May 27, 2016 China: Technology: Internet Equity Research TechNet 2016 Conference: Spotlight on new tech & a rational market Internet finance, new technology and digital ads set to exploit smartphone acreage, the most valuable real estate RELATED RESEARCH Throughout the GS TechNet 2016 conference one message was clear, China Internet: Battle of the Internet Giants IV: TAM’ing the technologies continue to evolve to exploit the most valuable real profit pool – May 17, 2016 estate for internet, the smartphone. Internet finance looks poised to Alibaba: Strengthening measures to defeat counterfeiting – grow significantly in China in particular, driven by business and May 23, 2016 geographical expansion. Ant Financial plans to grow to 2bn users in the Baidu: A cleaner, consumer-first Baidu emerges, TP -8% to next 10 years, from 0.45bn in 2015. WeBank, which acts as a platform US$220 – May 12, 2016 leveraging social data, is set to expand into wealth management. Paytm Digital advertising: Digital Advertising Takeaways; Tencent #1 Brand in China – May 3, 2016 India aims to have a merchant network that is twice the size of Visa, MasterCard and Amex in India combined, by year end. Tencent: Weixin: the north star (2); multiple drivers intact; reiterate CL-Buy – Apr 13, 2016 Other new tech topics: Content including games and movies will play a critical role in driving the adoption of virtual reality (VR) and also in determining whether it replaces smartphones in future. On autonomous driving (AD), Baidu is the frontrunner in China given its capabilities in deep learning, maps and big data. The company expects commercialization in three years, backed by the government’s “Internet Plus” strategy. Tougher VC environment drives more rational competition According to venture capital (VC) companies that presented at TechNet, category leaders are still able to raise significant amounts of capital, but there has been increasing focus on profitability and efficient use of cash. The slowdown in capital funding, as evidenced by private down-rounds and unicorn IPOs below private market valuations, was also discussed. In China, the long-term margin outlook will be the key, as laid out in our recent report “Battle of the Internet Giants IV: TAM’ing the profit pool”. China internet & education: Growth still robust despite downturn Online advertising: Despite Baidu’s reduced number of healthcare/ medical-related ads, its search advertising revenue remains resilient. Weibo expects to maintain strong momentum with its growing user base/SME advertising. Online gaming: NetEase expects to post strong growth with its solid game pipeline including both self-developed and licensed games on both PC and mobile. E-commerce: JD.com guided for a gradual improvement in OP margin as management strikes the fine line between growth and profitability. Education: New Oriental expects K-12 (primary & secondary education) momentum to drive strong revenue growth, while TAL Education guided for strong capacity expansion. Piyush Mubayi +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with David Jin, CFA companies covered in its research reports. As a result, +852-2978-1466 [email protected] Goldman Sachs (Asia) L.L.C. investors should be aware that the firm may have a conflict of George Meng, CFA interest that could affect the objectivity of this report. Investors +852-2978-0178 [email protected] Goldman Sachs (Asia) L.L.C. should consider this report as only a single factor in making Fan Liu, CFA +86(10)6627-3192 [email protected] Beijing Gao Hua Securities Company Limited their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research May 27, 2016 China: Technology: Internet Table of Contents Goldman Sachs TechNet Conference (Asia Pacific) 2016 3 Takeaways from keynote & panel discussions 3 1. Fintech, payment and Blockchain 3 2. Autonomous vehicle, VR/AR, e-commerce 7 3. Views from VCs 9 Takeaways from company meetings 11 1. Online advertising 11 2. Online gaming 12 3. E-commerce 13 4. Education 14 5. Evolving business models 15 Disclosure Appendix 16 Exhibit 1: Global