TD-SCDMAsns

EquityResearch13September2013BarclaysCapitalInc.
and/oroneofitsaffiliatesdoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.
Asaresult,investorsshouldbeawarethatthefirmmayhaveaconflictofinterestthatcouldaffecttheobjectivityofthisreport.
Investorsshouldconsiderthisreportasonlyasinglefactorinmakingtheirinvestmentdecision.
ThisresearchreporthasbeenpreparedinwholeorinpartbyequityresearchanalystsbasedoutsidetheUSwhoarenotregistered/qualifiedasresearchanalystswithFINRA.
PLEASESEEANALYSTCERTIFICATION(S)ANDIMPORTANTDISCLOSURESBEGINNINGONPAGE88.
ChinaInternetRidingthemobileinternetwaveWereiterateourPositiveviewontheChinaInternetsector.
ThenewrevolutionandtransitiontomobileshouldbenefitmostoftheChineseInternetcompanieswecover,especiallythosewithclearmobilestrategiesandamarketpositionsuchthattop-linegrowthre-acceleratesandpotentialgradualimprovementinmarginsisforecastoverthenext2-3years.
Aslikelybeneficiariesofthistransition,weupgradeourPT's12-33%forTencent,Qihoo,CtripandBaidu.
Weseefivekeytrendsforthesectorin2H13and2014:1)increasedcompetition/mobilegamemonetization;2)risingconsumptionbenefitingtransaction-basedmodels;3)increasedsmart-TVcompetition;4)challengeoftransitiontomobileadv;and5)continuedfightforusertraffic/mobileaccesspoints.
OurtopthreemobileInternetpicksareTencent,QihooandCtrip(allratedOW),whileotherswithgoodmobileexposureandpotentialupsidecatalystsonbusinessmodeldevelopment&executioninclude:Baidu,NetEase,Sina,andYouku(allratedOW).
Fivekeysectortrendsin2H13and2014:1)increasedcompetition&monetizationofsmartphonegames;2)risingconsumptionbenefitingtransaction-basedmodels(onlinetravelbooking,eCommerce,LBS-basedO2Obusinessopportunities);3)competitionbetweenonlinevideoplayersextendingtohomeentertainment/smart-TVarena;4)transitiontomobileadvertisingremainschallenginganddisruptive;and5)continuedfightforusertraffic/mobileaccesspointsviaindividualapps,integratedplatformandappstoredistributionapproach.
Keyconclusionsfrom2Q13results:1)morebeats&guide-upsthanmisses;2)mobilestrategies/initiativesakeyfocus;3)margintrendspointtostabilization/improvement;and4)PC-basedrevenuesremainresilientdespitemoretrafficshiftingtomobile.
Riskstoourview:1)Recentoutperformance(sectorup81.
8%YTDvsNASDAQup23%andHSCIup0.
8%)couldimplystockpricesrunningaheadoffundamentals,butweremainpositiveonstructuralgrowthopportunitiesforthesector;2)irrational&increasingcompetitioncouldleadtomargindisruptionanderosionofcreativity;and3)furtherslowdownoftheChinaeconomycoulddampenadvertisingdemand.
FIGURE1ToppicksinChinamobileinternetsectorCompanyRatingCPPTUpsideBarclaysResearchCommentOldNew%Tencent1OW/Pos402.
238845012%Well-positionedtocapturemobileInternetgrowthviaitsstrengthinmobileSNS,mobilegamingplatform,andmobileGuangdiantong,aswellasmobilepayments.
Qihoo2OW/Pos90.
88610010%GrowthopportunityonmonetizingmobiletrafficviaitsappstoredistributionandupsideriskstoPCsearchpenetration.
Ctrip2OW/Pos50.
4456019%Likelybeneficiaryofstructuralleisuretraveldemand;furthermarketsharegainviamobileinternetgrowthopportunities.
Notes:Pricingasof11September2013(1inHK$,2inUS$).
Source:BarclaysResearchestimatesINDUSTRYUPDATEAsiaex-JapanInternet&MediaPOSITIVEUnchangedForafulllistofourratings,pricetargetandearningschangesinthisreport,pleaseseetableonpage2.
Asiaex-JapanInternet&MediaAliciaYap,CFA+85229034593alicia.
yap@barclays.
comBarclaysBank,HongKongAnandRamachandran,CFA+6563083895anand.
ramachandran@barclays.
comBarclaysBank,SingaporeWilliamHuang+85229034766william.
huang@barclays.
comBarclaysBank,HongKongBarclays|ChinaInternet13September20132SummaryofourRatings,PriceTargetsandEarningsChangesinthisReport(allchangesareshowninbold)CompanyRatingPricePriceTargetEPSFY1(E)EPSFY2(E)OldNew11-Sep-13OldNew%ChgOldNew%ChgOldNew%ChgAsiaex-JapanInternet&MediaPosPosBaidu,Inc.
(BIDU)OWOW147.
31153.
00171.
00125.
035.
0506.
126.
333Ctrip.
comInternationalLtd.
(CTRP)OWOW50.
3545.
0060.
00331.
411.
41-1.
791.
885E-CommerceChinaDangdangInc.
(DANG)UWUW9.
014.
506.
0033-0.
61-0.
5018-0.
52-0.
2748Qihoo360TechnologyCo.
,Ltd.
(QIHU)OWOW90.
8586.
00100.
00161.
341.
3512.
452.
492TencentHoldingsLtd.
(700HK/0700.
HK)OWOW402.
20388.
00450.
00168.
738.
74011.
8111.
891Source:BarclaysResearch.
SharepricesandtargetpricesareshownintheprimarylistingcurrencyandEPSestimatesareshowninthereportingcurrency.
FY1(E):CurrentfiscalyearestimatesbyBarclaysResearch.
FY2(E):NextfiscalyearestimatesbyBarclaysResearch.
StockRating:OW:Overweight;EW:EqualWeight;UW:Underweight;RS:RatingSuspendedIndustryView:Pos:Positive;Neu:Neutral;Neg:NegativeValuationMethodologyandRisksAsiaex-JapanInternet&MediaBaidu,Inc.
(BIDU)ValuationMethodology:Our12-monthPTofUS$171isbasedon27xour2014Enon-GAAPEPADSofUS$6.
33.
Ourtargetmultipleof27ximplies1.
0xPEGtoatwo-year(2013-15E)earningsCAGRof27%,whichwebelieveisreasonable.
RiskswhichMayImpedetheAchievementoftheBarclaysResearchPriceTarget:ThekeydownsideriskstoourpricetargetforBaidubeingachieved,inourview,include:1)intensifiedPCsearchcompetitionasQihoorampsupmonetizationandifQihoosuccessfullyacquiresSogou;2)integrationriskswith91WirelessandNuomi;and3)marginsandmobilerevenuerampfailingtomeetexpectations.
Ctrip.
comInternationalLtd.
(CTRP)ValuationMethodology:Our12-monthPTofUS$60isbasedon32xour2014Enon-GAAPEPADSofUS$1.
88.
Ourtargetmultipleimpliesabout1.
0xPEGtoatwo-year(2013-15E)earningsCAGRof32%.
RiskswhichMayImpedetheAchievementoftheBarclaysResearchPriceTarget:ThekeydownsideriskstoourpricetargetforCtripbeingachieved,inourview,include:1)Ifcompetitionintensifiesfurtherandthepricingwarcontinues;2)newcompetitioncouldevolvefromtheeCommerceplatformandnicheappplayers;and3)macro-relatedweaknesscouldimpacttraveldemandandsentiment.
E-CommerceChinaDangdangInc.
(DANG)ValuationMethodology:Our12-monthpricetargetofUS$6.
00forDangdangisbasedonourDCFanalysisinwhichweuseaWACCof18%andexitgrowthrateof3%.
RiskswhichMayImpedetheAchievementoftheBarclaysResearchPriceTarget:ThekeyupsiderisksthatcouldpreventourpricetargetforDangdangfrombeingachieved,inourview,includethefollowing:1)anearlier-than-expectedreturntoprofitability;2)ifthemarketplacemodelgrowstobeasizeablecontributortothetoplineandmargins;and3)ifthecompanyweretoraisemorefundingorbecomeofinteresttopotentialacquirers.
Qihoo360TechnologyCo.
,Ltd.
(QIHU)ValuationMethodology:Our12-monthPTofUS$100isbasedon40xour2014Enon-GAAPEPADSofUS$2.
49.
Our40xtargetmultipleimplies0.
6xPEGtotwo-year(2013-15E)earningsCAGRof66%,whichwebelieveisnottoodemandingconsideringthegrowthrate.
RiskswhichMayImpedetheAchievementoftheBarclaysResearchPriceTarget:ThekeydownsideriskstoourpricetargetforQihoobeingachieved,inourview,include:1)Qihoofacingchallengestocontinuegainingsearchmarketshareoritssearchadvertisingcustomerbasegrowingmoreslowlythanweexpect;2)aslowdowninthewebgamesmarket;and3)ifcompetitionintensifiesandthereisnoclearvisibilityonthesuccessofmobileInternet.
TencentHoldingsLtd.
(700HK/0700.
HK)ValuationMethodology:Our12-monthPTofHK$450isbasedon30xour2014Enon-GAAPEPSofHK$15.
01.
Ourtargetmultipleof30ximplies1.
0xPEGforatwo-year(2013-15)earningsCAGRof30%,whichwebelieveisjustifiedgivenTencent'sprovenexecutionabilityanditsresilientandintegrateduserplatform.
RiskswhichMayImpedetheAchievementoftheBarclaysResearchPriceTarget:ThekeydownsideriskstoourpricetargetforTencentbeingachieved,inourview,include:1)WeChatmonetizationrampdisappoints;2)cannibalizationofTencent'swebgamesrevenuesbyWeChat;and3)regulatoryrisksandconflictswithtelcos.
Source:BarclaysResearch.
Barclays|ChinaInternet13September20133INVESTMENTSUMMARYFivekeytrendsforChina'sInternetindustryin2H13and2014WeseefivekeytrendsthatcoulddominatetheChinaInternetspacein2H13and2014:1.
Increasedcompetitionandmonetizationofsmartphone/social-relatedmobilegamesaddingfurtherexcitementintheonlinegamingindustry.
2.
Risingconsumptionbenefitingtransaction-basedmodelssuchasonlinetravelbooking,eCommerce,andLBS-basedO2Obusinessopportunities.
3.
Competitionbetweenonlinevideoprovidersextendingintothehomeentertainment/smart-TVarena.
4.
Thetransitiontomobileadvertisingremainingchallenginganddisruptiveforportals,whilePC-basedbrandadvertisingrevenuesseemtobeholdingupnear-term.
5.
Continuedfightforusertraffic/mobileaccesspointsviaindividualapps,anintegratedplatformandappstoredistributionapproach.
Thefollowingtablesummarisesourfivekeytrendsfor2H13andinto2014andtheirrespectiveimpactonourcoverageuniverse.
FIGURE2Fivekeytrendsfor2H13/2014andpotentialimpactonInternetcompaniesunderourcoverageFivekeytrendsPotentialoutcomeandimpactoncompaniesWhocouldbenefitWhatrisksdothecompaniesface1.
IncreasedcompetitionandmonetizationonmobilegamestoaddfurtherexcitementtoonlinegamingindustryTencentislikelytobethebiggestwinner,leveragingitsWeChatandmobileQQ;Qihooismonetizingmobilegamesviarevsshareonappstoredistributionchannel;PWRDisafastmoverwithfocusedstrategies;NTESmightleverageYiChatasgamedistributionchannel.
Platform:Tencent,Qihoo,Baidu;Gamingstocks:NTES,PWRDCompaniesthatareneitherplatformsnordeveloperscouldmissoutonthemobilegamesopportunity.
Increasingnumbersofwebgamedevelopersareswitchingfocustodevelopmobilegames,implyingintensificationofcompetitivelandscape.
2.
Risingconsumptionbenefitingtransaction-basedmodelssuchasonlinetravelbooking,eCommerceandLBS-basedO2ObusinessopportunitiesMobiletravelbookingscouldramp-upnicely,benefitingCtripandotherOTAsthathavegoodmobileapps.
eCommercemobile-basedtransactionscontinuetogrow,withAlibabaandTencentassignificantpotentialwinners.
Ctrip,TencentProfitabilityofprincipalbusinessdependsonindustryconsolidation;trafficacquisitioninmobilelandscapecouldbechallengingandlikelyadragonprofitability.
Competitionalsoshiftingfrom'pricing'to'speedandservice'oflogisticsdelivery.
3.
Competitionbetweenonlinevideoplayersextendingintohomeentertainment/smart-TVarenaBaiduiQiyi,LeTV,andXiaomileadthemarketonsmart-TVinitiatives,as'multi-screens'likelybecomethenormformostonlinevideoplayersforhigheruserpenetration.
Baidu(iQiyi)Contentdifferentiation,TVaffordability,anduserloyaltyremainchallenges.
4.
TransitiontomobileadvertisingremainingchallenginganddisruptiveforportalsSinaWeiboachieveshighermomentumonweibomonetizationviamobile,andTencentreleasedmobileGuangDianTongtofurthermonetizeperformance-basedadvertising.
Tencent,Sina,Sohu,Youku,BaiduandQihooTraditionaltime-basedbannerads,suchthatSina,SohuandNetEaseportalsmaysufferfrombudgetswitchingandmobiletrafficdilution.
5.
Continuedfightforusertraffic/mobileaccesspointsviaindividualapps,anintegratedplatformandappstoredistributionapproachInternetgiantscontinuetostrengthentheirmobiletrafficgatewayviaacquisitions(asshownwithrecentactionbyBaiduandAlibaba)bygainingaccesstoestablishedapps(Weibo)ormobileappstoredistribution(91Wireless).
Tencent,Baidu,QihooandSinaRevenuemonetizationonmobiledeviceswillcontinuetotrailbehindthemobiletrafficshift;mobilegamingandlocation-basedonline-to-offlinelocalservicesandtransaction-basedmodelcouldbenefitmore.
Source:BarclaysResearchestimatesBarclays|ChinaInternet13September20134ToppicksfortheChinaInternetSectorOurtoppicksareTencent,QihooandCtrip.
Tencent(0700.
HK;OW;PTHK$450)WelikeTencentbecauseofitsintegratedplatformstrategyandresilientrevenuestreamwithits:1)dominantmarketshareinonlinegaming;2)openplatformgrowthpotential,leveragingfastergrowthofthesocial/webgamesindustry;3)marketsharegainsintheonlineadvertisingbusinesswithbroad-basedsolutionsviaonlinevideo,performance-basedtargetedads,searchanddisplay;and4)growthpotentialinitsmobilepaymentandeCommerceplatforms–webelieveWeChathassignificantpotentialtomonetizethroughmobilegames,O2O/LBS,andmobileadvertising,andalsothateCommerceisprogressingwellwithanincreasingcontributiontoTencent'stopline.
Withsteadygamingrevenuesandhealthygrowthviaarichgamepipelineandeffectiveexpansionpacksforcoregames,TencentisabletofunditsgrowthinitiativesinWeChat,mobilegames,onlinevideoandsocialadvertising,aswellaseCommerceexpansion,inourview.
Weseethisasaclearstrategyandbelievethatwithitsstickyuserbase,integratedplatform,andprovenmanagementexecution,TencentcanonceagaindeliveronitspromisinggrowthprospectsaswetransitionfromPCtomobile.
Valuation:OurnewpricetargetofHK$450(fromHK$388)isbasedon30x(from26x)our2014Enon-GAAPEPSofHK$15.
01(fromHK$14.
92).
Risks:Keydownsideriskstoourpricetargetinclude:1)aslowdowninexistingPCgames;2)significantinvestmentandaggressiveWeChatmarketingpromotionalcampaigns,whichcouldputpressureonmargins;and3)ifWeChatmonetizationfailstomeetforecastedexpectationorlosesitsappealtousers.
Qihoo(QIHU;OW;PTUS$100)WhileQihoo'ssharepricehasseenageneralre-ratingoverthepast12months,webelievefurthercatalystscouldcomefrom:1)faster-than-expectedrevenuesrampfromitsmobileassistantappstoredistribution;2)furthersearchtrafficsharegains,leadingtofasterrampinsearchrevenues;and3)faster-than-expectedreboundinoperatingmarginsifrevenuesoutperformourexpectationfor2014drivenbyfaster-than-expectedrampinmobilerevenuesandsearchrevenues.
Valuation:OurnewpricetargetofUS$100(fromHK$86)isbasedon40x(from35x)our2014Enon-GAAPEPADSofUS$2.
49(fromUS$2.
45).
ThisimpliesaPEGofc0.
60xtoatwo-year(2013-15E)earningsCAGRof66%.
Risks:Keydownsideriskstoourpricetargetinclude:1)failuretogainfurthersearchtrafficshare;2)aslowdowninthewebgamesmarket;and3)marginsfailingtoreboundduetohigherinvestmentinthesearchbusiness.
Ctrip(CTRP;OW;PTUS$60)Similarly,althoughCtrip'ssharepricehasalsoseenageneralre-ratingoverthepast12months,webelieveitwillremainasolidplayintotheearlycycleofmobileInternetgrowthgiven:1)weexpectittogainmarketshareatafasterratethaninthelasttwoyearsasitfurtherconsolidatesfragmentedofflinetraditionaltravelagents,benefitingfromrisingsmartphonepenetration;2)itscomprehensiveofferingofonlinetravelservices,aswellasscale,shouldgiveitbetterleveragetocompetemoreefficientlyandeconomically;and3)whilecompetitionremainsintense,thecommoditisationofcouponrebatehasmeantpurepricingcompetitionisnotadifferentiatingfactorforplayersinthisspace,henceCtrip'sfullservice/one-stopshopservicecouldallowittocompeteatmoreflexibleprices.
Barclays|ChinaInternet13September20135Valuation:OurnewpricetargetofUS$60(fromUS$45)isbasedon32x(from25x)our2014Enon-GAAPEPADSofUS$1.
88(US$1.
79).
ThisimpliesaPEGof1.
0xtoatwo-year(2013-2015E)earningsCAGRof32%.
Risks:Keydownsideriskstoourpricetargetinclude:1)irrationalpricingwars;2)eLong'sairticketcashrebateprogrambecomingmoresuccessful,forcingCtriptoreactmoreaggressively;and3)afallinoperatingmarginsduetoincreasingcompetitionandaggressivesales&marketing.
Othernameswithgoodmobileexposureandpotentialupsidecatalystsonbusinessmodeldevelopment&executionBaidu(BIDU;OW;PTUS$171)AlthoughBaiducontinuestofacechallengesfromthethreatofQihoogainingstrongertractiononPCsearchandtheslowadoptionofmobileadbudgetsbysmallandmedium-sizeenterprises,weviewitsacquisitionsof91Wireless,NuomiandPPS(inJuly2013,August2013,andMay2013,respectively)asstrengtheningitsmobilepositionandseepotentialupsidecatalyststoBaidu'smobilestory.
Valuation:OurnewpricetargetofUS$171(fromUS$153)isbasedon27x(from25x)our2014Enon-GAAPEPADSofUS$6.
33(fromUS$6.
12).
ThisimpliesaPEGofc1.
0xtoatwo-year(2013-2015E)earningsCAGRof27%.
Risks:Keydownsideriskstoourpricetargetinclude:1)QihoogainingmoremarketshareandcompetingmoreaggressivelyinthePCsearcharea;2)operatingmarginsdecliningmorethanwecurrentlyexpect,drivenbyhighertrafficacquisitionandsalesandmarketingexpensestodefendQihoo;3)anyfailureofitslight-appstrategy;4)integrationrisksrelatedtorecentacquisitions;and5)furtherslowdowninChinaeconomy.
NetEase(NTES;OW;PTUS$76)WeremainpositiveonNTESgivenits:1)solidcorporategovernance;2)in-housedevelopmentstrength;3)diversifiedgameportfoliowithaprovenhitratio;and4)strongcashflowgeneration.
Wearealsoencouragedbymanagement'smobileinternetstrategiesformobilegames,musicandreading,andseepotentialupsidecatalyststoitsYiChatcooperationwithChinaTelecom.
WebelieveNTESwillleverageitsYiChatplatformtointegrateitsvariousmobileapps/contentofferingsandthatthiscouldmakeYiChatthecompany'smaindistributionchannelforitsfuturemobilegames.
Valuation:OurpricetargetofUS$76(unchanged)isbasedon12xour2014Enon-GAAPEPADSofUS$6.
32.
Thisimplies1.
0xPEGtoathree-year2012-15EearningsCAGRof12%.
Risks:Keydownsideriskstoourpricetargetinclude:1)continuedslowdowninitsWorldofWarcraftfranchise;2)newgamesfailingtogaintraction;and3)flagshipgamesstartingtoloseusers.
4)YiChatfailstobecomeaneffectivemobileplatform.
Youku(YOKU;OW;PTUS$28)Withadifferentiatedcontentstrategybalancingprofessionalcontentandin-houseproduction,webelieveYoukuaimstodeliverreasonabletop-linegrowthwithmanageablecontentcosts,andwillthuslikelyprogresstowardnon-GAAPprofitabilityby4Q13.
Ifmobilerevenuesgaintractionmorequickly,profitabilitycouldcomeearlier,offeringupsiderisktoourforecasts.
WeremainpositiveonoverallgrowthpotentialofonlinevideoadvertisingandbelieveYoukuwillcontinuetoexecuteanddeliveronitsstrategy,thuswerecommendinvestorsuseanysharepriceweaknessasanopportunitytoaccumulate.
Barclays|ChinaInternet13September20136Valuation:OurpricetargetofUS$28(unchanged)isbasedonDCFvaluationmethodology,andincorporatesassumptionsof14.
4%WACCanda4%terminalgrowthrate.
Risks:Keydownsideriskstoourpricetargetinclude:1)profitabilitytimingbeingfurtherdelayed;2)top-linegrowthbeingnegativelyimpactedbyslower-than-expectedeconomicrecoveryinChina;and3)anirrationalincreaseincontentcostsascompetitorsonceagainbidaggressivelyforgoodcontent.
Sina(SINA;OW;PTUS$84)GiventhatSinaWeiboremainsanimportantmediumforsocialmediaaccess,anditsstrengthanddominantpositioninmobilepenetration,webelievethecompanywillcontinuetobeavaluableassetasatrafficdistributionchannel.
Whileexecutionrisksremainon:1)balancingtheuserexperiencewithbanneradsandpromotionaltweetsmonetization;2)theeffectivenessofWeiboads;and3)progressandramp-upoftheWeibo-Taobaoaccountintegration,webelievethenewAlibaba-Weiboalliancewouldstrategicallybenefitrevenuesandearningsgrowth,positioningWeibotocaptureemerginggrowthopportunitiesinthesocialmedia/socialcommercelandscape.
Valuation:OurpricetargetofUS$84(unchanged)isbasedonSOTPanalysis,valuingSinaatUS$5.
6bn,including:1)WeibovaluationofUS$3.
7bn(US$56/sh),takingintoconsiderationSina's71%stake;2)portalvaluationofUS$644mn(US$9.
6/sh);and3)cashofUS$18.
5/sh.
Risks:Keydownsiderisksinclude:1)userchurnandusertimespenddiminishing;2)theWeibo-Taobaointegrationfailingtogaintractionfrommerchantsandusers;and3)afurtherslowdownintheportalbusiness.
RiskstooursectorviewPricinggettingaheadoffundamentalsAsshowninFigure101,theaveragesharepriceperformanceofcompaniesunderourcoverageuniversehasincreasedby70.
4%YTD,whichcomparestotheNASDAQup23.
1%andHSCIup0.
8%.
Webelievethisstrongperformancecanbeattributedto:1)better-than-expected1Q/2Q13resultswithsurprisesonmarginreboundsandguidancedrivenbylowinvestorexpectations,yetsolidmanagementexecutiononturningaroundtheirbusinessfundamentals2)lesssensitivitytomacroandgovernmentpoliciesasallInternetcompaniesarenotstate-ownedenterprisesnortheyareinacyclicalbusiness;3)increasedM&Aactivities;and4)smartphonepenetrationrampdrivingincreasedinnovationandfastreactionfromInternetcompanies.
Whilerecentperformancemayappeartoberunningaheadoffundamentals,weremainpositiveonthestructuralgrowthopportunitiesfortheChinaInternetsector,withthenewrevolutionandtransitiontomobilelikelytobenefitmostoftheChineseInternetcompanieswecover.
Assuch,wewouldadviseinvestorstouseanybroad-basedsharepriceweaknessasanopportunitytoaccumulate.
Irrational&increasingcompetitionAnyirrationalcompetitionsuchasthatexperiencedin2012,whenleadingOTAswerecompetingaggressivelyformarketsharebygivingbacklargecashcouponrebatesandonlinevideooperatorswerebiddingupTVdramastoexpensiveprices,couldleadtomargindisruptionanderosionofcreativity.
Risingcompetition,asevidencedbyQihooenteringthesearchenginebusinessandonlinegamingcompaniestryingtogaingamertractiononnewgamelaunches,couldleadtohigherS&MexpenseandR&Dtalents,inturnputtingfurtherpressureonmargins.
Barclays|ChinaInternet13September20137OtherFurtherslowdownofChinaeconomythatcoulddampenadvertisingdemand;OverhangonVariableInterestEntities(VIE)shareholderstructurethatcouldcomebacktoworryinvestorsiftheUS-listedADRsweretofaceanyde-listingissues.
Furthergovernmentcensorshiponsocialmediacommentsandincreasedrequirementforreal-nameregistration.
ChinaInternetSector–valuationcomparisonFIGURE3ChinaInternetSector–valuationcomparisonsNote:Pricesasofthemarketcloseon11Sep2013.
AllpricesinUSdollarsexceptforTencent,whichispricedinHongKongdollars.
Stockratings:OW:Overweight;EW:EqualWeight;UW:Underweight;NR:notrated.
Asiaex-JapanInternetindustryview:Positive.
EstimatesfornotratedcompaniesareconsensusestimatesfromBloomberg.
Forfulldisclosuresoneachratedcompany,includingdetailsofcompany-specificvaluationmethodologyandrisks,pleasereferto:http://publicresearch.
barcap.
com.
Source:Bloombergconsensusestimates,BarclaysResearchestimatesEPS-CAGRSales-CAGRPEGCompanyTickerCurr.
RatingTPLastFY12AFY13EFY14EFY15EFY12-15EFY12AFY13EFY14EFY15EFY12-15EFY14ELeadcategoryBaiduBIDUUSUSDOW$171.
0$147.
31$51,52530.
0x29.
2x23.
3x18.
0x19%14.
4x10.
0x7.
3x5.
8x36%1.
2xDangdangDANGUSUSDUW$6.
0$9.
01$723nmnmnmnmnm0.
9x0.
7x0.
6x0.
5x23%nmTencent700HKHKDOW$450.
0$402.
20$95,82641.
4x36.
3x26.
7x21.
7x25%13.
1x9.
7x7.
4x6.
0x30%1.
1xRenrenRENNUSUSDEW$3.
5$3.
50$1,326nmnmnmnmnm7.
8x7.
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8x17%nmSinaSINAUSUSDOW$84.
0$85.
16$5,675608.
3xnm37.
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0$66.
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2x19.
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0$23.
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0$90.
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0xGamingChangyouCYOUUSUSDOW$46.
0$31.
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5xGiantGAUSUSDOW$9.
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5x8.
9x7.
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7xNetEaseNTESUSUSDOW$76.
0$74.
03$9,67415.
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7x10.
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9x5.
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8xMktcap(US$mm)PERPricetoSalesBarclays|ChinaInternet13September20138CONTENTSINVESTMENTSUMMARY.
3FivekeytrendsforChina'sInternetindustryin2H13and2014.
3ToppicksfortheChinaInternetSector4Othernameswithgoodmobileexposureandpotentialupsidecatalystsonbusinessmodeldevelopment&execution.
5Riskstooursectorview.
6ChinaInternetSector–valuationcomparison7BARCLAYSSMARTPHONEFORECASTS&CHINAINTERNETREAD-THROUGH9KEYTREND1:MOBILEGAMES–INCREASEDCOMPETITIONWITHMONETIZATIONRAMP11KEYTREND2:TRANSACTION-BASEDTRAVEL&ECOMMERCETOBENEFITFROMMOBILE.
16KEYTREND3:ONLINEVIDEO–COMPETITIONEXTENDSTOSMART-TV21KEYTREND4:ONLINEADVERTISING–TRANSITIONTOMOBILEREMAINSCHALLENGING.
25KEYTRENDS5:CONTINUEDFIGHTFORACCESSPOINTS–APPASPLATFORMVSAPPSTORE.
272Q13RESULTSWRAP:POSITIVESURPRISESOUTWEIGHNEGATIVE30COMPANIES.
38-TENCENT(700HK;OW;PTHK$450,+12%39-QIHOO360TECHNOLOGY(QIHUUS;OW;PTUS$100;+10%45-CTRIP.
COMINTERNATIONAL(CTRPUS;OW;PTUS$60;+19%).
.
.
.
53-BAIDU(BIDUUS;OW;PTUS$171,+16%60-E-COMMERCECHINADANGDANG(DANGUS;UW;PTUS$6.
00;-33%652Q13RESULTSREVIEW.
68APPENDIX1:PRICEPERFORMANCEOFMAJORINTERNETCOMPANIES.
69APPENDIX2:BARCLAYSFORECASTSVSCONSENSUS;VALUATIONCOMPS.
70APPENDIX3:CHINAHANDSETSALES72COMPANYDATAPAGES.
73Barclays|ChinaInternet13September20139BARCLAYSSMARTPHONEFORECASTS&CHINAINTERNETREAD-THROUGHDaleGai,BarclaysAsiaex-JapanWirelessEquipment&Productsanalyst,forecasts2013Chinasmartphonesell-throughof360mnunits–160mnshippedin1H13and200mntobeshippedin2H13E.
AccordingtoDale,demandhasstayedontrackwithourforecasts(unchangedsince1Q13)andhedoesnotexpectanymajorupsidesurprisein2013consideringtheinventoryrisksinlow-endmodels.
ChinaMobilehasbeenthemajordriverofTD-SCDMA3Gsmartphonepenetrationin2013,andweexpectsteady3GsubscribergrowthinChinatostimulate35-40%3Gsmartphonepenetrationbyend-2013.
