Friday, September 26, 2014
China Merchants Securities (HK) Company Report Hong Kong Equity Research
Cheetah Mobile (CMCM US) Jeff HAO 852-31896117 The rising international mobile internet platform [email protected] ■ Leading mobile internet company in global scale in terms of MAU ■ Deep and fast expanding knowledge and exposure overseas WHAT’S NEW Initiation ■ High visibility and huge upside for mobile monetization
Large mobile user base with deep overseas exposure We believe Cheetah Mobile (CM) to be among the first China Internet BUY companies that benefiting from overseas expansion. As at 2Q2014, CM Previous N/A achieved 284mn mobile MAU. We expect the mobile MAU to reach 380mn and 479mn in 4Q2014 and 2015 respectively. There are only five Price US$20.71 internet companies globally that have more mobile MAU than CM: 12-month Target Price US$36.70 ( 77.2%) Facebook, Whatsapp, Baidu, Wechat and Skype. For overseas market, (Potential upside) CM is one of the few successful China Internet companies in overseas Previous N/A market, with 67% (190mn) of mobile MAU from overseas.
Significant mobile monetization opportunity Price Performance In spite of the large mobile user base, mobile revenue only represented (%) 1.5 CMCM Nasdaq100 20% of total revenue in 2Q2014. We expect mobile revenue to contribute more than 50% of total revenue in 2015. CM has found a proven mobile 1 monetization model. On the one hand, CM has proved its distribution capability based on its mobile app matrix strategy; CM is also proactively 0.5 building big data analysis capability based on large user behaviour data 0 base to achieve efficient targeted marketing. We therefore believe CM has a high visibility of mobile monetization outlook. -0.5 May/14 Jun/14 Jul/14 Aug/14 Sep/14
Catalysts and Risks Source: bigdata Catalysts: 1) more successful mobile monetization; 2) faster mobile user % 1m 6m 12m base growth. Risks: 1) competition leads to delay in monetization; 2) CMCM US (15.1) 13.8 - policy and different user behaviour risk in overseas market. Nasdaq 100 1.1 6.6 -
Valuation Industry Internet We initiate CM with BUY and PEG based TP of US$36.7. Our TP is S&P 500 1980 based on 123% 2014-2016E Non-GAAP EPADS CAGR and 0.37x PEG. Nasdaq100 4030 Our target PEG has 54% discount to peers average of 0.8x PEG. CM is Key Data trading at 0.21x PEG. Our 2014-2016 EPADS estimates are higher than 52-week range (US$) 12.50-30.77 consensus 1%, 4% and 5% respectively due to optimistic mobile Market cap (US$ mn) 3,390.19 monetization outlook. Our TP implies 44x 2015E and 18x 2016 E PE. Avg. daily volume(000’) 973 BVPS (RMB) 0.52 Financials Shareholdings Structure RMB mn 2012 2013 2014E 2015E 2016E GIC Private Limited 12.66% TCH Copper Limited 8.22% Revenue 288 750 1,653 3,418 6,220 T Rowe Price Associates 5.45% Growth (%) 106% 160% 120% 107% 82% OZ Management LP 4.90% 29 90 218 714 1,704 Non GAAP Net profit No. of shares outstanding (mn) 173.71 N/A 209% 142% 227% 138% Growth (%) Free float 10% Non-GAAPEPADS (RMB) 0.09 0.54 1.56 4.93 11.59 Related Research DPADS (RMB) 0.00 0.00 0.00 0.00 0.00 P/E (x) 1,576.4 275.4 95.1 30.1 12.8 P/B (x) 96.9 28.3 25.5 14.1 6.7 ROE (%) 18% 15% 27% 47% 53% Source: Company data, CMS (HK) estimates
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公司报告 招商证券（香港）有限公司
猎豹移动(CMCM US) 郝云帆 852-31896117 风口上的紫牛 [email protected] ■ 风口：工具+移动+海外市场 最新变动 首次覆盖 ■ 紫牛：敏锐的产品嗅觉+优秀的用户体验
■ 风口+紫牛=世界级移动互联网平台公司和巨大的移动端货币化空间 买入 庞大的移动用户基数及深厚的海外市场背景 凭借庞大的用户基数和深厚的国际化背景，我们相信猎豹移动将是最先受 前次评级 N/A
益于国际化红利的中国互联网公司之一。截止2Q2014猎豹移动拥有2.84亿 股价 US$20.71 移动MAU，我们预计4Q2014将达到3.8亿，2015年将达到4.79亿。根据我们 12个月目标价 的统计，截止2Q2014全球范围内移动端MAU超过猎豹移动的公司只有5家： US$36.70 ( 77.2%) Facebook, Whatsapp, Baidu，Wechat 以及Skype. 从海外市场的角度来 (上涨空间) 看，猎豹移动67%（1.9亿）的移动MAU来自海外，是目前在海外移动市场最 前次目标价： N/A 成功的中国互联网公司。 股价表现 巨大的移动货币化空间 (%) 尽管猎豹移动已经拥有庞大的用户群，但是截止2Q2014，猎豹移动来自移 1.5 CMCM Nasdaq100 动端的收入仅占总收入的20%。我们预计2015年移动端收入占收比将超过 50%。猎豹移动已经找到了“三级火箭”货币化模式。而猎豹移动的主要货 1 币化手段将是游戏和广告。猎豹移动一方面已经通过应用矩阵策略证明了 0.5 其强大的分发能力；另一方面，猎豹移动也在迅速建立基于海量用户行为 的大数据分析能力，以确保准确及无干扰的推送。在具备了分发和精准推 0