Internet comps P/E, PE at TP Last Target +/- Mkt Cap Performance non-GAAP EV/Revenue EV/EBITDA PEG non-GAAP Company Ticker fx Price Price Side Rating (US$mn) 3Mo YTD 2016E 2017E 2016E 2017E 2016E 2017E 2016E 2016E 2017E China Internet 58.com WUBA $ 51.87 64.0 23% Neutral 5,961 -6% -21% NM 28.5x 4.3x 3.0x NM 18.6x NM NM 35.2x Alibaba BABA $ 75.59 100.0 32% Buy 192 ,755 12% -7% 26.5x 21.2x 8.5x 6.6x 19.1x 14.1x 1.1x 35.0x 28.1x Autohome ATHM $ 24.83 Not Rated 2,907 0% -29% Baidu BIDU $ 176.71 220.0 24% Buy 62,520 9% -7% 29.5x 19.8x 4.7x 3.9x 17.8x 13.1x 0.7x 36.7x 24.7x Changyou CYOU $ 18.65 16.9 -9% Sell 986 4% -25% 9.7x 8.8x 0.8x 0.8x 3.1x 3.5x 1.1x 8.8x 8.0x Ctrip CTRP $ 44.89 55.0 23% Buy 21 ,936 8% -3% 84.4x 31.6x 7.4x 5.5x 58.8x 25.6x 0.8x 103.4x 38.7x JD.com JD $ 22.98 33.0 44% Buy 31 ,559 -11% -29% NM 51.6x 0.7x 0.6x 49.6x 20.3x NM NM 74.1x Jumei JMEI $ 5.36 9.5 77% Neutral 809 -17% -41% 14.3x 8.9x 0.5x 0.4x 13.6x 7.4x 0.3x 25.4x 15.9x NetEase NTES $173.00 182.0 5% Buy 22 ,872 8% -5% 15.8x 16.2x 3.7x 2.9x 11.1x 11.2x 2.2x 16.6x 17.0x Qunar QUNR $ 33.72 45.0 33% Neutral 4,973 -11% -36% NM 93.5x 5.9x 4.2x NM 55.7x NM NM 124.8x Sina SINA $ 50.39 48.0 -5% Neutral 2,972 16% 2% 31.1x 23.6x 1.5x 1.2x 12.2x 8.0x NM 29.7x 22.5x Sohu SOHU $ 40.22 41.0 2% Sell 1,556 -10% -30% NM 21.9x 0.4x 0.3x 69.9x 2.4x NM NM 22.3x SouFun SFUN $ 5.53 6.8 23% Neutral 2,355 7% -25% NM 16.4x 1.3x 0.9x NM 5.4x NM NM 20.1x Tencent 0700.HK HK$ 164.50 195.0 19% Buy*199 ,755 17% 8% 28.6x 23.5x 8.6x 7.2x 18.7x 15.7x 1.5x 33.9x 27.9x Tuniu TOUR $ 8.49 15.0 77% Neutral 1 ,126 -31% -47% NM NM 0.4x 0.2x NM NM NM NM NM VIPShop VIPS $ 11.12 16.5 48% Buy 7 ,101 -12% -27% 16.8x 14.6x 0.9x 0.7x 12.5x 11.3x 1.0x 24.9x 21.6x Weibo WB $ 24.25 22.0 -9% Neutral 5 ,406 57% 24% 45.5x 25.4x 8.3x 5.9x 34.3x 18.3x 0.7x 41.3x 23.0x Median (Sum for Mkt cap) 23% 567,548 4% -25% 27.5x 21.9x 2.6x 2.0x 18.2x 13.1x 1.0x 31.8x 23.0x China Education China Distance Education DL $ 11.33 14.0 24% Neutral 398 -5% -23% 15.2x 12.3x 2.1x 1.8x 7.0x 5.6x 0.6x 18.8x 15.2x New Oriental EDU $ 41.20 32.5 -21% Neutral 6,473 29% 31% 25.0x 21.6x 3.6x 3.1x 19.4x 16.4x 1.6x 19.7x 17.0x TAL XRS $ 56.92 63.0 11% Buy 5,210 10% 22% 34.4x 24.7x 6.0x 4.5x 27.3x 19.6x 1.2x 38.0x 27.4x Tarena TEDU $ 10.10 13.5 34% Buy 586 2% -3% 13.2x 11.0x 2.2x 1.7x 9.1x 6.7x 0.5x 17.6x 14.7x Median (Sum for Mkt cap) 17% 12,666 6% 10% 20.1x 16.9x 2.9x 2.5x 14.2x 11.6x 0.9x 19.3x 16.1x Asia, x-China Internet Kakao 035720.KQ W 99,600 134,000 35% Buy 4,969 5% -14% 24.3x 18.9x 4.5x 3.7x 14.0x 11.2x 32.7x 25.4x NCSOFT 036570.KS W 236,000 252,000 7% Neutral 4,376 1% 11% 15.4x 15.5x 4.2x 4.0x 10.3x 10.5x 16.5x 16.6x Nexon 3659.T ¥ 1,780 1,700 -4% Neutral 6,919 10% -10% 12.9x 11.6x 2.7x 2.3x 7.7x 6.9x 12.4x 11.0x Softbank 9984.T ¥ 6,206 7,800 26% Buy 67,055 17% 1% 14.1x 11.2x 1.9x 1.9x 6.7x 6.3x 17.8x 14.0x Yahoo Japan 4689.T ¥ 504 600 19% Buy 26,017 16% 2% 18.4x 17.2x Median (Sum for Mkt cap) 11% 196,158 10% 1% 18.4x 17.2x 1.9x 1.9x 7.2x 7.3x 20.4x 19.8x Global Internet Amazon AMZN $ 708.35 800.0 13% Buy* 341 ,484 28% 5% 86.5x 60.4x 2.3x 1.8x 21.5x 16.5x 97.7x 68.2x eBay EBAY $ 24.04 30.0 25% Buy 28,163 0% -13% 13.0x 11.9x 2.7x 2.2x 7.0x 6.4x 16.3x 14.8x Facebook FB $ 117.89 146.0 24% Buy 339 ,287 10% 13% 32.5x 26.2x 12.0x 9.0x 20.0x 15.7x 40.2x 32.4x Google GOOGL $ 738.10 850.0 15% Buy* 514,474 2% -5% 21.6x 18.0x 6.0x 4.9x 12.5x 10.6x 24.9x 20.8x LinkedIn LNKD $ 129.87 162.0 25% Buy 17,670 10% -42% 38.0x 29.3x 4.7x 3.8x 18.5x 15.0x 47.4x 36.6x Netflix NFLX $ 100 120 20% Buy 44,350 9% -12% NM 55.5x 5.0x 4.0x 83.4x 31.7x NM 66.4x Priceline PCLN $ 1,270 1,250.0 -2% Neutral 64,395 0% 0% 19.9x 16.9x 6.1x 5.0x 17.0x 14.3x 19.6x 16.6x Yahoo YHOO $ 35.59 38.0 7% Neutral 33,884 15% 7% 94.3x 65.2x 9.5x 9.2x 46.2x 41.1x 100.7x 69.6x Yandex YNDX $ 19.77 23.9 21% Buy 6 ,851 50% 26% 33.9x 22.7x 5.8x 4.8x 17.8x 11.8x 40.9x 27.4x Median 20% 1,531,385 10% -5% 33.9x 27.8x 3.6x 3.4x 18.5x 15.0x 40.2x 33.5x MEDIAN, GLOBAL 20% 2,307,757 9% -7% 25.0x 21.7x 2.7x 2.1x 16.4x 12.0x 27.0x 23.0x **Notes: *Denotes stock is on our regional Conviction List.