Figure5showsChinasmartphonesalesbypricesegmentin1H13,whenmorethan50%ofunitssoldwerepricedunderRMB1,000(US$150)attheretaillevel.
Daleexpectsq/qandy/ydeclinesinASPin2013duetoincreasinglow-endsmartphonesales.
Basedonchannelchecks,heestimatesanoverallChinasmartphoneASPofRMB1,200for2Q13(includingglobalbrands),butforlocalbrandsanASPofonlyRMB750.
Localbrandsareforecasttoaccountfor75%oftotalunitsinChinain2013.
Daleexpectsexpectfurthervolumegrowthin2014,inviewofincreasing3Gsubscribernumbers,andcontinuedhardwareupgradesforthemainstreamRMB1,000models.
FIGURE4Chinasmartphonequarterlysell-throughvolumes,1Q11-4Q14EFIGURE5Chinasmartphonesalesbypricesegment,1H13RMB600&below25%RMB600-99929%RMB1000-149919%RMB1500-19998%RMB2000-29997%RMB3000&above12%Source:SINO-MR,Companydata,BarclaysResearchestimatesSource:SINO-MR,BarclaysResearchDaleGaialsorecentlyraisedhisChinasmartphoneunitforecastfor2014Eto542mn(from503mn),orup8%.
Thisisbasedongreater-than-expectedy/yASPerosion,drivenbypricecompetition.
Inaddition,heexpects4Gsmartphonegrowthtoremainsmallintonextyear,likelyaccountingforonly4%oftotalunitsin2014Eonhisbest-casescenario.
Ontheotherhand,heisconservativeonsupplychainmarginsduetocompetition.
HeexpectsmoreChinasmartphonevendorstoofferdisruptivepricingtogainmarketshare,whichisnegativeforoverallprofitabilityinthe"foodchain".
Forexample,Xiaomi'srecentlaunchofitsmid-rangemodel"RedRice"(Hong-mi)withahigh-endhardwarespecification,waspricedatonlyRMB799(US$130),20%cheaperthantheretailpriceofotherwhite-boxbrandsinChina(usingMediaTek'sCPUs)andtwotothreetimescheaperthanglobalOEMs.
DisruptivepricinginAndroiddevicesisadouble-edgedsword,inDale'sview.
Whileanear-termboostindemandisexpected,competitioninhardwareupgradescouldleadtoearliersmartphone/tabletdemandmaturitywheninnovationslows.
Formoredetailsonsmartphoneshippingforecasts,pleaserefertoSmartMobilityAsiaex-Japan:ChinaSmartphonePulse-raisingCY14shipmentonaggressivepricing.
0204060801001201401601801Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q13E4Q13E1Q14E2Q14E3Q14E4Q14EmillionsofunitsPleasealsorefertoDaleGai'srecentreport:SmartMobilityAsiaex-Japan:ChinaSmartphonePulse-raisingCY14shipmentonaggressivepricing.
Barclays|ChinaInternet13September201310FIGURE6Globalsmartphoneshipmentforecastsbypricingsegment,2010-15E(units,mn)FOBPrice2010201120122013E2014E2015E2012-15ECAGRUS$4009315824128031233011%Total2834726809321,1761,35426%Source:IDC,Gartner,BarclaysResearchestimatesFIGURE7GlobalsmartphoneFOBASP(US$)trend,2010-15E2010201120122013E2014E2015E2012-15ECAGRUS$307344334321312303-3%y/y12%-3%-4%-3%-3%Source:IDC,Gartner,BarclaysResearchestimatesRead-throughforChina'sInternetsectorWeexpectasharpincreaseindemandforvariousmobileinternetservicesandcontentassub-Rmb1,000smartphonescontinuetohitthemarketandthemigrationofChinafeaturephoneuserstosmartphonesincreases.
Someofthechangesandmigrationmightoccurearlierandfasterthanwecurrentlyexpect,andInternetcompaniesareproactivelyadaptingtotherisingdemand.
GiventhatweareinthemidstofatransitionfromPCInternettomobileinternet,weexpectthenew'revolution'broughtaboutbyrisingsmartphonepenetrationwilldrivebothopportunitiesandchallengesforexistingInternetcompanies.
WereiterateourPositiveviewonChina'sInternetsectorandbelievethetransitionandrevolutioninmobileinternetgrowthwillbenefitmostoftheChineseInternetcompanies,especiallythosethathaveclearmobilestrategiesandwhosemarketpositionislikelytoseetheirtop-linegrowthreaccelerateandapotentialgradualmarginimprovementinthenext2-3years(includingTencent,Qihoo,CtripandBaidu).
Weseefivekeytrendsforthesectorin2H13and2014:1)increasedcompetitionandmonetizationofsmartphone-/social-relatedmobilegamesaddingfurtherexcitementtotheonlinegamingindustry;2)risingconsumptionbenefitingtransaction-basedmodelssuchasonlinetravelbooking,eCommerceandLBS-basedO2Obusinessopportunities;3)competitionbetweenonlinevideoplayersextendingtohomeentertainment/smart-TVarena;4)transitiontomobileadvertisingremainschallenginganddisruptive;and5)continuedfightforusertraffic/mobileaccesspointsviaindividualapps,integratedplatformandappstoredistributionapproach.
Barclays|ChinaInternet13September201311KEYTREND1:MOBILEGAMES–INCREASEDCOMPETITIONWITHMONETIZATIONRAMPAshighlightedinourpreviousreportsEtherWorldChina:MobileInternet:OpportunitiesandThreats(4October2012),EtherWorldChina–Onlinegames:Sizeandscalematter(7January2013),andChinaInternet:Keytrendsfor2H13(14June2013),mobilegamesstartedtotakeoffinChinain2Q13,withmajorgamingcompaniessuchasTencent,PerfectWorld,ShandaGamesandNetEaseallreleasingsmartphonegames.
WeexpectcompetitiontointensifyasleadingPConlinegamingcompaniessubsequentlyreleasehigher-qualityandmoresophisticatedmobilegamesin2H13,whichcouldresultinlongerlifecyclemobilegamesandgreatermonetizationopportunities.
Tencentlikelythebiggestbeneficiary,leveragingitsWeChatandMobileQQWereiterateourviewthatTencentisbestpositionedtoleverageashiftintrafficfromPCgamingtomobilegaming,as:1)ithasseveralmobileaccesspointswithalargeandstickyuserbase,suchaswirelessQQ,WeChat,MobileQzoneandMobileBrowser,allowingTencenttocapturemobileusersandcross-sellitsproducts;and2)itisthelargestPCgamingcompanyinChina,offeringmassivelymultiplayeronline(MMO)games,casualgames,webgamesandmobilegames,andwilllikelyattractthird-partydevelopersseekinginterestingmobilegamesfortheiruserswithitsopenplatformstrategy.
Withc478mnsmartphonemonthlyactiveusers(MAU)foritsMobileQQ,236mMAUforWeChat,andabout357mnMAUforMobileQzoneasof2Q13,Tencenthasthehighesttrafficandmostopportunitytopromotemobilegamestoitsusers,inourview.
Infact,withthereleaseofthelatestWeChatversion5.
0,Tencentalsoofficiallylauncheditsnewmobilegameplatformwithtwonewgames,TimiMatchEverydayandClassicAircraftshooting,on5August.
Tencentreleasedanothernewgame,LinkLink(WeLink),on22August,followedbyRhythmMaster(amusicgame)on2September.
Accordingtothelatestdatafromappannie.
com(asof9September),athird-partywebsitethattracksappstores,RhythmMaster,LinkLinkandTimiMatchcurrentlyrankfirst,secondandfourth,respectively,onChina'sIOSappstoreintermsofnumberofdownloadsinthe"games"categoryand"overall"ranking(Figure8).
Intermsofrankingbygrossrevenue,TimiMatchranksseventhandRhythmMasterdroppedtoeighthfromfourthasof5September.
FIGURE8TencentWeChatgamesandpipelineWeChatgamesLaunchdateGenreRankofdownloadsoniOSRankofdownloadsonAndroidRankofgrossrevsoniOSCurrentgamesTimiMatch05-Aug-13Casualpuzzle4127ClassicAircraftWar05-Aug-13Casualshooting6NA57LinkLink22-Aug-13Casualpuzzle2NA20RhythmMaster02-Sep-13Music&rhythm118ForthcominggamesDailyRacingNACasualracingNANANAWeGunNACasualshootingNANANAWeRunNACasualrunningNANANAHuanLeDouDiZhuNACasualcardgameNANANATowerofSaviorsNACasualRPGNANANAPlantvs.
ZombiesIINACasualsocialgameNANANAMoonWolfNARPGNANANAFruitNinjaNACasualRPGNANANADevilMakerNARPGNANANANote:rankasof9Sep2013.
Source:Companydata,Appannie.
com,BarclaysResearchestimatesBarclays|ChinaInternet13September201312Qihoo:monetizingviaappstoredistributionchannelQihoostartedtogeneratemoremeaningfulrevenuesfrommobileinternetin1Q13,weestimateapproximatelyUS$5-6mn,mainlythroughrevenuesharingandapplicationdownloadsviaitsmobileappstore.
Althoughthecompanyhasmadenospecificcommentontherevenuecontribution,webelieveitisapositivesignthatQihoohasbeenmakingprogressinmonetizingitsmobiletraffic.
Managementcommentedonits2Q13callthatthe360AppstorehasbeenoneofthemostpopularappstoresfortheAndroidplatform,andthatitsflagshipproduct–360MobileSafe–furtherexpandedmarketsharebyreaching338mnsmartphoneusersbyend-2Q13.
Inaddition,ourrecentproprietarysurveyofsmartphoneusersinChina(seeChinaInternet:MobileInternetsurveytakeaways,3September2013)showedthatQihoo's360mobileassistantappstorerankedamongthemostpopularchannelswithpenetrationratesof39.
1%foruserstosearchanddownloaditsapps,competinghead-to-headwithBaidu's91Wirelessappstoreat38.
5%.
WeestimateQihoo'sappstore-relatedrevenuewillcontributec14%andc22%ofthecompany'stotalrevenuein2013and2014,respectively(estimatesraisedinthisreport–seepages45-53).
FIGURE9BarclaysResearchmobileusersurvey–mostpopulardownloadappstoresSource:BarclaysResearchsurveyThefollowingtableshowsthetop10mobilegamesbytotaldownloadsonQihoo'smobileassistantplatform(mobileappstore).
FIGURE10Top10mobilegamesbasedontotalmonthlydownloadsRankGamenameDeveloperMonthlyno.
ofdownloads1TempleRun2ImangiStudios14,968,3192FishHunter2ChukongTechnology9,402,5033CarrotFantasyCairotTechnology7,756,4614HardestGameEver2ChienMingLiang5,974,7145ZhaoNiMeiFengboNetwork5,932,0276SkiingAdventureYouDaoYiNetwork4,991,3367Planetvs.
ZombiePopCap4,715,3668FruitNinjaHalfbrickStudios4,678,7769DouDiZhuLianzhongTechnology4,379,13710CarCarCartogetherYinHeJuZhenNetwork4,341,155Note:Rankasof10Sep2013.
Source:Qihoocompanydata,BarclaysResearch38.
5%13.
8%39.
1%4.
0%11.
5%19.
0%4.
6%91wirelessQQ360FeiliuUCOtherNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%Barclays|ChinaInternet13September201313PerfectWorld:fastmoverwithfocusedstrategyPerfectWorldlaunchedthreemobilegamesinMay2013(seeFigure11)–thecardgame"LegendofChu&Han",thestrategygame"RiseoftheKing",anda2Dturn-basedgame"ReturnofCondorHeroes".
Itkickedoffopenbetatestingfor"ReturnofCondorHeroes"on22AugustandstartedtoaggressivelypromotethegameviavariousthirdpartyAppstoresandgamedistributors.
Accordingtoappannie.
com,"ReturnofCondorHeroes"hasbeengaininggoodtraction,rankinginthetop10bygrossrevenuesinceitslaunch,withalatestrankingoffifthbygrossrevenueand90thbydownloadsonChina'sIOSappstore(asof10September2013).
FIGURE11PWRD'scurrentmobilegameportfolioPWRDcurrentgamesLaunchdateGenreRankofdownloadsoniOSRankofdownloadsonAndroidRankofgrossrevsoniOSLegendofChu&HanMay-2013RPGNANA76RiseoftheKingMay-2013RPGNANANAReturnofCondorHeroesMay-2013RPG(LouisCha'snovel)90NA5Note:rankasof10Sep2013.
Source:Companydata,AppAnnie,BarclaysResearchWeexpectPWRDtoreleasethesegamesoverseasbyleveragingitssolidglobaldistributionchannelsaswellasitspartnershipswithoverseasonlinegamepartners,andbelieveitwillhavemoreopportunitytorampupmonetizationintheseoverseasmarkets.
ShandaGames:howlongcan"MillionArthur"sustainitsperformanceinChinaShandaGamesfinished2Q13withtotalmobilegamerevenueofUS$16.
5mn,downfromUS$17.
0mnin1Q13,mainlyduetoadeclineinrevenuecontributionfromitsmobilegame"MillionArthur"inKoreaasusersspentlessonin-gamepurchaseofvirtualitems.
However,thiswaspartlyoffsetbythefirstfull-quartercontributionfrom"MillionArthur"inTaiwan.
Wenotethegame'srankonKoreaGoogleplayfelltoNo.
26asof30August,andNo.
46asof10Septemberbasedonthegame'sgrossrevenues(source:Appannie),comparedwithitstop-10positionthreemonthsago.
GivenKoreaisoneofonlyafew"core"countriesformobilegamesmonetizationintheworld,weviewtherapidslowdowninrevenuethereforMillionArthurasdisappointingandexpectittoraiseinvestorconcernsoveritsgamelifecyclesinceitwaslaunchedonlyinDecember2012.
Shandalaunched"MillionArthur"inChinaon18July,andplanstomigratethegametheSingaporeandMalaysiamarketslaterin2H13.
ThegamewastheNo.
2rankedgameappbygrossrevenueontheiOSAppstoreinChinawithin12hoursofitslaunch,andcurrentlysitsatNo.
3basedoniOSgamegrossingrank(source:Appannie,10September).
However,givenahighlycompetitivecard-battlemobilegamemarketinChina,webelievethelifecycleandpotentiallevelofsustainabilityareconsiderablerisksforMillionArthurinChina,aswehaveseeninKorea.
NetEase:leveragingYiChatasitsgamedistributionchannelWebelieveNetEaseiswellpositionedandpreparedtocaptureforthcomingmobilegameopportunitiesdueto:1)itsin-depthexperienceinPCgamedevelopmentandoperation;2)itsunderstandingofgamers'needsandpreferences;3)itsstrongtractionandsoliddownloadsofsomeofitssuccessfulmobileappssuchasNews(79mndownloadand29mactiveusers),Youdaodictionary(300mndownloads)andReader(70mndownloads)dataasof2Q13,enablingittocross-promoteitsupcomingmobilegames;aswellas4)itsrecenttie-upwithChinaTelecomonYiChat(acompetingproductforWeChat).
Barclays|ChinaInternet13September201314NTESlauncheditsfirstsmartphonegame–amobileversionof"FantasyWestWardJourney2"(FWJII,KoudaiXiyou)on2July.
Onits2Q13resultscall,managementnotedtheinitialpositivefeedbackforitspocketmobileversionofFWJIIandalsonotedplanstoreleaseafewmoremobilegamesinthenextfewmonths.
Givenadrevenuesfrommobilearestillsmall,andgivenitscontinuedfocusmoreonbalancingitsuserexperiencewithmonetization,NTESdoesnotplantoaggressivelymonetizeitsmobileapptrafficinthenearterm.
On4September,NetEasereleasedanewsmartphonegameonChina'sIOSplatform–Taikongzhanji,anaircraftshootinggame.
ThisisapaidgamethatchargesRmb6perdownload.
Asof9September,thegamerankedNo.
2onappannie.
comintermsofChinaIOSpaidgameranking(numberofdownloads).
WeexpectNTEStograduallyreleaseitsmobilegamesoverthe6-12months,potentiallyleveragingitsYiChatplatformasitsmaingamedistributionchannelforAndroidphones.
Competitionformobilegameslikelytointensifyin2H13and2014Movinginto2H13andinto2014,wesee:1)potentialsurprises/viralhitsamongupcomingmobilegamereleasesbymajoronlinegamingcompanies;2)migrationofmanyexistingPC-basedwebgamedeveloperstomobilegamedevelopmentorplatforms,leadingtomoreintensecompetitioninmobilegames–inthisscenario,differentiatedcontentandbroaddistributionchannelsarelikelytoprovethekeytosuccess;3)largegameplatformoperatorssuchasTencentandQihooleveragingtheirorganictrafficanduserbasetobecomethepartnerofchoiceformobilegamedistribution,andgeneratingmobilegamerevenuesviarevenue-sharingmodels.
Overtime,thelargerandstrongertheplatformsare,thestrongertheirpricingpowerwilllikelybe,aswithonlinePCgameplatforms.
Hence,therecouldbesomeshiftandchangeinrevenuesharingsplit,makingitmorefavourableforplatformsandlessfavourablefordevelopers,inourview.
Withtheupcomingreleaseofmobilegamesbymajoronlinegamingcompanies,welookforwardtoanevenmoreexcitingperiodin2H13assomeofthesereleasescouldpotentiallybecomebighits,posingupsideriskstoourexpectationsandmonetizationassumptions.
FIGURE12Comparisonofonlinegamingcompanies'currentmobilegamedevelopmentandoperationsGAMEPWRDGACYOUNTESTencentStrategyfocusGamedevelopment&operationGamedevelopmentGamedevelopmentGamedevelopmentGamedevelopment&operationGamedevelopment&operationDistributionplatformiOS,in-houseplatformiOS,FeiLiuMobile,Qihoo,91WirelessNANAiOS,Qihoo,91WirelessWeChat,WirelessQQ,iOSTargetedmarketKorea,China,Taiwan,Singapore,Malaysiaetc.
China,andmigratesuccessfultitlesintooverseasmarketChinaChinaChinaChina&overseasmarketsR&Dteam(Est.
)150-200150-200100-150100-150NAOver2,000(Est.
)2Q13TotalR&D(US$mn)26.
732.
513.
226.
333.
1NAMobilegamerevs(US$mn)16.
5NANANANANAMobilegamerevs%oftotal9.
4%NANANANANASource:Companydata,BarclaysResearchOvertime,therecouldbeashiftandchangeintherevenuesharingsplit,makingitmorefavourableforplatformsandlessfavourablefordevelopers,inourviewBarclays|ChinaInternet13September201315FIGURE13Comparisonofonlinegamingcompanies'mobilegamecoretitlesandpipelineGAMEPWRDGACYOUNTESTencentSuccessfulhittitlesMillionArthurLegendofCondorHeroesNANANATimiMatch,RhythmMaster,WeMatchMobilegamecurrentportfolioMillionArthur,WooolofPalatine,etc.
LegendofChuandHan,RiseoftheKing,ReturnoftheCondorHeroes,etc.
NoneNoneFWJKoudaiTimiMatch,RhythmMaster,WeMatch,ClassicAircraftWar,QQYujian,etc.
MobilegamepipelineDragonNest;HellLord;GuardianCross;G-HomeplatformOneortwogamesperquarters;mobileversionofSwordsmanOnlineOnenewtitleby4Q13Onenewtitleby4Q13Severalnewtitlesin2H13SeveraltitlespermonthreleasedonbothWeChatandWirelessQQplatformSource:Companydata,BarclaysResearchFIGURE14ComparisonofcurrentmobilegameoperationsTencentQihooRenrenStrategyfocusGameplatformoperationGameplatformoperationGameplatformoperationSuccessfultitlesTimiMatch,RhythmMaster,WeMatchI'mMTOnline,LegendofQMartial,DaZhangMengSoccerManager,RenrenFarmMajortitlesTimiMatch,RhythmMaster,WeMatch,ClassicAircraftWar,QQYujian,etc.
Only3rdpartygames3rdpartygamestogetherwithsomein-housetitlesUpcominggamesseveraltitlespermonthreleasedonbothWeChatandWirelessQQplatformDependingon3rdpartygames1~2in-housegamesperquarterTargetedmarketChinaandoverseasmarketsChinaChinaSource:Companydata,BarclaysResearchThefollowingtablesshowthetopmobilegameslistedbyrevenueandsortedbyplatform(IOSandAndroid)andcountry(China,KoreaandJapan),compiledbyAppAnnie.
FIGURE15TopmobilegamesbasedongrossrevenueinChina(iOS)FIGURE16TopmobilegamesbasedonnumberofdownloadsinChina(Android)RankGamenameDevelopers1I'mMTOnlineLOCOJOY2LegendofQMartialKoramGame3ClashofClansSupercell4MillionArthurMeiyuInformation5SwordsofKingdomLineKongEntertainment6RhythmMasterTencent7TimiMatchTencent8PowerofDragonCom.
Digitalcloud9DaZhangMengAir&MudStudio10ShenXianDaoPinIdeaCo.
RankGamenameDevelopers1ClassicAircraftWarTencent2RhythmMasterTencent3CavemanRunCrazyGame4TakagismIndividualdeveloper5TurboRacingForeverFun6DeathShooting-HuntleaderWinnerStudio7HappyDouDiZhuTencent8PopStarPopDaddyGames9TankWar2013MyWorks10JourneyWarsSuperFightingFreeWorksSource:AppAnnie(8Sep2013),BarclaysResearchSource:AppAnnie(8Sep2013),BarclaysResearchBarclays|ChinaInternet13September201316KEYTREND2:TRANSACTION-BASEDTRAVEL&ECOMMERCETOBENEFITFROMMOBILEInadditiontomobilegames,whichweviewasoneoftheeasiermonetizationmodelsformobiletraffic,webelievethetransaction-basedmobilemodelsuchasonlinetravelbookingandmobileeCommercewilllikelybenefitfromrisingsmartphonepenetrationandincreasedmobileInternetusagepenetrationinChina.
ThisisoneofthereasonsforourpositiveviewonCtrip.
WeexpectCtriptobenefitfromhighersmartphoneadoption,leadingtohighermobilebooking,whichcouldinturnresultinare-accelerationoftop-linegrowth.
Inaddition,Ctripnotedduringits2Q13earningscallthatitbelievesmarginsformobilebookingarelikelytobeslightlyhigherthanthoseforPCatnormalizedlevels,duetolowerS&Mspend.
WebelieveCtriptogainmoremarketshareatafasterratehencetofurtherconsolidatethefragmentedofflinetraditionaltravelagents.
MobiletravelbookingsrampingupnicelyAccordingtodatafromCtripandeLong,bookingsfrommobiledeviceshavegrownrapidlyoverthepast2-3quarters.
Specifically,Ctripnotedinits2Q13resultscallthatmobilebookingsaccountedfor20%oftotalhotelbookingsasof2Q13,upfrom15%in1Q13and10%in4Q12,whilemobilebookingsaccountedfor15%oftotalairticketbookingsasof2Q13,upfrom10%in1Q13.
eLongmanagementalsonotedinits2Q13resultscallthatmobileaccountedfor20%oftotalhotelbookingsinthatquarteranditexpectsthepercentagetoincreaseto25%in3Q13.
FIGURE17Mobilevolumeandappdownloadscomparison(CtripvseLong)Ctrip4Q121Q132Q13Appdownloads20mn35mn50mnOnline&mobilebookings%oftotal50%na55%HotelPCbookingnana45%Hotelmobilebooking10%15%20%AirPCbookingnana40%Airmobilebookingna10%15%eLong1Q132Q133Q13EAppdownloadsna25mnnaMobilebookings%oftotal15%20%25%Source:Companydata,BarclaysResearchBotheLongandCtriparecarryingoutaggressivemarketingcampaignstodrivemobileappinstallationandactivation,asnotedbyeLongmanagementonits2Q13call.
Weexpectsmartphonepenetrationcontinuestoincreaseoverthenext12-18months,andthatthepercentageoftrafficandbookingscomingfrommobilewillcontinuetorise,accountingforamoremeaningfulrevenuecontributionfortheonlinetravelagents(OTAs)of50%in2015,vs15-20%now.
Webelievemobiletrafficandmobilebookinggrowth,especiallyamongleisuretravellers,couldprovetobeanimportantdriverforvolumegrowthinthenext2-3years.
WeseeCtripbenefitingfromhigheruserpenetrationandadoption,whichislikelytohelpitgainmoremarketshareastheoveralltravelindustrycontinuestoconsolidate.
Barclays|ChinaInternet13September201317FIGURE18MobileInternetsurvey–mobiletravelapppenetrationFIGURE19MobileInternetsurvey–mobiletravelappdownloadsmarketshareSource:BarclaysmobileInternetsurveySource:BarclaysmobileInternetsurveyeCommercemobile-basedtransactionanotherrisingtrendConsistentwithothersegments,mobile-basedeCommercetransactionhavecontinuedtogrowfasterthanoveralleCommerceoverthepastfewquarters,withtotaltransactionvaluereachingRmb37.
5bnatend-2Q13,up181%y/yandaccountingfor8.
6%oftotalonlinetransactionvalueaccordingtoiResearch,athird-partyresearchproviderinChina.
WebelievetherisingpenetrationofmobileeCommercetransactionsisunderpinnedby:1)amoreuser-friendlyexperienceoneCommercesmartphoneapps;2)moreSKUorproductsdisplayedonmobileplatforms;and3)moresafeandconvenientpaymentoptionsonmobiledevices.
FIGURE20ChinamobilequarterlyeCommercetransactions(Rmbbn)andy/ygrowthFIGURE21ChinamobilequarterlyeCommercetransactionbreakdownSource:iResearch,BarclaysResearchSource:iResearch,BarclaysResearch41.
4%11.
5%5.
7%41.
4%21.
3%CtripElongQyerOthersNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%Ctrip34%Elong9%Qyer5%Others34%Notuse18%1.
12.
03.
25.
47.
613.
417.
924.
326.
737.
5260%374%414%518%605%554%462%351%250%181%0%100%200%300%400%500%600%700%05101520253035401Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13TotalmobiletransactionsYoYgrowth99.
3%98.
9%98.
4%97.
7%97.
1%95.
6%94.
4%94.
3%92.
4%91.
4%0.
7%1.
1%1.
6%2.
3%2.
9%4.
4%5.
6%5.
7%7.
6%8.
6%0%20%40%60%80%100%1Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13DesktoptransactionsMobiletransactionsBarclays|ChinaInternet13September201318FIGURE22ChinaeCommercequarterlytotaltransactionvalue(Rmbbn)FIGURE23ChinaeCommercetransactionbreakdown(quarterly)Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearchAlibabaGroupcontinuestodominatetheboththeC2C(ConsumertoConsumer)andB2C(BusinesstoConsumer)marketsinChina.
InB2C,Tmallfinished2Q13withatransaction-basedmarketshareof50.
7%,comparedto51.
3%in1Q13,whileTencent'smarketsharecameinat5.
6%vs6.
8%in1Q13.
FIGURE24ChinaB2Cmarketsharebreakdown(2Q13)FIGURE25Chinanon-platformB2Cmarketsharebreakdown(2Q13)Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearchWhilepricingcompetitioneasedslightlyin1H13,weexpectittopickupagainin2H13asweenterthetraditionallystrongershoppingperiod.
Inaddition,wenotethatsomeofthecompetitionhasshiftedto"speed"ofdeliveryservice.
Nonetheless,comparedto2012,theoverallcompetitiveenvironmenthasbeenscaledbacksomewhat.
Alibaba'sTaobaoWirelessremainsadominantmobiledeviceplayerwitha76%marketsharein2Q13,asmeasuredbytotaltransactionvalueonthemobileplatform(source:iResearch).
360BuyMobilehada4.
1%marketshareandwasthesecondlargestplayer,followedbyTencenteCommerceWirelessat1.
4%andSuningat1.
0%.
DangdangMobilehada0.
6%marketsharein2Q13.
OurrecentmobilesurveyalsonotedthatTaobao'smobileapphasapenetrationrateof69%whileDangdanghasapenetrationrateof13.
8%.
165.
4182.
7202.
5233.
9257.
8300.
9319.
3424.
9352.
1437.
196%80%78%45%56%65%58%82%82%45%0%20%40%60%80%100%120%0501001502002503003504004505001Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13Transactionvalue(Rmbbn)YoYgrowth21.
0%23.
2%24.
8%30.
3%23.
7%29.
5%31.
0%32.
3%34.
1%36.
1%79.
0%76.
8%75.
2%69.
7%76.
3%70.
5%69.
0%67.
7%65.
9%63.
9%0%20%40%60%80%100%1Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13B2CC2CTmall50.
7%JD17.
1%Tencent5.
6%Suning5.
0%Dangdang1.
8%Gome1.
9%VIPShop2.
0%Amazon2.
2%1Haodian1.
4%Others11.
6%JD43.
9%Suning12.
9%Dangdang4.
6%51Buy5.
4%VIPShop5.
1%Amazon5.
5%1Haodian3.
6%Gome3.
9%Vancl1.
9%Others13.
2%Barclays|ChinaInternet13September201319Benefitingfromrapidly-growingsmartphonepenetration,weexpectmobileeCommercetocontinuetogrowfasterthanoveralleCommercein2H13.
Similartoonlinetravelbooking,weexpectmobileeCommercetobeoneofthebiggestbeneficiariesofrisingsmartphonepenetrationandrisingconsumerdemand.
eCommercecompaniesthathavestrongermobileapps,suchasAlibabaandTencent,willlikelybetocommandhighermarketshareinthefuture,inourview.
Nevertheless,consumers'confidenceinamobilepaymentsystemanditseaseofusearelikelytobeanear-termhurdle.
FIGURE26MobileeCommercemarketsharebreakdown(2Q13)measuredbytotaltransactionvalueFIGURE27BarclaysResearchmobileusersurvey–mobileeCommercepenetrationratesSource:iResearch,BarclaysResearchSource:BarclaysResearchsurveyMobilepayment:significantopportunityforChina'sonlinepaymentmarketWhileChina'sbankingandpaymentsystemstilllagthoseofmoredevelopedcountries,weviewincreasedInternetpenetration,arisingmiddle-incomegroupthathashigherdisposableincomes,andincreasedadoptionofonlineshoppingbehaviourasasignificantopportunityforthecountry'soverallonlinepaymentindustry,inparticularformoreestablishedthird-partyoperatorssuchasAlibaba'sAlipayandTencent'sTenpay.