送能力的前提下，我们相信猎豹移动手机端货币化前景的可见度已经很 -0.5 高，并且潜力巨大。 May/14 Jun/14 Jul/14 Aug/14 Sep/14
催化剂及风险 资料来源：贝格数据 催化剂：1）移动端货币化超预期 2）移动端用户数增长超预期。风险： % 1m 6m 12m CMCM US (15.1) 13.8 - 1）竞争导致用户增长及货币化进程放缓 2）海外政策及用户行为风险 Nasdaq 100 1.1 6.6 -
估值 行业：互联网 我们首次给予猎豹移动买入评级，目标价US$36.7。我们的目标价是基于 标普500指数 1980 123% 2014-2016年EPADS CAGR以及0.37x PEG。我们相信0.37xPEG是合理 纳斯达克100指数 4030 重要数据 的，因为0.37xPEG比中国互联网平台公司2015年平均0.8x PEG具有54%的折 52周股价区间（美元） 12.50-30.77 扣。猎豹移动目前股价相当于0.21x PEG。我们2014-2016年EPADS预测分别 市值(百万美元) 3,390.19 比市场高1%，4%及5%，主要因为我们对猎豹移动端货币化乐观的展望。我 日均成交量（万股） 97.3 们的目标价相当于44x 2015E及18x2016E PE。 每股净资产（人民币） 0.52 主要股东 盈利预测及估值 GIC Private Limited 12.66% TCH Copper Limited 8.22% 人民币百万元 2012 2013 2014E 2015E 2016E T Rowe Price Associates 5.45% 营业额 288 750 1,653 3,418 6,220 OZ Management LP 4.90% 同比增长(%) 106% 160% 120% 107% 82% 总股数 （百万股） 173.71 Non-GAAP 净利润 29 90 218 714 1,704 自由流通量 10% 同比增长(%) N/A 209% 142% 227% 138% 相关报告 Non-GAAP 每股盈利(元) 0.09 0.54 1.56 4.93 11.59 每股股息(元) 0.00 0.00 0.00 0.00 0.00 市盈率(X） 1,576.4 275.4 95.1 30.1 12.8 市净率(X) 96.9 28.3 25.5 14.1 6.7 ROE(%) 18% 15% 27% 47% 53% 资料来源：公司资料,招商证券（香港）预测
彭博终端报告下载: CMHK
Investment thesis Leading global mobile applications developer CM is a leading China and global developer of mobile applications. According to App Annie, CM remained in the top ten rankings of Google Play non-gaming application downloads for seven consecutive months in 2014, during which it was ranked no.2 in July. As of 2Q2014, CM’s MAU of all its mobile applications reached 284mn. By applying the mobile app matrix strategy, CM deployed a series of mobile applications targeting mobile phone optimization, management and security, including Clean Master, CM Security, Battery Doctor and Photo Grid. Apart from its self- developed applications, CM is still actively acquiring third-party applications in line with its strategic direction of development.
Great beneficiary of internationalization Since the Android application market in China is relatively closed and with keen competition, the overseas market has become more and more important for the Chinese developers. However, owing to the diverse promotion channels as well as language and cultural differences of the overseas market, it has not been smooth sailing for the Chinese developers and Internet companies to develop in the overseas market. In view of CM’s extensive user base overseas, we believe CM will become one of the greatest beneficiaries of Chinese mobile applications going abroad. CM is one of the few Chinese mobile Internet companies specializing in the overseas market. CM started developing in the overseas market in 2012, and was one of the earliest Chinese Internet companies deploying in the overseas mobile Internet market. CM was the top company in the rankings of Google Play Chinese mobile application developers. Clean Master has been operating in the overseas market ever since it became online officially in 2012, but was only formally launched in China market in 4Q2013. As of 2Q2014, CM has 67% of mobile MAU from overseas.
Huge potential of monetization We expect CM’s mobile MAU to reach 380mn and 479mn in 4Q2014 and 2015 respectively. Based on the massive user base and rich portfolio of mobile applications, we are upbeat towards the monetization potential of CM. The monetization model of CM’s “three-level rocket” has begun to take shape. Clean Master and CM Security have basically completed the initial accumulation. CM will launch more mobile applications and services with strong attributes of monetization to strengthen the capability of monetization in the future. We expect to see more significant results of monetization from 3Q. The monetization model of CM mainly relies on mobile games and mobile advertising. As for mobile games, acting as an agent to distribute the domestic games overseas and sharing the revenue will be the main income source of mobile games. As for advertising, it will be primarily through the promotions by applications to derive advertising income in the near term. In the long run, monetization methods including searching and e-commerce will be explored.
