD’s competitive edge lies in its warehousing solution, while its 1P business gives it better access to suppliers, such that JD can cross-sell its logistics services to its merchants.

Among the advantages of the self-ownership model (insourcing) favoured by JD Logistics and SF Holding is that it gives operators greater control of the whole business, which can lead to enhanced service quality, allowing express service companies to better target high- end customers. Also, the model means that operators can access a more comprehensive range of data, which can give insight into improvements that can be made to operations.

5 https://www.mckinsey.com/~/media/mckinsey/featured%20insights/china/china%20digital%20consumer%20trends%20in%202019/china- digital-consumer-trends-in-2019.ashx

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China: logistics service providers Other express delivery operators Alibaba Cainiao JD Logistics SF Express (ie, YTO, ZTO, STO, YD) Business model Digitalised logistic network Self-operated Insourcing (self-ownership) Outsourcing/franchising Have alliance with STO Express, Supply chain Owns most of its equipment and Focused on express ZTO Express, YTO Express, management oriented. facilities including warehouses, delivery Best Express and Yunda Provides logistics transportation vehicles (trucks and Express services, covering aircraft) and occasionally its IT warehousing solutions to systems. last-mile delivery. Share same warehouse/staff for 1P and 3P orders Target All tiers of customers Mid-high end customers. Mid-high end customers Mid-low end customers customers 200k+ merchants, covering apparel, 3C products, furniture, fresh food, etc Warehousing Y Y Y Y(small contribution) management Largest bonded warehouse Large portion of revenue network in China. from warehousing management Cold chain Y (Hema, Danniao) Y Y Y(small contribution) products Last-mile Y Y Y Y delivery

Source: Daiwa

Payments The payments landscape in China is dominated by Alibaba’s Alipay and Tencent’s WeChat Pay, with market shares of 54.5% and 39.5%, respectively, as of 3Q19, according to iResearch. According to a presentation made at Alibaba’s 2019 investor day, as of 30 June 2019, Alipay had 900m annual active users in China while Alipay and local wallets’ AAU stood at 1.2bn globally. We believe the payment infrastructure in China has helped fuel the rapid growth of e-commerce over the past 10 years.

Proximity mobile payment users as % of smartphone users (2019E) 90% 81.1% 80% 70% 60% 50% 40% 29.0% 30% 19.1% 16% 20% 12.5% 10% 0% China US UK Germany France

Source: eMarketer Note: as of October 2019; age 14+; mobile phone users who have made at least one proximity mobile payment transaction in the past six months; includes point-of-sale transactions made by using mobile devices as a payment method; excludes transactions made via tablet

The customer-to-manufacturer (C2M) model is a beneficiary of the highly penetrated digital payment industry which allows end-users and manufacturers to transmit money seamlessly through an online platform.

Customer-to-manufacturer (C2M) The C2M model helps merchants improve the supply chain efficiency of the retail market so that they can adjust their production, inventory planning, sales plans and logistics services accordingly. As a result, merchants can deliver affordable and high quality household items to customers.

China Internet: 5 June 2020

C2M business model

Traditional retail model

Manufactureres Layer 1 Layer 2 Layer 3 Customers Farmers distributor distributor distributor

Wholesalers Distributors Logistics

C2M model

Manufactureres Advantages: 1) Better predict potential sales volume of merchandise potentially Customers Farmers 2) Merchants can adjust their production, inventory planning, sales plans and logistic services

Source: Daiwa

Insurtech China’s insurance sector grew by 3.9% YoY in terms of insurance premiums in 2018, at a slower pace than the annual average expansion rate of 20.7% during 2013-17. In that period of fast growth, industry growth was propelled by innovations locally, one of which was micro-insurance products, designed based on the digital footprint of a consumer. 6

Micro-insurance Zhong An, one of China’s largest digital insurance companies, was formed in 2013 through a partnership among Ant Financial, Ping An, and Tencent. The company has several new product innovations, ranging from insurance cover for train and airport delays, mobile phone screen cracks, to events cancelled due to bad weather. Zhong An realised that at a certain scale (critical mass), many of these pain points could be covered by an insurance policy. The new products were essentially designed to cater to a new general audience with vastly different consumption behaviours, as evidenced by a significant proportion of its customer base (60%) being aged 20 to 35, and most consumers from this age group bought their first insurance policy through the company.

Being another unicorn in China, the firm was listed on the Hong Kong exchange in September 2017 and has a market capitalisation of nearly USD5.2bn. 7

Is micro-insurance as popular in ASEAN? Within the start-up space in this region, there are 3 main players vying to be the Zhong An of Southeast Asia. The nascent space is observing growth, albeit not as rapidly as it is facing the obstacle of educating consumers on the value of insurance.

6https://cdn2.hubspot.net/hubfs/1660133/CN_Garphic%20and%20Meterial/CN_Rpeort/EMIS%20Insights%20- %202019%E5%B9%B4%E7%AC%AC%E4%B8%80%E5%AD%A3%E5%BA%A6%E4%B8%AD%E5%9B%BD%E4%BF%9D%E9%99%A9%E 4%B8%9A%E7%A0%94%E7%A9%B6%E6%8A%A5%E5%91%8A.pdf 7 https://www.bloomberg.com/quote/6060:HK

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Micro-insurance start-ups in Indonesia

The company distributes tailor made micro insurance products to consumers through partnered online platforms. PasarPolis has on-boarded more than 100 insurance products from 30 insurers on their platform. In August 2018, PasarPolis already secured around 500,000 policy holders with around 300,000 being Go-Jek drivers. The platform offers six types of insurance products from travel, property, health, life, to car insurance.

Countries: Indonesia. Going into Vietnam and Thailand Venture Funding: East Ventures, BEENEXT, GoJek, Tokopedia, Traveloka

Axinan describes itself as a full stack insurance provider, developing on demand and customizable products for online platforms. The firm was incubated from Paypal’s incubator and has signed partnerships with several e-commerce companies including Tokopedia. Countries: Singapore, Indonesia Venture Funding: Undisclosed – Open Space Ventures, Linear Ventures

Source: Crunchbase

Competition from abroad: Zhong An entering Southeast Asia via partnership with Grab In January 2019, Grab announced a joint venture with Zhong An to launch a digital insurance distribution platform. It started out offering drivers’ insurance to its drivers in Singapore, with a long-term goal of offering a myriad of mobile insurance products.

Innovations more relevant to Southeast Asia

Notable Insurtech start-ups globally Latest Total Funding Latest Round Latest Round Name Country Est. Category/Description Funding (USDM) Valuation Dilution Investors Zhong An China 2013 Online insurance broker IPO 931 2700 Na Softbank Investment, Morgan Stanley FWD Hong 2013 Digital first insurer Corporate 500M Na Na Swiss Re, NBD Ventures, Pacific Century Kong Taikang China 2015 Digital insurance platform Corporate - Na Na - Liang Zhi Bao China 2017 Enabler - Broker & Product Series A 14 Na Na XinCheng Investment, Fosun RZ Capital, Titan Innovation Ventures, Linear Ventures Waterdrop China 2013 P2P Insurance - Medical and Series C 227 855 14.50% Tencent Holdings, Boyu Capital Health 1an.com China 2016 Enabler - Broker & Product Na Na Na Na Na Innovation Wkbins China 2015 Enabler - Broker & Product Series C >37 Series C Na Phoenix Rui Capital, followed by Fengyun Innovation Undisclosed Capital Policy Bazaar India 2008 Insurance Comparison Series F 372 800 20% Temasek, Tiger Global Management, Softbank Platforms Acko India 2017 Digital first insurer Series C 107 235 21% Amazon, Ashish Dhawan Coverfox India 2011 Insurance Comparison Series C 47 Na Na IFC, Transamerica Ventures, SAIF Partners Platforms Turtle Mint India 2015 Distribution for insurance Venture 34 Na Na Sequoia Capital, Blue Ventures, Nexus Venture products Partners One Assist India 2011 Digital first insurer - products Debt 32 Na Na Sequoia Capital, Assurant, Arun Sarin Financing Digit Insurance India 2016 Internet First Insurers – Venture 100 Na Na Fairfax Financial Holdings general Friday Germany 2017 Digital first insurer – P&C Auto Venture 128 Na Na Baloise Strategic Ventures, German Media Pool Prima Italy 2017 Digital first insurer – P&C Auto Venture 114 Na Na Blackstone Tactical Opportunities, Goldman Sachs Private Capital Investing Oscar Health USA 2012 Digital first insurer – health Corporate 1300 3750 10% Alphabet, Founders Fund, Fidelity, Clover Health USA 2013 Digital first insurer – medical Series E 925 Na Na Greenoaks Capital, Sequoia Capital Gusto USA 2011 Employer insurance – HR Series D 516 3600 5% Fidelity Management and Research, Generation Cambridge Mobile USA 2010 Enablers – telematics Venture 503 Na Na Softbank Investment Advisers Telematics Lemonade USA 2015 Digital first insurer – property Series D 480 1700 15% Softbank, Allianz, Sequoia Capital Bright Health USA 2015 Digital first insurer – health Series C 440 950 20% Declaration Partners, Meritech Capital Metromile USA 2011 Digital first insurer – Series E 300 Na Na Intact Financial Corporation, Tokio Marine automobile Holdings Root Insurance USA 2015 Digital first insurer – Series D 178 900 10% Tiger Global Management, Red Point, Ribbit automobile Capital

Source: Golden Gate Ventures

China Internet: 5 June 2020

For Indonesia, the start-up and Insurtech landscape tends to emulate India more than China, as the latter has tech giants such as Ping An fuelling and shaping the industry.

Aggregator model more relevant to ASEAN. In a market with predominantly first-time buyers and low financial literacy, comparison sites tend to appeal more to the masses in Indonesia than pure digital products as they allow the user to browse through products, and conveniently compare pros and cons to arrive at a purchase decision. Comparatively, in the US where buyers are on average more sophisticated vis-à-vis insurance products, most Direct to Consumer, Digital-First Insurtech start-ups launch new insurance products online and are immediately understood to be a better alternative to existing options.

A gap still remains in the sale and distribution of traditional insurance. While agent distribution still has the highest share at 52% of total distribution, the share contracted rapidly over 2017-19. At 585,000 agents, the agent base (2019) for Indonesia is inadequate to serve the 265m population. The Indonesian Life Insurance Association (AAJI) states that the ideal number of life insurance agents required is closer to 1m to serve the population well.

Indonesia: insurance distribution channels

Others 13%

Bancassurance 25% Agent Network & Broker 52%

Source: Indonesia Life Insurance Association (AAJI)

Mutual insurance Another sub-sector within the Insurtech space that has been well received in China is the digital mutual insurance product pioneered by Waterdrop (水滴筹 ). The company, with over 70m users across 30,000 villages and towns in 30 provinces8 , was recently awarded the 'Innovator of the Year’ by Fortune China.

Established in 2016, Waterdrop first launched itself as a crowdfunding platform mostly rallying users to donate and provide financial aid to those with critical medical conditions. This value proposition allowed the firm to easily transition into offering mutual insurance and digital insurance products through its online brokerage arm.

Investors such as Boyu Capital, Tencent and CICC saw the potential of Waterdrop although the platform was not charging any fees for raising over CNY20bn of medical funds under its crowdfunding arm. In addition, the model has yet to fully prove its ability to transition into a sustainable insurance platform; only 14% of the large user base has been converted into purchases of insurance products.

Virality factor is weaker in Indonesia despite Muslim culture. Similar crowdfunding start-ups have been operating in Indonesia since 2013 but have not experienced explosive growth thus far despite the large Muslim population which subscribes to mandatory giving (Zakat). In recent years, there has been more interest from start-ups in Indonesia to emulate Waterdrop; in particular, Kitabisa.com looks the best-placed to foray into such mutual insurance offerings. However, there has been a shortage of start-ups attempting to

8 https://finance.yahoo.com/news/waterdrop-crowdfunding-topped-among-chinese-091500004.html

China Internet: 5 June 2020

pursue the Waterdrop approach, likely due to the extended incubation period required in order to operate a crowdfunding platform.

Demographic drivers are less encouraging in ASEAN. One of the main reasons supporting the growth of Waterdrop and Xiang Hu Bao (Alibaba’s version) is the underground ageing population within China. It is estimated that over 330m Chinese citizens will be over 65 years old by 20509. Further exacerbated by the unique family structure shaped by the country’s one-child policy, young people in China tend to feel pressure to insure themselves and loved ones in anticipation of their long-term financial responsibilities. In contrast, Southeast Asia has one of the youngest populations, with more than 50% of the population being below 30 years of age.

While mutual insurance appears to be a relevant and timely introduction to acclimatise consumers to the concept of insuring themselves, it is still a nascent space in ASEAN awaiting disruption.

Co-Living Reconceptualising co-housing and service apartments to cater to the growing millennial population all over the globe is at the core of co-living. The trend has burgeoned since 2011 in megacities in the US, Europe and China, and has been successful in proving its demand.

Notable co-living start-ups globally Key Operators and their footprint Operator Country of Established Footprint Expansion Plans Occupancy Ratio Name Origin Year Common United States 2015 New York, San Francisco, To cater to 10,000 members by More than 75% are on 12- Chicago, Washington, Seattle end-2020 month occupancy The United 2016 West London To continue expansion in the UK Currently 100% occupied Collective Kingdom with nearly 10,000 apartments Danke China 2015 Major cities in China Managing more than 410,000 Around 78% occupied rooms You+ China 2012 Major cities in China Managing more than 100,000 units More than 90% occupied Ziroom China 2011 9 cities across China Over 1,000,000 apartments More than 95% occupied

Source: https://finance.yahoo.com/news/danke-reduces-25-fundraising-rental-130000529.html https://markets.businessinsider.com/news/stocks/ziroom-has-gained-over-1-million-rooms-and-is-not-considering-ipo-for-the-moment- 1028674911

Notably, private capital has demonstrated more interest in China than other markets – Warburg Pincus has invested in 2 leading players, namely Mo Fang Gong Yu (魔方公寓) and Ziroom (自如公寓). The latter, which is by some distance the largest co-living platform in China, is a spin-off from parent company Lianjia, one of China’s offline to online real estate agencies. Lianjia claims to have more than a 50% share of the real estate rental market in China.

Funding activities of global co-living start-ups Country Date Latest Total Funding Name (Start) Founded Type Funding (USDm) Investors Ziroom China 2011 Spinout Series B 1100 Warburg Pincus, Tencent Holdings, Sequoia Capital, General Atlantic Danke Apartments China 2015 Startup Series D 875 Tiger Global Management, Ant Financial Medici Living Group (Quarters) Germany 2012 Startup Venture Round 830 Corestate Capital 52mf China 2010 Partnership Series D 650 Warburg Pincus, AVIC Trust The Collective UK 2010 Startup Debt and Equity 420 - Quarters US 2019 Partnership PE 300 Medici Living Group, W5 Group OYO LIFE (OYO) India 2013 Spinout (hotel) Series F 3200 Softbank, Grab, Didi Chuxing, Sequoia Capital

Source: Crunchbase

9 https://btcmanager.com/tencent-backed-waterdrop-gains-unicorn-status/?q=/tencent-backed-waterdrop-gains-unicorn-status/&

China Internet: 5 June 2020

Drivers of co-living vs. traditional rental models in China Increasingly mobile society migrating into cities. The period from 2001 to 2015 saw a wave of migration towards eastern coastal provinces into cities such as Guangdong, Shanghai and Zhejiang. The 3 provinces host the most sophisticated industrial clusters and promise employment opportunities10. In 2018, it was reported that there were over 225m rural to urban migrants within China. 11

Delayed marriages leading to later ownership. In China, marriage registrations are declining year-on-year as Chinese women choose to enter marriage later in their lives, prioritizing career over the purchase of homes to start a family. According to the National Bureau of Statistics, the marriage rate dropped from 9.9 per 1,000 people in 2013 to a 5- year low of 7.2 per 1,000 people in 2018.

Unaffordable housing ownership (housing price to income ratio). Property prices within major cities in China have quadrupled since 2000 to become some of the most expensive globally. During 2018, the average price-to-income ratio for a house in one of the top cities was 34.912 . With property ownership being out of reach, consumers are increasingly attuned to rental as an alternative option for short or mid-term housing.

How is the environment in Southeast Asia different?

Housing environment in Indonesia and Vietnam Indonesia Vietnam Research by Asia Green Real Estate has identified that the 2nd tier cities in In 2019, Ho Chi Minh City hit an average Similar Indonesia including Surabaya, Bandung, and Makassar (as the capitals of East population density of over 4,500 per relocation into Java, West Java, and South Sulawesi respectively) will experience more rapid square kilometre, higher than Shanghai, larger urban growth in population and urbanisation as compared with Jakarta [1]. However, at with at least 200,000 to 400,000 people cities least 1.3 million travel from outskirts of Jakarta to the city daily [2], an indication of migrating from rural areas to the city every the underestimated potential for relocation. year. [3] Ho Chi Minh City (Vietnam) appears to have a more demanding housing Housing prices environment with lower affordability of housing as compared with Jakarta. Separately, it is noted that rental cost in Jakarta is significantly higher, resulting in a

separate driver for innovation.

Source: Asia Green Real Estate, Jakarta Post Note: [1] https://www.asiagreen.com/en/news-insights/indonesia-s-second-tier-cities-on-the-move [2] https://www.thejakartapost.com/news/2015/02/17/138-million-commute-jakarta-daily.html [3] https://www.vietnam-briefing.com/news/ho-chi-minh-city-how-vietnams-emerging-megacity-will-develop.html/

Housing price comparison Shanghai Jakarta Ho Chi Minh City Price to Income Ratio: 41.18 17.69 22.95 Mortgage as Percentage of Income: 328.25% 221.40% 266.42% Loan Affordability Index: 0.30 0.45 0.38 Price to Rent Ratio - City Centre 50.31 17.69 22.95 Price to Rent Ratio - Outside of Centre 50.09 18.20 16.22 Gross Rental Yield (City Centre): 1.99% 5.65% 4.36% Gross Rental Yield (Outside of Centre): 2.00% 5.49% 6.17%

Source: Numbeo

Co-living is “Kost Living”. Within Jakarta, start-ups tend to focus on providing hassle- free accommodation for shorter durations at low cost, with only a light touch on the added community element. Rukita, one such platform that is tackling the rental space through this approach, focuses on both centralised whole buildings and decentralised independent units at various prime locations to serve students or working adults.

