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 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 2 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 3 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. 4 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.