Valuation We adopted the PEG valuation method for CM as we reckoned this would be more suitable for the high-growth Internet companies like CM. We initiate CM with BUY and PEG based TP of US$36.7. Our TP is based on 123% 2014-2016E CAGR and 0.37x PEG. We believe 0.37x PEG is reasonable, as it has 54% discount to peers average of 0.8x PEG in 2015, mainly reflecting that: 1) CM differentiates from comparable companies no matter in business scale or business maturity; 2) CM’s monetization uncertainty in the overseas mobile market. Our TP implies 44x 2015E and 18x 2016E PE.
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Focus charts Figure 1：Revenue distribution and growth (RMB000’) Figure 2：Revenue % of PC and Mobile
Internet security servises and others IVAS Mobile PC Online marketing services Total revenue growth
7,000,000 180% 100% 90% 160% 6,000,000 80% 140% 5,000,000 70% 120% 60% 4,000,000 100% 50%
3,000,000 80% 40% 30% 60% 2,000,000 20% 40% 10% 1,000,000 20% 0%
0 0% 2012 2013 2014E 2015E 2016E
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Figure 3：Mobile MAU (mn) Figure 4：Global popular mobile apps MAU (mn)
1200 700 1000 600 800 500
600 400
300 400
200 200
100 0
0 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3E 2014Q4E 2015E 2016E
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Figure 5：CM’s global download rankings July 2014 Figure 6：Peers valuation comparison
PE PEG Name Mkt Cap (US$m) FY14E FY15E FY14E FY15E TENCENT 147,627 37.1 28.1 1 0.8 QIHOO 360 10,148 33.5 20.4 1 0.6 BAIDU 77,373 35.4 25.3 1.5 1.1 YY 5,088 34 23.8 0.3 0.2 CTRIP 8,495 62.9 38.8 2.1 1.3 Average 40.6 27.3 1.2 0.8 CHEETAH MOBILE 3,344 84.6 28.8 0.63 0.21
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
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Mobile business Leading global mobile applications developer CM is a leading China and global developer of mobile applications. According to the statistics of App Annie, CM remained in the top ten rankings of Google Play non-gaming application downloads for seven consecutive months in 2014, during which it was ranked no.2 in July. CM deployed a series of mobile applications targeting mobile phone optimization, management and security, including Clean Master, CM Security, Battery Doctor and Photo Grid. With the advanced data analysis techniques and excellent user experience, its star product Clean Master already recorded a cumulative of over 250mn downloads within a year or so. Clean Master was ranked no.4 in Google Play July download rankings. Figure 7 GooglePlay non-gaming application monthly download rankings (by developers)
Source: Googleplay, CMS (HK)
Figure 8 GooglePlay non-gaming application monthly download rankings (by applications)
Source: Googleplay, CMS (HK)
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Figure 9 Global popular mobile apps MAU (mn) Figure 10 Mobile MAU (mn) 1200 700 1000 598 600 800 479 500 600 382.1 400 341.2 400 284.3 300 222.5 200 200 166 120.3 80.9 0 100 45.8 0 2013Q1 2013Q2 2013Q3 2013Q4 2014Q1 2014Q2 2014Q3E2014Q4E 2015E 2016E
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Case Study – Clean Master Clean Master is a type of mobile applications for system optimization, with main functions including garbage removal, memory cleanup, application management and acceleration. We attribute the success of Clean Master to two points. Firstly, it targeted the genuine needs of users accurately, in particular the Android users. The company discovered the most popular key word on Google Play under tools applications was clean instead of antivirus, and there was no good product for doing this yet. CM took advantage of this market space and utilized its technology and experience in PC. As a result, Clean Master was launched in 2012. The company also understood the psychological preference of overseas users for simple products with focused functions instead of products with too many functions. Therefore, Clean Master managed to attract a large crowd of users within a short period of time based on its excellent product design and strong functions. Secondly, it closely followed the needs of users on Google Play so as to build up its brand by providing timely one- on-one responses. Some users would also write down very long comments to express their satisfaction or dissatisfaction. The company would take it very seriously and already set up a team to follow the user feedbacks on Google Play. At present, the team is communicating with users by more than ten languages in various countries.
Figure 11 Clean Master team responds to users with unfavorable comments
Source: Googleplay, CMS (HK)
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Figure 12 CM’s main products
Source: Googleplay, CMS (HK)
Application of matrix strategy Comparing to most internet/mobile internet companies that only reply on one super app, Cheetah Mobile applies matrix strategy to its combination of mobile internet products. In particular, Cheetah Mobile has rolled out series of mobile apps for the improvement, management and security of handsets. Clean Master, its first product launched overseas, has become a super app. The advantages in applying matrix strategy include the follows, 1） Wider coverage on users for maximizing the exposure of Cheetah’s products. Since single product (especially tool) can only fulfil a particular demand of users, the growth in users may peak easily. While a product mix can fulfill different demand and cover more users. In addition, single product can only fulfill the demand of a particular segment (age, location or gender) of users. The coverage of single user segment may limit the potential of promotion and monetization as it is based on existing base of users, whilst a product mix can fulfill the demand of different user groups and have a wider coverage. 2） Establishing effective distribution system. With the support from a large and wide user base, single product or product mix as a whole can become effective distribution channels for mobile apps. For example, Clean Master, a core product of Cheetah, has been used for the promotion of CM Security, another product of the company, since January 2014. The MAU of CM Security increased from 0 to 23 mn in only 3 months. Solo Launcher is another example. The app has been promoted by the apps of Cheetah Mobile since late August, and it can be seen from the ranking that the distribution of the mobile apps of Cheetah Mobile has been very effective.