10 http://country.eiu.com/article.aspx?articleid=1326926316&Country=China&topic=Economy

11 https://www.washingtonpost.com/news/worldviews/wp/2018/03/15/chinas-peasants-left-for-the-cities-to-seek-their-fortune-and-it-made-them- miserable/ 12 https://www.forbes.com/sites/wadeshepard/2019/10/29/china-now-has-an-answer-to-its-housing-crisisits-called-rent/#70c4ef781a60

China Internet: 5 June 2020

Co-living start-ups in Indonesia

Freeware Rukita Yuk Stay CoHaus CoHive Company Spaces

Established Year 2019 2018 2017 2018 2015

Jakarta, Jakarta, Antasari, South Tangerang, Location Surabaya, Jakarta Jakarta Jakarta Medan, Bandung Yogyakart, Bali

Source: Crunchbase

Different from China or other markets (the US, the UK), where co-living is synonymous with a community and premium amenities, co-living in Southeast Asia seeks to solve practical pain points in the rental market and to aggregate people to a sharing economy in order to maintain affordability for consumers.

Ride hailing and Super Apps Ride hailing has seen the most number of tech behemoths emerging globally and venture capital funding has played an integral role in fuelling the sector. According to Crunchbase, over USD81bn has been injected into general hailing disruptors across the globe, the majority into the few cab hailing giants that most consumers recognise.

Ride-hailing global funding activity IPO proceeds Ticker Organisation Name Headquarters Location Last Equity Funding Type Total Funding Amount (USD) (USDbn) Market cap (USDbn) UBER US EQUITY Uber San Francisco, US 8.1 63.2 Didi Chuxing Beijing, China Corporate 212,447,000 T3 Mobile Travel Services Nanjing, China Series A 1,448,275,565 Grab Singapore Series I 9,800,000,000 LYFT US EQUITY Lyft San Francisco, US 2.34 10.8 Ola Kormangala, India Series J 3,808,672,049 GoJek Jakarta, Indonesia Series F 3,300,000,000

Source: Crunchbase, market cap as of 3 June 2020

Having raised more than USD21bn to date, Didi Chuxing is a close runner-up to Uber in this space and has ambitions to venture further afield into new markets such as South America, Australia and Japan. The USD57.6bn-worth company, which covers more than 90%13 of all domestic bookings, has grown beyond ride-hailing services into artificial intelligence, IoT and electric and autonomous vehicles.

Southeast Asia Super Apps Founded even earlier in 2010, Go Jek has grown very differently from its counterparts with Indonesia as its home ground. Similarly, Grab, which stemmed from Malaysia, bears more similarities to GoJek than it does to Uber and Didi Chuxing. A Super App approach – covering multiple services outside transportation – appears to be a unique trend to Southeast Asia for ride-hailing platforms operating there.

13 https://www.reuters.com/article/us-didi-chuxing-apps/chinas-didi-chuxing-to-allow-app-users-to-access-rivals-services-idUSKCN1UA0R6

China Internet: 5 June 2020

GoJek Super App

Source: GoJek

Grab Super App services

Source: engineering @ Grab

Opportunity to expand into industries that have a low reach or digital presence. Ride hailing has revolutionised the logistics space and consequently developed a digital payment network on the back of its e-wallet. This has enabled platforms to enter industries such as digital banking, telehealth, insurance, video streaming and on-demand services. Such expansion is even more impactful in Southeast Asia markets where consumers are: 1) just starting to go online and are mostly engaged via offline means, and 2) products and services are unable to reach these consumers due to geographical or infrastructure barriers.

In July 2019, GoJek announced a joint venture with Astra International to develop an all-in mobility solution, and meanwhile also struck a partnership with Visa to create new payment solutions for the unbanked. Separately, Grab formed a consortium with Singtel in late 2019 to apply for a digital banking licence in Singapore.14

In our view, both initiatives exemplify the irrefutable influence of Super Apps in ASEAN.

14 https://www.grab.com/sg/press/others/grab-and-singtel-partner-for-singapore-digital-banking-licence/

China Internet: 5 June 2020

China at a glance – Super Apps in China We believe the robust demand for O2O local services in China makes it possible for a company to build up a large user base in a short period of time.

Meituan has been successful in converting its high frequency users (food delivery) to low frequency business segments, namely the hotel and in-store segments, such that it could benefit from the lower user acquisition cost. This model is unprecedented even for leading US online travel agency players like Expedia and Tripadvisor.

Meituan: network effect

Users (Food delivery, local Hotel/Travel users service) The increase in food Higher active merchants delivery orders will lead Meituan has been will improve the variety of to more reviews on successful in converting restaurants and services Dianping, which could its high frequency/low on the platform, thus attract more potential margin business (food attracting more potential online food delivery delivery) into low customers users frequency/high margin business (hotel and travel) segments Merchants Meituan Dianping

The number of active merchants is likely to increase given the comprehensive store management system that Meituan provides to merchants

Source: Daiwa

China Internet: 5 June 2020

China seizing a leading position in the Big Data era Data as a fuel to help companies morph into ecosystems Reversing the copy-paste trend and becoming a leading data-driven economy “Now, China, as the largest marketplace with the largest amount of data, is really using AI to find every way to add value to traditional businesses, to Internet, to all kinds of spaces. The Chinese entrepreneurial ecosystem is huge so today the most valuable AI companies in computer vision, speech recognition, drones are all Chinese companies,” Lee added.”, according to TechCrunch.

- Lee Kai Fu, CEO of Sinovation Ventures, former President of Google China

As China is subject to less strict restrictions on users’ data privacy compared with the US, Internet giants can gather data from cameras, sensors, social media feeds and government data and use AI to provide solutions to various verticals. We believe this lays a strong foundation and provides a favourable operation backdrop for innovation business models in the future. We believe companies that stand to benefit from this environment include Sensetime and Megvii.

No. of installed surveillance cameras by region (2018-21E) (unit: millions) 600 567 3-year CAGR 18% 500

400 349

300

200 168 150 121 132 88 98 100

0 2018 2021 EMEA Americas China Asia (excluding China)

Source: IHS Markit Note: Data issued in November 2019

Chinese citizens may have concerns about their data privacy as surveillance cameras are ubiquitous in China such that users can see cameras being mounted on the street for traffic violation monitoring purposes or at the entrance of shopping malls and storefronts to collect data on users’ shopping behaviour, or at schools to monitor students’ performance in class and their degree of concentration. According to IHS Markit, the number of installed bases for security cameras in China is expected to grow at an 18% 3-year CAGR in 2018- 21, faster than that of EMEA (14%), the Americas (12%) and Asia excluding China (15%).

Given the Chinese government has less stringent rules on users’ data collection, apps in China can have access to a wide spectrum of their users’ data once the app is installed.

We believe the data from government surveillance cameras lays a solid foundation for the development of face recognition technology and harnesses the growth of the 4 key AI computer vision companies in China, namely SenseTime, Megvii, Cloudwalk and Yitutech.

China Internet: 5 June 2020

China: key AI computer vision companies benefiting from Big Data Company name Sensetime Megvii Cloudwalk Yitutech Company name (Chinese) 商汤科技旷视科技云从科技依图科技 Year founded 2014 2011 2015 2012 Latest funding round D D B+ C Valuation (USD bn) 7.5 (Sep 2019) 4+ (Aug 2019) 3.5+ (Apr 2019) 2.4 (Jul 2018) Key investors Alibaba, Softbank Vision Fund, Alibaba, Boyu Capital, Ant Chinese state-owned investment institutions Sequoia Capital China, ZhenFund Temasek Holdings, Tiger Global Financial, Bank of China, etc China Reform Fund, Bohai Capital Holding Management, etc Co., Yuexiu Financial Holdings Limited AI technology Face recognition, speech technology, Face recognition, image Face recognition Face recognition, vehicle recognition, text recognition recognition, OCR document medical image recognition recognition, txt recognition AI Solution Smart security, camera level algorithm AI-based solutions across three Smart camera, smart payment, smart Smart security, medical, finance, smart city, SDK categories: Personal IoT, City IoT recognition, smart security smart hardware and Supply Chain IoT. Key application TikTok's filters for streamers, software Alibaba, Ant Financial, Lenovo, Bank of China, Shanghai Pudong Airport, China Merchants Bank, Shanghai Pudong for government smart camera, China Mobile and Chinese Xiaomi, Haier Development Bank, JD Finance, 360 Finance property developers, shopping malls government entities and many other financial firms and mobile phone providers

Source: Crunchbase, Global Times, IoTone.com, equalocean,com, biometricupdate.com, TechCrunch, welcome.ai, .abacusnews.com, dealroom.co, kr-asia.com, Daiwa

Given the large population in China, the data amassed in China is significantly greater than that of the US and global peers, which helps propel China to be a leading data-driven digital economy. Besides data from surveillance cameras, we believe other data such as online payment transactions and online food delivery orders in China can provide insights for Internet companies to monetise those data in various verticals.

Assuming China had a population of around 1.4bn in 2019, the country has around 700m proximity mobile payment users, or 11x that of the US (64m) in 2019, according to eMarketer. Together with the higher transaction frequency because of the various use cases for mobile transactions in China, the transaction data for Chinese companies to analyse consumer behaviour is significantly more than that for its global peers, in our view. We believe the transaction data available to Chinese Internet companies will continue to increase driven by the continual rise in online penetration in e-commerce, travel and local services verticals in China.

China: proximity mobile payment users US: proximity mobile payment users 100% 100 40% 81% 82% 83% 83% 84% 32% 33% 34% 31% 35% 29% 80% 77% 78% 78% 80 27% 73% 75% 30% 60% 60 25% 61% 56% 59% 20% 40% 54% 50% 40 15% 10% 20% 20 5% 0% 0 0% 2019 2020 2021 2022 2023 2018 2019 2020 2021 2022 2023 Proximity mobile payment as % of smarphone users Proximity mobile payment as % of Internet users Proximity mobile payment users Proximity mobile payment as % of population Proximity mobile payment users as % of smartphone users Source: eMarketer, Daiwa Source: eMarketer, Daiwa Note: as of October 2019; age 14+; mobile phone users who have made at least one proximity Note: as of October 2019; age 14+; mobile phone users who have made at least one proximity mobile payment transaction in the past six months; includes point-of-sale transactions mobile payment transaction in the past six months; includes point-of-sale transactions made by using mobile devices as a payment method; excludes transactions made via made by using mobile devices as a payment method; excludes transactions made via tablet tablet

China Internet: 5 June 2020

2019 food delivery orders (m) 10,000 8,722.1

8,000

6,000

4,000

2,000 666.0 179.7 159.2 0 Meituan Delivery Hero Grubhub Takeaway.com 2019 food delivery orders (mn)

Source: Company data, Daiwa Note: Grubhub food delivery orders are calculated by multiplying the daily average Grubs by the number of days available in 2018 (assuming 365)

Big Data comes with better monetisation capability Once a platform amasses a certain level of data, the platform can use data technology to feed suitable service offerings to users that improve user retention rates and user stickiness. For example, food delivery platforms can feed certain cuisine to specific users depending on their historical orders, while for e-commerce players, feeds can be beneficial in lead-generation and product-discovery for long-tail products. The data on users’ consumption patterns also provides insights for advertisers and bodes well for Internet companies’ advertising revenue.

Data is the backbone of cross-selling efforts; the key driver for ARPU increases Alibaba We have seen some initial steps from Alibaba in terms of cross-selling its entertainment products to existing retail consumers. Per a recent company announcement, 12% of Alibaba’s China retail marketplace consumers are Youku-paying subscribers. Users who are part of the consumer bases of both Youku and Alibaba have greater purchasing power, as they spend 2.1x more than China retail marketplace consumers who are not Youku- paying users. In its local service segment, 48% of new users on Ele.me were acquired through Alipay as of 3Q FY20.

Alibaba’s management shared that the more apps a user uses, the higher the number of active days per month that the user spends on Alibaba’s platform. For instance, people who use 1 app have 9.3 active days per month vs. people who use 5 apps have 27 active days per month.

Meituan In our view, Meituan has the most successful model in terms of cross-selling given 70% of its new users for in-store, hotel and travel come from its food delivery segment.

5G technology likely to drive convergence and evolution in Southeast Asia Although online penetration and infrastructure development in Southeast Asia are still lagging behind that of China, the upcoming 5G technology could enable a swift shift in consumer behaviour towards higher online penetration in different verticals. For example, the peak 20Gbps download data rate for 5G is 20x that of the 1Gbps for 4G, while the peak upload data rate for 5G is 200x that for 4G; this enables a faster data transfer rate of high resolution video, so long and short-form video apps stand to be key beneficiaries.

In the 5G era, the faster peak data rate (which enables a faster data transfer rate), area traffic capacity (which enables data transmission in crowded areas), bandwidth (more data can be sent in a given amount of time), and connection density (ability to receive a signal in crowded areas) will further improve the user experience for using online applications and

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increase smartphone penetration in Southeast Asia, in our view. We believe this will give rise to other disruptive technology in addition to AR/VR, autonomous driving, and IoT, which would likely lead to more innovative business models and capture more Internet users in Southeast Asia.

Moving into ancillary businesses Industrial Internet: the “To B” era has arrived We believe the aforementioned drivers are some of the key pillars that have driven China to become the leader in consumer Internet. Meanwhile, the conversion to industrial Internet is gaining momentum and the stepped-up efforts of Internet companies will underpin the secular growth of this segment.

In order to expand their competitiveness across multiple verticals, Internet giants have expanded beyond their core business and are moving into ancillary businesses. For example, Tencent is expanding from its WeChat ecosystem to an industrial Internet ecosystem, while Alibaba is also expanding from its core e-commerce to foster a global digital economy through leveraging its comprehensive payment and cloud solutions. Their strategic focus is also evident in their investment portfolios for which “To B” enterprise solutions accounted for the second highest number of investments made by Tencent in 2019, and logistics accounted for the highest number of investments made by Alibaba in 2019.

While the consumer Internet has been the major driver for Chinese Internet companies during the past decade, new growth areas within the industrial Internet include smart logistics, order management, warehouse management, supply chain management, payment, and asset management.

Alibaba: digital economy

Physical Goods Services Entertainment

Food delivery, travel, local Online e-commerce Offline Video, music, movie services Data technology for digital media and Logistic infrastructure entertainment

Marketing services and data management platform

Payment and financial services infrastructure

Mobile digital map, navigation and real–time traffic information providers

Technology infrastructure for cloud, Internet of Things, mobility and big data

Source: Company data, Daiwa

Cloud solution provided to companies Cloud computing is the backbone of the industrial Internet, hence Alibaba, Tencent and Baidu have become leaders in the service (IaaS) and platform as a service (PaaS) markets from operational and financial perspectives.

China Internet: 5 June 2020

China: quarterly cloud revenue (CNYm) of key cloud service providers relative to the number of years since establishment 12,000

10,000

8,000

6,000

4,000

2,000

0 1 2 3 4 5 6 7 8 9 10 11 No. of Years since Establishment Tencent Cloud Alibaba Cloud Baidu Cloud Kingsoft Cloud UCloud

Source: Companies, Daiwa forecasts Note: Revenue of Alibaba Cloud and Kingsoft Cloud are reported figures. Quarterly revenue of Tencent Cloud, Baidu Cloud and UCloud are Daiwa’s estimates based on disclosed annual figures.

Alibaba Alibaba Cloud is China’s largest IaaS provider in terms of revenue, with a 41.9% share of the China IaaS and PaaS market as of 2H19, given its coverage of a wide spectrum of industries. Alibaba is at the forefront of promoting digitisation in China, in our view. Its “five- new” strategy aims to provide digitalisation solutions for new retail, new finance, new technology, new manufacturing and new energy. For example, for new retail, Alibaba Cloud can provide its customers with enhanced intelligent promotion and recommendation services by leveraging its AI and Big Data technology.

Tencent Tencent Cloud is China’s No.2 public cloud service provider, after Alibaba Cloud, according to IDC in 2H19. Tencent Cloud has continued to gain market share, from 10.3% in 1H18 and 11.8% in 2H18 to12% in 2H19. Tencent Cloud currently offers over 200 laaS, PaaS and SaaS products, and roughly 90 industry solutions.

Tencent: roadmap for Business Services segment

Source: Tencent

Baidu Baidu aims to provide complete solutions and ready-to-use services that facilitate its penetration of the industrial sector. Baidu’s IaaS+PaaS market share in China, in terms of revenue tracked by IDC, has increased notably, from less than 1% in 1H18 to 7.1% in 2H19.

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Verticals expansion leveraging the cloud Alibaba Cloud customers cover a broad spectrum of industries and have a strong presence in industries in which Alibaba is involved, including Internet and e-commerce (Taobao, Tmall), finance (Ant Financial), and communications and media (Youku, UC), game/video (Huya, Yoozoo), manufacturing (Oppo, Haier), energy (State Grid Corporation of China, China Southern Power Grid, Sinopec), media (CCTV, Xinhua News Press, Weibo), healthcare and life sciences (AnnoRoad, Chiatai Tianqing, Health 100), and property management (Colour Life Services)

Likewise, the major industries served by Tencent include games, online video, new retail, financial, municipal services and tourism, while the major industries served by Baidu include telecoms, media, financial, entertainment, manufacturing and transportation.

Government and regulatory support for tech companies China’s government has been extremely supportive of the Internet sector and encouraged Internet companies to further improve the efficiency of the country’s economy (eg, bike sharing, autonomous driving). The relatively lax regulations have allowed many new initiatives and business models to test out the domestic market.