AccordingtoiResearch,thetotalthird-partyonlinepaymentmarketinChinareachedRmb3.
7tnin2012,up66%fromRmb2.
2tnin2011;itisexpectedtogrowfurthertoRmb5.
7tnin2013andRmb14.
7tnby2016,athree-yearCAGRof37%.
Basedonmarketsharebreakdownofonlinepayments,Alipayisthelargestwithamarketshareof49.
2%in2012accordingtoiResearch.
WebelieveastickyuserbaseandwiderangeoffunctionswillenableAlibabatoeasilymigrateAlipayusersfromPCtomobileinthenext5years.
Tencent'sTenpayisthesecond-largestplayerwithamarketshareof20%in2012,followedbyUnionPayat9.
3%and99Billat6.
9%.
Thetopfouronlinepaymentprovidersaccountedformorethan85%ofthetotalmarketsize.
TaobaoWireless76.
2%JD4.
1%Tencent1.
4%Suning1.
0%Dangdang0.
6%Amazon0.
5%Others16.
2%69.
0%31.
6%22.
4%5.
2%13.
8%4.
0%10.
9%TaobaoT-mallJDVIPShopDangdangOtherNotuse0.
0%20.
0%40.
0%60.
0%80.
0%Barclays|ChinaInternet13September201320FIGURE28Totalthird-partyonlinepaymentmarketsize,2012FIGURE29Third-partyonlinepaymentmarketsharebreakdown,2012Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearchLookingatthemobilelandscape,China'sthird-partymobilepaymentmarketreachedRmb151bnin2012,up89%y/y,andiResearchestimatesitwillgrow100%in2013toRmb302bn.
By2016,thethird-partymobilepaymentmarketisexpectedtoreachRmb1.
36tn,implyingathree-yearCAGRof65%.
Inthemobilelandscape,Alipayseemstohaveanevenstrongermarketpositionwitha75%marketsharein2Q13(accordingtoiResearch),followedbyTenpayatjust5.
8%andUnionPayat5.
4%.
FIGURE30Totalthird-partymobileonlinepaymentmarketsizeFIGURE31Third-partyonlinemobilepaymentmarketshare,2Q13Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearch0.
51.
02.
23.
75.
78.
511.
714.
7100%118%66%56%49%37%26%0%20%40%60%80%100%120%140%024681012141620092010201120122013E2014E2015E2016ETransactionvalue(Rmbtrillion)y/ygrowthAlipay49.
2%Tenpay20.
0%UnionPay9.
3%99bill6.
9%ChinaPNR6.
7%Yeepay3.
1%Ips2.
8%Others2.
0%39.
058.
679.
9151.
1302.
3537.
0865.
31,358.
350%36%89%100%78%61%57%0%20%40%60%80%100%120%02004006008001,0001,2001,4001,60020092010201120122013E2014E2015E2016ETransactionvalue(Rmbbn)y/ygrowthAlipay75.
0%Tenpay5.
8%UnionPay5.
4%ChinaMobile3.
5%Qiandai2.
1%Umpay1.
9%Other6.
4%Barclays|ChinaInternet13September201321KEYTREND3:ONLINEVIDEO–COMPETITIONEXTENDSTOSMART-TVFollowingthemergerofYoukuandTudou(announcedinMarch2012),theonlinevideoindustrycontinuedtoconsolidateasBaidutookfullcontrolofiQiyiinlate2012andthenwithiQiyiacquiredPPS'sonlinevideobusinessinMay2013(announcedon6May).
GivenarelativelysteadymarketshareforPC-basedonlinevideoplayerssuchasYoukuTudou,iQiyiPPS,TencentandSohuvideoandastabilizingcontentprice,weexpectthePC-basedonlinevideocompetitionlandscapetobemaintainrelativelystableforthenextfewquarters,withgrowthmainlycomingfromacontinuedshiftinadvertisingbudgetsfromofflinetoonline.
Nevertheless,webelieveamoreexcitingdevelopmentin2H13andinto2014willbe"multi-screen"strategies,inwhichcompetitionwillextendtosmart-TV/homeentertainmentwhereonlinevideocontentproviderswillfightfor"livingroom"mindshare.
Wealsoexpectsmartphone/iPadadbudgetallocationtobeafocusareaforcompetitioninthevideospace.
1.
BaiduiQiyi,LeTVandXiaomileadthemarketinSmart-TVinitiativeBaiduiQiyi:On4September,BaiduiQiyiannouncedthatitplanstosella48-inchSmartTVjointlywithTCLMultimediaTechnologyGroup.
Theproductistogoonsaleeffectivelyfromtheannouncement,atRMB4,567fortheadvancedseriesandRMB2,999forthenormalseries.
Bothversionsincludethesame48-inchscreen,whiletheadvancedversionwouldsupportlargerstoragespace,clearervideoimage,andmorepremiumvideocontentthanthenormalversion.
Accordingtotheagreement,BaiduiQiyiwouldprovidethecontent,whileTCLisresponsibleformanufacturingproducts.
AsBaiduiQiyialreadyhasalargeinventoryofprofessionalproducedvideocontentsuchasTVdramas,moviesandrealityshows,webelievethenewSmart-TVinitiativecouldenableittohaveanearly-moveradvantageinpenetratingusers'homeentertainmenttimespend,allowinguserstoconsumecontentregardlessofthescreens/devicesusedandwherethecontentisviewed(athomeoroutsidethehome).
Overall,thiswillhelptoexpandSmart-TV'suserbaseandincreaseitsoverallusertimespend.
WhileSmart-TVisstillatanearlystageandnear-termuserpenetrationcouldbelimitedbyaffordability,webelievethe"multi-screen"approachwilllikelybecomethenormformostonlinevideoplayersastheycontinuetoseekhigheruserpenetrationandhigherusertimespend.
Overtime,weexpecttheirabilitytooffer"multi-screen"penetrationwillallowonlinevideoproviderstocapturealargershareofadvertisers'budgets.
FIGURE32OverviewofleadingSmart-TVprovidersinChinaSmart-TVprovidersSizeLaunchdatePricerangeTVmanufactureriQiyiTCLSmartTV48inch03-Sep-13Rmb4,567/Rmb2,999TCLXiaomi3D-capableSmartTV47inch05-Sep-13Rmb2,999WistronCorp.
(Taiwan)LeTVSmartTV40inch/60inch05-July-13Rmb6,999/Rmb1,999FoxconnAlibabaSmartTV42inch/55inch10-Sep-13Rmb1999andaboveSkyworthPPTVsmartTVboxnm01-Jun-12Rmb299N/ASource:Companydata,SinaTech,BarclaysResearchLeTV(notrated,300104SZ):LeTVannouncedinJulythatitplannedtolaunchtwoSmart-TVmodels(X60andS40)inpartnershipwithSharp,QualcommandChinaCentralTelevision'sonlineTVstation(CNTV).
Foxconnwouldmanufacturethemachines.
Accordingtocompanydisclosures,thenewSmart-TVmodelswouldfeatureQualcommS4PrimeprocessorswithWificonnectivity,andwouldbepricedatRMB6,999forthe60-inchX60versionandRMB1,999forthe40-inchS40version.
Barclays|ChinaInternet13September201322Xiaomi(privatecompany):XiaomiheldapressconferenceinBeijingon5Septembertounveilanewflagship47-inch,Android-powered3DSmartTV,whichisscheduledtogoonsaleinOctoberinChinaataretailpriceofRMB2,999.
Accordingtothecompany,theXiaomiSmart-TVisdescribedassuper-thin,measuringjust4.
8centimetres,andwillcomeinsixcolours.
Italsofeaturesa3Dhigh-definitionLCDscreenfromLGorSamsung,andrunsona1.
7GHz,quadcoreQualcommSnapdragon600processor.
Xiaomi'smovetoentertheTVmarkethascomeafterBaiduiQiyi'sannouncementofasimilaroffering,whileAppleiswidelyreportedtobeworkingonaSmart-TV(Source:DonewsTech,6September).
PPTValreadylaunchedaSmart-TVon1June2013,whileAlibabaannouncedon10SeptemberthatitistoreleaseaSmart-TVjointlywithSkyworth.
Despiterapidgrowthinonlinevideositesgrowing40.
0%y/yin2012and19.
7%y/yin1H13,themajorityoftimespentonvideoentertainmentinChinaremainsontheofflineTVplatform,suchastraditionalcableTV,digitalTV.
Hence,theextensiontotheSmart-TVmarketcouldallowInternetcompaniestocapturethelargeofflineTVmarket.
TheirSmart-TVs'ease-to-usefunctionsandrichercontentvstraditionalTV,supportedbycloudtransitionandadvancedprocessors,couldevenenablethemtotakeoverthetraditionalcableTVmarketinthelong-run,inourview.
BaiduiQiyiandXiaomihavebeenfastmoversintermsofexpandingtheirbusinesstotheSmart-TVmarket.
IfusertractiononSmart-TVisstrong,thiscouldpromptothercompanies,suchasYoukuTudou,TencentandSohu,toenterthemarket.
2.
Mobilemonetizationonvideoadscouldstartmeaningfullyin2H13Basedonthelatest2Q13resultsreportedbyYoukuTudou,thecompanycontinuedtoseegrowthmomentumonmobilevideotraffic.
Dailyvideoviewsgrew100%y/yto200mn,withmorethan180mnmonthlyactiveusersand70minutesofaveragevideotimespent.
AccordingtoYoukuTudou'sinternaldatamining(whichitdisclosedonits2Q13call)onusers'behaviour,nearly60%ofonlinevideouserswatchvideodailyonboththeirdesktopsandmobiledevicesand75%onamonthlybasis.
Inaddition,bothYoukuandTudou'smobileappshaveincludedasocialrecommendationfunctiontoenhanceuserinteraction.
Recallon7June,YoukuTudouannouncedthatithadreachedastrategiccontent-sharingalliancewithSina.
Basedontheagreement,SinawillhaveaccesstoYoukuTudou'svideolibraryandleverageWeibo'sstrongPCandmobileplatformtopromoteitslicensedvideocontenttoWeibousersstartingJuly2013.
Thevideopromotionunderthisprogrammeincludesmultipleformssuchas:1)apersonalizedrecommendationsectionembeddedbetweenmicro-bloggingposts;2)searchresultsformoviesandTVdramasprovidingdirectthumbnaillinkstowatchthevideotitlesinstantly;and3)directlinkstowatchvideosonYoukuTudouplatformsoneachtitle'sWeibohomepage.
WeviewtheYouku-Sinapartnershipasstrategicandpositiveforbothcompanies.
SincemanyWeibouserstendtopostinterestingvideolinks,webelievemeaningfulYoukuvideotrafficiscomingviatheWeiboplatform.
Summary:WebelieveBaidu'sstrategicdecisiontoacquirePPSandcombineitwithiQiyiwilllikelypromptfurtherstrategicagreements/partnershipsintheindustrywhilestrengtheningitsoverallvideostrategyandcompetitiveposition.
WhileweexpectiQiyiPPStogainfurthertractionfromadvertisers'budgetallocations,weremainconfidentonYoukuTudou'sstrongbrandandmanagementexecutiontrackrecord.
Hence,forinvestorswholikepureplayexposuretoonlinevideoadvertisinggrowth,webelieveYoukuTudouisstillthebeststandalonevideoplayer.
Thatsaid,iftherewereanyirrationalcompetitiononcontentcostagain,wethinkYoukuTudouislikelytobeatadisadvantagegivenitsbalancesheetpositioncomparedtothestrongerplayersfromBaidu,TencentandevenSohu(whichhassupportfromitsonlinegamingbusinessChangyou).
Barclays|ChinaInternet13September2013233.
Comparingthevariousvideosites'metricsLookingatthedailyandmonthlyuniquevisitors'metrics,YoukuTudoucombinedleadpeersonweb-based-onlyvideoservices;however,ifweincludeclient-basedvideoservices,metricsforiQiyiPPScombinedareveryclosetoYoukuTudou.
Infact,asofJuly2013,iQiyiPPShadalargermarketsharemeasuredbytotalusertimespentatabout20.
4%,followedbyYoukuTudouat18.
5%(Figure38).
FIGURE33Rankofdailyuniquevisitors(mn)forweb-basedvideosites,July2013FIGURE34Rankofdailyuniquevisitors(mn)forwebplusclient-basedvideosites,July2013RankCompanynameDailyUV(mn)1Youku34.
852Sohu27.
073Tudou23.
994iQiyi22.
605Tencent18.
226PPTV13.
287Xunlei13.
118Ku611.
789PPS5.
68RankCompanynameDailyUV(mn)1YoukuTudou58.
842iQiyiPPS50.
873PPTV32.
664Tencent28.
525Sohu27.
076Xunlei13.
117Ku611.
788Sina6.
78Source:iResearch,BarclaysResearchNote:YoukuTudou,iQiyiPPSdatamayincludeuseroverlapbetweenbothSource:iResearch,BarclaysResearchFIGURE35Rankofmonthlyuniquevisitors(mn)forweb-basedvideosites,July2013FIGURE36Rankofmonthlyuniquevisitors(mn)forwebplusclient-basedvideosites,July2013RankCompanynameMonthlyUV(mn)1Youku262.
682Sohu261.
693Tencent245.
454Tudou242.
905iQiyi211.
366Ku6157.
867XunleiKankan138.
968PPTV124.
569PPS94.
55RankCompanynameMonthlyUV(mn)1YoukuTudou505.
582iQiyiPPS424.
313Tencent324.
194Sohu261.
695PPTV220.
806Ku6157.
867Xunlei138.
968Sina107.
99Source:iResearch,BarclaysResearchNote:YoukuTudou,iQiyiPPSdatamayincludesuseroverlapbetweenbothSource:iResearch,BarclaysResearchBarclays|ChinaInternet13September201324FIGURE37Rankofmonthlytotaltimespent(mn)forweb-basedvideosites,July2013FIGURE38Rankofmonthlytotaltimespent(mn)forwebplusclient-basedvideosites,July2013RankCompanynameTimespent(mnhours)Marketshare(%)1Youku593.
0719.
5%2iQiyi482.
7315.
9%3Sohu429.
0014.
1%4Tudou397.
3013.
1%5PPTV146.
924.
8%6Xunlei137.
994.
5%7Tencent110.
603.
6%8Ku649.
281.
6%9PPS30.
701.
0%RankCompanynameTimespent(mnhours)Marketshare(%)1iQiyiPPS1,092.
7220.
4%2YoukuTudou990.
3718.
5%3PPTV593.
7811.
1%4Tencent549.
0410.
2%5Sohu429.
008.
0%6Xunlei137.
992.
6%7Ku649.
280.
9%8Sina23.
770.
4%Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearchFIGURE39Monthlytotaluniquevisitors(mn)forleadingvideoplayers(web-basedonly)FIGURE40Monthlytotaltimespentmarketshareforleadingvideoplayers(web+clientbased)Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearchFIGURE41Web-basedvideotimespentmarketshare,July2013FIGURE42Web-andclient-basedtotalvideotimespentmarketshare,July2013Source:iResearch,BarclaysResearchSource:iResearch,BarclaysResearch-50100150200250300Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13Jul-13TencentTudouQiyiSohuYouku0%5%10%15%20%25%30%35%Jan-10Apr-10Jul-10Oct-10Jan-11Apr-11Jul-11Oct-11Jan-12Apr-12Jul-12Oct-12Jan-13Apr-13Jul-13YoukuTudouiQiyiPPSPPTVintotalSohuTencentintotalYouku19.
5%Qiyi15.
9%Sohu14.
1%Tudou13.
1%PPTV4.
8%Xunlei4.
5%Tencent3.
6%PPS1.
0%Others23.
3%YoukuTudou18.
5%iQiyi9.
0%PPS11.
4%PPTV11.
1%Tencent10.
2%Sohu8.
0%Others31.
9%iQiyi&PPS20.
4%intotalBarclays|ChinaInternet13September201325KEYTREND4:ONLINEADVERTISING–TRANSITIONTOMOBILEREMAINSCHALLENGINGTheslowdowninChina'sGDPgrowthfrom9.
3%in2011to7.
8%in2012impactedtheoveralladvertisingbudgetsofanumberofadvertisingcompaniesinChina'sInternetsectorin2012,asreflectedinthedisappointingearningsresultslastyear.
Whiletheadvertisingoutlookandsentimenthasrecoveredsomewhatthisyear,duetogovernmenttransitionsuccessfullycompletedanduncertaintiesofpolicychangesnowbehind,wehavenotseenasignificantpick-upinoveralladbudgets.
Whiletheeconomicslowdownaffectedoveralladvertisingsentimentanddemand,theoverallonlineadvertisingoutlookremainsrelativelyhealthyandresilient,inourview,duetoacontinuedshiftofofflineadvertisingbudgetstoonlineandmoretargeted/higherROI(performancebased)onlineadmodels,suchassearchenginemarketingandsocialmediaadvertising.
Asaresult,giventhecontinuedshiftfromofflinebudgettoonline,especiallytoneweronlineadvertisingformatssuchasvideoadvertising,socialadvertising,and(toalesserextent)mobileadvertising,webelieveonlineadvertisingdemandhashelduprelativelywellforonlinevideositessuchasSohuTV,iQiyiandYoukuTudouandsocialnetworkingplayerssuchasSinaWeiboandTencent'sQzone(basedonrobustrevenuegrowth).
Inaddition,performance-basedadvertisingbudgets,suchassearchenginemarketingwithBaiduandTencent'sGuangdiantong(performancebasedtargetedadsystem),continuetogarnerstrongerdemandandhencefastergrowthcomparedwithbrandadvertisingbudgets.
Whilestillatanascentstageandalthoughadoptionbyadvertiserswilltaketime,mobileadvertisinghasalsostartedtocontributeanincreasingportionoftotalonlineadbudgetsforsomecompanies(forexample,Baidunotedthatitgeneratedmorethan10%oftotalrevenuefrommobilein2Q13).
ThisshouldenableonlineadvertisingdemandtoholdupbetterandbemoreresilienttoaneconomicslowdowninChina,inourview.
MobiletransitionremainschallengingforonlineportalWithintheonlineadvertisingsegment,webelievebrandadvertisingonthePCportalwillbemostnegativelyaffectedbythemobiletransition,whileonlinevideowillbebestpositionedtocaptureincrementaltraffic.
Theearlytransitionofsearchadvertisingcouldbeachallenge,butweexpectsearchvolumegrowthfrommobiletobemorethanoffsetbythePCtrafficcannibalization,andtoleadtoincrementalrevenuesgrowth(meaningcannibalizationonPCrevenueswouldbemorethanoffsetbyhighervolumeandrevenuescontributionfrommobile).
FIGURE43Brandadvertising–newsappSource:BarclaysResearchsurvey31.
6%46.
0%18.
4%13.
8%35.
6%2.
3%3.
4%NetEaseSinaSohuiFengTencentOtherNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%Barclays|ChinaInternet13September201326Themajorityofonlineportalshavepositionedthemobiletransitionviathereleaseoftheirflagshipnewsapps.
Sina,NetEaseandTencent'snewsappsstandoutashavingrelativelyhigheruserpenetration,accordingtoBarclay'srecentsurvey(Figure43).
Baidu:Baidusurprisedthemarketbyitsdisclosurethatmobilerevenueaccountedformorethan10%ofthecompany'stotalrevenuesin2Q13,duetothelaunchofitsupgradedadvertisingplatform.
NetEase:WefirstnoticedmobilebanneradsontheNTESnewsappafewmonthsago.
Thereisalsoatextlinkattheendofmostnewsarticles,whichwhenclickedleadstothebrandadlandingpageshowinganadvertisement.
WebelieveNTESisoneoftheearlierportalstointroduceadsonitsnewsappbasedonourpersonalusageandthusexpectagradualrampofadvertisingrevenuescontributionfrommobile.
PhoenixNewMedia:Mobileadvertisingrevenuegrew169%y/yin2Q13,contributingalmost22%oftotaladvertisingrevenuein2Q13(accordingtomanagement).
Thenumberofdailyactiveusersonmobiledevicesrose25%y/yor10%q/qtoover20mn,withuserengagementincreasingmeaningfullyfollowingthelaunchofamajorupgradedversionforthenewsapp.
OnlinevideohasattractedreasonableadbudgetfortabletsSohu:Followingthelaunchofthenewseasonof'TheVoiceofChina'on12July,Sohuvideo'sdailyuniquevisitorsandvideoviewsonboththePCandmobileplatformsroseafurther20-30%inthepastfourweeksInJuly,startingwith'TheVoiceofChina',Sohubegantoofferadvertiserstoplaceadsonmobile/ipadandhavealreadysignedupsomebignameadvertisersfromluxurygroups(suchasChanel)andtheautosector.
Thecompanycommentedinits2Q13earningscallthatitseesstrongmomentumcontinuing,withadrevenuesfor3Q13growingover60%y/y.
ThetotaluserbaseoftheSohuNewsapplicationincreasedmorethan20%y/yin2Q13.
SocialmediaadvertisingonmobilelikelybemoreeffectivethanbanneradsWithmorethan75%oftotalusersaccessingWeiboviamobiledevices,accordingtothecompany,weseeSinaWeiboasapotentialbeneficiaryofthemobiletransition,whichhashelpedalleviateaslowdowninitsPCportaladbusiness,andlikelyputsSinainabetterpositionthanotheronlineportals(likeSohu,NTES)todefendmobiletrafficcannibalization.
In2Q13,Sina'smobileadrevenuesgrew43%q/qandaccountedfor34%ofWeibobrandadrevenues,comparedto34%in1Q13and25%in4Q12.
FIGURE44BreakdownofSinaWeiborevenuesUS$mn1Q132Q13Brandadvertisingrevs18.
8025.
00Alibabarelatedrevs-5.
00WeiboVAS7.
007.
70TotalWeiborevs25.
8037.
70MobileDAUas%oftotal76.
50%NASource:Companydata,BarclaysResearchTencentisalsoleveragingthesuccessofGuangdiandongperformance-basedtargetedadsandhasextendedthattoitsmobileadnetwork,leveragingthestrengthofQzone,given57%oftotalQzonemonthlyactiveusersarenowaccessingmobileQzoneasof2Q13.
Asaresult,webelieveSinaandTencentcouldbebetterpositionedtodefendthetrafficshifttomobileintermsoftheirbrandadvertisingbudgetshare.
Barclays|ChinaInternet13September201327KEYTRENDS5:CONTINUEDFIGHTFORACCESSPOINTS–APPASPLATFORMVSAPPSTOREWiththerapidtransitionfrompredominantlyPC-basedtomobile-basedtraffic,manyChinaInternetcompaniesviewimprovingandexpandingtheirmobileplatformsasacorebusinessstrategyandinvestmentareaforthenextfewyearsinourview.
Hence,thecompetitiontogainmoremobiletraffic"gateways"andharnesstheirsmartphoneuserbaseshasbecomeincreasinglyintense,leadingtoincreasingM&Aactivityandstrategicinvestment/partnershipannouncementsinthesector.
Overthepastfewquarters,Alibaba,TencentandBaiduhavesteppeduptheireffortstostrengthentheirmobileInternetpositionviastrategicinvestmentsinprivateandpubliccompanies.
ListedcompaniessuchasYoukuandSinahavealsosoughttostrengthentheirmobilepositionandrecently(startingJuly2013)struckapartnershiptosharerevenuesfromvideotrafficonWeibo.
Individualappsastrafficgateway/accesspointWhilemobiletrafficandmobileaccesspointsarebeingfragmentedbydirectaccesspointstoindividualapps,somelarge/establishedindividualappscouldbecomeplatformsbythemselves.
Forexample,SinaWeiboissocialmediaservice,buttheWeibomobileappitselfcouldbecomeanimportantaccesspointformanyotherservicesthatneedtraffic.
AsshowninFigure45,76%ofWeibousersaccessitviamobiledevices,makingtheWeiboappa"musthave"apptoinstall.
TimespentbyusersonWeibocouldalsobecomeopportunitiesforadvertiserstocapturethe"eyeball"(impressiononads)orbecomeatrafficdistributionsourceforothereCommerceplatformssuchasAlibabaTaobaoandTmall.
Tencenthasalsopositioneditselfwellaheadofpeers,inourview,withthreemobileapps–MobileQQ,MobileQzoneandWeChat–allcapturinglargeproportionofitsuserbase.
SimilartoWeibo,webelieveallthreeofTencent'smobileappscouldbeconsideredimportantplatformsoftrafficre-distributionandcross-selling.
FIGURE45MAUmobilepenetrationforleadinghighly-usedplatformsasof2Q13MillionWeiboWeChatQQQzone360SafeBaiduSearchCNNICTotalregisteredusers(MAU)536(DAUof49.
8)400818626461591591MobilemonthlyactiveusersDAUof38236478357338100464Mobile%total76%59.
0%58.
4%57.
0%73.
3%16.
9%78.
5%Source:Companydata,iResearch,BarclaysResearchMobileappstoreastrafficgateway/accesspointInadditiontoindividualapps,mobileappstores–whereChineseusersgotosearchanddownloadtheirapps–arealsoconsideredanimportantmobilegateway.
Monetizationeffortsonappstorescomefrombannerads,revenuesharingonmobilegamesandrevenueshareonperdownload.
Asshownbyourrecentmobilesurvey,Qihoo'smobileassistantappstoreandBaidu's91Wirelessappstorerankasthetwomostpopularthird-partyappstoresinChina,withpenetrationratesof39.
1%and38.
5%,respectively(Figure47).
Qihoostartedtomonetizeitsmobiletrafficviarevenuesharingandappsadvertisingatend-2012,andweestimatethecompanygeneratedapproximately5%oftotalrevenues(orapproximatelyUS$5mn)fromappstoresin1Q13,withtherevenuescontributionincreasingtoc10%in2Q13(US$15mn).
Weestimateappstore-relatedrevenuecouldreachc13%oftotalrevenuein2013,risingto19%in2014E.
Barclays|ChinaInternet13September20132891Wireless:For1H13,91WirelessgeneratedtotalrevenueofRmb346.
7mn,up187.
6%y/yandaccountingfor43-58%ofthefull-yearguidancerangeofRmb600-800mn(providedbymanagementpreviously).
In2Q13,56%of91Wirelessrevenuecamefrommobilegamesrevenuessharewiththird-partydevelopers,whichgrew205%y/yand65%q/qtoRmb112mn,whilec41%ofrevenuescamefrommobileadvertisingrevenues,whichgrew174%y/yand18%q/qtoRmb82mn.
FIGURE46Mostpopulardownloadappstores'marketshareFIGURE47Mostpopulardownloadappstores'userpenetrationSource:BarclaysResearchmobileusersurveySource:BarclaysResearchmobileusersurveyBaidu:AlthoughBaiducontinuestofacechallengesintheadoptionofmobileadbudgetsbysmall-andmedium-sizeenterprises,weviewitsacquisitionof91Wireless,NuomiandPPSasstrengtheningitsmobileposition,andbelievethereareupsidecatalyststoBaidu'smobilestory.
Infact,ourrecentmobilesurveyshowsthatBaiduhasahigher-than-expectedpenetrationrateforanumberofapps,suchasmobilesearch,browsersandmaps(at73%vs16.
7%forAutoNavi).
FIGURE48MobilesearchpenetrationratesFIGURE49MobilebrowserpenetrationratesSource:BarclaysResearchmobileusersurveySource:BarclaysResearchmobileusersurvey91wireless29.
5%QQ10.
6%36030.
0%Feiliu3.
1%UC8.
8%Other14.
5%Notuse3.
5%38.
5%13.
8%39.
1%4.
0%11.
5%19.
0%4.
6%91wirelessQQ360FeiliuUCOtherNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%92.
5%4.
6%6.
3%0.
0%6.
9%2.
3%BaiduSosoSogouYichaOthersNotuse0.
0%20.
0%40.
0%60.
0%80.
0%100.
0%38.
5%52.
9%21.
8%9.
8%2.
9%6.
3%2.
3%Built-inUCBaiduQQOpera360Other0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%60.
0%Barclays|ChinaInternet13September201329FIGURE50MobilemapapppenetrationratesFIGURE51MobiletravelapppenetrationratesSource:BarclaysResearchmobileusersurveySource:BarclaysResearchmobileusersurveyWebelieveBaiduhasdemonstratedthatitistakingaggressivestepstostrengthenitsoverallmobileInternetposition,with:1)mobilerevenuecomprising10%ofthecompany'soverallrevenuein2Q13;2)theacquisitionof91Wireless;3)theacquisitionofamajoritystakeinNuomi;and4)theexpansionofitsonlinevideoofferingthroughtheacquisitionofPPSbyiQiyi.
Whileitisstillearlyinthemobiletransition,weareincreasinglymorepositiveonthecompany'sprogressanditsachievementsinimprovingitsoverallsearchtechnologyandcustomeradoptionrate.
Summary:AsweentertheseconddecadeofChina'sInternetindustrygrowth,weexpectthefightformobileaccesspointstocontinueandthetopthreeInternetgiantsBaidu,AlibabaandTencenttocontinuetogrowandwidenthegapwithotherInternetplayersinthespace.
Webelievemoreindustryconsolidationislikely,withmanymoreprivatestart-upspotentiallybeingboughtbyleadingInternetcompaniesratherthanseekingpubliclistings.
WeexpecttheshiftofInternetaccessfromPCtomobiletocontinue,andweexpectfurtherinvestmentactivitytobefocusedonmobile-relatedbusinessmodelsormobile-relatedusertrafficplayers.
16.
7%73.
0%4.
0%12.
6%0.
0%8.
0%0.
6%AutoNaviBaiduSogouGoogleNavInfoNotUseOther0.
0%20.
0%40.
0%60.
0%80.
0%41.
4%11.
5%5.
7%41.
4%21.
3%CtripElongQyerOthersNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%Barclays|ChinaInternet13September2013302Q13RESULTSWRAP:POSITIVESURPRISESOUTWEIGHNEGATIVELookingbackatthe2Q13results,weprovideafewkeytakeawaysforInternetcompaniesunderourcoverage:Thenumberofcompaniesdeliveringpositivesurpriseresultswith2Qbeatsandbetter-than-expected3Qguidanceoutweighedthenumberofcompaniesthatreportednegativeresults.