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Figure 13 Matrix of products of Cheetah Mobile
Source: Company data, CMS (HK)
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Figure 14 Effect of promotion to CM Security through Clean Master
Starting point of promotion
Source: Appannie, CMS (HK)
Figure 15 Promotion effect to Solo Launcher through matrix of Cheetah apps
Starting point of promotion
Source: Appannie, CMS (HK)
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Keen competition in domestic market, going overseas becomes common strategy Owing to the unified global development platform of App Store and Google Play, mobile internet is inherently an internationalized market. But in China, the third-party application stores have replaced Google Play as the main distribution channels of Android platform. The popularity of such stores has made China a relatively closed and independent market, hindering the internationalization of mobile applications in China. On the other hand, the mobile application market of China has very keen competition. Taking mobile games as examples, according to the statistics of 91.com and GameLook, there were approximately 1900 mobile games in 2013, among which only 62 games achieved monthly revenue of more than RMB10mn, with a success rate of just 3.2%. Hence the overseas market will have growing importance for the Chinese developers in the future. Figure 16 Global market share of smart phone OS Figure 17 Market share of third-party application stores in China
5.00% 6.50% 7.60% 14.80% Baidu Android Qihoo360 41.50% iOS 16.60% Tencent Others Wandoujia
80.20% Other 27.80%
Source: iResearch, CMS (HK) Source: iResearch, CMS (HK)
Scarcity of internationalized channels, directly benefiting CM Nevertheless, owing to language, culture and the lack of promotion channels, Chinese internet companies and mobile game companies are achieving limited effects of promotion overseas, including internet companies like Baidu, Tencent and 360, which are not developing satisfactorily in the international arena. As for China’s mobile game products, the main international channel is through the domestic agents with overseas resources or by cooperating directly with overseas agents. As for China’s mobile application products, there are still no satisfactory overseas promotion channels yet. Furthermore, though we can see there are some Chinese mobile game and mobile application developers entering the overseas market, even more overseas users of Chinese mobile games and mobile applications come from Japan, Korea and South East Asian regions, of which the culture is similar to Chinese culture. For the more mature overseas markets of Europe and US where the quality of customers is higher, it would be even more difficult for Chinese mobile application developers to enter. CM started developing in the overseas market in 2012, and was one of the earliest Chinese Internet companies deploying in the overseas mobile Internet market. Clean Master has been operating in the overseas market ever since it became online officially in 2012, but was only formally launched in China market in 4Q2013. As of 2Q2014, CM has 67% of mobile MAU from overseas. CM was the top company in the rankings of Google Play Chinese mobile application developers.
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Figure 18 CM’s shareholding structure
Other 26%
Kingsoft 46% Management 11%
Tencent Xiaomi 15% 1% Baidu 1%
Source: Bloomberg, CMS (HK)
Figure 19 Google Play rankings of mobile applications for Chinese internet companies China Rank Global Rank Applications Publisher Category
1 4 Clean Master Tools
2 9 Battery Doctor Tools
3 16 CM Security Tools
4 21 Photo Grid Photography
5 28 DU Speed Booster Tools
6 29 Carema 360 Photography
7 32 Wechat Communication
8 33 DU Battery Saver Tools
9 34 Mobogenie Market Tools
10 38 GO Launcher Tools
11 44 GO Keyboard Tools
12 51 360 Security Tools
Source: Appannie, CMS (HK)
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Figure 20 Reviews and ratings of CM’s applications surpassing other applications on the rankings Applications Google Play Ranking Avg Rating Review
Whatsapp 1 4.4 18,003,459
Facebook 2 4.0 21,016,223
Messenger 3 4.0 9,183,911
Clean Master 4 4.7 14,794,998
Instagram 5 4.5 14,852,879
Skype 6 4.1 4,734,552
Retrica 7 4.3 2,144,820
Viber 8 4.3 4,959,061
Line 9 4.2 4,141,168
Flashlight by Surpax 10 4.6 2,370,306
Battery Doctor 20 4.5 3,292,057
Du battery saver 22 4.5 3,105,760
CM Security 26 4.7 4,932,317
Du speed booster 28 4.5 2,320,805
Wechat 48 4.2 2,651,225
Source: Appannie, CMS (HK) Huge room for mobile monetization Benefiting from the massive number of users, the broad user groups, the extensive product lines and the comprehensive coverage of overseas markets, we reckon CM has huge potential of monetization in the mobile internet. We believe CM will adopt the proven “three-level rocket” model from PC internet to develop monetization. The so-called “three-level rocket” refers to the use of tools products with strong customer demand but weak monetization capability to attract a massive number of users, then directing the users to products and services with stronger monetization capability through the interactive push between products. Qihoo 360 and Sogou have also adopted similar business models. Figure 21 Three-level rocket monetization model of Qihoo 360 and Sogou
Source: CMS (HK)
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As for CM, with the growing popularity of Clean Master and CM Security, the bottom level of deployment in tools applications should have been completed (“Clean Master +CM Security”). CM has already started promoting products with stronger monetization capability on the basis of massive users at the bottom level, e.g. CM mobile browser and CM Locker. We expect CM to launch or acquire more similar applications in the future. Figure 22 CM’s three-level rocket monetization model
Source: Company data, CMS (HK)
The monetization methods of CM mobile applications include mobile games and mobile advertisements. As for mobile games, CM has successfully become the agent for several games and started promotion. At present, revenue of mobile games is mainly from the mainland. CM has already started building its team for overseas mobile games in 2Q. We expect CM’s revenue of mobile games to start growing significantly from 3Q.