While the overall regulatory environment is favourable, there has also been some regulatory action taken in certain verticals. For example, in the games vertical, card games are strictly regulated given their relation to gambling, and the suspension of banhao in March 2019 impacted small companies such that primary investors’ willingness to invest in online games companies has likely been adversely impacted.

Online education For online education, overall regulations related to online education players mainly aligns with offline regulations. Compared with the leading players, the regulations have some negative impact on smaller players as the standard of their teachers and facilities is below that of the top players in the industry. For example, some smaller education online platforms have not obtained all the legally required licences, approvals and permits for their online education business in China, which has caused disruption to their operations.

Live streaming and short-form video For live streaming and short-form video platforms, various regulations have been announced by the Cyberspace Administration of China (CAC); for example, the “addiction prevention” features was rolled out in 2019 for 21 short-form video platforms. The short- form video platforms that were required to add anti-addiction features were: Watermelon (owned by Byte Dance), Haokan (owned by Baidu), Quanmin (owned by Baidu), Bilibili, Miaopai (owned by Meitu), Bobo, Kanlema, Weishi (owned by Tencent), Acfun (owned by Kuaishou), Meipai (owned by Meitu), Xiaoying, Lishipin, Diyishipin and Weibo (owned by Sina). For the first time, long-form video platforms like Tencent video, iQiyi, Youku and PP were also required to add the feature.

Cloud In July 2018, the Ministry of Industry and Information Technology (MIIT) and the National Development and Reform Commission (NDRC) published the Guidelines on Promoting the Implementation of Cloud Access for Enterprises (2018-20) 《推动企业上云实施指南（二零一八至二零二零年）》 and the Three-year Action Plan on Expanding and Upgrading Information Consumption (2018-20) 《扩大和升级信息消费三年行动计划（二零一八至二零二零年）》, calling for policy support and the establishment of an industrial cooperation platform. It also targets for 1m enterprises to have access to cloud computing nationwide in 2020. Meanwhile, China’s “Made in China 2025” plan for intelligent manufacturing also promises to stimulate demand for cloud computing, in our view.

China Internet: 5 June 2020

For example, the Guangdong provincial government began its “digital government” reform in 2018. One of the action plans is to complete the construction of a unified government cloud and Big Data platform to enable inter-department and cross-level data sharing and collaboration in 2020.

China Internet: 5 June 2020

China Internet stock recommendations

We favour Alibaba and Tencent for their first-mover advantage in penetrating ASEAN through investments and industrial Internet initiatives (ie, cloud, payment), and see their network effect helping to sustain leadership in their core business. We also like JD’s exposure in Indonesia, Thailand and Vietnam as it is building up a long-term foundation to strengthen its e-commerce business in these countries.

We believe Alibaba is in the best position to benefit from the rise of online retail consumption demand in ASEAN, as:

x Alibaba has the largest exposure in ASEAN given its investment in Lazada, while Ant Financial is also the most active investor in ASEAN’s Fintech segment. x Alibaba and Lazada are more integrated, whereas Tencent’s investments are mostly financial-oriented. Although Lazada still faces fierce competition from other e-commerce platforms such as Shopee, we remain confident that Alibaba’s comprehensive ecosystem can help it secure a leading position in ASEAN through its investees in the long term and thereby unlock greater synergies compared with peers.

We believe Tencent’s financial investment-oriented strategy enables the company to have exposure to a wide variety of verticals in ASEAN compared with peers. This, together with Tencent’s industrial Internet initiatives and well-established payment infrastructure, should help it become a global gaming developer and distributor.

Given that JD adopts its 1P model strategy in ASEAN, we believe it could be difficult for JD to expand its investees’ market share meaningfully over the next 1-3 years. However, if JD execute wells on its 1P model and applies its logistics know-how from China to ASEAN and further strengthens its partnerships with local Super Apps, such as Go-Jek, to make up the shortfall that it faces on the payment and logistics front, we believe JD could gain a solid foothold in ASEAN. Overall, we remain positive on JD’s exposure to ASEAN as we believe ASEAN is a fragmented market and the company will be one of the beneficiaries of the rise in online consumption demand.

Positive stance on China Internet reaffirmed We are positive on the We believe the China Internet sector is set for considerable long-term growth, backed by: sector in light of 1) Technology advances, such as AI and cloud technologies. technology advances 2) The increasing online time of Chinese smartphone users, given the blurring lines and increasing user time between online and offline activities, along with innovations in online services. spent online 3) The rising uptake of paid content like video/music subscriptions and in-game spending.

From a short-term perspective, we contend that of all the sub-segments in the China Internet sector, e-commerce offers the most visibility in the prevailing macro and regulatory environment, given the consumption-upgrade trend.

Key risks to our sector view x A longer-than-expected macro slowdown would hurt consumption and marketing sentiment. x Slower-than-expected AI development amid rising tensions between China and the US.

China Internet: 5 June 2020

Appendix Post-IPO performance of China ADRs More than 35 Internet companies from China have launched IPOs in the US or Hong Kong since 2018. The top share-price performers among Chinese Internet ADRs since listing have been GSX Technology and Koolearn Technology. Although half of the companies remained loss-making as at June 2020, their share-price performance is not solely driven by their profitability status; factors such as the momentum of market-share gains, and long- term monetisation capability, also play a key role in driving investors’ expectations.

Post IPO since listing for ADRs in 2018 (150) (100) (50) 100 150 200 250 300 50 0

GSX TECHEDU-ADR 277 KOOLEARN TECHNOL 242 BILIBILI INC-ADR 204 WEIMOB INC 202 PINDUODUO INC 155 MEITUAN DIANPI-B 114 PING AN HEALTHCA 100 7ROAD HOLDINGS L 93 NIU TECHNOLO-ADR 27 TONGCHENG-ELONG 19 IQIYI INC-ADR 15 HUYA INC-ADR 5 TENCENT MUSI-ADR -8 NIO INC - ADR -15 DOUYU INTERN-ADR -18 XIAOMI CORP-B -24 IDREAMSKY TECHNO -30 VIOMI TECHNO-ADR -41 DUIBA GROUP LTD -41 360 FINANCE INC -43 ZENGAME TECHNOLO -43 SO-YOUNG INT-ADR -43 RUHNN HOLDING LT -47 111 INC -47 YUNJI INC-ADR -74 LAIX INC - ADR -76 BABYTREE GROUP -78 QUTOUTIAO -ADR -82 AURORA MOBIL-ADR -82 TUANCHE LTD-ADR -82 UXIN LTD - ADR -83 FINGERTANGO INC -84 MOGU INC-ADR -89 51 CREDIT CARD I -95

Source: Bloomberg Note: Share performance as of 3 June 2020

Meituan IPO’d on 20 September 2018 while it was still loss-making. Although the first set of quarterly results was lower than expectations, Meituan managed to beat expectations in the following quarterly results, and reached break-even in 2Q19, which resulted in a strong rally in the share price (157%) in the year to 3 June 2020.

China Internet: 5 June 2020

From October 2018 to March 2019, Meituan’s share price was driven mainly by the consensus 2019 revenue forecasts, given visibility on the break-even timeline for the food delivery segment was low. However, after its 1Q19 results, more investors switched their focus from top-line growth to bottom-line growth as the in-store, hotel and travel segments continued to deliver solid profitability. Hence, since March 2019, its share-price performance has been driven mainly by the consensus 2019 earnings forecasts and the group reached break-even at the net-profit level in 2Q19.

Meituan: share price vs. 2019 consensus revenue forecasts Meituan: share price vs. 2019 consensus earnings forecasts 112 65 110 0.4 0.2 111 100 60 0 90 110 -0.2 55 80 -0.4 109 -0.6 50 70 108 -0.8 60 -1 107 45 50 -1.2 106 40 40 -1.4 8-Jan-19 5-Mar-19 5-Feb-19 21-Jul-19 16-Oct-18 30-Oct-18 21-Oct-19 21-Oct-18 21-Apr-19 22-Jan-19 21-Jun-19 21-Jan-19 19-Mar-19 19-Feb-19 21-Feb-19 21-Mar-19 25-Dec-18 13-Nov-18 27-Nov-18 11-Dec-18 21-Aug-19 21-Sep-19 21-Nov-19 21-Sep-18 21-Nov-18 21-Dec-18 21-May-19 Yr 19 Revenue Estimate Share price Share price Yr 19 EPS, Adj Estimate

Source: Bloomberg Source: Bloomberg

Among all ADRs listed in the US since 2018, Pinduoduo had recorded a 155% rally in its share price as of 3 June 2020 since its listing on 26 July 2018, even though it remained loss-making as of 1Q20. Given its nascent stage of monetisation at the point when it was first listed, investors valued the company mainly using metrics like price-to-sales ratio and price-to-GMV. However, from 1Q19 to 4Q19, we believe investors started to focus on its bottom line, albeit their expectations have fluctuated with its quarter-by-quarter sales and marketing expenses. One difference between Meituan and Pinduoduo is that Pinduoduo has the potential to change the landscape of the e-commerce market in China, hence its valuation is not solely driven by its sales and marketing expenses, but also whether it can build a sustainable moat in the long run.

Pinduoduo: share price vs. 2019 consensus revenue forecasts Pinduoduo: share price vs. 2019 consensus earnings forecasts 50 4.6 45 0.1 4.4 40 0 40 -0.1 4.2 35 -0.2 30 4 30 -0.3 20 3.8 -0.4 25 3.6 -0.5 10 20 3.4 -0.6 0 3.2 15 -0.7 31-Jul-18 31-Jul-19 30-Apr-19 31-Oct-18 31-Oct-19 31-Jul-18 31-Jul-19 31-Jan-19 30-Jun-19 28-Feb-19 31-Mar-19 31-Aug-18 30-Sep-18 30-Nov-18 31-Dec-18 31-Aug-19 30-Sep-19 30-Nov-19 31-Oct-19 31-Oct-18 30-Apr-19 31-May-19 31-Jan-19 30-Jun-19 28-Feb-19 31-Mar-19 31-Aug-18 30-Sep-18 30-Nov-18 31-Dec-18 31-Aug-19 30-Sep-19 30-Nov-19 31-May-19 Share price Yr 19 Revenue Estimate Share price Yr 19 EPS, Adj Estimate

Source: Bloomberg Source: Bloomberg

Capital markets now more comfortable with unprofitable tech listings in certain verticals We believe the perception of investing in loss-making companies has changed over the past decade as investors’ comfort level with unprofitable tech listings and the duration of their loss-making have increased given the successful example of companies such as Amazon.

China Internet: 5 June 2020

In the past, even if companies were still loss-making, they would choose to go public when they foresaw a high chance of breaking even, so that they could raise capital while their market cap did not yet fully reflect the value of their operations, hence presenting upside opportunity for investors.

In Pinduoduo’s case, although its break-even timeline is still uncertain, its social e- commerce nature enables it to achieve a large scale of user base and GMV in lower-tier cities and therefore short-term losses may not be the biggest concerns for investors.

We believe Pinduoduo presents a new phenomenon for investing in new economy stocks. On the one hand, investors can be more comfortable investing in social e-commerce models considering e-commerce is a proven success model that can be benchmarked to Alibaba. At the same time, expectations of Pinduoduo’s break-even timeline could be too high as investors may believe it should break even much faster than Alibaba, since the well-established infrastructure in China for logistics and payments should provide better access to the merchant base as compared with a decade ago. However, we note that it may take time for Pinduoduo to shift from a low ARPU social e-commerce platform to a multi-category/technology driven e-commerce platform with the potential of rising ARPU in the long run.

On the contrary, for business models (ie, Meituan) where investors cannot benchmark against existing models or industry leaders, expectations are lower as uncertainties are higher — but the upside potential is likely to be greater, in our opinion.

Another example is online education. Although online education players are largely loss- making, the sector is popular among investors. Compared with offline tutoring, whose market players find it difficult to grab a large market share, online education platforms can reach a certain market share in a short period, allowing them to form a moat in the long run. We believe that as long as online education platforms continue to deliver strong top- line growth, investors will not be too worried about short-term investments by education platforms like EDU or TAL, since early-stage investment in lower-tier cities and online course quality, especially for K12 after school tutoring, is inevitable.

China Information Technology 5 June 2020

(BABA US) Alibaba Group Alibaba Group

Target price: USD265.00 (from USD265.00) Share price (3 Jun): USD218.60 | Up/downside: +21.2%

Best positioned to reap the ASEAN e-commerce boom John Choi (852) 2773 8730 ¾ Logistics and payments solutions likely to aid market-share gains [email protected] ¾ Diversified investment portfolio to help broaden core competence Robin Leung, CFA (852) 2848 4435 ¾ Reiterating our Buy (1) rating and TP of USD265 [email protected]

What's new: Despite the intense competition in the e-commerce space in Forecast revisions (%) the ASEAN market, we think Alibaba’s digital ecosystem, arguably the most Year to 31 Mar 21E 22E 23E comprehensive among peers, is best placed to gain market share among Revenue change - - - Net profit change - - - merchants and users in the long run. We believe Alibaba’s logistics solution Core EPS (FD) change - - - and Ant Financial’s broad investment in ASEAN countries are likely to Source: Daiwa forecasts reduce inefficiencies in logistics and help spur online payment penetration. Share price performance

What's the impact: First-mover advantage with largest exposure to (USD) (%) online consumption growth in ASEAN. We believe Alibaba is in the best 235 145 position among its domestic peers to benefit from the rise in online retail 214 133 193 120 consumption demand in ASEAN as it has the largest exposure to the region 171 108 given its investment in Lazada, while Ant Financial is the most active 150 95 investor in ASEAN FinTech. Alibaba and Lazada are more integrated, Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 whereas Tencent’s investments are mostly financial-oriented. Although Alibaba Gp (LHS) Relative to S&P 500 Index (RHS) Lazada still faces fierce competition from e-commerce platforms such as Shopee, we see 2 factors that are likely to lead to Lazada securing higher 12-month range 151.49-230.55 market share in the long term: 1) we expect Alibaba’s global digital Market cap (USDbn) 596.12 economy and ASEAN’s underpenetrated online retail consumption to drive 3m avg daily turnover (USDm) 583.08 Shares outstanding (m) 2,727 Lazada’s GMV growth, and believe its synergies with Alibaba will be Major shareholder SoftBank (25.0%) unleashed in the medium term, and 2) we see more diversified investments, especially in enterprise solutions, helping it branch out of its Financial summary (CNY) core competence to other verticals in the industrial Internet. Year to 31 Mar 21E 22E 23E Revenue (m) 673,092 840,072 991,070 Five advantages in ASEAN. We believe Alibaba has the following Operating profit (m) 113,250 149,935 188,722 Net profit (m) 151,843 198,515 242,121 advantages in ASEAN. 1) Superior logistics and payment capabilities: Core EPS (fully-diluted) 57.441 73.528 88.995 given these remain the biggest obstacles for e-commerce platforms EPS change (%) 10.8 28.0 21.0 seeking to improve the user experience, we see these challenges as Daiwa vs Cons. EPS (%) (2.3) (4.3) (9.7) PER (x) 27.1 21.1 17.5 opportunities for Lazada to expand its user base. 2) Solutions for SMEs: Dividend yield (%) 0.0 0.0 0.0 ASEAN is characterised by a fragmented retail landscape, and we think DPS 0.000 0.000 0.000 Alibaba’s comprehensive ecosystem will help unify merchants from PBR (x) 4.6 3.9 3.2 different regions with different languages by providing localised solutions. EV/EBITDA (x) 20.8 15.4 12.2 ROE (%) 18.4 20.1 20.3 3) Technology powered platform: during COVID-19, Lazada has helped Source: FactSet, Daiwa forecasts merchants in Thailand and Vietnam move their seller conferences online using livestreaming technology. 4) Personalisation: Alibaba is known for its recommendation feeds in China; we expect it to apply its algorithm in ASEAN. 5) Wide range: its broad supply-chain network bodes well for cross-border e-commerce and long-tail product offerings, in our view.

What we recommend: We reiterate our Buy (1) rating and SOTP-based 12-month TP of USD265. Key risk: macro uncertainty due to COVID-19.

How we differ: Relative to the market, we are likely more upbeat on Alibaba’s synergies in ASEAN countries.