Traffic/penetration/monetizationramponmobilewasakeyfocusonresultscalls.
Whilereinvestmentcontinuestoputpressureonmarginsforsomecompanies,theheavyinvestmentcycleseemstobebehindus,andweseesignsofstabilizingorimprovingmargins.
ThePC-basedbusinessmodelseemstoholduprevenuesrelativelywelldespitecannibalizationofPCtrafficbytheshifttomobile.
PositivesurprisesoutweighnegativesOfthe14companieswecover,eightdeliveredbetter-than-expectedtop-lineresultsin2Q13and11beatonearnings,whilesixcompaniesalsodeliveredupbeatguidancefor3Q13.
Comparedtothe2Q12results,sentimentandmanagement'stoneandguidanceweremuchbetterthisyear,inourview.
FIGURE522Q13resultsand3Q13guidance'BeatorMiss'comparison,andsharepriceperformance2Q13(A)3Q13guidanceSharepriceperformanceRevenuesEarningsRevenuesEarnings1-Daypost2Q13result1-MonthYTDBIDUBeatIn-lineBeatNA3.
2%-1.
8%35.
3%CTRPBeatBeatBeatNA19.
5%11.
2%107.
5%CYOUIn-lineBeatMissMiss-19.
9%-1.
0%12.
9%DANGIn-lineBeatIn-lineNA-11.
6%-20.
3%94.
9%GABeatBeatIn-lineNA-8.
6%4.
8%50.
3%GAMEMissBeatMissNA-10.
5%4.
7%31.
6%NTESIn-lineBeatNANA2.
8%21.
6%76.
7%PWRDBeatIn-lineBeatNA-7.
9%-6.
2%91.
9%QIHUBeatBeatBeatNA7.
8%20.
1%179.
8%RENNIn-lineBeatMissNA-11.
4%-12.
2%-2.
0%SINABeatBeatBeatNA3.
2%3.
2%60.
4%SOHUBeatBeatBeatMiss-9.
9%7.
1%40.
2%TencentBeatMissNANA-0.
5%9.
1%56.
6%YOKUIn-lineBeatIn-lineNA-8.
3%3.
1%31.
6%#Beat81160#In-line5230#Miss1132Source:Companydata,Bloomberg,BarclaysResearchThesolid2Q13results,aswellaspositivecommentsonguidance,ledtoBloombergconsensusearningsupgradesandstrongsharepriceperformancepost-results.
Barclays|ChinaInternet13September201331Mobile-relatedcommentsafocuson2Q13earningscallsInadditiontosolidfundamentalresults,oneofthekeytakeawaysfromthe2Q13resultscallswasthefocusonandhighlightingofmobile-relatedachievements.
Mostofthecompaniesprovidedpositivecommentsandfeedbackontheirmobileinternetprogress,withanincreasedpercentageoftrafficcomingfrommobiledevices,aswellasnotingthatmostmobiletrafficgrowthexceededexpectations.
Inparticular,manyinvestorsseemedsurprisedbythe10%mobilerevenueachievementbyBaidu.
FIGURE53Recap:2Q13earningscallkeyhighlightsonmobilerelatedcommentsCompanyUpdateonmobileInternetbusinessBIDUMobileaccountedfor10%oftotalrevenuesasaresultofthelaunchofintegratedPCandmobilebiddingsystem.
iQiyiPPSarethelargestvideoplatformbynumberofmobileusersandvideoviewingtimeCTRPOver50mnmobileappdownloadsby2Q13,over55%transactionsbookedthroughonline&mobilechannels;mobileaccountedfor20%ofhotelvolumesand15%ofairticketingvolumes;peaktransactionvalueperdayachievedoverRmb50mnonmobileCYOUSecuredrighttomakemobilegamesfor10martialartnovelswrittenbyLouisCha,includingTLBB;planstoreleasesomemobilegamesin2H13DANGMobiletrafficaccountedforalmost40%oftotaltrafficin2Q13GAPlanstoreleasethefirstmobilegamein2H13GAMEMobilecontributed9%oftotalrevsin2Q13;expect3Q13mobilegamerevstogrow50%q/qandaccountforover10%oftotalrevs;announcedthereleaseofG-Homemobilegameplatform,andplanstoreleasemobileversionofDragonNest,GuardianCrossandHellLordin2H13,with36gamesinthepipelinefornext12-18months.
NTESMobilenewsappreached120mninstallationand40mndailyactiveusersbyend-2Q13;YoudaoCloudnotereached15mnusersandYoudaoDictionaryhad350mncumulativeusers,ofwhich180mnarefrommobiledevices;jointlyreleasedYiChatwithChinaTelecomPWRDReleasedthreemobilegames–LegendofChuandHan,RiseoftheKing,andReturnoftheCondorHeroes–in2Q13QIHULaunchedLeiDian,amobilesearchplatform;totalsmartphoneusersthathave360MobileSafereached338mnRENN80%oftotaltrafficwasfrommobilein2Q13;mobilepenetrationofdailyuniquelog-inusersat65%,withtotalmobiletimespentpenetrationof77%in2Q13SINAMobileadvrevsgrew43%q/qandaccountedfor34%ofWeibobrandadrevs;averagetimespentonmobileup14.
5%inJunevsMarchSOHUSogouPinyinmobileversionreached150mnmonthlyactiveusers;SohuNewsappincreasedover20%q/q,andSohuvideoappgrew60%and70%q/qfordailyactiveusersandvideoviewsin2Q13TencentMonthlyactiveusersforWirelessQQgrew230%y/yto478mn,representing58%oftotalQQmonthlyusers.
MonthlyactiveusersforQzonereached357mn,representing57%oftotalQzonemonthlyusers;WeChatachieved100mnregisteredusersinInternationalmarketYOKUMobilevideoviewsgrewover100%y/yto200mn.
TimespentonYouku'smobileplatformreached180mnhours.
Onadailybasis,smartphoneuserswatchedover70minsvideoonmobileYoukuvs.
50minsonPCSource:Companyreports,BarclaysResearchMarginpressureseaseslightlyasmobilerevenuesrampWhilereinvestmentintomobileInternet-relatedR&DandtheS&Mpushcontinuestoputpressureonmarginsformostofthecompanies,comparedtolastyear,westartedtoseeimprovementinsomemargins,hencewebelievetheheavy/aggressiveinvestmentcycleasrelatedtomobileInternetcouldbebehindus.
Webelievewecouldstarttoseesignsofpotentialmarginsstabilizingorimprovinginthecomingquarters,especiallywhenmoremeaningfulmobilerevenuestakeoff.
Barclays|ChinaInternet13September201332FIGURE54Quarterlynon-GAAPoperatingmarginscomparison(1Q12to2Q13)0700BIDUCYOUDANGNTESRENNSINASOHUYOKUCTRPGAGAMEPWRDQIHUNon-GAAPoperatingmargins1Q1240.
4%49.
9%59.
3%-9.
6%53.
1%-58.
6%-13.
5%24.
3%-53.
1%30.
4%19.
8%35.
5%35.
7%37.
7%2Q1239.
6%52.
6%56.
2%-10.
2%48.
0%-43.
9%3.
0%19.
3%-14.
2%28.
4%23.
6%34.
6%25.
5%32.
4%3Q1237.
8%53.
7%56.
2%-7.
9%43.
6%-35.
8%6.
6%23.
7%-14.
2%25.
5%20.
2%30.
0%18.
3%28.
0%4Q1235.
5%46.
9%54.
5%-9.
2%46.
5%-49.
8%8.
0%22.
8%-12.
2%21.
2%35.
8%32.
4%9.
9%25.
4%1Q1338.
4%38.
9%57.
3%-5.
8%53.
4%-52.
0%-3.
6%23.
4%-41.
8%23.
4%6.
3%31.
0%24.
0%17.
1%2Q1335.
1%39.
5%51.
3%-5.
1%53.
4%-59.
5%8.
5%19.
4%-9.
0%24.
7%22.
0%30.
1%11.
9%36.
0%Source:Companydata,BarclaysResearchPC-basedrevenuesholdingupduringearlycycleofmobiletransitionWhiletherehavebeenconcernsthatPC-basedtrafficandrevenueswillbecannibalizedbymobiletrafficramp,sofar,webelievePC-basedrevenuesremainrelativelyresilient,especiallyforbrandadvertisingonportals,PCgamingrevenuesandevenBaidu'sPCsearchrevenues.
FIGURE55Revenuesandnon-GAAPearningsquarterlygrowthcomparison(1Q12to2Q13)0700BIDUCYOUDANGNTESRENNSINASOHUYOKUCTRPGAGAMEPWRDQIHUTotalrevenues(y/ygrowth)1Q1252.
2%80.
6%33.
3%63.
9%36.
3%56.
1%6.
0%30.
0%119.
5%23.
9%26.
2%10.
9%0.
0%202.
1%2Q1256.
2%62.
0%40.
3%55.
4%15.
2%47.
5%10.
6%28.
7%99.
2%18.
9%21.
1%-14.
4%-13.
2%107.
3%3Q1254.
3%52.
6%39.
3%43.
8%3.
8%47.
2%17.
0%22.
6%48.
2%22.
1%18.
6%-20.
1%-1.
9%77.
0%4Q1253.
4%42.
1%26.
1%32.
4%9.
3%48.
8%4.
3%21.
7%107.
7%20.
2%15.
5%-20.
2%-12.
4%65.
2%1Q1340.
4%42.
0%29.
8%24.
8%11.
0%45.
2%18.
6%35.
7%93.
7%29.
2%14.
2%-21.
6%-11.
9%58.
6%2Q1336.
6%43.
4%23.
8%28.
0%19.
4%10.
7%19.
7%32.
5%101.
3%32.
3%18.
6%-1.
7%8.
4%108.
4%Non-GAAPNetIncome(y/ygrowth)1Q1226.
9%80.
7%10.
6%NM35.
4%NM-183.
0%-46.
0%NM-8.
1%24.
6%7.
9%-20.
0%290.
5%2Q1226.
0%71.
0%30.
1%NM20.
5%NM-72.
0%-65.
5%NM-33.
8%24.
6%-7.
1%-49.
0%56.
5%3Q1228.
3%61.
7%41.
2%NM2.
8%NM-33.
2%-39.
8%NM-26.
2%32.
6%-28.
3%-39.
1%23.
9%4Q1240.
3%30.
7%6.
5%NM11.
0%NM-35.
6%-46.
6%NM-10.
9%37.
2%-25.
8%-50.
3%10.
2%1Q1323.
1%13.
8%17.
1%NM12.
7%NM-111.
0%1.
1%NM-0.
4%7.
8%-27.
6%-36.
3%-32.
0%2Q1322.
6%0.
7%4.
5%NM30.
3%NM280.
6%37.
6%NM45.
7%22.
0%21.
7%-42.
3%97.
9%Source:Companydata,BarclaysResearchRevisitingtheindustrygrowthoutlookAswereviewtheearningsresultsofthepastfewquarters,weconcludethat:1)searchandonlinevideoadvertisingremainsabrightspotwithfastergrowthprospects;2)onlinegaminggrowthhasslowedbutisstillgrowingatahealthyrate;3)eCommercestillbenefitsfromstructuralgrowthandtheoutlookappearspromising;4)cashiskingandprovidesinvestmentflexibility;and5)progressonmobileInternetstrategiesandpenetrationiskeyforsharepriceperformanceandinvestorinterestintheneartomid-term.
Barclays|ChinaInternet13September201333OnlineadvertisingAsnotedbelow,mostoftheonlineadvertisingcompanies(especiallytrueforbrandadcompaniessuchasSinaandSohuportals)havedeliveredbettergrowththisyearafterrelativelyweakadvertisingdemandin2012.
Inparticular,Sohu,drivenbymorecompany-specificreasons(easiery/ycompononlinevideoandrealestateverticals)wasabletodeliverastrongergrowthratein1H13andstrong3Qguidance.
Qihoo,benefitingfromnewrevenuestreamsfromsearchandappstorerevenues,wasabletore-acceleratetop-linegrowthin2Q13andguidesforstrongergrowthin3Q.
Renren,onthehand,continuestosufferfromweakadvertisingdemand,mainlyduetoincreasedcompetitionfromotherstrongerSNSplayerssuchasSinaWeiboandTencentQzone.
FIGURE56Onlineportalsandadvertisingcompanies'advertisingrevenuescomparison(actualsfor2012/1Q-2Q13;guidancefor3Q13)BrandadvrevsSINASOHUNTESTencentFENGBIDURENNQIHUy/ygrowth1Q128.
6%6.
7%12.
9%92.
3%71.
3%75.
0%14.
8%176.
40%2Q1212.
4%2.
3%20.
2%71.
7%29.
5%59.
7%-10.
5%89.
80%3Q1219.
4%1.
7%9.
5%69.
0%11.
4%49.
6%-13.
7%66.
40%4Q126.
8%5.
6%-6.
9%58.
3%28.
4%40.
8%-16.
7%49.
30%1Q1320.
0%31.
6%15.
7%57.
3%29.
1%39.
7%5.
0%38.
80%2Q1316.
9%44.
6%33.
3%47.
5%41.
9%38.
3%2.
0%78.
30%3Q13(guided)+25%to+27%+54%to+61%NANA+47%to+54%+40%to+43%-3%to-7%+115%to+118%q/qgrowth1Q12-24.
2%-21.
6%-48.
8%-9.
7%-14.
3%-4.
7%-37.
7%1.
30%2Q1231.
3%13.
7%42.
4%62.
9%14.
5%28.
0%61.
8%11.
90%3Q1216.
9%12.
4%18.
5%15.
4%-4.
8%14.
6%12.
2%15.
00%4Q12-8.
2%5.
4%7.
7%-6.
7%37.
4%0.
7%-26.
3%14.
60%1Q13-14.
8%-2.
2%-36.
4%-10.
3%-13.
8%-5.
3%-21.
5%-5.
80%2Q1327.
9%24.
9%64.
5%52.
7%25.
9%26.
6%57.
1%43.
80%3Q13(guided)+25%to+27%+22%to+25%NANA-1%to+4%+15%to+19%-5%toflat+19%to+21%Note:FENGreferstoPhoenixNewMedia(Ticker:FENG).
DataforSINA,SOHU,NTES,TencentandFENGrepresentsbrandadvertisingrevenueonly.
DataforBIDUrepresenttotalrevenue.
DataforRENNandQIHUrepresentsadvertisingrevenuebutguidanceisbasedontotalrevenue.
Source:Companydata,BarclaysResearchSearchWithintheonlineadvertisingindustry,searchadvertisingandonlinevideoadvertisingcontinuetocapturerelativelyfastergrowth.
AlthoughPCsearchqueriesseemtobeslowingdownasaresultoftrafficshiftingtomobile,overall,therelativelylowpenetrationofsearchmarketinginChinasuggeststhatthestructuralgrowthpotentialisstillpromising,hencenewentrantQihooandthird(bytrafficshare)playerSogouwilllikelycontinuetofightformarketsharegainsandrevenuesramp.
Inaddition,Baidunotedinits2Q13earningscallthatitsmonetizationabilityonPCqueriesimprovedandledtohighermonetizationonPCdespitelessexcitingtrafficgrowth.
Barclays|ChinaInternet13September201334FIGURE57Searchcompanies'searchrevscomparison(actualfor2012/1Q-2Q13;guidancefor3Q13)SearchBIDUQIHUSogouy/ygrowth1Q1282.
0%NA171.
2%2Q1262.
6%NA111.
3%3Q1251.
9%NA91.
7%4Q1243.
1%NA68.
4%1Q1341.
9%NA66.
6%2Q1343.
4%NA60.
5%3Q13(guided)+40%to+43%NA+45%to+50%q/qgrowth1Q12-4.
8%NA-5.
8%2Q1226.
9%NA32.
9%3Q1215.
8%NA22.
7%4Q122.
2%NA9.
7%1Q13-5.
5%NA-6.
9%2Q1328.
2%158.
3%28.
1%3Q13(guided)+15%to+19%NA+8%to+12%Source:Companydata,BarclaysResearchOnlinevideoOverthepast1-2years,onlinevideoadvertisinggrowthhasbeendrivenbyacontinuedshiftinofflineTVbudgetstoonlinevideosites,andincreaseduserdemandforentertainmentprogrammes.
Webelievethevideoadformatistransferabletomobiledevicesand,withrisingsmartphonepenetration,itwilllikelycontributetofastergrowthandhigherdemandinthenextfewyears.
Nevertheless,near-termchallengesremainonadvertisers'adoption.
FIGURE58Revcomparisonformajoronlinevideocos(actualfor2012/1Q-2Q13;guidancefor3Q13)OnlinevideoYoukuTudouSohuTencentiQiyiLeTVy/ygrowth1Q12119.
5%NANANA163.
3%2Q1299.
2%NANANA134.
2%3Q1294.
2%NANANA107.
7%4Q12107.
7%NAsignificantlyNA39.
5%1Q1393.
7%NA>100%yoyNA24.
0%2Q13101.
3%NAdoubleyoyNA47.
9%3Q13(guided)+65%to+73%NANANANAq/qgrowth1Q12-12.
7%NANANA13.
7%2Q1243.
4%NANANA0.
5%3Q1229.
6%NANANA-0.
5%4Q1226.
6%Double-digit%NANA22.
8%1Q13-18.
8%Double-digit%NANA1.
0%2Q1346.
0%NANANA19.
9%3Q13(guided)+10%to+16%NANANANANote:YoukuTudoustartedconsolidationinAug2012.
Source:Companydata,BarclaysResearchBarclays|ChinaInternet13September201335OnlinegaminggrowthstillhealthyWhileonlinegamingcompanieshaveexperiencedslowergrowthoverthepast2-3yearscomparedto50-60%growthin2007-08,overall,westillseethemajoritydeliveringadecentgrowthoutlook,withtheexceptionofShandaGames.
WebelieveitwillbedifficultforShandaGamestoturnarounditsbusinesseventhoughitmightbefocusingcorrectlyonitsmobilegamesstrategy.
WethereforeseeitscontinueddecliningtrendforlegacyMMOgamesasdifficulttoreplace,henceourUWrating.
FIGURE59Onlinegamecompanies'gamerevenuescomparison(actualfor2012/1Q13;guidancefor3Q13)OnlinegameTencentNTESGAMECYOUPWRDGAKingsofty/ygrowth1Q1248.
9%31.
4%10.
9%37.
1%0.
0%26.
2%17.
0%2Q1252.
9%10.
8%-14.
4%42.
6%-13.
2%21.
1%20.
6%3Q1243.
9%-0.
9%-20.
1%30.
5%-1.
9%18.
6%27.
7%4Q1234.
4%7.
9%-20.
2%29.
0%-12.
4%15.
5%27.
4%1Q1334.
1%11.
3%-21.
9%31.
4%-13.
1%12.
6%39.
5%2Q1331.
0%18.
2%-4.
0%22.
7%4.
7%11.
3%29.
6%3Q13(guided)NANA+3%to+4%+7%to+10%+12%to+17%NANAq/qgrowth1Q1219.
4%-0.
7%2.
5%3.
4%-7.
5%2.
8%1.
2%2Q124.
6%-4.
0%-18.
6%7.
6%-5.
9%3.
8%9.
2%3Q127.
3%-0.
5%-4.
4%10.
1%2.
9%2.
8%1.
1%4Q120.
3%13.
6%0.
1%5.
2%-2.
3%5.
2%14.
1%1Q1319.
1%2.
5%0.
3%5.
3%-8.
1%0.
2%10.
8%2Q132.
2%1.
9%0.
0%0.
5%13.
5%2.
7%1.
5%3Q13(guided)NANA+3%to+4%-4%to-1%+10%to+15%NANASource:Companydata,BarclaysResearcheCommercegrowthremainspromisingWhilewearepositiveonoveralleCommercestructuralgrowthpotential,weseebiggereCommercecompaniesandplatformsbenefitingfromeconomiesofscaleandbelievethatindustryconsolidationislikelytoemergeinthenext1-2years.
WeremaincautiousonwhetherDangdangwillhavesustainablescaletoenableittocompetewithbiggerplayers.
Barclays|ChinaInternet13September201336FIGURE60Revenue,transactionvalueandimpliedmarketshareformajoreCommerceplayerseCommerceDANGVIPSTencentMCOXLITBTmallJDy/ygrowth1Q1257.
6%250.
7%NA-35.
1%32.
1%NANA2Q1252.
7%233.
5%NA-40.
0%74.
2%NANA3Q1241.
7%197.
0%NA-42.
8%82.
0%NANA4Q1231.
1%184.
8%NA-39.
1%95.
8%NANA1Q1323.
1%206.
8%154.
2%-66.
8%98.
7%NANA2Q1323.
7%159.
7%156.
5%-65.
8%52.
6%NANA3Q13(guided)+23%+134%to+137%NANA+33%to+37%NANAq/qgrowth1Q12-12.
0%-3.
7%NA-41.
9%11.
5%NANA2Q1211.
5%33.
6%13.
9%14.
8%28.
3%NANA3Q126.
6%15.
3%32.
2%-12.
6%7.
9%NANA4Q1225.
4%92.
1%48.
5%4.
5%26.
8%NANA1Q13-17.
4%3.
7%13.
6%-68.
3%-1.
5%NANA2Q1312.
0%13.
1%15.
0%18.
3%-5.
4%NANA3Q13(guided)+6%+4%to+5%NANA-3%to-6%NANATransactionvalue(Rmbbn)estimatedbyiResearch1Q121.
10.
62.
0NANA32.
014.
12Q121.
21.
13.
6NANA51.
118.
03Q121.
31.
44.
5NANA55.
321.
84Q123.
82.
28.
1NANA81.
322.
01Q133.
12.
38.
2NANA61.
621.
02Q132.
83.
28.
8NANA80.
127.
0Marketshare(basedoniResearch'sestimatedtransactionvalue)1Q121.
8%1.
0%3.
2%NANA51.
5%22.
7%2Q121.
3%1.
2%4.
0%NANA57.
1%20.
1%3Q121.
3%1.
4%4.
5%NANA54.
6%21.
8%4Q122.
2%1.
6%6.
0%NANA60.
4%16.
4%1Q132.
6%1.
9%6.
8%NANA51.
3%17.
5%2Q131.
8%2.
0%5.
6%NANA50.
8%17.
1%Source:Companydata,iResearch,BarclaysResearchCashiskingandprovidesinvestmentflexibilityAnothertrendweseefortheInternetcompaniesisstrongcashflowgenerationabilitywithsolidbalancesheets,whichprovidesflexibilityformostofthemtore-investinnewgrowthareassuchasmobilestrategies.
Ontheonehand,wenotethatoverthepast10-12years,biggerinternetcompanies,suchasBaidu,Alibaba,andTencent,havebecomestrongerduetotheirstrongcashflowgeneration,whiletheirbalancesheetandearningsabilityhaveenabledthemtofundandmakestrategicinvestmentsinstart-ups.
Overthepast12months,wehavealsostartedtoseelarger-scaleM&Aactivity,withBaidupayingUS$1.
9bnfor91WirelessandAlibabapayingUS$586mnforan18%stakeinSinaWeibo.
Barclays|ChinaInternet13September201337FIGURE61Cash,netcash,cashflowandcapexcomparisonforInternetstocksinourcoverage(asof2Q13)US$mnCashDebtNetcashNetcash%mktcapOpcashflow(2Q13)Capex(2Q13)BIDU5,605.
01,912.
83,692.
27.
8%522.
289.
3CTRP1,125.
8252.
8873.
014.
3%NANACYOU803.
7323.
0480.
830.
5%96.
6NADANG210.
4-210.
432.
4%NA5.
8GA543.
8-543.
827.
9%NANAGAME485.
140.
0445.
141.
1%58.
95.
1NTES3,164.
1161.
13,003.
031.
3%171.
15.
6PWRD421.
849.
3372.
537.
3%NANAQIHU379.
0-379.
03.
7%86.
413.
4RENN836.
5-836.
565.
3%NANASINA1,237.
0-1,237.
023.
0%43.
610.
9SOHU1,210.
2323.
0887.
234.
9%NANATencent7,650.
61,909.
95,740.
76.
2%810.
4238.
5YOKU543.
8-543.
813.
7%-10.
322.
3Source:Companydata,BarclaysResearchestimatesRecapofBarclaysMobileInternetsurveyWeconductedausersurveyinthefourmajorChinesecitiesofShenzhen,Guangzhou,ShanghaiandBeijinginJulyandAugust2013andcollectedatotalof174userquestionnaires.
Giventhatoursurveywasdoneinfirst-tiercitiesonlyandtherelativelysmallsamplesize,wenotethattheresultsmaynotadequatelyrepresenttheentiremobileuserbaseandcouldhavesomebiastowardshigh-endusers.
Nonetheless,webelieveoursurveyprovidesuswithproprietaryfirst-handinformationandallowsustocross-checkandanalyzeourdatavis-à-viscompanycommentsandthelimitedthird-partyresearchdata.
OurproprietarysurveyofsmartphoneusersinChinashowsthat:1)Tencentleadsinsocialnetworkingappswithitsthreepillars,WeChat,MobileQQandMobileQzone,asWeChatstandsoutasoneofthemostusedappsamongsmartphoneuserswithapenetrationrateofc82%;2)Baiduleadsinmobilesearchandmapswithpenetrationratesofc93%and73%,respectively;3)Qihooleadsinmobilesecuritywithapenetrationrateofc63%;4)theQihoomobileassistantappstoreandthe91Wirelessappstorerankcloselywitheachotherwithpenetrationratesof39.
1%and38.
5%;and5)Alibaba'sTaobaoandTmallappsmaintaintheirdominantmarketshareamongthemostusede-commerceappswithpenetrationratesof69%andc32%,respectively.
Formoredetailaboutoursurveyresults,pleaserefertoChinaInternet:MobileInternetsurveytakeaways,3September2013.
Barclays|ChinaInternet13September201338CompaniesCOMPANIESBarclays|ChinaInternet13September201339TENCENT(700HK;OW;PTHK$450,+12%)SmartphonemonetizationfinallyemergingWemaintainourOverweightratingandraiseour12-monthpricetargetforTencenttoHK$450fromHK$388toreflecttheinitialtractionandsuccessofthecompany'sWeChatgamesmonetization.
WecontinuetoviewTencentasstrategicallypositionedtocaptureemergingmobileInternetgrowthopportunities,andweareconfidentinthecompany'sabilitytomonetizethroughmobilegames,advertising,paymentandcommerce.
BasedontheinitialfeedbackonfourWeChatgamesTencentlaunchedrecently,wehaverevisitedourWeChatassumptionsandbelieveourprevious400mnuserbasescenariofor2014wastooconservative.
Onwhatweseeasamorereasonablescenariofor2014of500mnusers,weareraisingour2013and2014revenue/non-GAAPEPSestimatesby0.
2%/0.
2%and1.
1%/0.
6%,respectively.
OurnewpricetargetofHK$450isbasedon30x(upfrom26x)ourrevised2014Enon-GAAPEPSofHK$15.
01(increasedfromHK$14.
92).
Ourtargetmultipleof30ximpliesabout1.
0xPEGforourtwo-year(2013-15)earningsCAGRof30%,whichwebelieveisjustifiedgivenTencent'sprovenexecutionabilityanditsresilientandintegrateduserplatform.
Inaddition,withWeChat'spotentialabilitytomonetizeitsInternationaluserbase,webelievethereisupsiderisktotheoverseassuccess,andhencepaying30xfora'global'presencecompanywithaprovenbusinessmodelisnotunrealistic.
RevisitourWeChatassumption:FollowingtheinitialsuccessofthefourWeChatgames,withtwoofthefourgamesrankinginthetop10bygrossrevenueonApple'sIOSstore(accordingtoappannie.
com),wehaverevisitedourWeChatassumptionsandbelieveourpreviousassumptionofa400mnuserbasefor2014Ewastooconservative.
Weareraisingourbase-casescenarioassumptionto500mnusersfor2014E.
Weassume17.
5%(upfrom15%)ofusersaregamersandmaintainourexpectationthat5%ofthosepayforgames(a5%"payingratio").
Scenarioanalysis:Basedonourbase-caseassumption,ourestimatefortotalWeChatrevenuefor2014increasestoRmb4.
14bn(fromRmb2.
95bn).
Ofthis,weestimategamingaccountsfor76%,emoticon15%andmobilepaymentrevenues9%.
Ourdownside-casescenarioassumesWeChatuserswillstayat400mnin2014(unchanged)withalowerpayingratio,andthisimpliesrevenueofRmb2.
11bn,49%belowourbase-casefor2014.
Ourupside-casescenarioassumesWeChatusersgrowto600mnin2014withahigherpayingratioandARPU,andthisimpliesrevenueofRmb7.
83bn,89%aboveourbasecasefor2014.
Risks:WhilewebelievetherecouldbeupsideriskstoourWeChatassumptions,wearebecomingmorecautiousonthepotentialdownsiderisksfromcannibalizationofTencent'swebgamerevenuebyWeChat.
ThemainreasonforthisistheincreasingnumberofwebgamedevelopersthatareswitchingtheirfocusawayfromPCwebgamesandarenowdevelopingsmartphonegames,resultinginfewernewwebgamesbeingreleasedbythesedevelopers.
AsTencent'sQzonewebgameopenplatformreliesheavilyonthird-partydeveloperstolaunchgamesontheplatform,areductioninthenumberofnewgamesavailablewouldimpactTencent'scommunityplatformrevenueinthefuture,inourview.
700HK/0700.
HKStockRatingOVERWEIGHTIndustryViewPOSITIVEPriceTargetHKD450.
00Price(11-Sep-2013)HKD402.
20PotentialUpside/Downside+12%Barclays|ChinaInternet13September201340RevisitingWeChatmonetizationassumptionsOurpreviousWeChatmonetizationassumptionwasbasedonauserbaseof400mnfor2014.
BasedontheinitialfeedbackonthefourWeChatgames,weestimateWeChat'suserbaseiseitherapproaching400mnoralreadyatthatlevel,andhenceraiseouruserbaseassumptionfor2014to500mn.
WeChatgamesrevenueassumptionsWealsoraiseourgamerbaseassumptionto17.
5%(from15%).
Hence,with500mnusers,weestimate87.
5mnofthemwillbegamers.
Wemaintainourgamerpayingratioat5%andARPUatRmb60(orcUS$10)permonth.