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Figure 23 Performance of mobile games distributed by CM
Source: Appannie, CMS (HK)
Figure 24 Performance of “Don’t Tap The White Tile” distributed by CM
Source: Appannie, CMS (HK)
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As for advertising, it will be mainly through the promotions by applications to derive advertising revenue in the near term. With the growing number of users of its products, CM will gradually open up the advertising space in its products. In the mid to long run, by way of products like browsers and mobile desktops, CM will direct the users towards products in areas including mobile search, mobile e-commerce, mobile payment and O2O to generate the related advertising revenue. Figure 25 Clean Master promotion in application Figure 26 Clean Master promotion in application
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Figure 27 Potential advertising space in CM Browser and CM Locker
Source: Company data, CMS (HK)
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Building long-term competitiveness upon big data analysis On the basis of massive users, CM has already started building a big data analysis platform based on user behavior. At present, CM is building two systems of big data analysis. The first is Facemark, which will undertake categorization and big data analysis based on user preference of mobile applications. The second is Crossover, in which CM will send out classified advertisements based on different user habits and scenarios. In the long run, big data analysis based on user behavior will be the core competitiveness and the monetization basis of CM.
Figure 28 App cloud of user behavior analysis
Source: Company data, CMS (HK)
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PC business The original name of CM was Kingsoft Internet Security. At present, it is the second largest PC internet security company in China, and is also one of the earliest Chinese internet security companies. CM started its business in PC internet security, and Kingsoft Antivirus, its flagship product, was first released in 1999. In 2010, Kingsoft Antivirus announced that it would be free permanently. Later, CM regained its second position in Chinese internet security market through product innovation, reform of internal management and ways of industry cooperation. Figure 29 Major PC security software market shares in China 100% 92.16% 90% 80% 70% 60% 50% 40% 30% 24.55% 22.87% 20% 14.34% 10% 2.60% 0% 360 Internet Kingsoft Tencent Rising Baidu Securitiy
Source: iResearch, CMS (HK)
Kingsoft Antivirus, CM’s flagship security product, was first released in 1999. At that time, CM was not established yet, so Kingsoft Antivirus was released by Kingsoft. After the return of Mr. Lei Jun, Kingsoft Security, the internet security division of Kingsoft, was established, which was then merged with Cattle Network to form Kingsoft Internet Security in 2010. Kingsoft Internet Security was renamed as Cheetah Mobile just before its listing in 2014. Figure 30 Development history of CM
Source: Company data, CMS (HK)
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Products and business models The main PC products of CM include Kingsoft Antivirus, Kingsoft Internet Security, CM Browser and navigation homepage Duba.com. CM’s PC revenue mainly derives from three areas: 1) online marketing revenue; 2) value- added services revenue; and 3) other revenue. Figure 31 CM’s PC business models
Source: Company data, CMS (HK) Online marketing CM mainly uses the navigation homepage Duba.com and CM Browser to direct traffic to the products, services or websites of other internet companies through hyperlinks, displayed advertising, search boxes and other forms of advertising. Figure 32 Navigation page Figure 33 CM’s PC browser
Search traffic referral Search traffic referral
Website traffic referral
Website traffic referral
E
- commerce trafficreferral Video traffic referral
Website traffic referral
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
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Figure 34 Vertical navigation websites under Antivirus navigation page
Source: Company data, CMS (HK)
Value-added services Revenue of value-added service mainly derives from the joint-operation revenue sharing of web games. CM directs users to the jointly operated web games through its own channels, which include: CM Browser, CM Game Center, navigation homepage Duba.com and security software popups.
Figure 35 CM games platform
Source: Company data, CMS (HK)
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Other revenue This is mainly derived from the membership fees of security software products and the revenue from the sales of security products by Kingsoft Japan, its affiliated company.