See important disclosures, including any required research certifications, beginning on page 93

Alibaba Group (BABA US): 5 June 2020

Financial summary Key assumptions Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Annual active buyers (m) 423 454 552 654 726 799 847 880 Average spending per user (CNY) 7,310 8,297 8,732 8,757 9,348 9,858 10,602 11,214 Core commerce revenue (CNYmn) 91,950 133,880 214,020 323,400 436,104 572,769 709,586 825,432 Core commerce EBITA margin (%) 63 62 53 42 38 35 34 35 Cloud revenue (CNYmn) 3,019 6,663 13,390 24,702 40,016 59,594 84,176 114,900 DME revenue (CNYmn) 4,391 14,733 19,564 24,077 26,948 31,571 36,143 39,757

Profit and loss (CNYm) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E China retail business 80,033 114,109 176,559 247,615 342,158 440,019 547,102 639,636 China wholesale business 4,288 5,679 7,164 9,988 12,427 14,720 16,486 17,970 Other Revenue 16,822 38,485 66,543 119,241 155,126 218,354 276,484 333,464 Total Revenue 101,143 158,273 250,266 376,844 509,711 673,092 840,072 991,070 Other income 0 0 0 0 0 0 0 0 COGS (34,355) (59,483) (107,044) (206,929) (282,367) (391,616) (489,762) (576,803) SG&A (20,512) (28,553) (43,540) (64,669) (78,870) (99,430) (114,688) (128,421) Other op.expenses (17,174) (22,182) (30,368) (48,162) (57,044) (68,796) (85,687) (97,125) Operating profit 29,102 48,055 69,314 57,084 91,430 113,250 149,935 188,722 Net-interest inc./(exp.) 50,308 5,888 26,929 38,916 67,776 8,600 9,000 9,000 Assoc/forex/extraord./others 2,058 6,086 4,160 (711) 3,835 2,000 2,000 2,000 Pre-tax profit 81,468 60,029 100,403 95,289 163,041 123,850 160,935 199,722 Tax (8,449) (13,776) (18,199) (16,553) (20,562) (19,758) (28,968) (35,950) Min. int./pref. div./others (1,559) (2,578) (18,219) 7,967 3,180 4,200 3,400 3,400 Net profit (reported) 71,460 43,675 63,985 86,703 145,659 108,293 135,366 167,172 Net profit (adjusted) 42,962 60,320 85,777 93,407 132,479 151,843 198,515 242,121 EPS (reported)(CNY) 29.126 17.618 24.994 33.619 54.371 40.423 50.529 62.401 EPS (adjusted)(CNY) 17.510 24.332 33.507 36.218 49.451 56.679 74.100 90.377 EPS (adjusted fully-diluted)(CNY) 16.769 23.457 32.752 38.403 51.849 57.441 73.528 88.995 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 37,333 64,050 89,883 94,575 123,748 147,120 197,337 244,603 EBITDA 44,034 74,456 105,792 120,264 157,659 182,886 237,819 288,407

Cash flow (CNYm) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Profit before tax 81,468 60,029 100,403 95,289 163,041 123,850 160,935 199,722 Depreciation and amortisation 7,048 14,292 22,020 37,080 33,911 35,766 40,482 43,804 Tax paid (8,449) (13,776) (18,199) (16,553) (20,562) (19,758) (28,968) (35,950) Change in working capital 6,953 7,259 22,082 32,250 68,339 49,245 48,307 62,446 Other operational CF items (30,184) 14,820 681 2,909 35,346 33,870 47,403 55,882 Cash flow from operations 56,836 82,624 126,987 150,975 280,075 222,973 268,158 325,903 Capex (10,845) (17,546) (29,836) (49,643) (81,457) (105,964) (126,811) (155,644) Net (acquisitions)/disposals (29,099) (67,942) (48,077) (47,012) (80,000) (119,116) (80,000) (80,000) Other investing CF items (2,887) 7,124 (5,977) (54,405) (16,939) (13,898) (17,588) (21,077) Cash flow from investing (42,831) (78,364) (83,890) (151,060) (178,396) (238,978) (224,399) (256,720) Change in debt 2,478 29,333 (3,590) (4,231) 8,442 33,634 16,886 33,008 Net share issues/(repurchases) (19,102) 1,425 399 (10,518) 90,100 0 0 0 Dividends paid 0 0 0 0 0 0 0 0 Other financing CF items 778 2,156 23,550 7,357 0 0 0 0 Cash flow from financing (15,846) 32,914 20,359 (7,392) 98,542 33,634 16,886 33,008 Forex effect/others 466 2,042 (6,067) 3,245 0 0 0 0 Change in cash (1,375) 39,216 57,389 (4,232) 200,222 17,629 60,645 102,191 Free cash flow 64,859 93,124 156,823 200,618 361,532 328,937 394,970 481,547 Source: FactSet, Daiwa forecasts

Alibaba Group (BABA US): 5 June 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Cash & short-term investment 112,864 149,402 208,812 201,756 374,460 444,822 505,467 607,658 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 16,993 29,060 43,228 58,590 84,229 111,060 134,545 160,275 Other current assets 4,178 4,054 4,815 9,927 4,234 4,234 4,234 4,234 Total current assets 134,035 182,516 256,855 270,273 462,923 560,117 644,246 772,168 Fixed assets 16,505 24,897 75,866 92,030 103,387 237,377 342,189 475,832 Goodwill & intangibles 87,015 139,528 189,614 333,211 337,729 348,291 347,398 346,671 Other non-current assets 126,690 159,871 194,789 269,562 408,946 480,140 574,692 667,162 Total assets 364,245 506,812 717,124 965,076 1,312,985 1,625,925 1,908,524 2,261,832 Short-term debt 4,304 14,897 6,028 22,466 5,154 7,356 7,356 7,356 Accounts payable 27,334 47,186 81,165 117,711 161,536 265,499 318,931 391,445 Other current liabilities 20,401 31,688 48,617 67,492 75,182 110,331 142,191 169,316 Total current liabilities 52,039 93,771 135,810 207,669 241,872 383,186 468,478 568,117 Long-term debt 53,262 76,835 119,525 111,834 120,276 153,910 170,796 203,804 Other non-current liabilities 9,055 12,085 22,350 30,171 71,186 71,815 72,467 73,076 Total liabilities 114,356 182,691 277,685 349,674 433,334 608,911 711,741 844,996 Share capital 132,557 167,578 189,766 238,603 352,811 386,681 434,084 489,966 Reserves/R.E./others 84,780 114,213 179,057 260,473 411,693 519,986 655,352 822,524 Shareholders' equity 217,337 281,791 368,823 499,076 764,504 906,666 1,089,436 1,312,489 Minority interests 32,552 42,330 70,616 116,326 115,147 110,347 107,347 104,347 Total equity & liabilities 364,245 506,812 717,124 965,076 1,312,985 1,625,925 1,908,524 2,261,832 EV 4,124,162 4,102,661 4,086,026 4,202,785 3,914,854 3,796,127 3,668,969 3,516,386 Net debt/(cash) (55,298) (57,670) (83,259) (67,456) (249,030) (283,557) (327,316) (396,498) BVPS (CNY) 88.440 112.464 142.899 190.871 281.971 335.037 403.260 486.520

Key ratios (%) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Sales (YoY) 32.7 56.5 58.1 50.6 35.3 32.1 24.8 18.0 EBITDA (YoY) 8.1 69.1 42.1 13.7 31.1 16.0 30.0 21.3 Operating profit (YoY) 2.7 71.6 40.3 5.2 30.8 18.9 34.1 24.0 Net profit (YoY) 23.8 40.4 42.2 8.9 41.8 14.6 30.7 22.0 Core EPS (fully-diluted) (YoY) 20.8 39.9 39.6 17.3 35.0 10.8 28.0 21.0 Gross-profit margin 66.0 62.4 57.2 45.1 44.6 41.8 41.7 41.8 EBITDA margin 43.5 47.0 42.3 31.9 30.9 27.2 28.3 29.1 Operating-profit margin 36.9 40.5 35.9 25.1 24.3 21.9 23.5 24.7 Net profit margin 42.5 38.1 34.3 24.8 26.0 22.6 23.6 24.4 ROAE 23.7 24.3 26.6 21.8 21.2 18.4 20.1 20.3 ROAA 13.9 13.8 14.0 11.1 11.6 10.3 11.2 11.6 ROCE 14.4 17.7 18.3 14.4 14.1 13.5 15.5 16.3 ROIC 18.6 16.1 18.2 10.4 13.6 14.0 15.3 16.4 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 10.4 22.9 18.1 17.4 12.6 16.0 18.0 18.0 Accounts receivable (days) 54.1 53.1 52.7 49.3 51.1 53.0 53.4 54.3 Current ratio (x) 2.6 1.9 1.9 1.3 1.9 1.5 1.4 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow yield 1.5 2.2 3.7 4.7 8.5 7.8 9.3 11.4 Source: FactSet, Daiwa forecasts

Company profile

Alibaba Group is the world’s largest e-commerce and m-commerce company in terms of GMV. Its ecosystem comprises B2C, C2C, B2B platforms, payment solutions, and cloud business for third- party service providers and other strategic partners.

Alibaba Group (BABA US): 5 June 2020

Making globalisation possible

Alibaba – a key beneficiary of the rise of ASEAN We believe Alibaba is in the best position among its domestic peers to benefit from the rise in online retail consumption demand in ASEAN, as: x It has the largest exposure in ASEAN by virtue of its investment in Lazada, while Ant Financial is the most active investor in ASEAN’s FinTech segment. x Alibaba and Lazada are more integrated, whereas Tencent’s investments are mostly financial-oriented investments. Although Lazada still faces fierce competition from e- commerce platforms such as Shopee, we remain confident that Alibaba’s comprehensive ecosystem will help it secure a leading position in ASEAN through its investees in the long term, hence unlocking greater synergies than peers.

Alibaba has the broadest According to data disclosed during the 2019 Alibaba Investor Day, 91% of people in exposure among all ASEAN do not have a credit card, while 83% of first-time buyers use cash on delivery. China Internet Against this backdrop, we believe Alibaba’s technology will lead to rising Internet companies to the online penetration and online payment penetration in ASEAN, moving Alibaba closer to its goal of retail boom building a global digital economy.

Alibaba’s investment in ASEAN Globalisation is an integral part of Alibaba’s digital economy, and we believe ASEAN is a preferred region to leverage Alibaba’s established infrastructure given the similarities between China and ASEAN countries.

Since 2015, Alibaba has made 3 major investments in Singapore (Lazada, Singapore Post and Quantium Solutions). It has also invested in Tokopedia in Indonesia. In the payments vertical, Ant Financial has invested in DANA (Indonesia), Ascend Money (Thailand), Mynt (Philippines) and TNG Digital (Malaysia).

Given its first-mover advantage in investing in ASEAN countries, Alibaba has the broadest exposure among all China Internet companies to the online retail boom, led by increasing online payments penetration helped by Ant Financial, which we think will be a clear advantage for Alibaba as it seeks to grow its footprint outside of China.

Alibaba Group (BABA US): 5 June 2020

Alibaba: major investments in ASEAN countries

Alibaba Ant Financial

Payment E-commerce Games Others

Lazada Singapore M- Daq

Indonesia DANA Tokopedia Akulaku Bukalapak

Thailand Ascend Money

Philippines Mynt

Vietnam

Malaysia TNG Digital

Source: Company data

We see more diversified Looking ahead, we see more diversified investments from Alibaba, especially in enterprise investments helping solutions, helping it branch out of its core competence to other verticals in the industrial Alibaba branch out its Internet. Hence, in the long term, we believe Alibaba will form a sustainable competitive core competence moat and further unlock shareholder returns.

Alibaba: number of investments (global) in 2019 4.5 4 4.0 3.5 3 3 3 3.0 2.5 2 2 2 2 2.0 1.5 1 1 1 1.0 0.5 0.0 Games FinTech Logistic Property Hardware Education Healthcare Automotive Media and Media entertainment Local services

Enterprisesolution Source: IT Juzi and Deep Echo

In contrast to other investments by China Internet companies, Lazada received direct resources from Alibaba to support its operation, which we consider to be an advantage for Lazada relative to its peers. In 2016, Alibaba acquired control of Lazada with a USD1bn investment. It invested an additional USD1bn in 2017 and a further USD2bn in 2018. Alibaba’s stake in Lazada reached 83% in 2018. In April 2018, Lucy Peng stepped down as Ant Financial’s Chairwoman and joined Lazada as CEO, indicating Alibaba’s determination to grow Lazada’s business, in our view. However, nine months into her new role, Lucy Peng stepped down and was replaced by Pierre Poignant as CEO. We believe Alibaba’s investment in Lazada allows it to fully capture the booming demand for e-commerce in Indonesia, Vietnam and Singapore by connecting sellers across China and ASEAN.

Alibaba Group (BABA US): 5 June 2020

Alibaba: international retail quarterly revenue including Lazada Lazada: key operating metrics (CNYm) 8,000 70% 7,000 63% 64% Leading brands in 60% Annual active Fulfillment center 55% LazMall 6,000 50% users 5,000 40% 4,000 35% 29% 30% 3,000 27% 23% 25% 30 2,000 20% > 60m 7,000+ centers in 1,000 8% 10% 0 0% 17 cities 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q FY18 FY19 FY19 FY19 FY19 FY20 FY20 FY20 FY20 International retail business (reported, including Lazada) YoY %

Source: Company data Source: Bloomberg

Lazada’s performance during COVID-19 We believe the rise of online consumption during the COVID-19 outbreak has helped Lazada strengthen its presence in ASEAN as it previously struggled to offer localised products. x According to a Bloomberg interview in April 2020, Lazada has more than 60m active buyers with more than 7,000 leading brands in LazMall and 30 fulfilment centres across 17 cities in Southeast Asia. x In the past, we believe online groceries were not sought-after items on Lazada given users in ASEAN (unlike Chinese users) are not used to purchasing groceries online. However, during the COVID-19 outbreak, many users were forced to purchase online, fuelling demand for fresh groceries and other products, such as toys and food products. We see this development as an important milestone as the outbreak led to users spending more time on Lazada’s platform and higher mindshare among ASEAN users.

Competitive advantages of Lazada We believe the synergies We believe the synergies between Alibaba and Lazada lead to several competitive between Alibaba and advantages over local peers. In 4Q19, Lazada recorded 97% YoY order growth, mainly Lazada give rise to driven by strong demand for the apparel and accessories, and general merchandise several competitive categories. advantages over local peers Leading logistics network Lazada is closely integrated with Alibaba in terms of logistics infrastructure, which we believe bodes well for the user experience and operating efficiency. x Lazada has established its own logistics ecosystems in Singapore, Indonesia, the Philippines, Vietnam, Malaysia, and Thailand. x According to data disclosed during the 2019 Alibaba Investor Day, among all orders on Lazada, over 75% of parcel volume is sorted by Lazada itself, while the geographical coverage of Lazada’s last-mile delivery network has reached 70%. x According to data disclosed during the 2018 Alibaba Investor Day, Lazada’s operational collaboration with Cainiao led to a 10% reduction in costs, including line-haul cost savings, volume consolidation, and last-mile cost reduction. x By merging with Cainiao’s cross-border network, Lazada’s formerly 7-day lead time has shortened to 72-hour delivery. Here, 72 hours represents the average time from the drop-off point in all tier-1 cities to a customer’s door, according to data disclosed during the 2018 Alibaba Investor Day.

Technology know-how from Alibaba x According to data disclosed during the 2018 Alibaba Investor Day, adoption of Alibaba’s product know-how improved Lazada’s transaction conversion by 30%, while the integration of technology infrastructure improved product development velocity by 5x. x For example, during the COVID-19 outbreak, Lazada helped merchants in Thailand and Vietnam move their seller conferences online using its livestreaming technology.

Alibaba Group (BABA US): 5 June 2020

Wide range x By leveraging Taobao’s diversified product offerings and supply chain network, Lazada had more high-quality merchants and products, with more than 200,000 high-quality merchants and 10m high-quality SKUs, according to data from the 2018 Alibaba Investor Day. x Lazada has a broad supply chain network, which we believe bodes well for cross-border e-commerce and long-tail product offerings. x According to data disclosed during the 2019 Alibaba Investor Day, Lazada recorded strong seller growth from March 2018 to August 2019, with 142% growth in the number of daily active stores and 97% growth in the number of stores with USD10,000 in monthly GMV during the same period.

Lazada: category mix by order volume (July 2019)

Consumer Electronics 17% Fashion and accessories 29%

Digital Goods 4%

General Merchandise 22% FMCG 28%

Source: Company data Note: 2019 Alibaba Investor Day, category mix by order volume across all Lazada markets and business formats in July 2019

Comprehensive localised solutions to SMEs x ASEAN is characterised by a fragmented retail landscape, and we believe Alibaba’s comprehensive ecosystem could help unify merchants from different regions with different languages by providing localised solutions. x Alibaba saw over 150m daily search queries in 5 local languages as at July 2019, according to data disclosed during the 2019 Alibaba Investor Day.

Personalisation x Alibaba is known for its recommendation feeds in China; we expect it to apply this algorithm in ASEAN countries.

ASEAN expansion not without challenges We see its massive user In terms of the competitive landscape in ASEAN, Lazada is facing fierce competition from base and Shopee, which is backed by Sea Limited (SEA) and Tencent. Shopee was able to ramp up underpenetrated online quickly by offering more localised products and leveraging SEA’s gaming exposure. retail consumption as Despite the near-term challenges, we see Alibaba’s global digital economy and key factors to drive underpenetrated online retail consumption in ASEAN as key factors to drive Lazada’s GMV Lazada’s GMV growth growth and believe its synergies with Alibaba will be realised in the medium term.

eWTP – the long-term goal Alibaba’s long-term goal to establish a global shipping network, global supply chain network and global last-mile network should enable globalisation within the Alibaba ecosystem, which is also referred to as e-WTP (Electronic World Trade Platform).