Hence,weestimategamerevenuesofRmb3.
15bnfor2014.
Sticker/emoticonrevenueassumptionsThenumberofpaidemoticoncategoriesonWeChatincreasedtosixasof5September(upfromfivewhenitwaslaunched).
AlthoughthereareonlysixemoticoncategoriesavailableforpurchaseinWeChat'sstickershopcurrently,weexpectTencenttograduallyintroduceagreatervarietyofemoticonsintheshop.
Forreference,LINEhas191stickersavailableforpurchase.
EachWeChatstickercostscRmb6(HK$8.
00/US$0.
99).
Ourbase-casescenarioassumesapayoutratioof3%withARPUofRmb10.
5peruserperquarterforstickers.
ThiswouldyieldcRmb630mnin2014E.
O2O/mobilepaymentrevenueassumptionsWeChat5.
0allowsuserstolinktheirbankaccountsorcreditcardstoitssystemandsupportsimmediatemobilepaymentviascanningQRcodesonWeChat.
Wehavebeenmoreconservativeinourassumptionsbecausethisfeatureisnewandthereisnocomparablecasestudyforcompetitorsinthemobilespace,suchasKakaoTalkorLINE.
WealsobelievemobilepaymentsarelikelytobemoregraduallyadoptedbyusersasonlinepaymentisstillnotmatureinChinaandChineseusersmaynothaveconfidenceinanonlinepaymentsystem.
Ourbase-casescenarioassumesc4%oftotalWeChatregisteredusersarelikelytoadopttheWeChatpaymentmechanismin2014,withanaveragespendperuserofRmb150perquarter.
Wealsoassumeatakerateof3%wouldyieldO2O(onlinetooffline)/e-commercepayment-relatedrevenueofRmb360mnin2014.
Barclays|ChinaInternet13September201341FIGURE62Tencent–summaryofourbase,downsideandupsidecasesvsourpreviousbasecaseestimatesfor2014US$mnOldest.
Newest.
DownsidecaseUpsidecaseRevenues(exWeChat)73,61873,29173,09373,489WeChatrevenues2,9524,1402,1127,830Totalrevenues76,57077,43175,20581,319Revsgrowth29%30%26%37%Grossprofit41,31541,80340,57743,929Grossmargins54.
0%54.
0%54.
0%54.
0%GAAPoperatingincome25,13825,28024,53126,574GAAPoperatingmargin32.
8%32.
6%32.
6%32.
7%Non-GAAPoperatingincome26,88927,04926,24928,431Non-GAAPOpmargin35.
1%34.
9%34.
9%35.
0%Financeincome,net-329-329-329-329Shareoflossofjointlycontrolledentity-80-80-80-80Shareoflossesofassociates-60-60-60-60Profitbeforetax24,66824,81124,06126,105Incometaxexpense-4,317-4,342-4,327-4,357Minorityinterests-15-15-15-15GAAPnetincome20,33620,45419,71921,732Non-GAAPnetincome22,09922,23421,49623,517y/ygrowth36%36%32%44%SBC/Amortization/options1,5311,7811,7771,785Non-GAAPEPS(Rmb)11.
8111.
8911.
4912.
57Non-GAAPEPS(HK$)14.
9215.
0114.
5115.
88Dilutedshares1878187818781878Fairvalue(HK$pershare)450(pricetarget)290556Impliedmultiple(2014E)30x20x35xSource:Companydata,BarclaysResearchestimatesScenarioanalysisDownsidecase:Ourdownside-casescenarioassumesaWeChatuserbaseof400mn,withWeChatrevenueofRmb2.
11bnin2014E.
Ofthis,weestimateRmb1.
68bnwouldcomefromgames,Rmb288mnfromemoticonrevenuesandRmb144mnfromO2Opaymentrevenue.
Ourdownside-casescenarioassumesARPUforgamersofRmb40permonth.
Weassume2%ofpayingmembersforemoticon,ARPUofRmb8perquarterand3%ofO2Ouserpenetration.
Upsidecase:Ourupside-casescenarioassumesthatWeChatusersgrowto600mnin2014,withtotalWeChatrevenueofRmb7.
83bn.
Ofthis,weestimateRmb4.
98bnwouldcomefromgames,Rmb756mnfromemoticonrevenuesandRmb432mnfromO2Opaymentrevenues.
Ourupside-casescenarioassumesthepayingratioincreaseto7.
5%whileARPUremainsstableatRmb60permonth.
Weassumethepercentageofemoticonpayingmembersincreasesto5%andO2Ouserpenetrationincreasesto5%.
Barclays|ChinaInternet13September201342Globalcompetitors–KakaoTalkandLINEKakaoTalkAccordingtoTechinAsia(source:sgentrepreneurs.
com,25December2012),KakaogeneratedmonthlyrevenueofUS$4.
1mninAugust2012,US$12.
2mninSeptember2012andUS$35.
3mninOctober2012,grossingcUS$51.
6mninjustthreemonthspostthereleaseofitsgameplatform.
Ontheotherhand,anotherarticle(source:Thenextweb.
com;dated16,July2013)reportedthatKakaoTalkachievedgrossrevenueofUS$311mnin1H13.
ThearticlealsonotedthatthegrossrevenuesaresharedbyKakaoTalk,gamedevelopersandmobileappstoressuchasAppleandGoogle.
NHN'sLINEDuringits2Q13resultsannouncement,NHNreportedthatLINEgeneratedrevenueofKRW111.
9bn,up63%q/qand+230%y/y,attributedtonewhitgamessuchasWindrunner(developedbyWemadeEntertainment),solidstickersalesandrevenuefromnewservices,suchasLINEPlay(avatarservice)andLINEManga(comics).
NHN'smanagementalsoguidedforrevenueofKRW400bnforLINEin2013.
Asnotedinthecompany'searningsbriefing,Japanstillaccountsfor80%ofLINE'srevenueandisexpectedtocontinuetoaccountforthelion'sshareofitsrevenuenear-term.
Intermsofsplit,roughly50%ofLINErevenuecomesfromgames,30%fromstampsandthebalancefromotherservices(includingLINEPlay).
Thereare47mnusersinJapanoutofthe200mntotalregistereduserbaseforLINE.
FIGURE63Totaluserbase–WeChatvsLINEandKakaoTalkSource:Companydata,BarclaysResearchFormoredetailonbackgroundandhistoricaltrendforuserbaseforKakaoandLINE,pleaserefertoourreport,Tencent:WeChatassumptions;2Q13preview,12August2013.
050100150200250300350400450Sep-10Nov-10Jan-11Mar-11May-11Jul-11Sep-11Nov-11Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-13KakaoLINEWeChatBarclays|ChinaInternet13September201343EstimaterevisionsBasedonournewWeChatassumptions,wehaverevisedourestimatesaccordingly.
WeraiseourmobilerevenueassumptiontoRmb4.
27bnin2014,upfromRmb4.
17bn.
Ournon-mobilerevenueestimatefor2014increasestoRmb3.
52bn,fromRmb3.
32bn,toreflectourhigherassumptionsforemoticonandO2Orevenues.
WeraiseourPConlinegamesrevenueestimatestoRmb34.
7bnfor2014(fromRmb34.
3bn)andtoRmb39.
3bnfor2015(fromRmb38.
8bn)toreflectstronggrowthofin-housegamesLeagueofLegendsandLegendofYulong.
WeincreaseoureCommercerevenueestimatesslightlytoRmb15.
3bnfor2014(fromRmb15.
2bn)andRmb22.
2bmfor2015(fromRmb21.
2bn).
FIGURE64Tencent–revisionstoBarclaysResearchestimatesRevenues(Rmbmn)Non-GAAPEPS(HK$)NetProfit(Rmbmn)OldNew%ChgOldNew%ChgOldNew%Chg2013E59,35859,4560.
2%10.
9911.
010.
2%14,98815,0200.
2%2014E76,57077,4311.
1%14.
9215.
010.
6%20,33620,4540.
6%2015E93,62495,6582.
2%18.
9618.
45-2.
7%25,95025,140-3.
1%Source:BarclaysResearchestimatesValuation:raisePTtoHK$450Weraiseour12-monthpricetargettoHK$450(fromHK$388)basedon30x(from26x,raisedtoreflectthehigherWeChatmonetizationassumption)ourrevised2014non-GAAPEPSestimateofHK$15.
01(fromHK$14.
92).
Ournewtargetmultipleof30ximplies1.
0xPEGtotwo-year(2013-15E)earningsCAGRof30%,whichwebelieveisreasonable.
WeremainpositiveonTencent'soverallstrategicdirectionforitsmobileopenplatforminitiativesandbelieveitiswellpositionedtocapturetheemergingopportunitiesinmobileInternetgrowthinthenextfewyears,leveragingitssticky,integratedmobileuserplatformonWeChat.
TencentremainsoneofourtoppicksandacoreInternetholding,inourview.
FIGURE65Tencent:one-yearforwardP/EbandFIGURE66Tencent:one-yearforwardP/EratioSource:Companydata,Bloomberg,BarclaysResearchestimatesSource:Companydata,Bloomberg,BarclaysResearchestimates0100200300400500600700800Jun-04Jan-05Aug-05Mar-06Oct-06May-07Dec-07Jul-08Feb-09Sep-09Apr-10Nov-10Jun-11Jan-12Aug-12Mar-1310x20x30x40x50x-51015202530354045Jun-04Jan-05Aug-05Mar-06Oct-06May-07Dec-07Jul-08Feb-09Sep-09Apr-10Nov-10Jun-11Jan-12Aug-12Mar-13AvgPE-1SD+1SDBarclays|ChinaInternet13September201344RisksThekeydownsideriskstoourpricetargetbeingachieved,inourview,include:1)WeChatmonetizationrampdisappoints;2)WeChatcannibalizingPCgames;and3)regulatoryrisksandconflictswithtelcos.
IncomestatementFIGURE67Tencent–consolidatedincomestatement(Rmbmillion,exceptpersharedata)Yearto31Dec2012A1Q13A2Q13A3Q13E4Q13E2013E2014E2015ERevenuesVAS35,71910,66610,75211,52011,58544,52455,37565,054Onlinegaming22,8497,1357,2897,7487,48029,65234,72339,314Mobilegame-3383053905661,5994,2715,289Communityandopenplatforms9,1472,5512,5092,7462,90910,71512,85815,430Non-mobilegame-6436496366302,5583,5225,021Onlineadvertising3,3828501,2971,4001,2854,8326,0947,552eCommercetransactions4,4281,9132,1992,4383,0309,58115,34022,243Others365119136119146519623810Totalrevenues43,89413,54814,38515,47716,04759,45677,43195,658YoYchange54.
0%40.
4%36.
6%33.
8%32.
0%35.
5%30.
2%23.
5%CostofrevenuesVAS12,0643,5933,8353,9743,93915,34218,31020,817Onlineadvertising1,7335046016516172,3722,7683,021eCommercetransactions4,1931,7822,0732,2922,8188,96514,17620,241Others21875817187315374405Totalcostofrevenues18,2075,9546,5906,9897,46226,99435,62844,484Grossprofit25,6877,5947,7948,4898,58532,46241,80351,174Grossmargin58.
5%56.
1%54.
2%54.
8%53.
5%54.
6%54.
0%53.
5%Otheroperatingexp/(income)(552)(627)(406)(117)(122)(1,272)(761)(451)Sellingandmarketing2,9939621,2341,3471,3804,9235,0786,218Generalandadministration7,7652,1962,4012,5742,6489,81912,20614,827Totaloperatingexpenses10,2072,5313,2293,8043,90513,47016,52320,594Operatingprofit15,4805,0634,5654,6854,68018,99225,28030,580Operatingmargin35.
3%37.
4%31.
7%30.
3%29.
2%31.
9%32.
6%32.
0%Financeincome,net(348)(82)14(82)(82)(232)(329)(329)Shareoflossofjointlycontrolledentity(54)13146(20)(20)137(80)100Shareoflossesofassociates(26)(12)(15)(15)(15)(57)(60)(50)Profitbeforetax15,0525,1004,6104,5684,56218,84024,81130,301Incometaxexpense(2,266)(1,029)(926)(914)(912)(3,781)(4,342)(5,151)Minorityinterest(53)(27)(4)(4)(4)(39)(15)(10)Netincome12,7334,0443,6803,6503,64615,02020,45425,140Netmargin32.
5%30.
2%29.
1%26.
2%25.
3%27.
4%28.
7%28.
7%DilutedEPS(RMB)6.
832.
171.
981.
961.
958.
0510.
9313.
37DilutedEPS(HKD)8.
412.
712.
502.
472.
4710.
1713.
8116.
88Non-GAAPnetincome14,2864,0384,1524,0554,06216,30722,23427,477Non-GAAPdilutedEPS(RMB)7.
672.
162.
232.
182.
188.
7411.
8914.
61Non-GAAPdilutedEPS(HK$)9.
442.
702.
822.
752.
7511.
0115.
0118.
45Dilutedsharesaverage(m)1,8631,8671,8631,8641,8661,8651,8711,881Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September201345QIHOO360TECHNOLOGY(QIHUUS;OW;PTUS$100;+10%)Strongexecutionproven;ridingonitsappstorestrategyWemaintainourOverweightratingandraiseour12-monthpricetargetforQihootoUS$100fromUS$86onthebackofourpositiveviewofChinasmartphoneshipmentgrowthandincreasedtrafficatthecompany'smobileassistantappstore.
WebelieveQihooiswell-positionedtobenefitfromtheearlycycleofmobileinternetgrowthgivenitsimmediateabilitytomonetizethroughitsappstore.
Asaresultofstronger-than-expectedtractionforsomeofitsmobilegamesdistribution,weareraisingourrevenueestimatesfor2013and2014by1.
8%and3.
3%,respectively,andournon-GAAPEPADSestimatesby1.
8%forbothyears.
Qihoohasdemonstratedonceagainthatitisabletoexecutealongitswell-plannedstrategyand,givenourestimatedearningsgrowthforthecompanyinthenexttwoyears(aCAGRof66%for2013-15E),webelieveapplyingahighertargetmultipleisjustified.
OurnewpricetargetofUS$100isbasedon40x(upfrom35x)ourrevised2014Enon-GAAPEPADSofUS$2.
49(increasedfromUS$2.
45).
Qihoohasdoneitagainwithitsappstore:With338mntotalsmartphoneusersforitsmobilesecurityproductasatend-2Q13,upfrom120mnin2Q12and275mnin1Q13,weseepromisinggrowthintheneartomidtermfromitsmobilemonetizationcapability.
BasedonthestrongperformanceofrecentlylaunchedmobilegamesonQihoo'splatform(suchasPWRD'sReturnofCondorHeroesandMengWoAi'sLuALu),weareraisingourappstorerevenueestimateto14%oftotalrevenuein2013(from13%)andto22%oftotalrevenuein2014(from19%).
Mobilevideoapptocapturemoretraffic:Accordingtolocalpressreports(SohuTech,10September2013),Qihoohasannouncedthatitplanstoreleasea360mobilemovieappon16September.
Accordingtothereports,theappwouldalsoenableuserstocustomizetheirmoviesubscriptionbasedontheirinterests,andwouldsupportnon-WiFifilm-watching.
Iftheupcominguserfeedbackispositive,thismightbeonemoremobileaccesspointforQihootomonetizeitsmobiletraffic,inourview.
Searchmarketshare:ThelatestiResearchIUTtrackingsuggestsQihoo'sPV-basedtrafficshareisnow11.
8%(1September),whileCNZZ'slatestdailytrackingsuggestsQihoo'susage-basedmarketshareisat17.
7%(10September).
Weconsiderthistobeinlinewithmanagementcommentsmadeduringits2Q13earningscall.
Withasearchtrafficshareofcloseto20%asofAugustaccordingtomanagement,despitetherevenueinitiativeonlystartingtwoquartersago,webelievethereisstillalargegapbetweentrafficsharegainsandrevenueshare.
Weforecastsearchrevenuetocontribute13.
2%of2013revenue,orUS$85.
7mn(vszerorevenuein2012–onlystartedmonetizationin1Q13)andforecasty/ygrowthof184%toUS$243mnin2014(25%oftotalrevenue).
Valuationandrisks:Qihoo'ssharepricehasrisen206.
0%ytdvsNASDAQup23.
4%,andisnowtradingat67.
4x2013Eand36.
4x2014EP/E,aboveitshistoricalone-yearforwardaverageP/Eratioof24.
4xandtheChinaInternetpeeraverageof23.
8xfor2014E.
WhilewebelievethevaluationissupportedbyQihoo'ssearchandappstorecatalysts,wecautionthatthesharepricehasrisensharplywithinashorttimeframe,andthatanynegativenewsordisappointmentinthecompany'sfundamentalscouldleadtosignificantsharepricevolatility.
QIHUStockRatingOVERWEIGHTIndustryViewPOSITIVEPriceTargetUSD100.
00Price(11-Sep-2013)USD90.
85PotentialUpside/Downside+10%Barclays|ChinaInternet13September201346LeadingpositioninthemobilesecurityandappstorespaceWhilemanyofthebigInternetcompanieswerefocusingonmigratingandinvestinginmobileInternet-relatedresourcesandstrugglingtotransitiontheirexistingPC-basedmonetizationmodelstomobiledevices,webelieveQihoo'smanagementtooktheviewthatitwouldbedifficulttotransfermanyofitsbusinessmodels,especiallyonlineadvertising,anditsPC-baseddirectorypaid-linkadvertisingrevenuestomobile.
Thebeststrategicapproachinordertomonetizetheemerginggrowthofmobiletrafficwastoleveragethecompany'sstrongsecurityprotectionoffering.
However,giventhatthedirectorybusinessandevenmobilebrowsershadnotyetbeensuchimportantonlineaccesspointsasPCs,webelieveQihoothoughtthebestwaytomakemoneyonmobiletrafficwastocapturethattrafficandcontrolaccesspoints,identifyingthe'important'accesspointformobileas'appstores'.
TheopenplatformmodelofGoogle'sAndroidsystemhascreatedopportunitiesforChina'ssmartphoneecosystemandmanyInternetandtelecomcarriershavestartedtodevelopandbuildtheirownappstores,withtheaimthatuserswillrelyontheirstoretosearchanddownloadapps.
Qihooalsobelievesthatofferingsecurityprotectionformobileusersforfreewillenableittogainalargeuserbase,throughwhichitcanpushitsmobileassistantappstoretousers.
Althoughalatecomer,Qihoo'smobileassistantappstartedtogainmoretractionin2012.
Qihoostartedtomonetizeitsmobiletrafficviarevenuesharingandappsadvertisingattheendof2012.
Weestimatethecompanygeneratedc5%ofitstotalrevenue(orcUS$5mn)fromtheappstorein1Q13,withtherevenuecontributionincreasingtoc10%in2Q13E(orUS$15mn).
Weareraisingourappstore-relatedrevenueestimatesto14%oftotalrevenuefor2013(from13%)andto22%oftotalrevenuefor2014(from19%).
InourrecentmobileusagesurveyinJulyandAugust,weaskeduserswheretheydownloadtheirappsfromandwhichchannel/appstoretheyusetosearchforapps.
91WirelessandQihoo's360mobileassistantrankedamongthemostpopularchannels,withpenetrationratesof38.
5%and39.
1%,respectively(Figure69).
ThissuggeststousthatQihoonowhasaleadingmarketpositionintermsofappstoreawareness.
WeconsiderQihoo'sstrategytobesuccessfulsofarandbelievetherecentacquisitionof91WirelessbyBaiduprovidessupporttoQihoo'sappstoreapproach,astheacquisitionpositionsBaidutocompeteinthesamespaceasQihoo.
UndertheBaiduumbrella,91Wireless'smarketpositionwilllikelybestrengthened,inourview.
Barclays|ChinaInternet13September201347FIGURE68BarclaysResearchmobileusersurvey–mostpopulardownloadappstores'marketshareFIGURE69BarclaysResearchmobileusersurvey–mostpopulardownloadappstores'userpenetrationSource:BarclaysResearchsurveySource:BarclaysResearchsurveyQihoo'sappstoreappearstobeprioritychoiceforgamedistributionAccordingtolocalpressreports(GameportalNetEaseTech,Youxi.
comandeeyy.
com,10September),oneofthepopularmobilegames,"LuALu"developedbyMengWoAiTechnology,beganunlimitedclosed-betatestingonQihoo360Appstore,andrankedfirstamongdailygameappdownloadswithaccumulativedownloadsof1.
39mnwithinfourdays'ofoperation.
The1.
39mndownloadsforthisgameismorethandoubleofthesumofdownloadsfortwoexistinghitmobilegames–"I'mMYOnline"and"SwordofKingdom",suggestingQihooAppstore'shasalargeuserpenetrationandisincreasinglybecominganeffectivegamedistributionplatformformobilegamedevelopers.
Meanwhile,PerfectWorld'sin-housemobilegame"ReturnofCondorHeroes"launchedabetaversioninMayandkickedoffopen-betatestingon22August;itwasrankedNo.
3asof11September,basedongames'grossrevenues(source:Appannie).
AccordingaTencentTechreport(dated26August),Qihootogetherwith91Wireless,UCandPPAssistantarethemajorrevenuedistributionchannelsfor"LegendofCondorHeroes"withadailycontributionofcRmb200,000.
Qihootolaunchonlinevideo/movieappinitiativeAccordingtolocalpressreports(SohuTech,10September),Qihooannouncedplanstoreleasea360mobilemovieappandhasformedapartnershipwithanewmovie,"SilentWitness".
Thecompany'sVicePresident,YuGuangdong,reportlycommentedthat360Moviecouldpotentiallybeanotherentertainmentproductdistributionplatformonmobile,followingQihoo'sappstoreandsecurityplatforms.
Itwouldincludevariousmoviecategories,62channels,andainventoryofmorethan150kmovies.
Theappwouldalsoenableuserstocustomizetheirmoviesubscriptionbasedontheirinterests,andsupportnon-WiFifilm-watching.
Iftheforthcominguserfeedbackispositive,thimightbeonemoremobileaccesspointforQihootomonetizeitsmobiletraffic,inourview.
RecentCBfundraisingimprovesbalancesheetandinvestmentflexibilityQihoorecentlycloseditsUS$600mnconvertiblebondplacement,improvingitscashpositiontoclosetoUS$1bn,fromUS$378mnatend-2Q13.
Theconvertibleseniornoteisdueon15September2018atanexercisepriceofUS$110.
96andhasanannualinterestrateof2.
50%.
91wireless29.
5%QQ10.
6%36030.
0%Feiliu3.
1%UC8.
8%Other14.
5%Notuse3.
5%38.
5%13.
8%39.
1%4.
0%11.
5%19.
0%4.
6%91wirelessQQ360FeiliuUCOtherNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%Barclays|ChinaInternet13September201348Inourview,thesuccessfulCBofferingindicatesinvestorconfidenceinQihoo'sbusinessstrategy,particularlyitssolidpositioninthemobileInternetspaceandrapidrampinsearchmonetization.
Duringits2Qearningscall,managementnotedthatitplanstocontinuetoexploreM&Aoracquisitionopportunities,butdoesnothaveanyspecificplans.
OnlinesearchcontinuestogainmarketshareAccordingtothelatestpublishedmonthlydata(July2013)andweeklydata(till1Sept2013)fromiResearchiUserTracker,Qihoo360'ssearchnumberscontinuedtogrow,withmonthlytotalpageviewstopping3.
5bn(up22.
7%m/m),including2.
7bnviewsgeneratedfromthe360searchboxand768mnviewsfromindependentsearchURLs(so.
com).
Thelatestavailableweeklydata(1Sep)suggestsQihooSearch'smarketsharereached11.
8%.
Meanwhile,BaiduSearch'smarketshareremainsstableat80.
5%,broadlyflattishinrecentweeks,whileQihoocontinuestotakemarketsharefromsmallerplayerssuchasSoso,GoogleandevenSogou,accordingtoiResearchtrackingdata.
CNZZ'spublisheddatasuggestsmoreaggressivemarketsharegainsforQihoo,whichfinishedthelatestweekwithusage-basedmarketshareof17.
7%asof10Sep2013,comparedto11.
3%atthebeginningofthisyear(Figure73).
IntermsofmonthlysearchusagemarketsharebreakdowninAugust2013,Qihoohadan18.
2%share,comparedtoBaidu's63.
2%andSogou's10.
4%.
Withasearchtrafficshareofcloseto20%,andgiventhatQihooonlykickedoffitssearchmonetizationin1Q13,webelievethereisstillalargegapbetweentrafficsharegainsandrevenuesharegrowthpotential.
Asaresult,weexpectQihootofurtherimproveandenhanceitssearchmonetizationvia:1)growingandexpandingitssearchadvertiserbase;2)improvingitscoverageratioandsearchrelevancytoenhanceitsmonetizationcapability;and3)continuingtorampsearchtraffic,mainlyviaorganictrafficgrowthandQihoo'sbrowserpenetration,whichshouldtranslateintohighertrafficandhigherclick-throughrates.
FIGURE70QihooSearchmonthlytotalpageviews(millions)FIGURE71QihooSearchlatestpageview-basedmarketshareSource:iResearch,BarclaysResearchSource:iResearch(asofweekof1Sep2013),BarclaysResearch05001,0001,5002,0002,5003,0003,5004,000Jul-12Aug-12Sep-12Oct-12Nov-12Dec-12Jan-13Feb-13Mar-13Apr-13May-13Jun-13Jul-13Monthlytotalpage-viewsBaidu80.
5%Google2.
2%Sogou3.
7%Soso0.
6%Qihoo36011.
8%Others1.
1%Barclays|ChinaInternet13September201349FIGURE72Onlinesearchusagemarketsharebreakdown,Aug2013FIGURE73Qihoo'sdailysearchusagemarketsharetrendSource:CNZZ(asofmonthAugust2013),BarclaysResearchSource:CNZZ(asof10Sep2013),BarclaysResearchBaidu63.
2%Qihoo18.
2%Sogou10.
4%Soso3.
6%Google2.
9%Others1.
8%10.
0%11.
0%12.
0%13.
0%14.
0%15.
0%16.
0%17.
0%18.
0%19.
0%01-Jan-1322-Jan-1312-Feb-1305-Mar-1326-Mar-1316-Apr-1307-May-1328-May-1318-Jun-1309-Jul-1330-Jul-1320-Aug-1310-Sep-13Barclays|ChinaInternet13September201350EstimaterevisionsWeraiseourappstorerevenueassumptionforQihooto14%oftotalrevenuesfor2013and22%oftotalrevenuesfor2014,upfrom13%and19%,respectively.
ThisisonthebackofthestrongperformanceofrecentlyreleasedmobilegamesonQihoo'splatform.
Thesechangesdriveournon-GAAPFDEPSestimatesfor2013-15marginallyby1-2%.
FIGURE74Qihoo–revisionstoBarclaysResearchestimatesNetRevenues(US$mn)Non-GAAPFDEPS(US$)GAAPNetProfit(US$mn)OldNew%ChgOldNew%ChgOldNew%Chg2013E6476490.
4%1.
341.
350.
4%1111110.
4%2014E9901,0081.
8%2.
452.
491.
8%2252291.
9%2015E1,3511,3963.
3%3.
533.
601.
8%3363483.
3%Source:BarclaysResearchestimatesWeraiseourwebgamesrevenueforecasts(inwhichrevenuesharingfromappstoregamesisrecorded)toUS$211.
7mnfromUS$209.
2mnfor2013,toUS$320mnfromUS$301.
9mnfor2014,andtoUS$455mnfromUS$410.
2mnfor2015.
Valuation:raisePTtoUS$100Qihoo'ssharepricehasoutperformedsignificantlyyear-to-date,up206.
0%vsNASDAQup23.
4%,andcomparedwithanaverageof+72.
4%forthe14ChineseInternetcompanieswecover.
Ithasalsore-ratedseveraltimessincethereleaseofitssearchengine.
However,webelievegiventhegapbetweenthefastrampofsearchtrafficshareandthemoregradualrampofsearchrevenueshare,weseenear-tomid-termcatalystscomingfrom:1)furthersurprisesonearningsbeats,especiallyiftherampofsearchrevenuesprogressesevenfasterandstrongerthanwecurrentlyexpect;2)furtherrisingsmartphonepenetrationthatwilllikelyleadtohigheruserpenetrationofitsmobilesecurityproductandhighermonetizationcapabilityofitsappstoremodel;and3)marginscouldcontinuetosurpriseifthetoplinecontinuestooutperform,giventhescalabilityofthesearchbusinessandahigher-marginprofileofthemobileappstoremodel(recordedonanetrevenuebasis).
WeremainOverweightonQihooandbelievetherecouldstillbeupsiderisktoourestimatesifsearchrevenuesgainbettertractionandrampfasterthanwecurrentlyexpect,andifmobileappstoresgaingreatertraction.
WeraiseourpricetoUS$100fromUS$86,basedon40x(upfrom35x,raisedtoreflectthetransitiontothemobiletrend)ourrevised2014Enon-GAAPEPADSofUS$2.
49(increasedfromUS$2.
45).
Our40xtargetmultipleimplies0.
6xPEGtotwo-year(2013-15E)earningsCAGRof66%,whichwebelieveisnottoodemandingconsideringthegrowthrate.
Inourview,despitetherecentre-ratingofthestockduetosolidexecutiononsearchmonetizationandfaster-than-expectedmonetizationonmobileInternet,QihoostilloffersoneofthefastestrevenuegrowthprospectsamongtheInternetcompanieswecover.
AsindicatedinFigure3,QihooisoneofveryfewChineseInternetcompaniesinourcoverageuniversethatstillenjoysover50%earningsgrowth.
Giventherelativelyearlystageinitsmonetizationrampinbothfastgrowthsegments(searchandmobileappstoremonetization),weforecastGAAPearningsgrowthof140%y/yin2013and106%in2014insupportofitshighertargetmultiple.
Whileour40xtargetmultipleishigherthanonestandarddeviationabovethehistoricalone-yearforwardP/E,andlooksrelativelyexpensivecomparedtothehistoricaltradingrange,webelieveQihoocouldcontinuetosurpriseontheupsideinbothearningsandguidance.