Figure 36 Membership fees of CM’s security products
Source: Company data, CMS (HK)
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Figure 37 Earnings estimates and financial indicators RMB ‘000 2012 2013 2014E 2015E 2016E Online marketing services 212,443 612,565 1,237,381 2,239,660 3,673,043 Internet value-added services 2,354 83,155 377,524 1,143,897 2,516,573 Internet security services & others 73,130 54,191 37,934 34,140 30,726 Revenues 287,927 749,911 1,652,839 3,417,697 6,220,342 Cost of revenues -71,560 -140,526 -394,700 -1,059,486 -2,114,916 Gross profit 216,367 609,385 1,258,138 2,358,211 4,105,426 Research and development -114,329 -217,846 -437,453 -751,893 -1,119,662 Selling and marketing -57,167 -201,504 -559,122 -751,893 -995,255 General and administrative -34,408 -97,817 -241,158 -375,947 -622,034 Operating profit (loss) 10,463 92,218 20,406 478,478 1,368,475 Interest income 3,263 7,077 16,827 30,016 61,478 Other income/expenses 1,033 11,393 - - - Income (loss) before taxes 14,759 110,688 38,143 508,493 1,429,953 Income tax benefit/(expenses) -4,915 -48,670 -8,243 -101,699 -285,991 Net profit to majority shareholders 8,847 52,690 29,900 406,795 1,143,963 Share-based compensation 20,287 37,396 188,359 307,593 559,831 Non-GAAP OP 39,597 182,304 238,665 1,192,865 3,072,269 Non-GAAP NP 29,134 90,086 218,259 714,388 1,703,794
Growth Total revenue 105.6% 160.5% 120.4% 106.8% 82.0% Gross profit 150.7% 181.6% 106.5% 87.4% 74.1% Operating profit -128.4% 781.4% -77.9% 2244.8% 186.0% Net profit to majority shareholders 132.6% 530.0% -51.8% 1260.5% 181.2% Non-GAAP Operating profit 416.8% 360.4% 30.9% 399.8% 157.6% Non-GAAP Net profit 219.4% 209.2% 142.3% 227.3% 138.5%
Revenue breakdown Online marketing services 74% 82% 75% 66% 59% Internet value-added services 1% 11% 23% 33% 40% Internet security services & others 25.4% 7.2% 2.3% 1.0% 0.5%
Cost as % of revenue Cost of revenues -24.9% -18.7% -23.9% -31.0% -34.0% Research and development -40% -29% -26% -22% -18% Selling and marketing -19.9% -26.9% -25.0% -22.0% -16.0% General and administrative -12.0% -13.0% -15.0% -11.0% -10.0% Tax -33.3% -44.0% 20.0% 20.0% 20.0%
Margin GP margin 75.1% 81.3% 76.1% 69.0% 66.0% OP margin 3.6% 12.3% 1.2% 14.0% 22.0% NP margin 3.4% 8.3% 1.8% 11.9% 18.4% Non-GAAP NPM 10.1% 12.0% 13.2% 20.9% 27.4% Non-GAAP OPM 10.7% 17.3% 12.6% 23.0% 31.0% Source: Company data, CMS (HK) estimates
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Financial analysis Revenue analysis The three sources of revenue of Cheetah Mobile: online marketing, internet value-added services (IVAS) and internet security services. Figure 38 Analysis on growth of revenue Figure 39 QoQ growth of segment revenue
RMB'000 Internet security services & others IVAS Online marketing services Online marketing services IVAS
800,000 200% Internet security services & others Revenue
700,000 150% 600,000
500,000 100%
400,000 50%
300,000 0% 200,000
100,000 -50%
3Q13 4Q13 1Q14 0 2Q13 2Q14 2011 2012 2013 2Q13 2Q14 Source: Company data, CMS (HK) Source: Company data, CMS (HK)
Online marketing services were the major source of revenue and monetization of traffic for Cheetah Mobile. The company effectively led the traffic of its mobile internet platform to the website of e-commerce customers and related search engines. In addition, it provided advertising services on its web portals for promoting the products and brands of its customers. The charging methods of the company mainly included (1) introduction fees by “per thousand searches”; (2) by clicking rate of advertisements; and (3) active distribution of advertisements to target user groups and charge based on cost per time (CPT), cost per click (CPC) and cost per sale (CPS). From 2011 to 2013, the proportion of revenue from online marketing services accounted for 17.1%, 73.8% and 81.7% of the total respectively. The YoY growth rates for 2012 and 2013 reached 788% and 188%, respectively. Internet value-added services (IVAS) were mainly provided through online games. The company released games in its game center since 3Q12, and it has released more than 400 games. There are two operating models of Cheetah for game business: joint operation or exclusive operation. Under the model of joint operation, the company shares revenue with game developers and does not pay any royalties and related promotion expenses, which is also the major operation model of the company. Under the exclusive operating model, the company pays royalties and patent fees to game developers and shares the expenses of operation and promotion. In 2013, revenue from internet value- added services increased by 3,433% and the proportion to total revenue reached 11%. Internet security services included game acceleration, real-time data restoration and membership fees. Under the rapid development of online marketing services and internet value-added services, the proportion of revenue from security services decreased.