Alibaba Group (BABA US): 5 June 2020

Indonesia: leading e-commerce players by monthly web visits Indonesia 1Q19 2Q19 3Q19 4Q19 1Q20 1 Tokopedia Tokopedia Tokopedia Shopee Shopee 2 Bukalapak Shopee Shopee Tokopedia Tokopedia 3 Shopee Bukalapak Bukalapak Bukalapak Bukalapak 4 Lazada Lazada Lazada Lazada Lazada 5 Bilibili Bilibili Bilibili Bilibili Bilibili 6 JD ID Orami JD ID JD ID JD ID 7 Orami Bhinneka Bhinneka Fabelio Orami 8 Socialla JD ID Socialla Bhinneka Bhinneka 9 Zalora Blanja Orami Orami Socialla 10 Bhinneka Zalora Ralali Zalora Zalora

Source: iPrice

Singapore: leading e-commerce players by monthly web visits Singapore 1Q19 2Q19 3Q19 4Q19 1Q20 1 Qoo10 Lazada Lazada Lazada Lazada 2 Lazada Qoo10 Qoo10 Qoo10 Qoo10 3 Shopee Shopee Shopee Shopee Shopee 4 StrawberryNET EZBuy EZBuy Amazon Amazon 5 EZBuy Zalora Zalora EZBuy Zalora 6 Zalora eBay eBay Zalora Courts Singapore 7 eBay Forty Two Courts Singapore Courts Singapore EZBuy 8 Reebonz Reebonz Love, Bonito eBay eBay 9 Forty Two Althea Forty Two Love, Bonito Love, Bonito 10 HipVan HipVan Reebonz Reebonz Reebonz

Source: iPrice

Vietnam: leading e-commerce players by monthly web visits Vietnam 1Q19 2Q19 3Q19 4Q19 1Q20 1 Shopee Shopee Shopee Shopee VN Shopee VN 2 Tiki Tiki Sendo Thegioididong Thegioididong 3 Lazada VN Lazada VN Thegioididong Sendo Tiki 4 Thegioididong Sendo Tiki Lazada VN Lazada VN 5 Sendo Thegioididong Lazada VN Tiki Sendo 6 Dienmayxanh Dienmayxanh Dienmayxanh Dienmayxanh Dienmayxanh 7 FPT Shop FPT Shop FPT Shop FPT Shop FPT Shop 8 Adayroi Adayroi Dienmaycholon Dienmaycholon Dienmaycholon 9 CellphoneS CellphoneS Adayroi CellphoneS CellphoneS 10 Vatgia Phong Vu CellphoneS Hoanghamobile Hoanghamobile

Source: iPrice

Thailand: leading e-commerce players by monthly web visits Thailand 1Q19 2Q19 3Q19 4Q19 1Q20 1 Lazada TH Lazada TH Lazada TH Lazada TH Lazada TH 2 Shopee TH Shopee TH Shopee TH Shopee TH Shopee TH 3 Chilindo Notebook Spex Notebook Spex Pomelo JD Central 4 Notebook Spex JIB Pomelo JD Central Advice 5 Advice Advice Chilindo Powerbuy Central Online 6 JIB Chilindo Advice Chilindo Powerbuy 7 JD Central JD Central JIB Notebook Spex JIB 8 Powerbuy Powerbuy Powerbuy Advice Chilindo 9 Central Online Central Online Central Online Central Online Shop 24 10 Shop 24 Pomelo JD Central JIB Pomelo

Source: iPrice

Valuation We reaffirm our call Buy We reiterate our Buy (1) rating and maintain our SOTP-based 12-month TP of USD265, (1) and TP of USD265 based on FY21E adjusted earnings.

Alibaba Group (BABA US): 5 June 2020

Alibaba: SOTP valuation analysis FY21E (CNYm) CNY (m) USD (m) Note

Core Commerce

Revenue (FY21E) 572,769

Non-GAAP EBITA (FY20E) 198,261

Non-GAAP EBITA margin % 34.6%

Assumed tax rate 19%

Target earnings 161,384

Target multiple 24.0x Applying EV/NOPAT Core Commerce valuation 3,873,226 543,229 [A]

Cloud computing

Revenue (FY21E) 59,594

Target multiple 10.0x Applying EV/Sales Cloud valuation 595,936 83,581 [B]

Digital media and entertainment (DME)

Revenue (FY21E) 31,571

Target multiple 2.5x Applying EV/Sales DME valuation 78,927 11,070 [C]

Innovation initiatives and others

Revenue (FY21E) 9,159

Target multiple 7.0x Applying EV/Sales Innovation initiatives valuation 64,115 8,992 [D]

Notable investments (USDbn)

Ant Financial Group 33.0% equity interest Weibo (WB US) 31.4% equity interest Sun Art (6808 HK) 36.2% equity interest Suning Commerce (002024 CH) 19.9% equity interest Total notable investment 420,193.1 58,933.1 [E]

Enterprise value 5,032,397 705,806 [F] = [A]+[B]+[C]+[D]+[E] Net cash (FY21E) 239,599.8 33,604.5 [G] Minority interest (FY21E) 110,347 15,476 [H] Equity value 5,161,649 723,934 [I] = [F]+[G]-[H]

No. of ADS outstanding 2,727 [J]

Target price (USD) 265.5 [K] = [I]/[J]

Adopted target price (USD) 265 Source: Daiwa forecast

Risks The key risk to our investment case for Alibaba is macro uncertainty due to COVID-19.

In an ASEAN context, we note the following risks: x Lazada capturing lower-than-expected market share in the ASEAN market. x Margin uncertainty arising from likely aggressive investment in logistics and other infrastructure through Lazada.

China Consumer Discretionary 5 June 2020

(9988 HK) Alibaba Group - H Alibaba Group - H

Target price: HKD260.00 (from HKD260.00) Share price (3 Jun): HKD209.60 | Up/downside: +24.0%

What's new: Despite the intense competition in the e-commerce space in Forecast revisions (%) the ASEAN market, we think Alibaba’s digital ecosystem, arguably the most Year to 31 Mar 21E 22E 23E comprehensive among peers, is best placed to gain market share among Revenue change - - - Net profit change - - - merchants and users in the long run. We believe Alibaba’s logistics solution Core EPS (FD) change - - - and Ant Financial’s broad investment in ASEAN countries will reduce Source: Daiwa forecasts inefficiencies in logistics and help spur online payment penetration. Share price performance

What's the impact: First-mover advantage with largest exposure to (HKD) (%) online consumption growth in ASEAN. We believe Alibaba is in the best 225 125 position among its domestic peers to benefit from the rise in online retail 209 118 193 110 consumption demand in ASEAN as it has the largest exposure to the region 176 103 given its investment in Lazada, while Ant Financial is the most active 160 95 investor in ASEAN FinTech. Alibaba and Lazada are more integrated, Nov-19 Feb-20 May-20 whereas Tencent’s investments are mostly financial-oriented. Although Alibaba Gr (LHS) Relative to HSI (RHS)

Lazada still faces fierce competition from e-commerce platforms such as Shopee, we see 2 factors that are likely to lead to Lazada securing higher 12-month range 170.00-223.60 market share in the long term: 1) we expect Alibaba’s global digital Market cap (USDbn) 590.00 economy and ASEAN’s underpenetrated online retail consumption to drive 3m avg daily turnover (USDm) 626.07 Shares outstanding (m) 21,816 Lazada’s GMV growth, and believe its synergies with Alibaba will be Major shareholder SoftBank (25.0%) unleashed in the medium term, and 2) we see more diversified investments, especially in enterprise solutions, helping it branch out of its Financial summary (CNY) core competence to other verticals in industrial Internet. Year to 31 Mar 21E 22E 23E Revenue (m) 673,092 840,072 991,070 Five advantages in ASEAN. We believe Alibaba has the following Operating profit (m) 113,250 149,935 188,722 Net profit (m) 151,843 198,515 242,121 advantages in ASEAN. 1) Superior logistics and payment capabilities: Core EPS (fully-diluted) 7.180 9.191 11.124 given these remain the biggest obstacles for e-commerce platforms EPS change (%) 10.8 28.0 21.0 seeking to improve the user experience, we see these challenges as Daiwa vs Cons. EPS (%) (2.3) (4.3) (9.7) PER (x) 26.8 20.9 17.3 opportunities for Lazada to expand its user base. 2) Solutions for SMEs: Dividend yield (%) 0.0 0.0 0.0 ASEAN is characterised by a fragmented retail landscape, and we think DPS 0.000 0.000 0.000 Alibaba’s comprehensive ecosystem will help unify merchants from PBR (x) 4.6 3.8 3.2 different regions with different languages by providing localised solutions. EV/EBITDA (x) 20.5 15.2 12.0 ROE (%) 18.4 20.1 20.3 3) Technology powered platform: during COVID-19, Lazada has helped Source: FactSet, Daiwa forecasts merchants in Thailand and Vietnam move their seller conferences online using livestreaming technology. 4) Personalisation: Alibaba is known for its recommendation feeds in China; we expect it to apply its algorithm in ASEAN. 5) Wide range: its broad supply-chain network bodes well for cross-border e-commerce and long-tail product offerings, in our view.

What we recommend: We reiterate our Buy (1) rating and SOTP-based 12-month TP of HKD260. Key risk: macro uncertainty due to COVID-19.

How we differ: Relative to the market, we are likely more upbeat on Alibaba’s synergies in ASEAN countries.

See important disclosures, including any required research certifications, beginning on page 93

Alibaba Group - H (9988 HK): 5 June 2020

Profit and loss (CNYm) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E China retail business 80,033 114,109 176,559 247,615 342,158 440,019 547,102 639,636 China wholesale business 4,288 5,679 7,164 9,988 12,427 14,720 16,486 17,970 Other Revenue 16,822 38,485 66,543 119,241 155,126 218,354 276,484 333,464 Total Revenue 101,143 158,273 250,266 376,844 509,711 673,092 840,072 991,070 Other income 0 0 0 0 0 0 0 0 COGS (34,355) (59,483) (107,044) (206,929) (282,367) (391,616) (489,762) (576,803) SG&A (20,512) (28,553) (43,540) (64,669) (78,870) (99,430) (114,688) (128,421) Other op.expenses (17,174) (22,182) (30,368) (48,162) (57,044) (68,796) (85,687) (97,125) Operating profit 29,102 48,055 69,314 57,084 91,430 113,250 149,935 188,722 Net-interest inc./(exp.) 50,308 5,888 26,929 38,916 67,776 8,600 9,000 9,000 Assoc/forex/extraord./others 2,058 6,086 4,160 (711) 3,835 2,000 2,000 2,000 Pre-tax profit 81,468 60,029 100,403 95,289 163,041 123,850 160,935 199,722 Tax (8,449) (13,776) (18,199) (16,553) (20,562) (19,758) (28,968) (35,950) Min. int./pref. div./others (1,559) (2,578) (18,219) 7,967 3,180 4,200 3,400 3,400 Net profit (reported) 71,460 43,675 63,985 86,703 145,659 108,293 135,366 167,172 Net profit (adjusted) 42,962 60,320 85,777 93,407 132,479 151,843 198,515 242,121 EPS (reported)(CNY) 3.641 2.202 3.124 4.202 6.796 5.053 6.316 7.800 EPS (adjusted)(CNY) 2.189 3.042 4.188 4.527 6.181 7.085 9.263 11.297 EPS (adjusted fully-diluted)(CNY) 2.096 2.932 4.094 4.800 6.481 7.180 9.191 11.124 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT 37,333 64,050 89,883 94,575 123,748 147,120 197,337 244,603 EBITDA 44,034 74,456 105,792 120,264 157,659 182,886 237,819 288,407

Alibaba Group - H (9988 HK): 5 June 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Cash & short-term investment 112,864 149,402 208,812 201,756 374,460 444,822 505,467 607,658 Inventory 0 0 0 0 0 0 0 0 Accounts receivable 16,993 29,060 43,228 58,590 84,229 111,060 134,545 160,275 Other current assets 4,178 4,054 4,815 9,927 4,234 4,234 4,234 4,234 Total current assets 134,035 182,516 256,855 270,273 462,923 560,117 644,246 772,168 Fixed assets 16,505 24,897 75,866 92,030 103,387 237,377 342,189 475,832 Goodwill & intangibles 87,015 139,528 189,614 333,211 337,729 348,291 347,398 346,671 Other non-current assets 126,690 159,871 194,789 269,562 408,946 480,140 574,692 667,162 Total assets 364,245 506,812 717,124 965,076 1,312,985 1,625,925 1,908,524 2,261,832 Short-term debt 4,304 14,897 6,028 22,466 5,154 7,356 7,356 7,356 Accounts payable 27,334 47,186 81,165 117,711 161,536 265,499 318,931 391,445 Other current liabilities 20,401 31,688 48,617 67,492 75,182 110,331 142,191 169,316 Total current liabilities 52,039 93,771 135,810 207,669 241,872 383,186 468,478 568,117 Long-term debt 53,262 76,835 119,525 111,834 120,276 153,910 170,796 203,804 Other non-current liabilities 9,055 12,085 22,350 30,171 71,186 71,815 72,467 73,076 Total liabilities 114,356 182,691 277,685 349,674 433,334 608,911 711,741 844,996 Share capital 132,557 167,578 189,766 238,603 352,811 386,681 434,084 489,966 Reserves/R.E./others 84,780 114,213 179,057 260,473 411,693 519,986 655,352 822,524 Shareholders' equity 217,337 281,791 368,823 499,076 764,504 906,666 1,089,436 1,312,489 Minority interests 32,552 42,330 70,616 116,326 115,147 110,347 107,347 104,347 Total equity & liabilities 364,245 506,812 717,124 965,076 1,312,985 1,625,925 1,908,524 2,261,832 EV 4,080,621 4,059,120 4,042,485 4,159,244 3,871,313 3,752,586 3,625,428 3,472,845 Net debt/(cash) (55,298) (57,670) (83,259) (67,456) (249,030) (283,557) (327,316) (396,498) BVPS (CNY) 11.055 14.058 17.862 23.859 35.246 41.880 50.407 60.815

Key ratios (%) Year to 31 Mar 2016 2017 2018 2019 2020 2021E 2022E 2023E Sales (YoY) 32.7 56.5 58.1 50.6 35.3 32.1 24.8 18.0 EBITDA (YoY) 8.1 69.1 42.1 13.7 31.1 16.0 30.0 21.3 Operating profit (YoY) 2.7 71.6 40.3 5.2 30.8 18.9 34.1 24.0 Net profit (YoY) 23.8 40.4 42.2 8.9 41.8 14.6 30.7 22.0 Core EPS (fully-diluted) (YoY) 20.8 39.9 39.6 17.3 35.0 10.8 28.0 21.0 Gross-profit margin 66.0 62.4 57.2 45.1 44.6 41.8 41.7 41.8 EBITDA margin 43.5 47.0 42.3 31.9 30.9 27.2 28.3 29.1 Operating-profit margin 36.9 40.5 35.9 25.1 24.3 21.9 23.5 24.7 Net profit margin 42.5 38.1 34.3 24.8 26.0 22.6 23.6 24.4 ROAE 23.7 24.3 26.6 21.8 21.2 18.4 20.1 20.3 ROAA 13.9 13.8 14.0 11.1 11.6 10.3 11.2 11.6 ROCE 14.4 17.7 18.3 14.4 14.1 13.5 15.5 16.3 ROIC 18.6 16.1 18.2 10.4 13.6 14.0 15.3 16.4 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 10.4 22.9 18.1 17.4 12.6 16.0 18.0 18.0 Accounts receivable (days) 54.1 53.1 52.7 49.3 51.1 53.0 53.4 54.3 Current ratio (x) 2.6 1.9 1.9 1.3 1.9 1.5 1.4 1.4 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow yield 1.5 2.2 3.7 4.8 8.6 7.8 9.4 11.5 Source: FactSet, Daiwa forecasts

Company profile

Alibaba Group - H (9988 HK): 5 June 2020

Making globalisation possible

Alibaba Group - H (9988 HK): 5 June 2020

Alibaba: major investments in ASEAN countries

Alibaba Ant Financial

Payment E-commerce Games Others

Lazada Singapore M- Daq

Indonesia DANA Tokopedia Akulaku Bukalapak

Thailand Ascend Money

Philippines Mynt

Vietnam

Malaysia TNG Digital

Source: Company data

We see more diversified Looking ahead, we see more diversified investments from Alibaba, especially in enterprise investments helping solutions, helping it branch out of its core competence to other verticals in the industrial Alibaba branch out of its Internet. Hence, in the long term, we believe Alibaba will form a sustainable competitive core competence moat and further unlock shareholder returns.

Enterprisesolution Source: IT Juzi and Deep Echo

In contrast to other investments by China Internet companies, Lazada received direct resources from Alibaba to support its operation, which we consider to be an advantage for Lazada relative to its peers. In 2016, Alibaba acquired control of Lazada with a USD1bn investment. It invested an additional USD1bn in 2017 and a further USD2bn in 2018. Alibaba’s stake in Lazada reached 83% in 2018. In April 2018, Lucy Peng stepped down as Ant Financial’s Chairwoman and joined Lazada as CEO, indicating Alibaba’s determination to grow Lazada’s business, in our view. However, nine months into her new role, Lucy Peng stepped down and was replaced by Pierre Poignant as CEO. We believe Alibaba’s investment in Lazada allows it to fully capture the booming demand for e- commerce in Indonesia, Vietnam and Singapore by connecting sellers across China and ASEAN.

Alibaba Group - H (9988 HK): 5 June 2020

Source: Company data Source: Bloomberg

Alibaba Group - H (9988 HK): 5 June 2020

Lazada: category mix by order volume (July 2019)

Consumer Electronics 17% Fashion and accessories 29%

Digital Goods 4%

General Merchandise 22% FMCG 28%

Source: Company data Note: 2019 Alibaba Investor Day, category mix by order volume across all Lazada markets and business formats in July 2019

Personalisation x Alibaba is known for its recommendation feeds in China; we expect it to apply this algorithm in ASEAN countries.

Alibaba Group - H (9988 HK): 5 June 2020

Source: iPrice

Valuation We reaffirm our call Buy We reiterate our Buy (1) rating and maintain our SOTP-based 12-month TP of HKD260, (1) and TP of HKD260 based on FY21E adjusted earnings.

Alibaba Group - H (9988 HK): 5 June 2020

Alibaba: SOTP valuation analysis FY21E (CNYm) CNY (m) USD (m) Note

Core Commerce

Revenue (FY21E) 572,769

Non-GAAP EBITA (FY20E) 198,261

Non-GAAP EBITA margin % 34.6%

Assumed tax rate 19%

Target earnings 161,384

Target multiple 24.0x Applying EV/NOPAT Core Commerce valuation 3,873,226 543,229 [A]

Cloud computing

Revenue (FY21E) 59,594

Target multiple 10.0x Applying EV/Sales Cloud valuation 595,936 83,581 [B]

Digital media and entertainment (DME)

Revenue (FY21E) 31,571

Target multiple 2.5x Applying EV/Sales DME valuation 78,927 11,070 [C]

Innovation initiatives and others

Revenue (FY21E) 9,159

Target multiple 7.0x Applying EV/Sales Innovation initiatives valuation 64,115 8,992 [D]

Notable investments (USDbn)

Enterprise value 5,032,397 705,806 [F] = [A]+[B]+[C]+[D]+[E] Net cash (FY21E) 239,599.8 33,604.5 [G] Minority interest (FY21E) 110,347 15,476 [H] Equity value 5,161,649 723,934 [I] = [F]+[G]-[H]

No. of ADS outstanding 2,727 [J]

Target price (USD) 265.5 [K] = [I]/[J]

Adopted target price (HKD) 260 Source: Daiwa forecast

Risks

The key risk to our investment case for Alibaba is macro uncertainty due to COVID-19.