Barclays|ChinaInternet13September201351FIGURE75Qihoo360:1-yearforwardP/EbandFIGURE76Qihoo360:1-yearforwardP/EratioSource:Companydata,Bloomberg,BarclaysResearchestimatesSource:Companydata,Bloomberg,BarclaysResearchestimatesRisksWeseethefollowingdownsideriskstoourpricetarget:1)Qihoofacingchallengestocontinuegainingsearchmarketshareoritssearchadvertisingcustomerbasegrowingmoreslowlythanweexpect;2)aslowdowninthewebgamesmarket;and3)ifcompetitionintensifiesandthereisnoclearvisibilityonthesuccessofmobileInternet.
020406080100120Mar-11May-11Jul-11Sep-11Nov-11Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-1310x20x30x40x50x0102030405060Mar-11May-11Jul-11Sep-11Nov-11Jan-12Mar-12May-12Jul-12Sep-12Nov-12Jan-13Mar-13May-13Jul-13‐1SD+1SDAvgP/EBarclays|ChinaInternet13September201352IncomestatementFIGURE77Qihoo360Technology–consolidatedincomestatement(US$million,exceptpersharedata)US$million20121Q132Q133Q13E4Q13E2013E2014E2015EInternetservicesOnlineadvertising221.
563.
090.
6110.
8126.
0390.
4635.
8887.
2Directorysite203.
757.
075.
082.
889.
6304.
4392.
2461.
2Search0.
06.
015.
527.
936.
385.
7243.
3425.
8IVAS103.
346.
960.
971.
080.
2259.
1372.
1508.
9Webgame84.
136.
848.
758.
667.
6211.
7320.
0455.
2NonWebgame19.
210.
112.
212.
412.
747.
452.
153.
6TotalInternetservices328.
9109.
9151.
7181.
9206.
2649.
51007.
91396.
0Totalrevenue329.
0109.
9151.
7181.
9206.
2649.
51007.
91396.
0YoYgrowth96.
0%58.
6%108.
4%116.
4%100.
3%97.
4%55.
2%38.
5%CostofrevenueInternetservices32.
813.
917.
824.
627.
884.
1151.
2216.
4Totalcostofrevenue32.
813.
917.
824.
627.
884.
1151.
2216.
4GrossprofitInternetservicesGM296.
196.
0133.
8157.
3178.
4565.
3856.
61179.
6Grossprofit296.
296.
0133.
8157.
3178.
4565.
3856.
61179.
6Grossmargin90.
0%87.
3%88.
2%86.
5%86.
5%87.
0%85.
0%84.
5%OperatingexpensesSellingandmarketing58.
227.
124.
036.
437.
1124.
6157.
6209.
4Generalandadministration34.
311.
912.
915.
318.
658.
790.
1114.
5Researchanddevelopment156.
350.
260.
367.
376.
3254.
1339.
2446.
7Totaloperatingexpenses248.
789.
297.
2118.
9132.
0437.
3586.
9770.
6Income(loss)fromoperating(GAAP)50.
16.
836.
638.
446.
4128.
0269.
8409.
0Income(loss)fromoperating(Non-GAAP)100.
718.
854.
552.
962.
9189.
0365.
5534.
7Non-GAAPoperatingmargin30.
6%17.
1%36.
0%29.
1%30.
5%29.
1%36.
3%38.
3%Interestincome6.
71.
41.
81.
61.
66.
47.
28.
0Otherexpense-2.
30.
0-0.
1-0.
5-0.
5-1.
1-2.
0-3.
0Exchangegain(loss)0.
00.
41.
40.
50.
52.
80.
00.
0Income(loss)beforeincometaxandequityinvestment62.
78.
838.
440.
048.
0135.
2275.
1414.
1Incometax(benefit)11.
42.
24.
36.
07.
219.
741.
362.
1Equitymethodinvestment-4.
8-1.
0-0.
9-0.
9-0.
9-3.
7-3.
6-3.
6Netincome(loss)46.
55.
633.
233.
139.
9111.
8230.
2348.
4Noncontrollinginterest0.
30.
0-0.
2-0.
2-0.
2-0.
7-0.
9-0.
9Netincome(loss)attributedtoQihoo36046.
75.
633.
032.
939.
7111.
1229.
3347.
5Non-GAAPNetincometoQihoo36097.
417.
551.
047.
456.
2172.
1325.
1473.
2Non-GAAPNetmargin29.
6%15.
9%33.
6%26.
1%27.
3%26.
5%32.
3%33.
9%Non-GAAPdilutedEPS(US$)0.
800.
140.
400.
370.
441.
352.
493.
60Basicordinaryshares(m)176.
0178.
0179.
0179.
9180.
8179.
4183.
1184.
9Dilutedordinaryshares(m)184.
0189.
0191.
0192.
0192.
9191.
2195.
3197.
3Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September201353CTRIP.
COMINTERNATIONAL(CTRPUS;OW;PTUS$60;+19%)SmartphonepenetrationtodriveacceleratedgrowthWereiterateourOverweightratingonCtripandraiseourpricetargettoUS$60fromUS$45.
WebelieveCtripremainsasolidplayerintotheearlycycleofmobileinternetgrowthforthefollowingreasons:1)weseeCtripgainingmarketshareatafasterrateasitfurtherconsolidatesitspositionvs.
thefragmentedofflinetraditionalagentsonthebackofrisingsmartphonepenetration;2)its"one-stopshop"comprehensiveofferingofonlinetravelservicesanditsscaleshouldprovidebetterleverageforthecompanytocompetemoreefficientlyandeconomically;and3)whilecompetitionremainsintense,diminishingmarginshavemeantpurepricingcompetitionisnotacompetitivedifferentiationforallplayers,andhenceCtrip'sfullservice/one-stopshopservicecouldallowittocompeteinamoreflexibleway.
Weraiseour2014and2015revenue/non-GAAPEPSforecastsby4%/5%and5%/10%,respectively,toreflectfastertop-linegrowthdrivenbyhighermobilevolumeandmarketsharegains.
OurnewpricetargetofUS$60isbasedon32x(upfrom25x)ourrevised2014Enon-GAAPEPADSofUS$1.
88.
Ourtargetmultipleimpliesabout1.
0xPEGtoatwo-year2013-2015EearningsCAGRof32%,whichwebelieveisnotunreasonablegivenwhatweviewasthecompany'sfastergrowthprofileandstrongerfundamentals,similartoitshighgrowthperiodfrom2005-2007whereCtripalsotradedatarelativelyhighmultiple(30-50x),reflectingitsgrowthoutlookduringthatperiod.
Mobiletraction:Withmobiletrackingat>50mndownloadsandaccountingfor>20%ofhotelbookingvolumesandc15%ofticketingbookingvolumesasat2Q13,accordingtomanagement,Ctripnotedonits2Q13resultscallthatmobiletransactionsbymoreloyalusersandbusinesstravellershaveincreased.
Weestimatefastermobilevolumegrowthcouldalsobenefitmarginexpansionlongertermduetolowertrafficacquisitioncostsforonlinemarketing.
Qunarpartnershiplikelytohavepositiveimpactonpackagedtourtrafficandrevenues:CtripandQunarenteredintoacooperativeagreementon2August2013inwhichCtripwillprovideitspackagedtourinventoriesonQunar'splatform.
WewouldnotbesurprisedifCtripweretoexploreopportunitiestoprovideitshotelandairticketinginventoriesonQunar'splatforminthefuture.
Consolidationandmarketsharegains:DuringtheearlycycleofthePCInternetboominChina,Ctripleverageditsfull-serviceoffering(callcentre+onlinebookingplatform)aswellasitsefficientexecutionabilitytogainmarketsharefromfragmentedofflinetravelagents.
TheemergenceofonlineplatformssuchasQunarandTaobaoledtoslowermarketsharegainsforCtripduring2010-2012(asreflectedinslowingtop-linegrowth).
However,asoneoftheearlymoversindevelopingandprovidingacomprehensivemobileapp,webelieveCtripcouldproveonceagainitsabilitytofurtherconsolidatesmallerofflineagentsasitincreasesitsmobileapppenetration.
Asaresult,webelieveare-accelerationoftop-linegrowthforCtripislikelyoverthenext12-24months,boostedbyfastermarketsharegains.
Risks:1)Ifcompetitionintensifiesfurtherandthepricingwarcontinues;2)newcompetitioncouldevolvefromtheeCommerceplatformandnicheappplayers;and3)macro-relatedweaknesscouldimpacttraveldemandandsentiment.
CTRPStockRatingOVERWEIGHTIndustryViewPOSITIVEPriceTargetUSD60.
00Price(11-Sep-2013)USD50.
35PotentialUpside/Downside+19%Barclays|ChinaInternet13September201354MobiletravelbookingsrampingupnicelyAsdisclosedbyCtrip,bookingsfrommobiledeviceshavegrownrapidlyoverthepast2-3quarters.
Thecompanynotedonits2Q13earningscallthatmobilebookingsaccountedfor20%oftotalhotelbookingsasof2Q13,upfrom15%in1Q13and10%in4Q12,whilemobilebookingsaccountedfor15%oftotalairticketbookingsasof2Q13,upfrom10%in1Q13.
Assmartphonepenetrationcontinuestoincreaseoverthenext12-18months,weexpectthepercentageoftrafficandbookingscomingfrommobilewillcontinuetoriseandaccountforamoremeaningrevenuecontribution(c50%in2015).
Webelievemobiletrafficandmobilebookinggrowth,especiallyamongleisuretravellers,couldproveanimportantdriverforfurthervolumegrowthinthenexttwotothreeyears.
WeexpectCtriptobenefitfromhigheruserpenetrationandadoption,andthatthisislikelytohelpitincreaseitsmarketshareastheoveralltravelindustrycontinuestoconsolidate.
AccordingtoourmobileusersurveyinJulyandAugust,theCtripmobileapphasapenetrationrateofc41%,followedby11.
5%foreLong.
WeseethisasbeingrelativelyconsistentwiththeprogressofappdownloadsforCtrip.
FIGURE78BarclaysResearchmobileusersurvey–mobiletravelapppenetrationratesFIGURE79ChinaInternet–mobiletravelappdownloadsandmobilebookingvolumesforCtripandeLongSource:BarclaysResearchsurveySource:Companydata,BarclaysResearchQunarpartnership:positiveimpactonpackagedtourrevenueOn2August,CtripandQunarannouncedthattheyhadenteredintoacooperativeagreementforthepackagetourbusiness,alleviatingtheirpreviouscompetitiveposition.
BasedonourchecksontheQunarwebsite(asof11Sept),webelieveCtrip,Tuniuand17uarethethreeleadingagenciesforpackagedtoursonQunar'splatform(Figure80).
CurrentlyQunar'splatformhasmorethan131,000tourpackagescovering1,268agencies,withCtrip,Tuniuand17ufeaturingmostfrequently.
Basedonour11Septemberonlinechecks(andwithanabsenceofmoreprecisedatapointsfromthecompany),weestimateCtripcouldbethesecond-largestagencyofferingpackagetoursonQunar'splatform,behindTuniu,anditmaycontributecloseto15-20%oftotalpackagetourproductsforQunar.
41.
4%11.
5%5.
7%41.
4%21.
3%CtripElongQyerOthersNotuse0.
0%10.
0%20.
0%30.
0%40.
0%50.
0%4Q121Q132Q13Appdownloads20mn35mn50mnOnline&mobilebookings%oftotal50%na55%HotelPCbookingnana45%Hotelmobilebooking10%15%20%AirPCbookingnana40%Airmobilebookingna10%15%1Q132Q133Q13Appdownloadsna25mnnaMobilebookings%oftotal15%20%25%CtripeLongBarclays|ChinaInternet13September201355FIGURE80NumberofpackagetoursofferedonQunar'swebsiteforselectivemajorroutesStartingCityTuniuCtrip17uBeijing3,8451,108770Shanghai4,7221,3591,282Shenzhen1,13059019Guangzhou1,08762231Hangzhou2,207640106Nanjing2,328677124Source:Qunarwebsite,BarclaysResearchestimates,asof11Sep2013PromisingstructuralgrowthfortravelindustryAccordingtotheChinaNationalTourismAdministration(CNTA),China'sdomesticexpenditureontourismreachedcRmb1,931bnin2011,+53.
5%y/yfrom2010.
Thisgrowthrateof53.
5%isthehighestoverthepast12years.
Despitealackofavailableofficialdata,webelievegrowthremainedstrongin2012andsofarin2013givenrisingmiddle-classincomesandgrowingdemandforleisuretravel.
Giventhebetterservice,convenienceandeaseofcomparingpricesitcanprovide,onlinetravelbookingisbecominganincreasinglyimportantmediumforprice-sensitiveleisuretravellers,inourview(Figure81).
FIGURE81China'sdomesticexpenditureontourismSource:China'sNationalTourismAdministration,CEIC,BarclaysResearchMeanwhile,revenuesforChina'sonlinetravelmarketreachedRmb173bn(US$28bn)in2012,+32%from2011accordingtoiResearch.
iResearchexpectstheonlinetravelmarkettogrowtoRmb408bn(US$67bn)by2016,implyingaCAGRof24%for2012-2016.
Amongtheonlinetravelindustry,China'sonlinetravelagency(OTA)marketreachedRmb9.
4bnin2012withpenetrationof5.
4%,andisexpectedtogrowtoRmb23.
5bnby2016withpenetrationof5.
8%,implyingaCAGRof26%.
Therisingonlinebookingpenetration,especiallyfromthosecomingfrommobileinternetbooking,wouldlikelyleadtoCtriptakingmoremarketsharefromofflineagenciesorsmallerOTAsinthenextfewyears(Figure82and83).
3183523883444715296237778751,0181,2581,93112.
1%10.
9%10.
1%-11.
2%36.
8%12.
2%17.
9%24.
7%12.
6%16.
4%23.
5%53.
5%-20%-10%0%10%20%30%40%50%60%05001,0001,5002,0002,500200020012002200320042005200620072008200920102011Domestictourismexpenditurey/ygrowthBarclays|ChinaInternet13September201356FIGURE82Chinaonlinetravelmarket(Rmbbn)andy/ygrowthFIGURE83Chinaonlinetravelagent(OTA)market(Rmbbn)andpenetrationSource:ChinaNationalTourismAdministration,iResearchestimates,BarclaysResearchSource:ChinaNationalTourismAdministration,iResearchestimates,BarclaysResearchDuringtheearlycycleofthePCInternetboominChina,Ctripleverageditsfull-serviceoffering(callcentre+onlinebookingplatform)aswellasitsefficientexecutionabilitytotakemarketsharefromthefragmentedofflinetravelagents.
Thistranslatedto50%+top-linegrowthand60%earningsgrowthduring2005-07vs15-20%over2011-12.
Ctriptradedata30-50xone-yearforwardP/Emultipleduringthisperiod.
Thenumberoftravelagenciesgrewatamid-to-high-single-digitlevelover2005-07,downfromadouble-digitgrowthrateover2000-05.
ThissuggeststousthatCtripandotherleadingOTAstookmarketsharefromsmallerofflineagencies,whichcontributedtoCtrip'smarketsharegainsandrevenuegrowththatwas2-3xhigherthantheindustryaverage.
FIGURE84Ctriprevenuesandy/ygrowth(2005-07)FIGURE85Ctripearningsandy/ygrowth(2005-07)Source:Companydata,BarclaysResearchSource:Companydata,BarclaysResearch48.
661.
894.
9131.
4173.
0220.
0275.
0337.
0408.
027.
0%53.
6%38.
5%31.
6%27.
2%25.
0%22.
5%21.
1%0%10%20%30%40%50%60%050100150200250300350400450200820092010201120122013E2014E2015E2016EOverallonlinetravelmarketsizey/ygrowth2.
943.
766.
167.
869.
4011.
8414.
9518.
8723.
506.
0%5.
9%6.
5%5.
4%5.
4%5.
5%5.
5%5.
6%5.
8%0.
0%1.
0%2.
0%3.
0%4.
0%5.
0%6.
0%7.
0%0510152025200820092010201120122013E2014E2015E2016EOTAmarketsizeOTA%ofonlinetravelmarket64.
6899.
94164.
3856.
4%49.
4%53.
7%44%46%48%50%52%54%56%58%020406080100120140160180200520062007Netrevenuesyoygrowth27.
9837.
8366.
5267.
3%30.
6%64.
4%0%10%20%30%40%50%60%70%80%010203040506070200520062007Non-GAAPnetincomeyoygrowthBarclays|ChinaInternet13September201357FIGURE86Ctripone-yearforwardP/Eband(2005-07)FIGURE87Ctripone-yearforwardP/Eratio(2005-07)Source:Companydata,Bloomberg,BarclaysResearchSource:Companydata,Bloomberg,BarclaysResearchTheemergenceofonlineplatformssuchasQunarandTaobaoledtoslowermarketsharegainsforCtripduring2010-12,asreflectedinitsslowerrevenuegrowth.
However,asoneoftheearlymoversindevelopingandprovidingacomprehensivemobileapp,webelieveCtripcouldproveonceagainitsabilitytofurtherconsolidatesmallerofflineagentsasitincreasesitsmobileapppenetration.
Asaresult,webelieveare-accelerationoftop-linegrowthforCtripislikelyoverthenext12-24months,boostedbyfastermarketsharegains.
Growthinthenumberoftravelagenciescontinuedtodeceleratein2012(seeFigure88)andweexpectittorecordfurthery/ydeclinesinthenextfewyearsasmarketconsolidationbytheleadingOTAscontinues.
FIGURE88NumberoftravelagenciesinChinaSource:ChinaNationalTourismAdministration,iResearch,BarclaysResearch$0$5$10$15$20$25$30$35Jan-05Apr-05Jul-05Oct-05Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-0710x20x30x40x50x-102030405060Jan-05Apr-05Jul-05Oct-05Jan-06Apr-06Jul-06Oct-06Jan-07Apr-07Jul-07Oct-07AvgP/E+1SD-1SD4,9866,2227,3268,99310,53211,55213,36114,92716,24517,95718,94320,11020,39922,69123,86724,31117%25%18%23%17%10%16%12%9%11%5%6%1%11%5%2%0%5%10%15%20%25%30%05,00010,00015,00020,00025,00030,0001997199819992000200120022003200420052006200720082009201020112012#ofTravelAgencyintotalYoYgrowthBarclays|ChinaInternet13September201358EstimaterevisionsPackagedtours:BasedonourexpectationthatCtrip'spackagedtourbusinesswillbenefitfromthepartnershipwithQunar,weraiseourpackagetourestimatesfor2014and2015,withy/ygrowthof35%and33%,respectively,upfrom29%and27%previously.
Hotelrevenues:Weraiseourhotelvolumeassumptionstoreflectfastervolumepick-up,benefitingfromsmartphonepenetration.
Wenowestimatehotelrevenuegrowat29%and22%y/yin2014and2015,respectively,upfrom22.
5%and24%previously.
Airticketingrevenues:Wealsoraiseourairticketingvolumeassumptiontoreflectfastervolumepick-up,benefitingfromsmartphonepenetration.
Weestimateairticketrevenuesgrowat25.
9%and24.
9%y/yin2014and2015,respectively,upfrom22.
7%and22.
8%previously.
Margins:Wealsoassumeoperatingleveragekicksinonfasterrevenuegrowth,andnowmodelnon-GAAPoperatingmarginsof27.
3%and27.
7%for2014and2015,respectively,upfrom26.
8%and26.
6%previously.
Thesechangesdriveournon-GAAPFDEPADSestimatesfor2013-15higherby0.
2-10%.
FIGURE89Ctrip–revisionstoBarclaysResearchestimatesNetrevenues(US$mn)Non-GAAPFDEPADS(US$)Netprofit(US$mn)OldNew%ChgOldNew%ChgOldNew%Chg2013E854.
9858.
30.
4%1.
411.
410.
2%131.
1131.
30.
1%2014E1,058.
61,102.
64.
2%1.
791.
885.
3%170.
8181.
36.
2%2015E1,309.
91,380.
95.
4%2.
192.
4110.
0%204.
26231.
2413.
2%Source:BarclaysResearchestimatesFollowingthebetter-than-expected2Q13resultsandstronger-than-expected3Q13guidance,aswellasourviewthattop-linegrowthwillacceleratefurther,drivenbymobileadoptionwithfurthermarket-sharegains,weturnmuchmorepositiveandconfidentonCtrip'sgrowthoutlook.
WeseeaveryhealthytrendforonlinetraveldemandandweexpectCtriptohaveadominantpositioninthismarketinthenextfewyears.
Valuation:raisePTtoUS$60Onthebackofourmorepositiveoutlook,weraiseourpricetargettoUS$60(fromUS$45)basedona32xtargetmultiple(upfrom25x,raisedtoreflectthetransitiontothemobiletrend)onourrevised2014Enon-GAAPEPADSofUS$1.
88(previouslyUS$1.
79).
Ournewtargetmultipleof32xisinlinewithourrevisedtwo-yearearningsCAGR(2013-15E)of32%,alsosuggesting1.
0xPEG.
Webelievethishighermultipleiswarranted,giventhestabilizingmargintrendandpotentiallyimprovingmarginoutlook,aswellasfastergrowthdrivenbyfastermobileadoptionandoverallstructuralleisuretraveldemandgrowth.
RisksWeseethefollowingdownsideriskstoourpricetarget:1)ManyexistingaswellasnewplayershavestartedtocompetemoreaggressivelytocapturethegrowingdemandfortravelfromChina'sexpandingmiddle-classpopulation.
CtripcontinuestofacestrongcompetitionfromeLong,Qunar,TaobaoTravelandotherOTAs,aswellasincreaseddirectsalesfromsuppliers(airlinesandhotels).
2)Pricingcompetitiononhotelcoupondiscountingandaircouponrebateswilllikelycontinue.
AnyfurtherincreaseinintensityofcompetitionorirrationalpricingcompetitioncouldputpressureonCtrip'smarket-sharegainsandlikelyfurtherpressuremargins,asCtripdefendsitsmarketposition.
3)Anyunexpectedmacroeventssuchasearthquakes,waroraslowdownintheeconomycouldaffecttraveldemand.
Barclays|ChinaInternet13September201359IncomestatementFIGURE90Ctrip.
comInternational–consolidatedincomestatement(US$million,exceptpersharedata)Yearto31Dec,US$m2012A1Q13A2Q13A3Q13E4Q13E2013E2014E2015EHotelreservation273.
372.
583.
394.
695.
4346.
6448.
1547.
2Air-ticketing271.
373.
585.
196.
690.
5346.
6436.
3544.
8Packagedtour110.
737.
930.
548.
134.
6151.
5204.
9272.
6CorporateTravel32.
18.
210.
711.
112.
042.
253.
466.
3Others20.
45.
75.
66.
15.
623.
026.
430.
4Totalrevenues707.
7197.
8215.
1256.
5238.
1909.
91,169.
31,461.
3Less:Businesstaxandrelatedsurcharges40.
210.
912.
314.
613.
651.
566.
680.
4Netrevenues667.
5186.
9202.
8241.
9224.
5858.
31,102.
61,380.
9YoYGrowth18.
9%27.
4%27.
9%26.
6%25.
1%26.
7%28.
5%25.
2%Costofservices166.
649.
050.
467.
359.
4226.
7291.
4364.
7Grossprofit501.
0137.
9152.
5174.
6165.
1631.
7811.
31,016.
2Grossmargin75.
0%73.
8%75.
2%72.
2%73.
5%73.
6%73.
6%73.
6%Productdevelopment125.
137.
544.
847.
950.
0180.
1215.
3255.
5Salesandmarketing149.
040.
942.
248.
444.
0175.
5233.
7269.
3Generalandadministrative52.
515.
815.
518.
119.
168.
490.
6109.
1Share-basedcompensation69.
318.
018.
119.
420.
275.
699.
2131.
2Totaloperatingexpenses395.
9112.
1120.
5133.
8133.
2501.
0608.
9765.
0Operatingprofit105.
125.
831.
940.
831.
8130.
6202.
3251.
1Operatingmargin(non-GAAP)26.
1%23.
4%24.
7%24.
9%23.
2%24.
1%27.
3%27.
7%Interestincome26.
63.
67.
04.
95.
220.
723.
025.
2Otherincome20.
91.
23.
93.
31.
29.
65.
721.
9ProfitbeforetaxandMI152.
630.
642.
949.
038.
2161.
0231.
0298.
3Incometaxexpense(47.
3)(9.
9)(11.
5)(14.
7)(11.
5)(47.
5)(71.
3)(89.
5)Minorityinterests3.
83.
93.
63.
84.
015.
416.
716.
7Netprofit114.
724.
734.
339.
332.
5131.
3181.
3231.
2GAAPbasicEPADS(US$)0.
840.
190.
260.
300.
251.
001.
391.
75GAAPdilutedEPADS(US$)0.
790.
180.
240.
270.
220.
901.
221.
54Non-GAAPnetprofit183.
9742.
6852.
3958.
6852.
73206.
89280.
58362.
42Netmargin(non-GAAP)27.
6%22.
8%25.
8%24.
3%23.
5%24.
1%25.
4%26.
2%Non-GAAPdilutedEPADS(US$)1.
280.
300.
360.
400.
361.
411.
882.
41Weightedaveragesharecount(m)144.
36144.
06146.
30147.
32148.
06146.
43148.
91150.
40Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September201360BAIDU(BIDUUS;OW;PTUS$171,+16%)RepositioningitsmobilestrategyAlthoughBaidupotentiallyfacesheadwinds–suchasQihoogainingmoreshareinPCsearchandgettingtractionfromsmallandmedium-sizeenterprisesonmobileadbudgets–weviewitsacquisitionof91Wireless,NuomiandPPSasallstrengtheningitsmobilepositionandbelievethereareupsidecatalyststoBaidu'smobilestory.
Inaddition,itsvideobusiness,iQiyi,continuestorideontheemerging"multi-screen"strategywithearlyentranceintosmartTVcompetitionthatshouldhelpstrengtheniQiyi'sbrandandexpanditsuserreach.
Webelievethekeyquestionsinthenextfewquarterswillrevolvearoundintegrationprogressandrealizationofsynergieswiththenewbusinessesithasacquiredandmanagementexecution.
Weareadjustingourestimatestoreflecttheconsolidationof91Wirelessstartingin4Q13andNuomistartinginthelatterhalfof4Q13.
Weraiseour12-monthpricetargettoUS$171(fromUS$153)basedon27x(from25x)ourrevised2014Enon-GAAPEPADSofUS$6.
33(fromUS$6.
12).
Ourtargetmultipleof27ximplies1.
0xPEGonatwo-year(2013-15E)earningsCAGRof27%,whichwebelieveisreasonable.
Appstoreasimportantmobileaccesspoint:Withitsacquisitionof91Wireless,wethinkinvestorscanbeconfidentthatBaiduhassecuredanimportantmobileaccesspoint.
Asnotedinoursectordiscussionearlier,otherthanindependentappslikeWeChatandWeibo,thealternativewayofcapturingsizeablemobiletrafficishavinganappstore.
With91,Baiducanexpanditsabilitytomonetizemobiletrafficviapayperappdownloadsandsharemobilegamerevenues.
Leveragingthestrengthof91WirelesstoencouragedeveloperstobuildonBaidu'scloudinfrastructurecouldenableBaidutodevelopitssearchfunctionality,includingin-appsearchfeatures,aswellasencouragelong-tailappdeveloperstoconverttheirappsintothe"lightapp"approachwhereBaiduiscultivatingthenecessaryinfrastructure.
O2Osynergieswithmap:IntegratingNuomi'sgroupbuyingbusinessintoBaidumapwillstrengthenitsmapoffering,leveragingitsLBSfunctionanduserbaseandallowingBaidutomoreaggressivelypenetratelocalmerchants'O2Obusiness.
Upsidetomobilesearchrevenues:Whilewebelieveadvertisershavebeenslowtoadoptmobilesearchadvertising,webelieveBaiduisdoingagoodjobineducatingandencouragingsmallandmedium-sizeenterprisestotryoutmobile.
Hence,webelieveitisamatteroftimebeforeweseemoremeaningfulportionsofadvertisingbudgetsshiftingtomobile.
Afterthesurprisingdisclosurethat10%oftotalrevenuewerefrommobilein2Q13,givenhowquicklytheoverallspaceisprogressing,wewouldnotbesurprisedifmobilesearchrevenuesrampfasterandmoresmoothlythanwepreviouslyexpectedandhenceweseepotentialupsideriskto3Q13guidanceandourestimatesinthissegment.
Risks:1)IntensifiedPCsearchcompetitionasQihoorampsupmonetizationandifQihoosuccessfullyacquiresSogou(Sohu.
comInc.
:Adjustingestimatesandpricetarget,31May2013)2)integrationriskswith91WirelessandNuomi;and3)marginsandmobilerevenuesrampfailingtomeetexpectations.
BIDUStockRatingOVERWEIGHTIndustryViewPOSITIVEPriceTargetUSD171.
00Price(11-Sep-2013)USD147.
31PotentialUpside/Downside+16%Barclays|ChinaInternet13September201361Strengtheningmobilepositionviaacquisitions1.
BaiduiQiyileadsthemarketinsmartTVinitiativeOn4Sep,Baidu'siQiyiannounceditwouldsell48-inchsmartTVsjointlywithTCLMultimediaTechnologyGroup(1070HK,NotRated).
TheywilleffectivelycostRmb4,567foranadvancedseriesandRmb2,999forthenormalseries.
Accordingtotheagreement,iQiyiwillprovidethecontent,whileTCLisresponsibleforproductmanufacturing.
AsiQiyialreadyhasalargeinventoryofprofessionallyproducedvideocontentsuchasdrama,moviesandrealityshows,webelievethenewinitiativeinsmartTVscouldenableiQiyitogainanearlymoveradvantageinpenetratingusers'homeentertainmenttime,allowinguserstoconsumeitscontentregardlessofthescreen/deviceandregardlessofwhethertheuserisoutandaboutorathome.
ThiswillhelpexpanditsuserbaseandincreasethetimeusersspendoniQiyicontent.
2.
91WirelessacquisitionallowsBaidutoenterappstoreandmobilegameoperationsOn13Aug,Baiduannouncedithassignedadefinitivemergeragreementtoacquirea100%equityinterestin91WirelessforatotalconsiderationofUS$1.
9bn.