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Figure 40 Breakdown of revenue 2Q14 Figure 41 Revenue from PC and mobile ends
Online marketing services IVAS Internet security services & others Mobile PC 100%
3% 80% 22% 60% 40% 20%
75% 0%
Source: Company data, CMS (HK) Source: Company data, CMS (HK) Cost analysis: Figure 42 Analysis on profit margins Figure 43 Analysis on cost structure
GPM OPM NPM Non-GAAP NPM Cost of sales R&D S&M G&A Operating profit
90% 100% 7.1% 4.5% 6.1% 3.5% 80% 90% 13.5% 18.7% 11.6% 16.9% 70% 80% 22.9% 8.6% 70% 25.4% 60% 35.4% 60% 17.9% 30.9% 50% 32.3% 50% 40% 40% 30% 33.5% 36.5% 24.6% 27.2% 30% 21.6% 20% 20% 10% 10% 18.5% 20.1% 18.8% 22.3% 21.5% 0% 0% 2Q13 3Q13 4Q13 1Q14 2Q14 2Q13 3Q13 4Q13 1Q14 2Q14
Source: Company data, CMS (HK) Source: Company data, CMS (HK)
The cost of principal business of Cheetah Mobile mainly included the cost of leasing bandwidth and IDC as well as employees’ remuneration, business and value-added tax directly related to its revenue. According to the quarterly financial data of the company, its gross margin increased to 78% in 2Q14 from 60% in 1Q12. The improvement in the historic gross margin was due to increased monetization in the PC internet products of the company. However, we estimate the gross margin of the company to fall on quarterly basis as revenue from the lower margin mobile end gradually increases. The operating costs of the company included R&D expense, cost of sales and general and administration expense. R&D expense mainly included the remuneration to design and development personnel of products. It was directly related to the cycle of product development and the pace of new products release. The company has been committed to the introduction of R&D personnel with experience and expertise for improving quality and user experience of its products. As a result, the R&D expense increased quickly and has been maintained at a higher proportion of revenue. We expect such trend to continue in the future. Cost of sales mainly included the expense of advertisement, events and payment to third-party channels for the marketing and promotion of new products. We expect the cost of sales to maintain rapid growth for fulfilling the need of expansion of the company. General and administration expense mainly included the expense of daily administration and lease of office premises as well as other operating expense. We expect general and administration expense to maintain steady growth and account for a decreasing proportion to revenue as efficiency of management improves.
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Analysis on balance sheet: Figure 44: Summary of cash balance and cash flow RMB mn 2012 2013 Cash 134 531 Short-term investment 40 56 Net cash flow from operating activities 46 198 Net cash flow from investment activities (51) (101) Net cash flow from financing activities 1 304 Source: Company data, CMS (HK) Cash and short-term investment were the major components of total assets of the company. The company has no interest-bearing debts and bank borrowings. In 2012 and 2013, the proportions of cash and short-term liabilities of the company reached 55% and 64% respectively. The major source of cash was IPO and investment from strategic shareholders. As a necessary means for financial management, the company invested its idle cash in short-term corporate wealth management products issued within China – such products were of high liquidity and the banks guaranteed the capital and income. This part of investment was reflected in the short-term investment. As the company will invest more cash in the development of new products (mainly through the recruitment of outstanding development personnel) and marketing activities for stepping up monetization, we believe it will optimize the allocation between cash and short-term investment and fulfill the needs of its operating activities and target of capital preservation. In addition, the company always focuses on the development of internet industry and will selectively invest for necessary M&As. The company has recorded net inflow of operating cash since 2012. Its net operating cash flow for 2012 and 2013 amounted to RMB45.79 mn and RMB198 mn respectively. The increasing inflow of operating cash indicated the continued monetization of the company’s internet business as well as the improvement in its financial management. In 2012 and 2013, the net cash expenditure on investing activities of the company amounted to RMB51.24 mn and RMB101 mn respectively. The objectives of investment were mainly purchase of hardware and equipment as well as the pre-IPO M&As. We believe the expenditure of the company in the two areas will continue to increase with its revenue. In 2012 and 2013, the pre-IPO financing activities of the company led to a cash inflow of RMB0.63 mn and RMB304 mn respectively, mainly through the issuance of preferred shares.
Valuation We adopted the PEG valuation method for CM as we reckoned this would be more suitable for the high-growth Internet companies like CM. We initiate CM with BUY and PEG based TP of US$36.7. Our TP is based on 123% 2014-2016E CAGR and 0.37x PEG. We believe 0.37x PEG is reasonable, as it has 54% discount to peers average of 0.8x PEG in 2015, mainly reflecting that: 1) CM differentiates from comparable companies no matter in business scale or business maturity; 2) CM’s monetization uncertainty in the overseas mobile market. Our TP implies 44x 2015E and 18x 2016E PE.