China Information Technology 5 June 2020

(700 HK) Tencent Holdings Tencent H ol dings

Target price: HKD515.00 (from HKD515.00) Share price (3 Jun): HKD432.60 | Up/downside: +19.0%

Best proxy to capture the ASEAN Internet boom John Choi (852) 2773 8730 ¾ Financial investment-oriented strategy offers better diversification [email protected] ¾ Exposure to the leading ASEAN gaming and online shopping platform Robin Leung, CFA (852) 2848 4435 ¾ Reiterating our Buy (1) rating and 12-month TP of HKD515 [email protected]

What's new: We believe Tencent’s financial investment-oriented strategy Forecast revisions (%) gives it the broadest exposure to different verticals in ASEAN among its Year to 31 Dec 20E 21E 22E peers, which will turn it into a proxy for the overall growth of the Internet Revenue change - - - Net profit change - - - economy in ASEAN. Tencent has the widest reach of user base in ASEAN, Core EPS (FD) change - - - which together with its industrial Internet initiatives and payment Source: Daiwa forecasts infrastructure, is likely to shape it into a global gaming developer and distributor, and potentially a global entertainment platform. Share price performance

(HKD) (%) What's the impact: Exposure to the leading gaming and e-commerce 440 150 platforms in ASEAN. Tencent owns a 25.6% stake in SEA Limited as an 405 135 370 120 associate company, which has a strong presence in games and e- 335 105 commerce in ASEAN, and offers Tencent diversified exposure, in our view. 300 90 Games: Garena holds the rights to publish Tencent’s mobile (eg, CODM, Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 Arena of Valor) and PC games across ASEAN and Taiwan. With Tencent (LHS) Relative to HSI (RHS) international games revenue only accounting for 23% of Tencent’s total revenue as of 4Q19, we see the overseas market remaining a key focus 12-month range 316.20-440.00 area for the company, while Tencent stands to generate synergies and Market cap (USDbn) 528.37 achieve better operating efficiency with SEA Limited in game distribution in 3m avg daily turnover (USDm) 1,292.73 Shares outstanding (m) 9,466 ASEAN. E-commerce: Shopee’s GMV rose by 74% YoY for 1Q20 while its Major shareholder Naspers Limited (31.2%) gross orders were up 111% YoY, which we attribute to its better-than-peer localisation. We believe Tencent’s financial investment-oriented strategy Financial summary (CNY) gives it more flexibility to achieve localisation than its peers. Year to 31 Dec 20E 21E 22E Revenue (m) 473,081 587,822 688,054 Wide exposure to different verticals is a differentiating factor. Operating profit (m) 136,889 164,165 188,187 Net profit (m) 115,993 140,274 162,513 Tencent’s investment in Go-Jek provides Tencent with exposure to the local Core EPS (fully-diluted) 12.079 14.604 16.916 services segment. More importantly, since 2019, Go-Jek has been stepping EPS change (%) 22.9 20.9 15.8 up to become a super app with involvement in online payment, online Daiwa vs Cons. EPS (%) 2.3 0.6 (2.9) PER (x) 32.9 27.2 23.5 delivery, accommodation booking, and logistics. We expect this type of Dividend yield (%) 0.0 0.0 0.0 high-frequency local service to generate synergies for Tencent in user DPS 0.001 0.001 0.002 acquisition for its entertainment ecosystem in the long run. In addition to PBR (x) 6.8 5.4 4.3 Tencent’s investment in SEA Limited, the company has been active in EV/EBITDA (x) 20.2 16.3 14.5 ROE (%) 23.6 22.4 20.6 investing in local service and payment companies in the ASEAN market. Source: FactSet, Daiwa forecasts Since 2008, Tencent has mainly focused on games, Fintech and entertainment investments in SE Asia. Of these, Tencent has invested in Go-Jek (Indonesia), Sea Group (Singapore), Ookbee U (Thailand), Sanook (Thailand), Voyager Innovations (Philippines) and VNG (Vietnam).

What we recommend: We reiterate our Buy (1) rating and SOTP-based 12-month target price of HKD515. Risks: fewer-than-expected synergies between Tencent’s games and its investees in the long run.

How we differ: We are likely more upbeat on Tencent’s game revenue growth in China and ASEAN countries.

See important disclosures, including any required research certifications, beginning on page 93

Tencent Holdings (700 HK): 5 June 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Monthly Active Users (MAU) of WeChat 697 889 989 1,098 1,165 1,223 1,260 1,298 (m) PC game revenue (CNYmn) 42,529 44,801 54,995 50,394 47,536 44,178 41,139 39,506 Mobile game revenue (inc. in online 21,300 38,400 62,800 77,800 93,700 132,183 149,842 172,532 games & social network) (CNYmn) Social netowrk revenue (ex. Mobile 16,840 24,609 36,188 48,452 58,755 72,049 81,916 87,508 games) (CNYmn)

Profit and loss (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Value-added services (VAS) 80,669 107,810 153,983 176,646 199,991 248,410 272,898 299,546 Online advertising 17,468 26,969 40,439 58,079 68,377 84,815 104,533 124,605 Other Revenue 4,726 17,158 43,338 77,969 108,921 139,856 210,392 263,902 Total Revenue 102,863 151,937 237,760 312,694 377,289 473,081 587,822 688,054 Other income 1,886 3,594 20,140 16,714 19,689 16,535 23,513 20,642 COGS (41,631) (67,439) (120,835) (170,574) (209,756) (260,355) (342,537) (399,411) SG&A (18,189) (21,966) (27,231) (31,743) (30,265) (36,660) (31,742) (44,035) Other op.expenses (6,629) (12,629) (23,472) (34,012) (44,577) (55,713) (72,890) (77,062) Operating profit 38,300 53,497 86,362 93,079 112,380 136,889 164,165 188,187 Net-interest inc./(exp.) 709 664 1,032 (100) (1,299) (748) (1,000) (1,000) Assoc/forex/extraord./others (2,793) (2,522) 821 1,487 (1,681) 469 1,000 1,000 Pre-tax profit 36,216 51,639 88,215 94,466 109,400 136,610 164,165 188,187 Tax (7,108) (10,193) (15,744) (14,482) (13,512) (21,787) (27,580) (31,615) Min. int./pref. div./others (173) (309) (961) (1,265) (2,578) (2,587) (2,900) (3,500) Net profit (reported) 28,935 41,137 71,510 78,719 93,310 112,237 133,686 153,071 Net profit (adjusted) 32,372 45,459 65,126 77,469 94,351 115,993 140,274 162,513 EPS (reported)(CNY) 3.109 4.363 7.602 8.335 9.717 11.688 13.918 15.934 EPS (adjusted)(CNY) 3.478 4.821 6.924 8.203 9.965 12.251 14.816 17.164 EPS (adjusted fully-diluted)(CNY) 3.445 4.788 6.829 8.097 9.825 12.079 14.604 16.916 DPS (CNY) 0.435 0.610 0.880 1.000 1.200 0.001 0.001 0.002 EBIT 43,685 59,801 82,023 92,481 114,601 153,563 188,388 214,828 EBITDA 44,929 66,126 109,834 127,091 156,957 192,602 237,055 265,249

Cash flow (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax 36,216 51,639 88,215 94,466 109,400 136,610 164,165 188,187 Depreciation and amortisation 6,674 12,741 23,611 34,248 44,673 55,713 72,890 77,062 Tax paid (7,108) (10,193) (15,744) (14,482) (13,512) (21,787) (27,580) (31,615) Change in working capital 0 0 0 0 0 0 0 0 Other operational CF items 9,649 11,021 10,058 (3,296) 8,029 30,904 33,601 33,845 Cash flow from operations 45,431 65,208 106,140 110,936 148,590 201,441 243,076 267,478 Capex (5,440) (8,399) (12,108) (19,743) (22,766) (42,577) (52,904) (61,925) Net (acquisitions)/disposals (11,353) (8,903) (17,500) (37,743) (14,900) (42,723) (51,267) (61,521) Other investing CF items (46,812) (53,621) (66,736) (94,427) (78,504) (88,280) (111,564) (131,611) Cash flow from investing (63,605) (70,923) (96,344) (151,913) (116,170) (173,580) (215,736) (255,056) Change in debt 48,490 1,161 1,272 1,398 0 0 0 0 Net share issues/(repurchases) 0 0 0 0 0 0 0 0 Dividends paid (3) (4,048) (5,714) (8,282) 0 0 0 0 Other financing CF items (29,959) 34,330 31,040 37,771 1,672 (11,359) (11) (13) Cash flow from financing 18,528 31,443 26,598 30,887 1,672 (11,359) (11) (13) Forex effect/others 371 2,736 (2,551) 2,207 1,085 0 0 0 Change in cash 725 28,464 33,843 (7,883) 35,177 16,501 27,329 12,408 Free cash flow 39,991 56,809 94,032 91,193 125,824 158,863 190,172 205,553 Source: FactSet, Daiwa forecasts

Tencent Holdings (700 HK): 5 June 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 98,169 72,652 107,303 100,404 135,171 151,672 179,001 191,410 Inventory 222 263 295 324 718 718 718 718 Accounts receivable 7,061 10,152 16,549 28,427 35,839 42,577 52,904 61,925 Other current assets 49,926 66,087 54,299 87,925 82,240 88,956 99,863 107,412 Total current assets 155,378 149,154 178,446 217,080 253,968 283,923 332,487 361,465 Fixed assets 9,973 13,900 23,597 35,091 46,824 66,081 89,594 123,996 Goodwill & intangibles 13,439 36,467 40,266 56,650 128,860 191,084 265,150 353,220 Other non-current assets 128,028 196,378 312,363 414,700 524,334 567,526 619,793 682,314 Total assets 306,818 395,899 554,672 723,521 953,986 1,108,614 1,307,023 1,520,996 Short-term debt 15,315 15,744 20,448 40,554 33,229 33,229 33,229 33,229 Accounts payable 15,700 27,413 50,085 73,735 80,690 98,764 125,208 145,742 Other current liabilities 93,391 58,040 81,207 88,146 126,237 143,346 160,515 176,753 Total current liabilities 124,406 101,197 151,740 202,435 240,156 275,339 318,952 355,724 Long-term debt 50,014 93,753 111,457 138,735 187,584 187,584 187,584 187,584 Other non-current liabilities 10,298 14,702 14,382 26,144 37,422 37,422 37,422 37,422 Total liabilities 184,718 209,652 277,579 367,314 465,162 500,345 543,958 580,730 Share capital 0 0 0 0 0 0 0 0 Reserves/R.E./others 120,035 174,624 256,074 323,510 432,706 549,564 701,461 875,161 Shareholders' equity 120,035 174,624 256,074 323,510 432,706 549,564 701,461 875,161 Minority interests 2,065 11,623 21,019 32,697 56,118 58,705 61,605 65,105 Total equity & liabilities 306,818 395,899 554,672 723,521 953,986 1,108,614 1,307,023 1,520,996 EV 3,725,876 3,805,119 3,802,272 3,868,233 3,898,411 3,884,497 3,860,067 3,851,159 Net debt/(cash) (32,840) 36,845 24,602 78,885 85,642 69,141 41,812 29,403 BVPS (CNY) 12.907 18.641 27.210 34.256 45.712 58.057 74.103 92.453

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) 30.3 47.7 56.5 31.5 20.7 25.4 24.3 17.1 EBITDA (YoY) 33.5 47.2 66.1 15.7 23.5 22.7 23.1 11.9 Operating profit (YoY) 35.8 36.9 37.2 12.8 23.9 34.0 22.7 14.0 Net profit (YoY) 24.3 40.4 43.3 19.0 21.8 22.9 20.9 15.9 Core EPS (fully-diluted) (YoY) 23.8 39.0 42.6 18.6 21.3 22.9 20.9 15.8 Gross-profit margin 59.5 55.6 49.2 45.5 44.4 45.0 41.7 42.0 EBITDA margin 43.7 43.5 46.2 40.6 41.6 40.7 40.3 38.6 Operating-profit margin 42.5 39.4 34.5 29.6 30.4 32.5 32.0 31.2 Net profit margin 31.5 29.9 27.4 24.8 25.0 24.5 23.9 23.6 ROAE 32.4 30.9 30.2 26.7 25.0 23.6 22.4 20.6 ROAA 13.5 12.9 13.7 12.1 11.2 11.2 11.6 11.5 ROCE 28.6 24.8 23.3 19.6 18.4 20.0 20.8 20.0 ROIC 39.7 27.5 27.0 21.4 19.5 18.4 18.4 17.6 Net debt to equity n.a. 21.1 9.6 24.4 19.8 12.6 6.0 3.4 Effective tax rate 19.6 19.7 17.8 15.3 12.4 15.9 16.8 16.8 Accounts receivable (days) 20.7 20.7 20.5 26.2 31.1 30.3 29.6 30.5 Current ratio (x) 1.2 1.5 1.2 1.1 1.1 1.0 1.0 1.0 Net interest cover (x) n.a. n.a. n.a. 924.8 88.2 205.3 188.4 214.8 Net dividend payout 14.0 14.0 11.6 12.0 12.3 0.0 0.0 0.0 Free cash flow yield 1.1 1.5 2.5 2.4 3.3 4.2 5.1 5.5 Source: FactSet, Daiwa forecasts

Company profile

Tencent is the largest and most used Internet service portal in China. Over the past decade, the company has been able to maintain steady earnings growth under its user-oriented strategy. It was listed on the main board of the Hong Kong Stock Exchange on 16 June 2004.

Tencent Holdings (700 HK): 5 June 2020

Quest of globalisation Key beneficiary of the rise of ASEAN SEA Limited offers We believe Tencent’s financial investment-oriented strategy gives the company exposure Tencent diversified to a wider variety of verticals in ASEAN than its peers. This, together with Tencent’s exposure to games, e- industrial Internet initiatives and well-established payment infrastructure, will help Tencent commerce and other to become a global gaming developer and distributor, in our view. digital financial services Wide exposure in ASEAN Financial investment in SEA Limited. Contrary to Alibaba, which has consolidated Lazada and imposed control of the company, Tencent owns a 25.6% stake in SEA Limited as an associate company. Nonetheless, SEA Limited has a strong presence in games, e- commerce and online payment (Airpay), which we believe gives Tencent diversified exposure.

x Games: Garena holds the rights to publish Tencent’s mobile (eg, CODM, Arena of Valor) and PC games across ASEAN and Taiwan. Tencent’s international games revenue accounted for 23% of total revenue as of 4Q19. We expect the overseas market to remain a key focus area for Tencent, while the company stands to generate synergies and achieve better operating efficiency with SEA Limited in game distribution in ASEAN.

x E-commerce: Shopee’s GMV rose by 74% YoY for 1Q20 while its gross orders were up 111% YoY, which we attribute to its better-than-peer localisation in terms of product offerings. We believe Tencent’s financial investment-oriented strategy provides more flexibility from an investee perspective, allowing it to achieve better localisation than peers such as Alibaba’s Lazada.

x Digital financial services: Airpay is an e-wallet app for users to pay for products and services, and is integrated into the Garena and Shopee platforms. We note that Tencent has gained exposure to online payment in ASEAN through Airpay, Voyager Innovation, and Go-Jek.

Shopee: monthly web visits in Vietnam in 4Q19 Shopee: monthly web visits in Indonesia in 4Q19

40 38 80 73 68 35 70 30 28 27 27 60 25 25 50 39 20 40 15 28 27 10 30 10 20 14 5 10 0 0 Shopee VN Thế Giới Di Sendo Lazada VN Tiki Ði?n máy ng Xanh Shopee Tokopedia Bukalapak Lazada Blibil JD ID Độ Source: iPrice Source: iPrice

Tencent Holdings (700 HK): 5 June 2020

Shopee: gross orders (m) Shopee: GMV (USDbn) 500 300% 7 140% 6 120% 400 244% 250% 217% 5 117% 100% 200% 300 181% 4 80% 150% 141% 113% 83% 74% 200 93% 3 71% 71% 60% 110% 100% 63% 111% 2 40% 100 83% 103% 50% 1 20%

0 0% 0 0% 4Q161Q172Q173Q174Q171Q182Q183Q184Q181Q192Q193Q194Q191Q20 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 Gross orders (m) YoY growth GMV (USDbn) YoY growth

Source: Company data Source: Company data

Wide exposure to different verticals in ASEAN Investment in Super app Tencent has wide Tencent’s investment in Go-Jek provides Tencent exposure to the local services segment. exposure to different More importantly, since 2019, Go-Jek is stepping up to become a super app with verticals in ASEAN involvement in online payment, online delivery, accommodation booking, and logistics. We including local services expect this type of high-frequency local services to generate synergies for Tencent in user and music acquisition in the long run.

Other investments in ASEAN Besides Tencent’s investment in SEA Limited, the company has been active in investing in local service and payment companies in ASEAN markets. Since 2008, Tencent has mainly focused on games, Fintech and entertainment investments in Southeast Asia. Of these, Tencent has invested in Go-Jek (Indonesia), Sea Group (Singapore), Ookbee U (Thailand), Sanook (Thailand), Voyager Innovations (Philippines) and VNG (Vietnam).

Venturing into offshore gaming companies VNG VNG dominates the MMORPG market in Vietnam and is one of the largest game publishers with self-developed games capabilities. It has more than 70m of installs on mobile and the top local games are dominated by Garena and VNG, according to data from App Annie. Notable games from VNG’s games studio include Dead Target: Zombie (MMORPG FPS zombie shooting games), Sky Garden: Farm in Paradise, Dead Target: Zombie 2, Cube Skyland, iCa, Tini Farm, and Zombie Shootdown.