Weviewthecompletionoftheagreementonthistransactionasstrategicallypositiveandsoundforthefollowingreasons:1)the91appstorewillallowBaidutogainanimportantmobiletrafficaccesspoint/gateway,strengtheningitsabilitytocontrolmobiletraffic;2)Baiducanleveragethe91appstore'sdistributionabilitytoinfluencethewaydeveloperscreateandmonetizetheirapps;3)Baiducouldleveragethestrengthof91WirelesstoencouragedeveloperstobuildonBaidu'scloudinfrastructure,allowingBaidutodevelopitssearchfunctionality,whichwouldincludesin-appsearchfeatures;4)Baiducanexpanditsabilitytomonetizemobiletrafficviapayperappdownloadsandsharemobilegamerevenues(diversifyingawayfromarelianceonSMEandbusiness,towardsconsumers'wallets);and5)91appstorewillalsobecomeaconvenientdistributionchannelforBaidutopromoteandpushitsownmobileappssuchasmap,mobilebrowsers,anditssearchapp.
Formoredetails,pleaserefertoourpreviouslypublishedreports:Baidu-Acquiring91Wireless;takingastepforwardonmobileappstoreandmobilesearchinitiatives(July16)andBaidu–91Wirelessacquisitionofficiallysigned(August14).
3.
NuomiacquisitionallowsBaidutopenetrateintolocalservicesmarketOn22Aug,Baiduannounceditwasacquiringa59%equityinterestinNuomiforatotalconsiderationofUS$160mn,implyingatotalvaluationofUS$271mn.
Nuomi,asoneofthetopthreegroupbuysitesinChina,generatedapproximatelyUS$120mningeneralmerchandisesaleswith3.
8mnactivepayingusersin2Q13.
ThirtypercentofsalestransactedonNuomiderivedfrommobiledevicesin2Q.
Weviewthetransactionasstrategicallypositive,aswethinkthisinvestmentcould:1)createclearsynergywithBaiduMap'sLBSfunction,andoffersawaytomonetizeBaidu'smapping/LBSservicesonmobile;2)strengthenBaidu'smobileInternetposition,togetherwiththeconsolidationof91Wireless;and3)enableBaidutopenetratetheeCommercemarket,particularlythehugenumberoflocalservicesmerchantsinChina,anddiversifyBaidu'sbusinessandrevenuestreams.
However,onthenegativeside,giventhatNuomiisstillloss-makingandgroupbuyisalow-marginbusiness,weexpecttheinvestmentinNuomitofurtherpressureBaidu'smarginspostthetransaction.
Barclays|ChinaInternet13September201362WeestimateNuomiwillgeneratetotalnetrevenues(onlyrecognizingcommissionsasrevenues)ofUS$26mnin2013.
Forthefullyear2012,NuomirecordedtotalnetrevenuesofUS$16.
1mnwhiletotaloperatingexpenses(asdisclosedbyRenrenonitsearningsresultcall)wereapproximatelyUS$42.
2mn,implyingatotaloperatinglossofaroundUS$26mn.
For1Q13,RenrenreportedNuomi'sexpenseswereUS$11.
8mnwhileitonlyrecordednetrevenuesofUS$5.
1mn,suggestinganoperatinglossofUS$6.
7mn.
RenrendidnotdisclosethedetailsofNuomi'sexpensesin2Q13.
AssumingtheinvestmentinNuomistaysrelativelystableeachquarter,totalexpensesfor2013couldrangebetweenUS$45mnandUS$50mn,whichcouldtranslatetoanegativeimpactonBaidu'soverallmarginsofapproximately1%.
However,beingpartofabigfamily,Baiduwilllikelyuseitsresources(likelargetrafficnumbers,mappenetration,etc)tohelpNuomigrowitsmarketsharequicklyandeffectively.
Thisshouldtranslateintohighertransactionvalueandrevenuessothat,overtime,theoperatinglossesgraduallyimprove.
EstimaterevisionsBasedonthelatestresultsupdateandBaidu'sacquisitionof91WirelessandNuomi,wereviseourforecastsaccordinglytoreflecttheconsolidationof91Wirelessstarting4Q13andreflectahalf-quartercontributionfromNuomiin4Q13.
Weraiseour4Q13estimatestoreflectourassumptionforthe91Wirelesscontribution.
WeaddaUS$43mnrevenuecontributionfrom91WirelessandaddUS$3.
95mnrevenuefromthehalfquarter(aswebelievethetransactionislikelytocloseinmid-to-endNovember)contributionfromNuomi.
Weestimate91Wirelesswillcontributeapproximately3%ofBaidu'stotalrevenuesfor2014and2015.
Sinceweestimatethat91Wirelesswasalreadyprofitable,thetransactionshouldbeaccretivetoearningsfor2014and2015.
Ontheotherhand,weestimateNuomiwillaccountfor0.
5%ofBaidu'stotalrevenuesfor2014and0.
6%for2015,andgivenitisstilllossmakingbutstillsmall-scale,weestimatethenegativemarginimpactfromNuomiisrelativelylimited,andhenceweadjustoursalesandmarketingexpenseestimatesslightlytoreflectthehighercostcomponentfortheNuomibusiness.
FIGURE91Baidu–revisionstoBarclaysResearchestimatesNetrevenues(US$mn)Non-GAAPFDEPS(US$)GAAPnetprofit(US$mn)OldNew%ChgOldNew%ChgOldNew%Chg2013E4,7344,7780.
9%5.
035.
050.
5%1,6901,6960.
3%2014E6,3256,5623.
8%6.
126.
333.
4%2,0162,0803.
2%2015E8,0068,3264.
0%7.
968.
203.
0%2,6282,7022.
8%Source:BarclaysResearchestimatesValuation:raisingPTtoUS$171Withourrevisedestimates,weraiseour12-monthpricetargetfromUS$153toUS$171.
OurnewpricetargetofUS$171isbasedon27x2014Enon-GAAPEPADSofUS$6.
33(fromUS$6.
12previously).
Webelieveour27xtargetmultipleisreasonableandisinlinewiththecompany'stwo-yearearningsCAGRof27%for2013-15E,andimplies1.
0xPEG.
Barclays|ChinaInternet13September201363FIGURE92Baidu:one-yearforwardP/EbandFIGURE93Baidu:one-yearforwardP/EratioSource:Bloomberg,BarclaysResearchestimatesSource:Bloomberg,BarclaysResearchestimatesAsaresultofstronger3Qguidance,faster-than-expectedramponmobilemonetization,andtheproposedacquisitionof91Wireless,webelieveBaiduhassteppedupitseffortstorepositionitselftocapturegrowthinthemobileInternetsegment.
Whileitisstillearlyinitsmobiletransition,weareturningmorepositiveonthecompany'sprogressanditsachievementsinimprovingitsoverallsearchtechnologyandcustomeradoptionrate.
Webelievethiscouldbethebeginningofthecompany'smobileinflectionpoint.
Hence,wemaintainourOverweightratingwithanewPTofUS$171.
RisksCompetitioninPCsearchlikelytointensify:AsQihoo'ssearchrevenuesrampupaggressively,Baiduwilllikelyfacemoreintensecompetitionindesktopsearch,whichcouldfurtherpressureitstrafficacquisitioncostsaswellasS&Mspend,asBaiduwillneedtostepupitseffortstodefendmarketshareandretainemployees.
Inaddition,ifthereportednewsflowofQihooacquiringSogoumaterializes,thiscouldallowQihootoachieve25%trafficshareandbecomeamoremeaningfulcompetitortoBaidu.
Mobilerevenuerampandmargintrendfailingtomeetexpectations:WhilewethinkitisencouragingthatBaidunowgenerates10%ofitstotalrevenuesfrommobile,webelievethesuddenjumpcanbeattributedto:1)anaggressivepushfromthesalesteam;and2)aggressivediscountsorincentivestodrivemoreandfasteradoptionfromadvertisers.
Currently,asusers'behaviouronandexperienceofmobiledevicescontinuestoevolve,webelievemostoftheclick-throughratesonmobilearelikelytobelowerqualityandhencethereistheriskthatadvertisersfindROIonmobiletrafficislowandthusdecidetospendlessoroptoutofthemobilekeywordsoption.
Ifthisweretohappen,mobilerevenuescouldsuffer.
Furthermore,giventhecontinuedinvestmentphase,andasitisdefendingitscompetitiveposition,BaiduwilllikelyneedtospendaggressivelyonS&Mandtrafficacquisition,whichwilllikelyweighonitsmargins,and,iftherevenuerampfailstomaterializeorthemacroenvironmentworsens,thereisdownsiderisktomarginsandearnings.
$0$50$100$150$200$250$300$350Aug-05Aug-06Aug-07Aug-08Aug-09Aug-10Aug-11Aug-12Aug-1310x20x30x40x50x-20406080100120140Aug-05Aug-06Aug-07Aug-08Aug-09Aug-10Aug-11Aug-12Aug-13-1SD+1SDAvgPEBarclays|ChinaInternet13September201364IncomestatementFIGURE94Baidu–consolidatedincomestatement(US$million,exceptpersharedate)Yearto31Dec2012A1Q13A2Q13A3Q13E4Q13E2013E2014E2015EOnlinemarketingservices3,570.
7958.
51,228.
41,436.
01,459.
65,093.
96,786.
88,592.
7Others9.
72.
53.
53.
550.
660.
2269.
6360.
3Totalgrossrevenues3,580.
4961.
01,231.
91,439.
51,510.
25,154.
17,056.
48,953.
1Less:Businesstaxandsurcharges252.
469.
788.
8100.
8105.
7365.
0493.
9626.
7Totalnetrevenues3,328.
0891.
31,143.
11,338.
71,404.
54,777.
66,562.
58,326.
3YoYgrowth55.
4%42.
0%43.
4%44.
5%48.
5%43.
6%37.
4%26.
9%Trafficacquisitioncosts309.
898.
2143.
4179.
9202.
4623.
81,051.
11,427.
5Bandwidthcosts171.
665.
274.
586.
490.
6316.
7415.
9502.
7Depreciationofserversandotherequipment172.
153.
658.
269.
174.
0254.
9372.
4472.
8Operationalexpenses91.
435.
239.
646.
149.
1170.
0223.
6272.
8Totalcostofrevenues779.
5267.
6340.
2416.
0456.
81,480.
92,267.
42,941.
9Grossprofit2,548.
5623.
7802.
9922.
7947.
73,296.
84,295.
15,384.
4Grossmargin71.
2%64.
9%65.
2%64.
1%62.
8%64.
1%60.
9%60.
1%Selling,generalandadministrative392.
7131.
8172.
0204.
4226.
5734.
8947.
21,080.
3Researchanddevelopment346.
2118.
1144.
1167.
0184.
2613.
5830.
1995.
5Share-basedcompensation34.
117.
913.
621.
622.
775.
7141.
1179.
1Totaloperatingexpenses773.
1267.
8329.
8393.
0433.
41,424.
01,918.
42,254.
8Operatingincome1,775.
4355.
9473.
1529.
7514.
21,872.
82,376.
73,129.
6Operatingmargin(GAAP)49.
6%37.
0%38.
4%36.
8%34.
1%36.
3%33.
7%35.
0%Interestincome120.
729.
736.
937.
337.
7141.
7154.
6160.
9Otherincome/(expense),net72.
91.
04.
52.
93.
011.
4(13.
0)(18.
8)Profitbeforetax1,921.
8385.
8514.
5569.
8554.
62,024.
62,517.
03,270.
4Tax(250.
8)(62.
6)(83.
8)(96.
9)(94.
3)(337.
6)(440.
5)(572.
3)Netincome1,681.
3328.
9430.
8473.
8461.
31,695.
62,080.
12,701.
7GAAPnetmargin46.
9%34.
2%35.
0%32.
9%30.
5%32.
9%29.
5%30.
2%Non-GAAPNetincome1,715.
4346.
8444.
4495.
4483.
91,771.
32,221.
32,880.
8Non-GAAPnetmargin47.
9%36.
1%36.
1%34.
4%32.
0%34.
4%31.
5%32.
2%GAAPbasicEPS(US$)4.
790.
951.
231.
351.
324.
855.
957.
72GAAPdilutedEPS(US$)4.
810.
951.
231.
351.
314.
845.
937.
69Non-GAAPdilutedEPS(US$)4.
901.
001.
261.
411.
385.
056.
338.
20Weightedaveragedilutedshares(m)349.
79349.
90349.
94350.
44350.
94350.
31351.
08351.
28Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September201365E-COMMERCECHINADANGDANG(DANGUS;UW;PTUS$6.
00;-33%%)Transitiontomarketplacemodelimprovingmarginsbutsacrificingtop-linegrowthWemaintainourUnderweightratingonDangdangbutraiseour12-monthpricetargettoUS$6.
00(fromUS$4.
50)toreflectgrossmarginimprovements.
Similarto1Q13,Dangdang'sproactiveapproachtoshiftitslow-marginself-procurementgeneralmerchandisebusinesstoacommission-basedmarketplacemodelseemstobeworkingandpreservingitscashpositioneffectively,atleastinthenearterm.
However,withthegrowthrateforitstotalgrossmerchandisevalue(GMV)deceleratingfrom175%y/yin1Q13and178%in2Q13to3Q13guidanceof165%despitecontributionsfromitsnewlylaunchedflashsalesplatform"WeiPingHui",wearecautiousoverwhetherthemarginimprovementdrivenbyshiftingtoacommission-basedmarketplacemodelmighteventuallyreachaceiling.
Inaddition,astheeCommercemarkethasyettoachievestabilityandmarketsharegainremainsanear-tomid-termpriorityforothereCommercepeers,webelieveamoreaggressivepushbycompetitorsinonlinebookpricingwouldputDangdang'sabilitytosustainitsmarginsunderpressureandcouldchallengeitsreturntoprofitability.
OurnewpricetargetofUS$6.
00isbasedonourDCFmodel,andourdiscountrateandperpetualgrowthrateassumptionsareunchanged(weuseaWACCof18%andanexitgrowthrateof3%).
3Q13guidanceinline:Afterreporting2Q13resultsthatwerebroadlyin-linewithBloombergconsensusexpectationsandourestimates,Dangdangguidedfor3Q13totalrevenuetogrow23%y/y(thesameas2Q13)toRmb1.
584bn(US$259mn).
Thiswasc2%higherthanourestimatebutin-linewithconsensusestimatesatthattime.
Thecompanyguidedforthegrossmerchandisevalueofthemarketplacebusinesstogrow165%y/y(vs175%in2Q13)toRmb905mn,drivenbyacontinuedshiftofmoreitemstothemarketplace,cross-sellingandtargetedmarketingefforts.
WenowforecastaGMVforthemarketplacebusinessofRmb908mn.
Marginsflattishsequentially:Grossmargincameinat17.
1%in2Q13,down0.
1%q/qcomparedto17.
2%in1Q13and13.
1%in2Q12,benefittingfromthecontinuedtransitiontothemarketplacemodel.
However,aggressivepromotionsinthesummercouldleadtoshort-termfluctuationsinmargins.
Ontheimprovingmargintrend,wereduceourlosspershareexpectationsfor2013and2014by13%and43%,respectively.
ThisleadstoourhigherpricetargetofUS$6.
00.
In-houseapparelbrandsuspendedduetolackofbrandawareness:Accordingtolocalpressreports(SinaTech,11Sep),Dangdang'schairmanannouncedthatthecompanywouldtemporarilysuspendexpansionplansforitsin-houseapparelbrand,"DangdangYouPing",asaresultofalackofbrandawarenessandeconomiesofscale.
ThebrandwasonlylaunchedinMay2013.
Lackofdesign&manufacturingcapacity,orplatformandcash-reservationsupportwouldrestrictthecompany'sabilitytopenetrateotherarenaseasily,inourview.
Risks:1)Anearlier-than-expectedreturntoprofitability;2)ifthemarketplacemodelgrowstobeasizeablecontributortothetoplineandmargins;and3)ifthecompanyweretoraisemorefundingorbecomeofinteresttopotentialacquirers.
DANGStockRatingUNDERWEIGHTIndustryViewPOSITIVEPriceTargetUSD6.
00Price(11-Sep-2013)USD9.
01PotentialUpside/Downside-33%Barclays|ChinaInternet13September201366EstimaterevisionsFollowingDangdang's2Q13results,3Q13guidanceandthelatestbusinessupdate,wereviseourestimates.
FIGURE95Dangdang–revisionstoBarclaysResearchestimatesRevenues(US$mn)Non-GAAPEPS(US$)NetProfit(US$mn)OldNew%ChgOldNew%ChgOldNew%Chg2013E1,0251,0491.
0%(0.
61)(0.
50)NA(50.
80)(42.
31)NA2014E1,2391,2883.
0%(0.
52)(0.
27)NA(44.
44)(24.
12)NA2015E1,4541,5586.
4%0.
050.
12NA0.
305.
71NASource:BarclaysResearchestimatesWeraiseourgrowthassumptionsformarketplacerevenuetoUS$16.
4mn,US$66.
1mnandUS$123.
9mnfor3Q13,full-year2013and2014,implyingy/ygrowthof150%,134%and87%,respectively,butlowerourassumptionsforgeneralmerchandiserevenuetoUS$73.
8mn,US$329.
4mnandUS$374.
6mnfor3Q13,full-year2013and2014,implyingy/ygrowthof14%,14.
3%and13.
7%,respectively.
Weraiseourgrossmarginassumptionfor3Q13to17.
6%from17.
1%,andnowexpectagradualmarginimprovementfrom17.
7%in2013to19.
3%in2014.
Valuation:raisePTtoUS$6.
00WeraiseourpricetargettoUS$6.
00fromUS$4.
50becauseofourrevisedassumptionofahigherrevenuecontributionfromthehigh-marginmarketplacebusiness,alongwithalowercontributionfromthelow-marginself-procurementgeneralmerchandisemodel.
Asaresultofthecompany'simprovingmarginprospects,wereduceourlosspershareexpectationby13%in2013and43%in2014.
WereiterateourUnderweightratinggivenourconcernsoverthesustainabilityofthecompany'smarginimprovementstoryandthecompetitivelandscaperemainingveryintense.
WeuseDCFtovaluethecompanyduetotheearningsfluctuationscausedbytheintensivepricewarwithothereCommerceplayers,thecompany'slowmarginsanditsaggressiveapproachtoinvestments,whichhaveledtobiglossesinrecentquarters.
Ourdiscountrateandperpetualgrowthrateassumptionsareunchanged(weuseaWACCof18%andanexitgrowthrateof3%).
RisksThekeyupsideriskstoourpricetargetforDangdangincludethefollowing:1)anearlier-than-expectedreturntoprofitability;2)ifthemarketplacemodelgrowstobeasizeablecontributortothetoplineandmargins;and3)ifthecompanyweretoraisemorefundingorbecomeofinteresttopotentialacquirers.
Barclays|ChinaInternet13September201367IncomestatementFIGURE96Dangdang–consolidatedincomestatement(US$million,exceptpersharedata)Yearto31Dec2012A1Q13A2Q13A3Q13E4Q13E2013E2014E2015EProductrevenue805.
9205.
4232.
9244.
8296.
9982.
51,164.
61,367.
5Media522.
1139.
1154.
0171.
0187.
3653.
1789.
9947.
9Generalmerchandise283.
866.
378.
973.
8109.
6329.
4374.
6419.
6Otherrevenue27.
89.
410.
416.
429.
866.
1123.
9190.
8Totalnetrevenues833.
7214.
7243.
3261.
2326.
71,048.
61,288.
41,558.
3YoYGrowth45.
0%24.
8%28.
0%27.
5%26.
1%25.
8%22.
9%20.
9%Costofrevenues717.
4177.
9201.
7215.
4266.
2863.
31,040.
11,230.
8Grossprofit116.
336.
841.
745.
960.
6185.
4248.
3327.
5Grossmargins13.
9%17.
2%17.
1%17.
6%18.
5%17.
7%19.
3%21.
0%Fulfillment118.
229.
729.
131.
942.
5133.
5162.
4196.
3Marketing31.
57.
012.
59.
414.
743.
745.
353.
0Technologyandcontent24.
67.
97.
78.
99.
333.
939.
346.
7Generalandadministrative22.
15.
25.
76.
57.
224.
735.
039.
0Totaloperatingexpenses194.
849.
854.
556.
773.
7235.
3282.
1335.
0(Loss)incomefromoperations(78.
5)(12.
9)(12.
9)(10.
8)(13.
1)(49.
9)(33.
8)(7.
6)Operatingmargin(GAAP)-9.
4%-6.
0%-5.
3%-4.
1%-4.
0%-4.
8%-2.
6%-0.
5%Interestincome5.
00.
70.
10.
70.
72.
13.
24.
6Other(expenses)income,net2.
30.
52.
31.
31.
35.
56.
54.
9(Loss)incomebeforeincometaxes(71.
2)(11.
7)(10.
4)(8.
9)(11.
2)(42.
3)(24.
1)5.
7IncometaxbenefitNet(loss)income(71.
2)(11.
7)(10.
4)(8.
9)(11.
2)(42.
3)(24.
1)5.
7Netmargin(GAAP)-8.
5%-5.
5%-4.
3%-3.
4%-3.
4%-4.
0%-1.
9%0.
4%Non-GAAPnetincome(69.
4)(11.
3)(10.
0)(8.
5)(10.
7)(40.
5)(21.
9)9.
5GAAPbasicEPADS(US$)(0.
89)(0.
15)(0.
13)(0.
11)(0.
14)(0.
53)(0.
30)0.
07GAAPdilutedEPADS(US$)(0.
89)(0.
15)(0.
13)(0.
11)(0.
14)(0.
53)(0.
30)0.
07Non-GAAPdilutedEPADS(US$)(0.
87)(0.
14)(0.
12)(0.
11)(0.
13)(0.
50)(0.
27)0.
12Weightedaveragedilutedshares(m)-basic80.
1680.
1780.
2080.
4080.
6080.
3481.
1181.
31Weightedaveragedilutedshares(m)-diluted80.
1680.
1780.
2080.
4280.
6380.
3681.
1881.
40Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September2013682Q13RESULTSREVIEWFIGURE972Q13ChinaInternetstocks'resultsreviewStockCode0700BIDUCYOUDANGNTESRENNSINASOHUYOKUCTRPGAGAMEPWRDQIHUCurrencyRMBUSDUSDUSDUSDUSDUSDUSDUSDUSDUSDUSDUSDUSDSales14,384.
51,143.
1182.
4243.
3369.
049.
6157.
5338.
9122.
8202.
895.
8175.
6115.
4151.
7Grossprofit7,794.
2802.
9151.
441.
7283.
431.
784.
3225.
431.
0152.
584.
2113.
487.
2133.
8R&DNA144.
126.
37.
733.
122.
232.
563.
010.
844.
813.
226.
732.
560.
3S&M1,234.
1172.
018.
512.
550.
630.
233.
971.
526.
942.
28.
827.
031.
824.
0G&A2,400.
9NA13.
35.
712.
314.
09.
025.
212.
315.
55.
612.
512.
012.
9Opincome4,565.
1473.
193.
3(12.
9)174.
6(34.
7)(18.
2)64.
4(19.
0)31.
958.
347.
310.
936.
6Effectivetaxrate20%16%14%0%11%-1%-30%23%0%27%3%-7%20%11%Netincome3,680.
4430.
875.
2(10.
4)178.
4(9.
3)(11.
5)21.
5(17.
1)34.
362.
960.
613.
233.
0Non-GAAPNI4,152.
0444.
475.
6(10.
0)191.
4(3.
8)14.
222.
5(7.
3)52.
462.
564.
815.
951.
0EPS1.
981.
231.
41(0.
13)1.
37(0.
02)(0.
17)0.
56(0.
10)0.
240.
240.
230.
270.
17Non-GAAPEPS2.
231.
261.
41(0.
12)1.
47(0.
01)0.
210.
58(0.
04)0.
360.
250.
240.
330.
40Cashbalance35,1863,7004812103,0038361,237887544873544482372379Cashpershare18.
910.
69.
02.
623.
12.
218.
523.
03.
36.
02.
21.
87.
62.
0Shares(diluted)1,862.
8349.
753.
580.
2130.
2375.
466.
838.
5165.
6146.
3247.
1267.
849.
0191.
0SBC259.
813.
60.
40.
412.
95.
231.
61.
27.
918.
12.
61.
12.
818.
0SBCas%revs1.
8%1.
2%0.
2%0.
2%3.
5%10.
4%20.
1%0.
4%6.
4%8.
9%2.
7%0.
6%2.
4%11.
8%YoYgrowthSales36.
6%43.
4%23.
8%28.
0%19.
4%10.
7%19.
7%32.
5%101.
3%32.
3%18.
6%-1.
7%8.
4%118.
9%Grossprofit25.
4%29.
1%22.
3%67.
7%33.
3%13.
7%20.
5%44.
6%NM32.
2%20.
2%1.
7%0.
7%117.
0%R&DNM78.
8%57.
1%25.
3%34.
3%24.
6%28.
4%50.
6%95.
1%62.
5%12.
6%13.
0%8.
8%117.
5%S&M102.
4%91.
8%27.
3%119.
2%67.
9%40.
0%0.
5%47.
4%113.
1%31.
8%145.
9%31.
2%65.
7%102.
4%G&A28.
9%NM70.
9%17.
6%27.
2%31.
0%14.
8%57.
4%81.
8%27.
2%-6.
6%10.
8%-8.
3%69.
3%Opincome15.
9%6.
8%14.
0%NM25.
5%NMNM49.
4%NM20.
7%15.
8%-15.
7%-55.
3%153.
2%Netincome18.
7%-0.
4%8.
8%NM29.
5%NMNM99.
9%NM82.
0%26.
6%24.
3%-47.
2%134.
6%Non-GAAPNI22.
6%0.
7%4.
5%NM30.
3%NM280.
6%37.
6%NM45.
7%22.
0%21.
7%-42.
3%97.
9%EPS18.
6%-0.
7%8.
9%NM31.
0%NMNM99.
2%NM86.
7%17.
2%30.
2%-47.
5%NMNon-GAAPEPS22.
5%0.
3%4.
5%NM31.
8%NM363.
5%37.
4%NM46.
2%18.
7%27.
5%-42.
6%90.
6%Cashbalance17.
5%26.
5%3.
4%-7.
1%28.
3%-9.
3%72.
7%12.
8%-0.
5%13.
2%87.
3%67.
5%9.
4%-41.
6%Cashpershare17.
5%26.
5%3.
4%-7.
4%29.
7%-5.
9%72.
7%12.
7%-30.
6%13.
6%82.
1%75.
4%8.
7%-62.
5%QoQgrowthSales6.
2%28.
3%2.
7%13.
3%6.
5%6.
5%25.
0%10.
2%47.
8%8.
6%3.
9%1.
5%14.
8%38.
0%Grossprofit2.
6%28.
7%2.
6%13.
0%11.
8%5.
8%30.
5%10.
4%NM10.
6%6.
7%1.
9%13.
3%39.
4%R&DNM22.
0%31.
1%-3.
7%10.
2%-7.
4%8.
2%22.
3%17.
6%19.
5%5.
4%6.
9%11.
5%20.
2%S&M28.
2%30.
5%42.
3%79.
8%91.
8%36.
4%15.
9%22.
1%31.
0%3.
1%80.
0%-0.
8%104.
3%-11.
3%G&A9.
3%NM3.
1%9.
3%0.
6%24.
1%-14.
3%14.
2%-8.
3%-1.
9%10.
7%7.
3%10.
7%8.
6%Opincome-9.
8%32.
9%-8.
2%NM-0.
6%NMNM-9.
1%NM23.
9%0.
3%-0.
4%-49.
0%437.
4%Netincome-9.
0%31.
0%-3.
2%NM4.
2%NMNM-6.
5%NM38.
7%11.
8%55.
1%-37.
6%494.
4%Non-GAAPNI2.
8%28.
1%-3.
0%NM5.
9%NMNM-6.
0%NM22.
8%13.
2%47.
7%-32.
9%190.
9%EPS-8.
8%30.
1%-3.
2%NM3.
9%NMNM-6.
6%NM35.
5%13.
7%56.
5%-37.
9%292.
1%Non-GAAPEPS3.
1%26.
6%-3.
0%NM5.
6%NMNM-6.
1%NM20.
9%12.
8%49.
0%-33.
3%187.
8%ExpenseratioR&DNA12.
6%14.
4%3.
1%9.
0%44.
7%20.
6%18.
6%8.
8%22.
1%13.
7%15.
2%28.
1%39.
8%S&M8.
6%15.
1%10.
1%5.
1%13.
7%60.
9%21.
5%21.
1%21.
9%20.
8%9.
2%15.
4%27.
5%15.
8%G&A16.
7%NM7.
3%2.
3%3.
3%28.
3%5.
7%7.
4%10.
0%7.
6%5.
9%7.
1%10.
4%8.
5%MarginsGrossmargins54.
2%65.
2%83.
0%17.
1%73.
2%64.
0%53.
6%66.
5%25.
2%75.
2%87.
9%64.
6%75.
5%88.
2%Non-GAAPGM54.
2%65.
2%83.
0%17.
1%73.
2%64.
0%56.
4%66.
5%25.
2%75.
2%87.
9%64.
6%75.
5%88.
2%Operatingmargins31.
7%38.
4%51.
1%-5.
3%50.
7%-70.
0%-11.
6%19.
0%-15.
5%15.
7%60.
8%26.
9%9.
5%24.
1%Non-GAAPOpM35.
1%39.
5%51.
3%-5.
1%53.
4%-59.
5%8.
5%19.
4%-9.
0%24.
7%63.
5%30.
1%11.
9%36.
0%Netmargins25.
6%35.
0%41.
2%-4.
3%49.
4%-18.
8%-7.
3%6.
4%-13.
9%16.
9%65.
6%34.
5%11.
4%21.
8%Non-GAAPNM29.
1%36.
1%41.
4%-4.
1%52.
1%-7.
7%9.
3%6.
6%-5.
9%25.
8%65.
2%35.
1%13.
8%33.