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Peers comparison PE PEG Name Ticker Price (HK$) Mkt Cap (US$m) FY14E FY15E FY14E FY15E TENCENT 700 HK 122.2 147,627 37.1 28.1 1.0 0.8 QIHOO 360 QIHU US 80.59 10,148 33.5 20.4 1.0 0.6 BAIDU BIDU US 220.68 77,373 35.4 25.3 1.5 1.1 YY YY US 91.03 5,088 34.0 23.8 0.3 0.2 CTRIP CTRP US 65.64 8,495 62.9 38.8 2.1 1.3 Average 40.6 27.3 1.2 0.8 CHEETAH MOBILE CMCM US 24.75 3,344 84.6 28.8 0.63 0.21 Source: Bloomberg, CMS (HK)
At the same time, we adopted the DCF valuation as an auxiliary valuation, which arrived at a TP of US$36.19 for CM. Key assumptions of DCF model
Beta 1.3 Risk-free interest rate (Rf) 4.3% Risk premium (Rp) 11.3% Tax rate 20% Cost of Debt 6.0% Cost of Equity 19.0% Perpetual growth rate (g) 3.0% WACC 19.0% Source: Bloomberg, CMS (HK)
FCF calculation RMBmn 2014E 2015 2016 2017 2018 2019 2020 2021 2022 2023 FCF 456 952E 2172E 2943E 4180E 4793E 5312E 5570E 5977E 6358E Discounted FCF total 12580 Terminal value 7198 Enterprise value 19778 Cash 1070 Equity value 20849 Per share (US$) 36.19 Source: Bloomberg, CMS (HK) estimates
Sensitivity analysis US$ WACC 18.0% 18.5% 19.00% 19.5% 20.0% 2.0% 37.5 36.4 35.3 34.3 33.3 2.5% 37.9 36.8 35.7 34.7 33.7 Growth 3.0% 38.4 37.3 36.2 35.1 34.1 3.5% 38.9 37.7 36.6 35.6 34.5 4.0% 39.4 38.3 37.1 36.0 35.0 Source: Bloomberg, CMS (HK)
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Financial Summary
Balance Sheet Profit & Loss Statement RMB million 2012 2013 2014E 2015E 2016E RMB million 2012 2013 2014E 2015E 2016E Current assets 260 765 1,338 2,506 4,868 Revenue 288 750 1,653 3,418 6,220 Cash & equivalents 134 531 998 1,945 4,043 Cost of sales -72 -141 -395 -1,059 -2,115 ST investments 40 56 56 56 56 Gross profit 216 609 1,258 2,358 4,105 Receivables 45 100 207 427 691 R&D costs -114 -218 -437 -752 -1120 Prepayments & others 38 76 76 76 76 Selling & marketing exp. -57 -202 -559 -752 -995 Deferred tax assets 3 2 2 2 2 Administrative exp. -34 -98 -241 -376 -622 Non-current assets 57 145 163 220 312 Op profit 10 92 20 478 1,368 Property, plant & equipment 15 31 65 129 225 Finance costs 3 7 17 30 61 LT investments 0 12 12 12 12 Other exp. 1 11 1 0 0 Intangible assets 21 33 17 10 6 Profit before tax 15 111 38 508 1,430 Goodwill 13 53 53 53 53 Tax -5 -49 -8 -102 -286 Other non-current fin. assets 1 9 9 9 9 Profit after tax 10 62 30 407 1,144 Deferred tax assets 6 7 7 7 7 Non-GAAP net profit 29 90 218 714 1704 Total assets 317 910 1,503 2,728 5,181 Non-GAAP EPADS (RMB) 0.09 0.54 1.56 4.93 11.59 Current liabilities 152 264 637 1,147 1,898 Payables 11 23 66 177 352 Accrued exp. & other payables 127 219 525 889 1,407 Ratios Deferred income 12 8 33 68 124 2012 2013 2014E 2015E 2016E Income tax payable 2 14 14 14 14 YoY growth rate Long-term liabilities 5 52 52 52 52 Revenue 106% 160% 120% 107% 82% Deferred income & others 4 12 12 12 12 Op profit n.a 781% -78% 2245% 186% Deferred tax liabilities 1 39 39 39 39 Net profit 133% 530% -52% 1261% 181% Total liabilities 157 316 689 1,199 1,949 Profitability Issued capital 0 0 0 0 0 Gross margin 75% 81% 76% 69% 66% Reserves 147 519 707 1,015 1,575 NP margin 3% 8% 2% 12% 18% Retained earnings 13 75 105 512 1,655 ROE 6% 10% 27% 47% 53% Total equity and liabilities 317 910 1,501 2,726 5,180 ROIC Liquidity 49% 35% 46% 44% 38% Cashflow Statement D/A 1.71 2.90 2.10 2.18 2.56 RMB million 2012 2013 2014E 2015E 2016E Liquid ratio 1.71 2.90 2.10 2.18 2.56 CF from OA 46 198 525 1,060 2,284 Quick ratio Changes in WC 2 25 267 289 487 Op efficiency 0.91 0.82 1.10 1.25 1.20 CF from IA -51 -101 -58 -113 -187 Asset turnover 6.45 7.47 8.00 8.00 9.00 Assets purchase -18 -34 -58 -113 -187 AR turnover 6.53 6.00 6.00 6.00 6.00 Assets disposal 0 0 0 0 0 AP turnover Acquisition of business 0 -53 0 0 0 Valuation ratios Providing loans to third parties -8 -20 0 0 0 PE 1,576.4 275.4 95.1 30.1 12.8 Recovering of loans 2 5 0 0 0 PB 96.9 28.3 25.5 14.1 6.7 Purchase of ST investments -95 -142 0 0 0 EV/EBITDA 455.2 121.8 76.2 22.5 9.4 Disposal of ST investments 71 145 0 0 0 Source: Company data, CMS (HK) estimates Others -3 -3 0 0 0 CF from FA 1 304 0 0 0 Proceeds from issue of original shrs 1 0 0 0 0 Proceeds from issue of pref. A shrs 0 0 0 0 0 Proceeds from issue of pref. B shrs 0 322 0 0 0 Dividends 0 -18 0 0 0 Net increase in cash & -5 402 467 948 2,097 equivalents Beginning balance 139 134 531 998 1945 Forex changes 0 -6 0 0 0 Cash & equivalents ending 134 531 998 1,945 4,043 balance
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Investment Ratings Rating Definition BUY Expected to outperform the market index by >10% over the next 12 months NEUTRAL Expected to outperform or underperform the market index by 10% or less over the next 12 months SELL Expected to underperform the market index by >10% over the next 12 months
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