JOOX – a key incumbent in the ASEAN music streaming market JOOX, Tencent’s international music streaming platform, was launched in 2015 and currently operates in Hong Kong, Macau, Thailand, Indonesia, Malaysia, Myanmar and South Africa. According to Reuters, the COVID-19 outbreak helped drive a 50% increase in its traffic to its karaoke services over the same period last year. While JOOX is one of the leading music streaming platforms in Southeast Asia, other music streaming platforms include Resso (owned by Bytedance), Spotify (Tencent has a 9% stake), Apple Music, YouTube Music, and KKBox. In light of the competition, JOOX offers users a free VIP trial (listening to music without ads, unlimited skips) for a certain period if users share the song on WeChat Moments or Facebook. We believe there is ample room for the music streaming market to grow given it is still at a nascent stage in terms of cultivating users to pay for the streaming model.

During Tencent Music Entertainment’s (TME US) 2Q19 earnings call, management stated that it had launched WeSing in Southeast Asia, and in 3Q19, WeSing achieved top ranking in Indonesia, Thailand, and Malaysia.

Tencent Holdings (700 HK): 5 June 2020

Tencent: major investments in ASEAN countries

Tencent

Payment E-commerce Games Others

Singapore Sea Group

Indonesia Gojek

Thailand Ookbee U Sanook

Voyager Innovations Philippines

Vietnam VNG

Malaysia

Source: Company data

Indonesia’s leading e-commerce players – by monthly web visits Indonesia 1Q19 2Q19 3Q19 4Q19 1Q20 1 Tokopedia Tokopedia Tokopedia Shopee Shopee 2 Bukalapak Shopee Shopee Tokopedia Tokopedia 3 Shopee Bukalapak Bukalapak Bukalapak Bukalapak 4 Lazada Lazada Lazada Lazada Lazada 5 Bilibili Bilibili Bilibili Bilibili Bilibili 6 JD ID Orami JD ID JD ID JD ID 7 Orami Bhinneka Bhinneka Fabelio Orami 8 Socialla JD ID Socialla Bhinneka Bhinneka 9 Zalora Blanja Orami Orami Socialla 10 Bhinneka Zalora Ralali Zalora Zalora

Source: iPrice

Singapore’s leading e-commerce players – by monthly web visits Singapore 1Q19 2Q19 3Q19 4Q19 1Q20 1 Qoo10 Lazada Lazada Lazada Lazada 2 Lazada Qoo10 Qoo10 Qoo10 Qoo10 3 Shopee Shopee Shopee Shopee Shopee 4 StrawberryNET EZBuy EZBuy Amazon Amazon 5 EZBuy Zalora Zalora EZBuy Zalora 6 Zalora eBay eBay Zalora Courts Singapore 7 eBay Forty Two Courts Singapore Courts Singapore EZBuy 8 Reebonz Reebonz Love, Bonito eBay eBay 9 Forty Two Althea Forty Two Love, Bonito Love, Bonito 10 HipVan HipVan Reebonz Reebonz Reebonz

Source: iPrice

Tencent Holdings (700 HK): 5 June 2020

Vietnam’s leading e-commerce players – by monthly web visits Vietnam 1Q19 2Q19 3Q19 4Q19 1Q20 1 Shopee Shopee Shopee Shopee VN Shopee VN 2 Tiki Tiki Sendo Thegioididong Thegioididong 3 Lazada VN Lazada VN Thegioididong Sendo Tiki 4 Thegioididong Sendo Tiki Lazada VN Lazada VN 5 Sendo Thegioididong Lazada VN Tiki Sendo 6 Dienmayxanh Dienmayxanh Dienmayxanh Dienmayxanh Dienmayxanh 7 FPT Shop FPT Shop FPT Shop FPT Shop FPT Shop 8 Adayroi Adayroi Dienmaycholon Dienmaycholon Dienmaycholon 9 CellphoneS CellphoneS Adayroi CellphoneS CellphoneS 10 Vatgia Phong Vu CellphoneS Hoanghamobile Hoanghamobile

Source: iPrice

Thailand’s leading e-commerce players – by monthly web visits Thailand 1Q19 2Q19 3Q19 4Q19 1Q20 1 Lazada TH Lazada TH Lazada TH Lazada TH Lazada TH 2 Shopee TH Shopee TH Shopee TH Shopee TH Shopee TH 3 Chilindo Notebook Spex Notebook Spex Pomelo JD Central 4 Notebook Spex JIB Pomelo JD Central Advice 5 Advice Advice Chilindo Powerbuy Central Online 6 JIB Chilindo Advice Chilindo Powerbuy 7 JD Central JD Central JIB Notebook Spex JIB 8 Powerbuy Powerbuy Powerbuy Advice Chilindo 9 Central Online Central Online Central Online Central Online Shop 24 10 Shop 24 Pomelo JD Central JIB Pomelo

Source: iPrice

Valuation We reiterate our Buy (1) rating and 12-month SOTP-based TP of HKD515.

Tencent: SOTP analysis Average of Target Valuation Valuation SOTP analysis (CNYbn) 2020-21E revenue Target OPM Tax rate earnings Target multiple metrics (CNYbn) Games 183.7 47% 20% 69 28.0x EV/NOPAT 1,933.7 [a] IVAS (Video, music, literature, etc) 77.0 N/A N/A N/A 3.5x EV/Sales 269.4 [b] Advertising (WeChat, News) 94.7 42% 20% 31 23.0x EV/NOPAT 722.9 [c] Fintech 133.6 8.0x EV/Sales 1,068.7 [d] Business services (Cloud) 33.2 10.0x EV/Sales 332.2 [e] Investees 294.0 [f] Enterprise value 4,620.9 [g]=[a]+[b]+[c]+[d]+[e]+[f] Minority interests (2020E book value) 58.7 Group net debt (2020E) 69.1 Equity value (CNY) 4,493.0 [j]=[g]-[h]-[i] FX - CNYHKD 1.1 Equity value 4,942.3 Outstanding shares 9.6 Target price (HKD) 514.7

Source: Daiwa estimates

Risks The key risk to our investment case for Tencent is macro uncertainty due to COVID-19.

In an ASEAN context, we note the following risks: x Garena/Shopee capturing lower-than-expected market share in the ASEAN market. x Fewer-than-expected synergies realised among Tencent’s investments with its core gaming business, given its financial investment-oriented strategy.

China Consumer Discretionary 5 June 2020

(JD US) JD.com JD.com

Target price: USD65.00 (from USD65.00) Share price (3 Jun): USD56.73 | Up/downside: +14.6%

Paving the way for long-term growth John Choi (852) 2773 8730 ¾ 1P model positive for localisation though may limit near-term expansion [email protected] ¾ Reliance on third-party logistics and payments lacks direct control Robin Leung, CFA (852) 2848 4435 ¾ Reiterating our Buy (1) call and TP of USD65 [email protected]

What's new: Since JD had adopted its 1P model strategy in ASEAN, we Forecast revisions (%) believe the company will find it hard to expand its investees’ market share Year to 31 Dec 20E 21E 22E meaningfully in the next 1-3 years. However, if JD executes its 1P model Revenue change - - - Net profit change - - - well, applies its logistics knowhow from China to ASEAN, and further Core EPS (FD) change - - - strengthens its partnerships with local super apps such as Go-Jek to make Source: Daiwa forecasts up for its shortfalls in payments and logistics, JD will likely gain a solid foothold in ASEAN, in our view. Overall, we remain positive on JD’s Share price performance exposure to the fragmented ASEAN market and expect it to be one of the (USD) (%) key beneficiaries of rising online consumption demand. 60 205 51 174 43 143

What's the impact: 1P model positive for localisation in ASEAN, 34 111 though lacks direct control of logistics and payments. We believe JD’s 25 80 1P model strategy will enable it to source products well-suited to local Jun-19 Sep-19 Dec-19 Mar-20 Jun-20 demand, given the ASEAN retail market is fragmented and localisation is a JD.com (LHS) Relative to S&P 500 Index (RHS) key factor in acquiring customers. Although JD could bring in its warehousing solution and logistics expertise from China to ASEAN, we 12-month range 26.17-56.73 think it still faces challenges in building strong relationships with brands and Market cap (USDbn) 82.92 suppliers, given the small scale of its delivery team and the fact it lacks its 3m avg daily turnover (USDm) 266.22 Shares outstanding (m) 1,462 own payment infrastructure. As a result, JD has to rely on third-party Major shareholder Richard Liu Qiangdong (15.1%) service providers. Financial summary (CNY) JD’s partnership network in ASEAN. In Indonesia, JD.id and Go-Jek Year to 31 Dec 20E 21E 22E have a last-mile delivery logistics joint venture, J-Express (JX), in which JX Revenue (m) 708,800 840,182 978,684 collaborates with Go-Jek’s crowdsourced courier network to provide cost- Operating profit (m) 15,518 21,845 30,829 Net profit (m) 19,261 23,537 31,043 effective logistics coverage nationwide. In Vietnam and Thailand, Tiki’s Core EPS (fully-diluted) 12.861 15.639 20.523 (backed by JD) orders are fulfilled by TikiNow, while JD Central’s orders are EPS change (%) 78.3 21.6 31.2 fulfilled by JD Express and other third-party couriers. On the payment front, Daiwa vs Cons. EPS (%) 63.9 25.8 22.0 - PER (x) 31.4 25.8 19.7 JD mainly partners with third party payment service providers in ASEAN Dividend yield (%) 0.0 0.0 0.0 [Go-Jek’s Go-Pay in Indonesia, Zalopay (backed by VNG) and Momo Pay DPS 0.000 0.000 0.000 in Vietnam, and DANA and LinkAja in Thailand]. Although Go-Jek has a PBR (x) 5.9 4.8 3.9 competitive edge in last-mile delivery and its high frequency nature bodes EV/EBITDA (x) 24.6 18.0 12.7 ROE (%) 21.2 21.1 22.5 well for payment penetration, which are positives for JD, the potential scale Source: FactSet, Daiwa forecasts of expansion of JD’s ecosystem looks to be lower than for Lazada and Shopee, which have their own payment apps and logistics arms.

What we recommend: We reiterate our Buy (1) call and TP of USD65, based on a 25x PER applied to 2020-21E JD retail’s NOPAT, and JD Finance and JD’s Logistics’ valuation attributable to JD.com. Risks: market-share losses by JD’s investees and higher-than-expected investment in infrastructure.

How we differ: We are likely more positive than the market on the execution on JD’s 1P model strategy in ASEAN in the long term.

See important disclosures, including any required research certifications, beginning on page 93

JD.com (JD US): 5 June 2020

Financial summary Key assumptions Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Annual Active Customer (m) 155 227 293 305 362 380 392 403 Average Spending per User (CNY) 2,985 2,905 3,069 3,692 3,838 4,384 4,830 5,222 Total Orders (m) 1,280 1,622 2,259 2,750 3,277 3,803 4,230 4,619 Direct Sale (1P) GMV (CNYbn) 256 372 523 642 778 933 1,040 1,158 Marketplace (3P) GMV (CNYbn) 205 286 375 485 611 733 851 948 Marketplace Take Rate (%) 6 7 8 9 11 12 14 15 Electronics & home appliances rev. 135 180 236 280 329 386 441 500 (CNYbn) General merchandise & others rev. 33 58 96 136 182 237 282 333 (CNYbn) Marketplace & advertising rev. (CNYbn) 0 17 25 34 43 52 71 86 Logistics & other service rev. (CNYbn) 0 3 5 12 23 34 46 60

Profit and loss (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Product Revenue (1P) 167,936 237,944 331,824 416,109 510,734 622,724 722,894 832,573 Service Revenue (3P) 13,565 22,484 31,591 45,911 66,155 86,076 117,288 146,111 Other Revenue (458) (2,138) (1,083) 0 0 0 0 0 Total Revenue 181,042 258,290 362,332 462,020 576,888 708,800 840,182 978,684 Other income 0 0 0 0 0 0 0 0 COGS (158,960) (222,935) (311,517) (396,066) (492,467) (602,404) (711,634) (825,030) SG&A (9,421) (13,595) (19,133) (24,396) (27,724) (29,629) (35,708) (41,105) Other op.expenses (18,019) (23,012) (32,517) (44,176) (47,702) (61,249) (70,995) (81,720) Operating profit (5,358) (1,252) (835) (2,619) 8,995 15,518 21,845 30,829 Net-interest inc./(exp.) 600 608 1,567 1,263 1,061 1,066 1,600 1,600 Assoc/forex/extraord./others (2,998) (1,239) (610) (1,018) 3,637 (1,853) (1,000) (1,200) Pre-tax profit (7,756) (1,882) 121 (2,374) 13,693 14,731 22,445 31,229 Tax 15 (166) (140) (427) (1,802) (1,226) (4,489) (6,246) Min. int./pref. div./others (1,367) (1,758) (134) 309 295 217 200 199 Net profit (reported) (9,108) (3,807) (152) (2,492) 12,185 13,722 18,156 25,182 Net profit (adjusted) 815 2,131 4,678 3,460 10,750 19,261 23,537 31,043 EPS (reported)(CNY) (6.660) (2.715) (0.107) (1.732) 8.337 9.388 12.360 17.058 EPS (adjusted)(CNY) 0.596 1.520 3.289 2.404 7.355 13.178 16.023 21.028 EPS (adjusted fully-diluted)(CNY) 0.596 1.520 3.213 2.404 7.214 12.861 15.639 20.523 DPS (CNY) 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 EBIT (5,358) (1,252) 2,886 1,913 8,868 19,944 27,726 37,190 EBITDA 11 2,169 3,357 2,963 10,938 21,149 27,686 36,755

Cash flow (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Profit before tax (7,756) (1,882) 121 (2,374) 13,693 14,731 22,445 31,229 Depreciation and amortisation 2,619 3,420 4,193 5,560 5,828 5,632 5,842 5,926 Tax paid (118) 279 (47) (261) (1,080) (1,226) (4,489) (6,246) Change in working capital (3,041) 2,661 16,192 13,061 7,342 7,414 7,706 11,411 Other operational CF items 8,131 4,289 4,362 5,766 (703) 4,673 5,041 5,383 Cash flow from operations (165) 8,767 24,821 21,752 25,080 31,223 36,544 47,703 Capex (5,300) (4,229) (11,356) (21,369) (9,000) (11,553) (12,855) (14,974) Net (acquisitions)/disposals (7,447) (7,733) (6,167) (15,811) 714 2,000 2,000 2,000 Other investing CF items 10,464 (36,307) (19,976) 11,102 (17,064) (12,500) (17,500) (22,500) Cash flow from investing (2,283) (48,269) (37,499) (26,079) (25,349) (22,053) (28,355) (35,474) Change in debt 1,145 (462) 3,954 (9,090) (4,052) 0 0 0 Net share issues/(repurchases) 0 (5,256) 136 3,580 112 112 112 112 Dividends paid 0 0 0 0 0 0 0 0 Other financing CF items 3,555 46,417 15,145 16,730 6,513 (131) (131) (131) Cash flow from financing 4,700 40,699 19,235 11,220 2,572 (19) (19) (19) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 2,252 1,198 6,557 6,893 2,303 9,150 8,171 12,210 Free cash flow (5,465) 4,538 13,465 383 16,080 19,669 23,690 32,729 Source: FactSet, Daiwa forecasts

JD.com (JD US): 5 June 2020

Financial summary continued … Balance sheet (CNYm) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Cash & short-term investment 22,759 24,409 38,386 39,538 64,515 82,277 104,048 134,858 Inventory 20,540 28,909 41,700 44,030 57,932 70,968 81,887 94,935 Accounts receivable 9,508 16,141 16,359 11,110 6,191 6,797 7,596 8,848 Other current assets 5,661 37,473 18,583 10,178 10,457 11,993 14,032 16,264 Total current assets 58,468 106,932 115,029 104,856 139,095 172,035 207,563 254,905 Fixed assets 9,428 11,463 22,822 38,112 37,352 37,315 38,993 41,630 Goodwill & intangibles 5,293 17,285 20,394 22,131 30,289 31,338 32,820 34,750 Other non-current assets 11,977 24,693 25,811 44,066 52,988 54,439 55,541 56,405 Total assets 85,166 160,374 184,055 209,165 259,724 295,127 334,917 387,690 Short-term debt 3,040 11,109 12,885 147 0 0 0 0 Accounts payable 29,819 46,036 74,338 79,985 90,428 102,326 113,082 128,840 Other current liabilities 15,589 47,595 31,028 40,730 49,589 54,926 60,945 67,575 Total current liabilities 48,449 104,740 118,251 120,862 140,017 157,252 174,027 196,415 Long-term debt 5,459 0 10,923 9,875 10,052 10,052 10,052 10,052 Other non-current liabilities 580 14,414 2,493 1,600 9,031 9,031 9,031 9,031 Total liabilities 54,488 119,154 131,666 132,337 159,099 176,334 193,109 215,498 Share capital 48,393 59,259 76,255 98,795 106,641 111,305 116,365 121,766 Reserves/R.E./others (17,853) (25,366) (24,214) (23,062) (8,821) 4,684 22,640 47,622 Shareholders' equity 30,541 33,893 52,041 75,732 97,820 115,988 139,004 169,389 Minority interests 138 7,327 348 1,096 2,804 2,804 2,804 2,804 Total equity & liabilities 85,166 160,374 184,055 209,165 259,724 295,127 334,917 387,690 EV 575,418 583,568 575,309 561,120 537,881 520,118 498,348 467,538 Net debt/(cash) (14,260) (13,299) (14,579) (29,516) (54,463) (72,226) (93,996) (124,806) BVPS (CNY) 22.333 24.168 36.586 41.538 56.003 68.433 83.761 103.926

Key ratios (%) Year to 31 Dec 2015 2016 2017 2018 2019 2020E 2021E 2022E Sales (YoY) 57.4 42.7 40.3 27.5 24.9 22.9 18.5 16.5 EBITDA (YoY) n.a. 19,106.8 54.8 (11.7) 269.1 93.4 30.9 32.8 Operating profit (YoY) n.a. n.a. n.a. (33.7) 363.7 124.9 39.0 34.1 Net profit (YoY) 136.2 161.4 119.5 (26.0) 210.7 79.2 22.2 31.9 Core EPS (fully-diluted) (YoY) 109.0 154.9 111.5 (25.2) 200.0 78.3 21.6 31.2 Gross-profit margin 12.2 13.7 14.0 14.3 14.6 15.0 15.3 15.7 EBITDA margin 0.0 0.8 0.9 0.6 1.9 3.0 3.3 3.8 Operating-profit margin n.a. n.a. 0.8 0.4 1.5 2.8 3.3 3.8 Net profit margin 0.5 0.8 1.3 0.7 1.9 2.7 2.8 3.2 ROAE 2.4 6.6 10.9 6.2 15.2 21.2 21.1 22.5 ROAA 1.1 1.7 2.7 1.8 4.6 6.9 7.5 8.6 ROCE n.a. n.a. 4.5 2.3 9.0 16.7 19.8 22.3 ROIC (45.1) (6.1) 0.4 (7.3) 16.7 30.7 37.0 51.8 Net debt to equity n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Effective tax rate 0.2 (8.8) 115.4 (18.0) 13.2 8.3 20.0 20.0 Accounts receivable (days) 12.0 18.1 16.4 10.9 5.5 3.3 3.1 3.1 Current ratio (x) 1.2 1.0 1.0 0.9 1.0 1.1 1.2 1.3 Net interest cover (x) n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a. Net dividend payout n.a. n.a. n.a. n.a. 0.0 0.0 0.0 0.0 Free cash flow yield n.a. 0.8 2.3 0.1 2.7 3.3 4.0 5.6 Source: FactSet, Daiwa forecasts

Company profile

JD.com is the largest direct-sales B2C online retailer and the second-largest B2C online retailer overall in China in terms of transaction value. Founded by Richard Liu Qiangdong, JD.com was listed on NASDAQ in May 2014 and adopts a dual-class share structure comprising Class A and Class B shares.

JD.com (JD US): 5 June 2020

Key beneficiary of ASEAN e-commerce growth Challenging near-term outlook, but long-term positive Since JD has adopted its 1P model strategy in ASEAN, we believe the company will find it hard to expand its investees’ market share meaningfully in the next 1-3 years. However, if JD executes its 1P model well, applies its logistics knowhow from China to ASEAN, and further strengthens its partnerships with local super apps such as Go-Jek to make up for the shortfall it faces in the payment and logistics areas, we believe JD is likely to gain a solid foothold in ASEAN.

Overall, we remain positive on JD’s exposure to ASEAN as we believe ASEAN is a fragmented market and JD will be one of the beneficiaries of the rising online consumption demand.

JD’s advantages in ASEAN 1P model JD’s 1P model and x We believe JD’s 1P model strategy will allow the company to source products that are shortfalls in logistics well-suited to local demand, since the ASEAN retail market is fragmented and and payments are localisation is a key factor in acquiring customers. In Indonesia, JD.ID ’s 1P GMV challenges, though we contribution reached 70%, according to Xinhuanet in March 2020, with particular believe JD will be one of strength in categories such as 3C, mother and child, and cosmetics. the beneficiaries of x To illustrate JD’s 1P advantage, when the COVID-19 outbreak started in China, JD.id rising online was able to stock up medical supplies such as facial masks to prepare for the surge in consumption demand demand a month ahead. x We contend that JD can leverage its logistics expertise in China to build strong relationships with local partners in ASEAN. Currently, JD has 13 warehouses in Indonesia, with its logistics service covering 90% of Indonesia’s provinces.

JD’s challenges in ASEAN Structural challenges in supply chain x Although JD could bring in its warehousing solution expertise from China to ASEAN, we believe it still faces challenges in building strong relationship with brands and suppliers, and lacks its own delivery team and payment infrastructure.

Payment x Indonesia’s payment major players include Go-Pay (Go-Jek’s payment arm), OVO (investment by Grab), LinkAja and DANA (backed by Ant Financial). The major shareholders of JD.id are JD.com and Provident Capital (also an investor in Go-Jek). While JD invested USD100m in Go-Jek in 2017, JD.id announced in February 2020 that it had received an undisclosed amount of funding from Go-Jek and Go-Pay is now the e-wallet payment option on JD.id in Indonesia. x Although we believe the strategic relationship between JD and Go-Jek will mitigate the pressure that JD is facing on the payment front, JD mainly partners with third-party payment service providers in ASEAN (Zalopay [backed by VNG] and Momo Pay in Vietnam, and DANA and LinkAja in Thailand), which we think limits the scale of growth of its ecosystem as compared with Lazada and Shopee, which have their own payment apps.

Payment methods in Indonesia, Vietnam and Thailand Payment Shopee Lazada Tiki JD.id JD Central Indonesia Airpay, ShopeePay DANA Go-pay Vietnam Airpay, ShopeePay Lazada e-Wallet Zalopay, Momo Thailand Airpay, ShopeePay Lazada e-Wallet DANA, LinkAja

Source: Company data, Daiwa

JD.com (JD US): 5 June 2020

Logistics x In February 2019, Go-Jek further enhanced its strategic partnership with JD.id and last- mile delivery logistics joint venture J-Express (JX) to strengthen its logistics capabilities. JX will collaborate with Go-Jek’s crowdsourced courier network to provide cost-effective logistics coverage nationwide. The partnership will also involve collaborations in payment solutions, marketing, and IT with JD.id. JD also owns Jaya Ekspres Transindo, a logistics company in Indonesia. x Although JD also has a joint venture with Go-Jek, Company JX, we believe Lazada and Shopee have better logistics capabilities as they have their own logistics firms, namely Lazada eLogistics (LEL) and Shopee Express. In July 2019, 89% of orders were delivered the same day or next day from Lazada fulfilment centres, which is measured from the warehouse to metro areas, through LEL, excluding public holidays and weekends. Through JD’s x The difficulty of last-mile delivery in Indonesia is still a major concern for e-commerce partnership with Go-Jek, players as the country’s geography (more than 17,500 islands) often requires two JD may benefit in terms modes of transportation. Even Lazada and Shopee have to use third-party logistics to of last-mile and on- help with last-mile delivery. Hence, we think Go-Jek has an advantage in fulfilling last- demand deliveries mile delivery orders due to its high frequency of local services. Given JD’s close partnership with Go-Jek, we believe it may benefit in terms of last-mile and on-demand deliveries. x In other countries such as Vietnam and Thailand, Tiki’s (backed by JD) orders are fulfilled by TikiNow, while JD Central’s orders are fulfilled by JD Express and other third- party couriers. x In the long run, we believe Big Data analytics will be the key success factor for e- commerce logistics, and Lazada has a clear advantage over peers given it has the most comprehensive logistics network in ASEAN and a large dataset due to its strong presence.

Logistics network in Indonesia, Vietnam and Thailand Logistic Shopee Lazada Tiki JD.id JD Central Indonesia Shopee express, Third parties LEL Express (Lazada eLogistics), Third parties JX company Vietnam Shopee express LEL Express, GHN express, Ninja Van, BEST TikiNOW Inc, etc Thailand Shopee express LEL express JD express, Kerry, DHL, aCommerce

Source: Company data, Daiwa

Source: iPrice

JD.com (JD US): 5 June 2020

Source: iPrice

Cross-border e-commerce Unlike its peers, JD x We believe JD’s supply chain ecosystem still has ample room for expansion given JD lacks a comprehensive Worldwide lags Tmall Global and Kaola (before its acquisition from Alibaba). ecosystem Lacks complete ecosystem x JD lacks the user traffic support that Shopee has given SEA’s broad ecosystem. In 4Q19, JD.id was ranked sixth and Tiki fifth in terms of monthly web visits, according to iPrice.

JD.id: monthly web visits (4Q19) Tiki: monthly web visits (4Q19) 80 73 40 38 68 70 35 60 30 28 27 27 25 50 25 39 40 20 28 27 15 30 10 10 20 14 5 10 0 0 Shopee VN Thế Giới Di Sendo Lazada VN Tiki Ði?n máy Shopee Tokopedia Bukalapak Lazada Blibil JD ID Động Xanh Source: iPrice Source: iPrice

Category expansion x Judging from the interface of JD.id and Tiki, we note that 3C electronics remain the key product category on JD’s platform. In our view, JD may face challenges if it tries to gain a strong foothold in other categories. x Lazada has the highest number of product listings of 200m across 6 core markets.

JD.id: interface Tiki: interface

Source: Company data Source: Company data

JD.com (JD US): 5 June 2020

In terms of investment in ASEAN, JD mainly focuses on e-commerce and local services investments in Southeast Asia. JD has invested in JD.id (Indonesia), JD Central (Thailand), Tiki (Vietnam), Traveloka (Indonesia), Go-Jek (Indonesia), and the Asianparent (Singapore).

JD: major investments in ASEAN countries

Payment E-commerce Games Others

Singapore theAsianparent

Indonesia JD. ID Traveloka Gojek

Thailand JD Central

Philippines

Vietnam Tiki

Malaysia

Source: Daiwa

We believe JD is likely to Since JD lacks a comprehensive ecosystem, unlike its peers, we believe JD is likely to invest in local services invest in local services (such as ride-hailing service providers Go-Jek and travel platform and enterprise solutions Traveloka) and enterprise solutions as a gateway to acquire users for its e-commerce as a gateway to acquire business. users for its e-commerce business

JD: number of investments (global) in 2019 3.5 3 3.0

2.5 2 2 2 2.0

1.5 1 1 1 1 1 1.0

0.5

0.0 E-commerce Enterprise solution Local services Automotive Logistic Utility Hardware Advertising Agricultural Source: IT Juzi and Deep Echo

JD.com (JD US): 5 June 2020

Valuation We reiterate our Buy (1) call and TP of USD65, based on a 25x PER applied to 2020-21E JD retail’s NOPAT, and JD Finance and JD’s Logistics’ valuation attributable to JD.com.

2020E 2021E Average JD Retail (USDbn)

Operating profit (CNYbn) 24.2 31.0

Tax 20% 20%

NOPAT (CNY bn) 19.3 24.8 22.0 Target PER 27.0x 23.0x 25.0x Valuation 93.8 102.5 79.3

JD Finance - valuation (USDbn) 19.8 JD stake 36% Holding discount 30% Valuation - attributable to JD 5.0

JD Logistics (USDbn)

Valuation of the 18.6% stake sold (USDbn) 2.5 Stake sold 18.6% JD Logistics - valuation 13.4 JD stake 81.4% Holding discount 30% Valuation attributable to JD 7.7

Plus: Net cash (USDbn) 5.3

SOTP valuation for JD (USDbn) 97.2 No. of shares (m) 2,995 ADS conversion ratio 2.0

Implied SOTP-based target price for JD (USD) 64.9 Source: Daiwa Estimates

Risks The key risk to our investment case for JD is macro uncertainty due to COVID-19.

In an ASEAN context, we note the following risks: x Market-share losses by JD’s investees in key markets such as Indonesia, Thailand, and Vietnam. x Given JD investees’ lack of in-house logistic and payment infrastructure, the company may need to invest further in key markets such as Indonesia and Vietnam, which could lead to a prolonged period of subdued profitability.

JD.com (JD US): 5 June 2020

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Jiro IOKIBE (852) 2773 8702 [email protected] Shipbuilding; Machinery Co-head of Asia Pacific Research Mike OH (82) 2 787 9179 [email protected] John HETHERINGTON (852) 2773 8787 [email protected] Banking; Capital Goods (Construction and Defence); REITs, Utilities; Steel Co-head of Asia Pacific Research JH LEE (82) 2 787 9838 [email protected] Craig CORK (852) 2848 4463 [email protected] Consumer/Retail – Cosmetics Regional Head of Asia Pacific Product Management Thomas Y KWON (82) 2 787 9181 [email protected] Patrick PAN (852) 2773 8805 [email protected] Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Games Strategy (China) SK KIM (82) 2 787 9173 [email protected] Kevin LAI (852) 2848 4926 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware Chief Economist for Asia ex-Japan; Macro Economics (Regional) Henny JUNG (82) 2 787 9182 [email protected] Eileen LIN (852) 2773 8736 [email protected] IT/Electronics – Semiconductor/Display and Tech Hardware (Small/Mid Cap); Chemicals Macro Economics (Regional) Minjoo KANG (82) 2 787 9176 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Media Head of Automobiles; Transportation and Industrials (Hong Kong/China) Fiona LIANG (852) 2532 4341 [email protected] TAIWAN Industrials (Hong Kong/China) Rick HSU (886) 2 8758 6261 [email protected] Leon QI (852) 2532 4381 [email protected] Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Regional Head of Financials, FinTech and HealthTech; Banking; Diversified financials; (Regional) Insurance (Hong Kong/China) Frank FANG (886) 2 8758 6257 [email protected] Kevin JIANG (852) 2532 4383 [email protected] Banking; Diversified financials; Insurance Banking (China) Steven TSENG (886) 2 8758 6252 [email protected] Susie LIU (852) 2773 8745 [email protected] IT/Technology Hardware (Automation and PC Hardware) Diversified financials (China) Kylie HUANG (886) 2 8758 6248 [email protected] Anson CHAN (852) 2532 4350 [email protected] IT/Technology Hardware (Handsets and Components) Consumer (Hong Kong/China) Helen CHIEN (886) 2 8758 6254 [email protected] Adrian CHAN (852) 2848 4427 [email protected] Small/Mid Cap Consumer (Hong Kong/China) Anita LI (886) 2 8758 6256 [email protected] Jonathan HO (852) 2848 4056 [email protected] Small/Mid Cap Consumer (Hong Kong/China)

Andrew CHUNG (852) 2773 8529 [email protected] INDIA Head of Gaming (Hong Kong/China) Punit SRIVASTAVA (91) 22 6622 1013 [email protected] John CHOI (852) 2773 8730 [email protected] Head of India Research; Strategy; Banking/Finance Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Saurabh MEHTA (91) 22 6622 1009 [email protected] Carlton LAI (852) 2532 4349 [email protected] Capital Goods; Utilities Small/Mid Cap (Hong Kong/China)

Candis CHAN (852) 2848 4976 [email protected] SINGAPORE Internet; Education (Hong Kong/China) Ramakrishna MARUVADA (65) 6228 6742 [email protected] Dennis IP (852) 2848 4068 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Head of Hong Kong/China Energy (PURE, Oil and Gas, Coal, EV Materials); Regional Head of Power, Utilities, Renewable and Environment (PURE) David LUM (65) 6228 6740 [email protected] Anna LU (852) 2848 4465 [email protected] Banking; Property and REITs Power, Utilities, Renewable and Environment (PURE) – IPP, Wind and Nuclear (China) Jame OSMAN (65) 6228 6744 [email protected] Jonas KAN (852) 2848 4439 [email protected] Transportation; Plantations; Consumer Head of Hong Kong and China Property Cynthia CHAN (852) 2773 8243 [email protected] PHILIPPINES Property (China) Micaela ABAQUITA (63) 2 737 3021 [email protected] Selwyn CHENG (852) 2773 8716 [email protected] Banking; Property Custom Products Group Renzo CANDANO (63) 2 737 3022 [email protected] Jack CHAN (852) 2773 8731 [email protected] Consumer Custom Products Group Gregg ILAG (63) 2 737 3023 [email protected] Utilities; Energy; Industrial Conglomerates CHINA Enze DAIO (86) 21 6841 3315 [email protected] JAPAN IT/Electronics - Hardware (China) Yukino YAMADA (81) 3 5555 7295 [email protected] Colin YANG (86) 21 6841 3286 [email protected] Strategy (Regional)

Power, Utilities, Renewable and Energy (PURE) – Hydro, Solar (China)

JD.com (JD US): 5 June 2020

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JD.com (JD US): 5 June 2020

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This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. Daiwa Securities Group Inc., its subsidiaries or affiliates do and seek to do business with the company(s) covered in this research report. Therefore, investors should be aware that a conflict of interest may exist. The following are additional disclosures.

Ownership of Securities For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationship For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Viva Biotech Holdings (1873 HK).

*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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Relevant Relationship (DHK) DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.

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Thailand This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”). This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents. The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, TNS, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user. TNS, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of

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conflict of interest that may affect the objectivity of this research.

United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.

Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.

Germany This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.

Bahrain This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113

United States This research is distributed into the United States directly by Daiwa Capital Markets Hong Kong Limited and indirectly by Daiwa Capital Markets America Inc. (DCMA), a U.S. Securities and Exchange Commission registered broker-dealer and FINRA member firm, exclusively to “major U.S. institutional investors”, as defined under Rule 15a-6 promulgated under the U.S. Securities Exchange Act of 1934, as amended, and as interpreted by the staff of the U.S. Securities and Exchange Commission (SEC). This report is not an offer to sell or the solicitation of any offer to buy securities. U.S. customers wishing to effect transactions in any designated investment discussed in this report should do so through a qualified salesperson of DCMA. Non-U.S. customers wishing to effect transactions in any designated investment discussed in this report should contact a Daiwa entity in their local jurisdiction. The securities or other investment products discussed in this report may not be eligible for sale in some jurisdictions. Analysts employed outside the U.S., as specifically indicated elsewhere in this report, are not registered as research analysts with FINRA. These analysts may not be associated persons of DCMA, and therefore may not be subject to FINRA Rule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account. ADDITIONAL IMPORTANT DISCLOSURES CAN BE FOUND AT: https://daiwa3.bluematrix.com/sellside/Disclosures.action

Ownership of Securities For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. Investment Banking Relationships For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.

Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analyst is named on the report); and no part of the compensation of such analyst (or no part of the compensation of the firm if no individual analyst is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 70.04% Hold** 24.21% Sell*** 5.75% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2020. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. x In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. x In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. x For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. x There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. x There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. x Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us. Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association