6%Source:Companydata,BarclaysResearchestimatesBarclays|ChinaInternet13September201369APPENDIX1:PRICEPERFORMANCEOFMAJORINTERNETCOMPANIESFIGURE98Sharepriceperformance–onemonthFIGURE99Sharepriceperformance–threemonthsNote:Pricesasof11Sep2013Source:Bloomberg,BarclaysResearchNote:Pricesasof11Sep2013Source:Bloomberg,BarclaysResearchFIGURE100Sharepriceperformance–sixmonthsFIGURE101Sharepriceperformance–yeartodateNote:Pricesasof11Sep2013Source:Bloomberg,BarclaysResearchNote:Pricesasof11Sep2013Source:Bloomberg,BarclaysResearch-14%-12%-8%1%2%2%2%5%6%6%8%8%12%14%16%22%32%-20%-10%0%10%20%30%40%DANGRENNLONGVIPSYOKUPWRDSOHUCYOUSINAGAMEBIDUGA700HKYYCTRPNTESQIHU0%2%3%4%12%12%14%20%21%30%35%49%51%51%52%63%105%0%20%40%60%80%100%120%CYOUGAMESOHURENNGALONGYOKUDANGNTESPWRD700HKVIPSBIDUCTRPSINAYYQIHU1%5%14%31%34%35%37%47%47%68%76%90%102%132%150%184%190%0%20%40%60%80%100%120%140%160%180%200%LONGCYOURENNGAYOKUGAMENTESSOHU700HKBIDUSINAVIPSPWRDDANGCTRPYYQIHU1%5%14%31%34%35%37%47%47%68%76%90%102%132%150%184%190%0%20%40%60%80%100%120%140%160%180%200%LONGCYOURENNGAYOKUGAMENTESSOHU700HKBIDUSINAVIPSPWRDDANGCTRPYYQIHUBarclays|ChinaInternet13September201370APPENDIX2:BARCLAYSFORECASTSVSCONSENSUS;VALUATIONCOMPSFIGURE102ChinaInternetcoverage–Barclaysforecastsfor3Q13Eand4Q13EvsconsensusNote:Asof11Sep2013.
Source:BarclaysResearchestimates,BloombergforconsensusFIGURE103ChinaInternetcoverage–Barclaysforecastsfor2013Eand2014EvsconsensusNote:Asof11Sep2013.
Source:BarclaysResearchestimates,BloombergforconsensusTickerCur.
GuidanceYoYBarclaysConsensusGuidanceBarclaysConsensusBarclaysConsensusBarclaysConsensusBIDUUSD1422to146040%to43%1,439.
381,431.
00NA1.
411.
441,463.
041,449.
001.
361.
34CYOUUSD180to1869%to12%182.
28183.
671.
33to1.
381.
361.
37187.
58192.
171.
411.
40CTRPUSD230to23920%to25%241.
19240.
00NA0.
400.
40221.
77222.
560.
350.
36DANGUSD25923%257.
96261.
40NA(0.
16)(0.
11)319.
34329.
60(0.
16)(0.
11)GAUSDNANA97.
4296.
96NA0.
240.
23103.
63101.
840.
240.
24GAMEUSD182-1843%to4%182.
55182.
33NA0.
230.
24188.
37189.
000.
220.
24NTESUSDNANA397.
25391.
43NA1.
451.
43409.
92414.
861.
551.
54PWRDUSD127to13312%to17%132.
50130.
20NA0.
510.
40142.
90136.
000.
680.
50QIHUUSD181to183115%to118%181.
86182.
60NA0.
370.
36203.
78202.
220.
430.
40RENNUSD47to493%to7%49.
6248.
20NA(0.
06)(0.
08)50.
0048.
65(0.
07)(0.
10)SINAUSD176to18019%to22%182.
59179.
11NA0.
330.
31189.
25183.
440.
340.
35SOHUUSD358to37025%to30%362.
23365.
570.
50to0.
550.
520.
52357.
87375.
860.
580.
52YOKUUSD135to14265%to73%137.
36139.
63NA(0.
03)(0.
04)155.
37151.
000.
01(0.
00)700HKCNYNANA15,477.
4015,409.
00NA2.
182.
1515,948.
9016,428.
002.
162.
143Q13E4Q13ERevenue(m)EPSRevenue(m)EPSTickerCur.
BarclaysConsensusBarclaysConsensusBarclaysConsensusBarclaysConsensusBIDUUSD5,030.
985,064.
005.
035.
096,699.
936,689.
006.
126.
24CYOUUSD729.
82736.
545.
645.
66809.
44824.
086.
276.
15CTRPUSD854.
88860.
751.
411.
371,058.
631,064.
001.
791.
73DANGUSD1,037.
951,049.
00(0.
58)(0.
47)1,250.
651,285.
00(0.
61)(0.
22)GAUSD390.
21387.
400.
960.
93477.
61437.
101.
151.
01GAMEUSD722.
08726.
140.
860.
78721.
75782.
860.
890.
85NTESUSD1,522.
731,567.
005.
875.
681,738.
941,781.
006.
326.
26PWRDUSD492.
60486.
442.
011.
59572.
50572.
132.
481.
98QIHUUSD647.
01643.
711.
341.
18989.
73990.
002.
452.
00RENNUSD194.
80198.
33(0.
14)(0.
20)238.
69248.
38(0.
10)(0.
23)SINAUSD655.
30641.
670.
910.
85857.
70802.
832.
281.
86SOHUUSD1,366.
951,388.
002.
312.
421,545.
591,641.
002.
733.
29YOKUUSD498.
58500.
38(0.
28)(0.
30)751.
61735.
810.
180.
30700HKCNY59,358.
2059,766.
008.
738.
8776,569.
5677,329.
0011.
8111.
072013E2014ERevenue(m)EPSRevenue(m)EPSBarclays|ChinaInternet13September201371FIGURE104ChinaInternetSector–valuationcomparisonsNote:Pricesasofthemarketcloseon11Sep2013.
AllpricesinUSdollarsexceptforTencent,whichispricedinHongKongdollars.
Stockratings:OW:Overweight;EW:EqualWeight;UW:Underweight;NR:notrated.
Asiaex-JapanInternetindustryview:Positive.
EstimatesfornotratedcompaniesareconsensusestimatesfromBloomberg.
Forfulldisclosuresoneachratedcompany,includingdetailsofcompany-specificvaluationmethodologyandrisks,pleasereferto:http://publicresearch.
barcap.
com.
Source:Bloombergconsensusestimates,BarclaysResearchestimatesEPS-CAGRSales-CAGRPEGCompanyTickerCurr.
RatingTPLastFY12AFY13EFY14EFY15EFY12-15EFY12AFY13EFY14EFY15EFY12-15EFY14ELeadcategoryBaiduBIDUUSUSDOW$171.
0$147.
31$51,52530.
0x29.
2x23.
3x18.
0x19%14.
4x10.
0x7.
3x5.
8x36%1.
2xDangdangDANGUSUSDUW$6.
0$9.
01$723nmnmnmnmnm0.
9x0.
7x0.
6x0.
5x23%nmTencent700HKHKDOW$450.
0$402.
20$95,82641.
4x36.
3x26.
7x21.
7x25%13.
1x9.
7x7.
4x6.
0x30%1.
1xRenrenRENNUSUSDEW$3.
5$3.
50$1,326nmnmnmnmnm7.
8x7.
0x5.
7x4.
8x17%nmSinaSINAUSUSDOW$84.
0$85.
16$5,675608.
3xnm37.
4x20.
4x210%11.
1x8.
9x6.
8x5.
4x27%0.
2xSohuSOHUUSUSDOW$75.
0$66.
14$2,53226.
1x28.
7x24.
2x19.
3x12%2.
4x1.
9x1.
6x1.
5x19%1.
9xYoukuYOKUUSUSDOW$28.
0$23.
43$3,886nmnm94.
9x31.
4xnm9.
0x5.
2x3.
4x2.
5x47%nmCtripCTRPUSUSDOW$60.
0$50.
35$6,51639.
2x35.
6x26.
7x20.
9x23%10.
4x8.
1x6.
3x5.
1x27%1.
1xQihooQIHUUSUSDOW$100.
0$90.
85$11,154114.
0x67.
4x36.
4x25.
3x65%35.
2x17.
8x11.
5x8.
3x60%0.
6xAverage143.
3x39.
4x43.
0x22.
6x59%12.
0x8.
0x5.
9x4.
6x32%1.
0xGamingChangyouCYOUUSUSDOW$46.
0$31.
45$1,6675.
8x5.
6x5.
0x4.
6x10%2.
7x2.
3x2.
1x1.
9x15%0.
5xGiantGAUSUSDOW$9.
2$8.
50$2,0369.
5x8.
9x7.
4x6.
8x11%6.
0x5.
3x4.
3x3.
8x17%0.
7xNetEaseNTESUSUSDOW$76.
0$74.
03$9,67415.
8x12.
6x11.
7x10.
7x14%7.
1x5.
9x5.
2x4.
7x15%0.
8xPerfectWorldPWRDUSUSDEW$22.
0$21.
28$1,03710.
4x10.
6x8.
6x7.
8x10%2.
3x2.
1x1.
8x1.
6x12%0.
9xShandaGamesGAMEUSUSDUW$3.
5$4.
10$1,1095.
7x4.
7x4.
6x4.
6x7%1.
5x1.
6x1.
6x1.
6x-5%0.
6xTaoMeeTAOMUSUSDNRNA$5.
78$21226.
0x37.
3x29.
6x36.
1x-10%5.
3x4.
9x4.
4x4.
5x5%nmThe9NCTYUSUSDNRNA$2.
55$58nmnmnmnmnm2.
4x1.
7x0.
9x0.
6x57%nmNQMobileNQUSUSDNRNA$20.
11$1,04676.
5x19.
5x15.
5x12.
6x83%11.
4x5.
6x4.
0x3.
3x52%0.
2xNetDragon777HKHKDNRNA$17.
60$1,13828.
6x13.
8x14.
6x14.
1x27%6.
5x4.
4x4.
3x3.
8x19%nmKingsoft3888HKHKDNRNA$19.
38$2,93041.
9x29.
0x23.
3x19.
2x30%13.
2x8.
9x7.
1x5.
9x31%nmYYYYUSUSDNRNA$47.
29$2,572nm41.
7x26.
9x18.
8x70%19.
8x9.
6x6.
2x4.
5x63%0.
4xAverage24.
4x18.
4x14.
7x13.
5x25%7.
1x4.
7x3.
8x3.
3x26%0.
6xVerticalAirMediaAMCNUSUSDNRNA$1.
80$110nmnm20.
7x15.
3xnm0.
4x0.
4x0.
4x0.
3x4%nmBitautoBITAUSUSDNRNA$15.
87$66132.
4x17.
5x14.
4x22.
4x13%3.
9x2.
9x2.
2xnm13%1.
1xJiayuanDATEUSUSDNRNA$7.
62$23858.
6x24.
0x21.
2x16.
9x51%3.
7x3.
0x2.
5x2.
4x16%0.
4xPhoenixNMFENGUSUSDNRNA$10.
59$81640.
3x25.
2x19.
6x16.
5x35%4.
6x3.
6x2.
9x2.
5x23%nm51JobsJOBSUSUSDNRNA$66.
56$1,92325.
5x22.
7x19.
7x15.
9x17%8.
3x7.
4x6.
5x5.
6x14%1.
2xSkyMobiMOBIUSUSDNRNA$3.
42$10838.
4xnmnmnmnm1.
1x1.
3x1.
5x1.
8x-14%nmSoufunSFUNUSUSDNRNA$47.
35$3,82926.
3x17.
0x14.
3x12.
9x27%8.
9x6.
5x5.
5x4.
8x23%0.
5xeLongLONGUSUSDNRNA$15.
92$55088.
4xnm37.
9xnanm4.
7x3.
2x2.
4xnm37%nmLITBLITBUSUSDNRNA$11.
69$575nm36.
5x19.
5x11.
5xnm2.
9x1.
9x1.
2x0.
8x51%nmVIPshopVIPSUSUSDNRNA$49.
14$2,719nm51.
3x27.
3x18.
5xnm3.
9x1.
7x1.
1x0.
8x69%nmVisionChinaVISNUSUSDNRNA$1.
95$10nmnmnmnmnm0.
1x0.
1x0.
1x0.
1x0%nmAverage44.
3x26.
7x21.
0x16.
2x29%4.
5x3.
1x2.
5x2.
1x21%0.
8xAverage(threecategoriesintotal)63.
1x25.
8x23.
8x16.
9x36%7.
4x5.
0x3.
8x3.
3x26%0.
8xMktcap(US$mm)PERPricetoSalesBarclays|ChinaInternet13September201372APPENDIX3:CHINAHANDSETSALESFIGURE105ChinahandsetsalesunitsandmarketsharetrendSource:Gartner,BarclaysResearchFIGURE106ChinasmartphonesalesunitsandmarketsharetrendSource:Gartner,BarclaysResearchVendor1Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13Chinatotalhandsetshipment(mnunits)Samsung10.
59.
69.
711.
010.
49.
612.
313.
310.
810.
510.
911.
614.
516.
4Lenovo2.
22.
53.
23.
53.
73.
63.
65.
25.
86.
87.
28.
17.
510.
4Yulong0.
10.
10.
11.
01.
71.
81.
92.
13.
03.
84.
95.
87.
07.
4Huawei2.
12.
02.
12.
63.
44.
04.
36.
56.
05.
45.
65.
97.
26.
5ZTE2.
72.
62.
72.
72.
84.
34.
76.
16.
26.
45.
35.
45.
76.
2Apple0.
20.
30.
30.
91.
22.
12.
32.
15.
74.
93.
95.
06.
85.
7Tianyu2.
32.
42.
42.
81.
92.
01.
82.
01.
72.
12.
52.
73.
33.
7Nokia20.
317.
819.
520.
722.
315.
714.
813.
78.
76.
94.
93.
73.
03.
6Others46.
038.
168.
866.
869.
167.
962.
357.
053.
750.
654.
959.
554.
349.
4Market86.
475.
4108.
8112.
1116.
6111.
0108.
0108.
1101.
697.
4100.
2107.
8109.
2109.
3Shipmenty/ySamsung19.
2%14.
6%11.
2%14.
5%-1.
2%-0.
6%27.
1%21.
0%3.
7%9.
1%-11.
2%-13.
4%34.
3%56.
7%Lenovo56.
4%93.
1%46.
2%64.
8%68.
5%44.
5%11.
0%48.
2%56.
9%88.
4%100.
8%55.
7%28.
7%53.
0%Yulong1781.
1%1509.
4%1713.
5%103.
3%77.
4%115.
5%155.
3%177.
1%134.
3%93.
6%Huawei2.
4%-10.
1%0.
9%25.
1%61.
6%96.
8%102.
6%151.
5%75.
4%37.
6%30.
9%-9.
7%19.
2%19.
0%ZTE122.
0%91.
0%18.
6%2.
8%NMNMNM124.
5%120.
2%49.
4%11.
9%-10.
5%-8.
2%-4.
3%Apple232.
7%460.
8%579.
2%664.
4%120.
0%359.
4%132.
9%71.
0%138.
1%19.
7%18.
4%Tianyu7.
9%31.
2%25.
1%33.
3%-17.
4%-17.
5%-24.
3%-28.
0%-12.
1%5.
8%36.
8%34.
7%98.
1%78.
9%Nokia23.
9%0.
9%4.
1%3.
3%9.
9%-11.
5%-24.
0%-33.
5%-61.
0%-56.
1%-66.
8%-72.
7%-66.
1%-47.
8%Others143.
7%90.
1%195.
2%146.
8%50.
3%78.
2%-9.
4%-14.
6%-22.
3%-25.
5%-11.
8%4.
4%1.
1%-2.
4%Market69.
8%42.
9%83.
8%70.
0%34.
9%47.
1%-0.
7%-3.
5%-12.
9%-12.
2%-7.
3%-0.
3%7.
5%12.
2%MarketshareSamsung12.
2%12.
8%8.
9%9.
8%8.
9%8.
6%11.
4%12.
3%10.
6%10.
7%10.
9%10.
7%13.
2%15.
0%Lenovo2.
5%3.
3%3.
0%3.
1%3.
2%3.
3%3.
3%4.
8%5.
7%7.
0%7.
2%7.
5%6.
9%9.
5%Yulong0.
1%0.
1%0.
1%0.
9%1.
4%1.
6%1.
8%1.
9%2.
9%3.
9%4.
9%5.
4%6.
4%6.
8%Huawei2.
5%2.
7%2.
0%2.
3%2.
9%3.
6%4.
0%6.
1%5.
9%5.
6%5.
6%5.
5%6.
6%5.
9%ZTE3.
1%3.
4%2.
5%2.
4%2.
4%3.
9%4.
4%5.
6%6.
1%6.
6%5.
3%5.
0%5.
2%5.
6%Apple0.
3%0.
4%0.
3%0.
8%1.
1%1.
9%2.
1%1.
9%5.
6%5.
0%3.
8%4.
6%6.
3%5.
3%Tianyu2.
6%3.
1%2.
2%2.
5%1.
6%1.
8%1.
7%1.
9%1.
6%2.
1%2.
5%2.
5%3.
0%3.
4%Nokia23.
5%23.
6%17.
9%18.
4%19.
1%14.
2%13.
7%12.
7%8.
6%7.
1%4.
9%3.
5%2.
7%3.
3%Others53.
2%50.
6%63.
2%59.
6%59.
3%61.
2%57.
7%52.
7%52.
9%51.
9%54.
8%55.
2%49.
7%45.
2%Vendor1Q102Q103Q104Q101Q112Q113Q114Q111Q122Q123Q124Q121Q132Q13Chinasmartphoneshipment(mnunits)Samsung0.
20.
10.
30.
61.
32.
34.
26.
96.
97.
07.
99.
012.
514.
7Lenovo0.
10.
00.
10.
20.
20.
10.
41.
02.
44.
47.
07.
77.
210.
2Yulong0.
10.
11.
00.
90.
80.
80.
91.
83.
34.
65.
66.
97.
4Huawei0.
00.
00.
10.
91.
12.
43.
53.
53.
55.
05.
37.
16.
5ZTE0.
00.
10.
40.
81.
83.
12.
73.
44.
14.
65.
26.
2Apple0.
30.
91.
22.
12.
32.
15.
74.
93.
95.
06.
85.
7Tianyu0.
10.
10.
20.
70.
42.
33.
03.
6OPPO0.
00.
00.
20.
51.
01.
32.
02.
6Others4.
84.
96.
27.
07.
78.
39.
810.
210.
111.
714.
115.
719.
822.
2Market5.
35.
47.
110.
012.
515.
721.
727.
833.
639.
447.
956.
670.
679.
1Smartphonemix6.
2%7.
2%6.
5%8.
9%10.
7%14.
1%20.
1%25.
7%33.
1%40.
4%47.
9%52.
5%64.
6%72.
3%Shipmenty/ySamsung469.
5%2252.
4%1268.
6%1040.
3%452.
1%205.
6%89.
1%31.
6%80.
5%111.
0%Lenovo255.
7%139.
1%309.
3%442.
3%154.
9%208.
6%353.
8%498.
3%1513.
2%3118.
6%1847.
3%665.
9%193.
6%134.
2%YulongNM642.
3%618.
7%-8.
5%114.
1%306.
3%507.
6%498.
0%278.
0%122.
0%Huawei51822.
2%NM5103.
5%2699.
4%273.
1%203.
8%110.
3%54.
0%103.
5%85.
9%ZTE5346.
0%2923.
9%637.
1%313.
8%122.
1%51.
8%90.
8%78.
8%Apple664.
4%120.
0%359.
4%132.
9%71.
0%138.
1%19.
7%18.
4%Tianyu183.
2%1572.
7%1775.
6%400.
5%OPPO8943.
9%2763.
8%736.
3%468.
7%OthersNMNMNMNM59.
7%70.
3%59.
0%46.
5%31.
4%42.
2%43.
6%53.
6%97.
0%88.
6%Market2088.
5%2307.
1%5962.
0%2318.
4%134.
2%189.
6%206.
9%178.
7%168.
3%151.
4%120.
8%103.
7%110.
1%100.
8%MarketshareSamsung4.
1%1.
8%4.
3%6.
0%10.
0%14.
6%19.
2%24.
7%20.
6%17.
7%16.
5%15.
9%17.
7%18.
6%Lenovo1.
1%0.
8%1.
1%1.
7%1.
2%0.
9%1.
7%3.
6%7.
3%11.
1%14.
6%13.
6%10.
2%12.
9%Yulong2.
0%1.
5%10.
4%6.
8%5.
2%3.
5%3.
4%5.
4%8.
5%9.
7%10.
0%9.
8%9.
4%Huawei0.
0%0.
7%1.
2%7.
5%7.
3%11.
0%12.
5%10.
4%8.
8%10.
5%9.
4%10.
1%8.
2%ZTE0.
0%0.
0%0.
5%1.
0%3.
0%5.
3%8.
4%11.
0%8.
1%8.
7%8.
5%8.
2%7.
4%7.
8%Apple4.
2%9.
5%9.
9%13.
3%10.
4%7.
5%17.
0%12.
3%8.
0%8.
7%9.
7%7.
3%Tianyu0.
6%0.
5%0.
5%1.
8%0.
8%4.
1%4.
3%4.
6%OPPO0.
0%0.
0%0.
0%0.
0%0.
1%0.
2%0.
7%1.
2%2.
2%2.
4%2.
8%3.
3%Others89.
7%89.
7%87.
1%69.
8%61.
1%52.
7%45.
1%36.
7%29.
9%29.
8%29.
3%27.
6%28.
1%28.
0%Barclays|ChinaInternet13September201373CompanydatapagesCOMPANYDATAPAGESBarclays|ChinaInternet13September201374Asiaex-JapanInternet&MediaIndustryView:POSITIVEBaidu,Inc.
(BIDU)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD147.
31PriceTargetUSD171.
00WhyOverweightWebelieveBaiduhassteppedupitseffortsandrepositioneditselftocapturemobileInternetgrowth.
Whileitisstillearlyinthemobiletransition,weareturningmorepositiveonthecompany'sprogressandachievementsinimprovingitsoverallsearchtechnologyandcustomeradoptionrate,aswellasare-accelerationinitsgrowthstory.
UpsidecaseUSD201.
00Thiscaseassumesafasterrampinmobilesearchmonetizationandasmaller-than-expectedimpactfromQihoo,suggestingupsidetoourestimatesandmargins,withthemultiplelikelyrisingto45x.
DownsidecaseUSD120.
00Thiscaseassumesmobilesearchmonetizationgrowsslowerthanexpected,andQihoocommandsa20%trafficshareandgeneratesmeaningfulsearchrevenuesfrominternalandGoogleadsystems,withthemultiplelikelydroppingto25x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue3,3284,7786,5628,32635.
8%EBITDA2,0192,3002,9673,63621.
7%EBIT1,7751,8732,3773,13020.
8%Pre-taxincome1,9222,0252,5173,27019.
4%Netincome1,6811,6962,0802,70217.
1%EPS(adj)($)4.
905.
056.
338.
2018.
7%EPS(reported)($)4.
814.
845.
937.
6917.
0%Netcashpershare($)9.
6414.
6921.
6930.
1346.
2%Dilutedshares(mn)349.
8350.
3351.
0351.
20.
1%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)71.
264.
060.
960.
164.
0Operatingprofitmargin(%)49.
636.
333.
735.
038.
6EBITDAmargin(%)56.
444.
642.
040.
645.
9Netmargin(%)47.
032.
929.
530.
234.
9ROIC(%)218.
4192.
6178.
5217.
2201.
7ROA(%)21.
517.
216.
517.
118.
1ROE(%)28.
722.
420.
820.
923.
2Balancesheetandcashflow($mn)CAGRTangiblefixedassets6357021,2061,44731.
6%Intangiblefixedassets8661,0041,0481,0727.
4%Cashandequivalents5,2787,0519,54012,50833.
3%Totalassets7,3309,41612,58715,94529.
6%Shortandlong-termdebt1,9041,9051,9271,9270.
4%Otherlong-termliabilities0000N/ATotalliabilities1,4101,5791,9402,23716.
6%Netdebt/(funds)-3,373-5,146-7,613-10,581N/AShareholders'equity5,9787,89410,70413,76532.
1%Changeinworkingcapital12541822518012.
9%Cashflowfromoperations1,9252,5903,0333,56422.
8%Capitalexpenditure-401-584-507-461N/AFreecashflow1,5242,0062,5263,10326.
7%ValuationandleveragemetricsAverageP/E(adj)(x)30.
029.
223.
318.
025.
1P/E(reported)(x)30.
630.
424.
919.
226.
3EV/EBITDA(x)23.
820.
214.
811.
317.
5FCFyield(%)3.
03.
94.
96.
04.
4P/Sales(x)14.
410.
07.
35.
89.
4P/BV(x)8.
66.
54.
83.
85.
9Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)N/AN/AN/AN/AN/ASelectedoperatingmetrics(mn)Numberofcustomers367.
3480.
2580.
9681.
0TAC/grossrevenue(%)8.
712.
114.
915.
9TotalARPU($)60.
5765.
1171.
7077.
45Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201375Asiaex-JapanInternet&MediaIndustryView:POSITIVEChangyou.
comLtd.
(CYOU)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD31.
45PriceTargetUSD44.
00WhyOverweightWearepositiveonChangyou,given1)itsdefensiveearnings;and2)substantialupsideifnewgamesoutperformexpectations.
WithasteadyperformancefromTLBBandstrongrecurringcashflows,weseelimiteddownsidetoearnings.
UpsidecaseUSD60.
00Thisassumesnewgamesperformbetterthanexpected,DMDregainstractionwithhigherAPAandARPU,whichwouldleadtohigherearningswiththemultipleexpandingto10.
0x.
DownsidecaseUSD23.
00AssumingnewgamesfailandTLBBremainsthemajorrevenuecontributorwiththemultiplede-ratedto3xasinvestorsareconcernedaboutwhetherChangyoucandeliverarepeatperformance.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue62373080988912.
5%EBITDA38643346852811.
0%EBIT3483693964387.
9%Pre-taxincome3613814084507.
6%Netincome2823003343689.
2%EPS(adj)($)5.
425.
646.
276.
888.
2%EPS(reported)($)5.
295.
616.
256.
889.
2%Netcashpershare($)7.
9511.
1514.
4023.
0542.
6%Dilutedshares(mn)53.
653.
653.
854.
00.
3%DPS($)3.
000.
000.
000.
00-100.
0%MarginandreturndataAverageGrossmargin(%)83.
283.
184.
985.
484.
2Operatingprofitmargin(%)55.
850.
549.
049.
351.
1EBITDAmargin(%)61.
959.
357.
859.
459.
6Netmargin(%)45.
341.
141.
341.
442.
3ROIC(%)287.
9107.
5124.
1156.
7169.
1ROA(%)25.
725.
124.
420.
624.
0ROE(%)55.
334.
132.
525.
236.
8Balancesheetandcashflow($mn)CAGRTangiblefixedassets6512411610416.
9%Intangiblefixedassets1891891891890.
0%Cashandequivalents6657178311,24523.
2%Totalassets1,1151,2301,3401,75016.
2%Shortandlong-termdebt239120570-100.
0%Otherlong-termliabilities139761313-55.
0%Totalliabilities445345302275-14.
8%Netdebt/(funds)-426-597-774-1,245N/AShareholders'equity5258851,0381,47541.
1%Changeinworkingcapital-16121218N/ACashflowfromoperations34040244750814.
3%Capitalexpenditure-67-86-90-94N/AFreecashflow27331535741414.
8%ValuationandleveragemetricsAverageP/E(adj)(x)5.
85.
65.
04.
65.
3P/E(reported)(x)5.
95.
65.
04.
65.
3EV/EBITDA(x)3.
22.
51.
90.
82.
1FCFyield(%)16.
218.
721.
124.
420.
1P/Sales(x)2.
72.
32.
11.
92.
2P/BV(x)3.
21.
91.
61.
22.
0Dividendyield(%)9.
50.
00.
00.
02.
4Totaldebt/capital(%)240.
941.
621.
40.
076.
0Selectedoperatingmetrics($k)AggregatedAPA2,5832,0112,1302,155TotalARPU($)1,174.
001,590.
831,522.
281,601.
38DMDrevenue($mn)5577Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201376Asiaex-JapanInternet&MediaIndustryView:POSITIVECtrip.
comInternationalLtd.
(CTRP)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD50.
35PriceTargetUSD60.
00WhyOverweightWeexpectfurthermarketsharegainsforCtripandexpectacceleratedtop-linegrowth,dueto:1)improvingoperationandexecution;and2)fastadoptionofmobilemigration.
Furthermore,weseerisingsmartphonepenetrationdrivingfastertop-linevolumegrowthinthenext1-2years,likelytranslatingintohigherprofitgrowth.
UpsidecaseUSD82.
00Thisassumesmarginsimproveto30%in2013amidhighergrowthfrommobilevolumes,alesscompetitiveenvironment,orcompetitorsdiscontinuingtheircouponprogrammes.
Thisalsoassumesearningsre-accelerateandtheP/Emultipleexpandsto37x.
DownsidecaseUSD38.
00Thisassumesmarginsdeteriorateto18%asaresultofstrongercompetition,whichwoulddriveourtargetP/Emultiplelowerto20x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue6688581,1031,38127.
4%EBITDA12114922127231.
0%EBIT10513120225133.
7%Pre-taxincome15316123129825.
0%Netincome11513118123126.
3%EPS(adj)($)1.
281.
411.
882.
4123.
3%EPS(reported)($)0.
790.
901.
221.
5424.
6%Netcashpershare($)4.
474.
947.
5110.
9934.
9%Dilutedshares(mn)1441461491501.
4%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)75.
073.
673.
673.
673.
9Operatingprofitmargin(%)15.
715.
218.
318.
216.
9EBITDAmargin(%)18.
117.
420.
119.
718.
8Netmargin(%)17.
215.
316.
416.
716.
4ROIC(%)29.
352.
1145.
7-1,812.
5-396.
4ROA(%)6.
47.
78.
89.
18.
0ROE(%)17.
720.
622.
021.
920.
5Balancesheetandcashflow($mn)CAGRTangiblefixedassets180126125127-11.
2%Intangiblefixedassets1841861861860.
5%Cashandequivalents8999401,3171,83226.
8%Totalassets1,8731,8992,3452,94416.
3%Shortandlong-termdebt253217198180-10.
7%Otherlong-termliabilities910131520.
6%Totalliabilities5637169041,12726.
0%Netdebt/(funds)-646-723-1,119-1,652N/AShareholders'equity1,0421,0031,2781,65416.
7%Changeinworkingcapital863111513717.
0%Cashflowfromoperations26627143253726.
5%Capitalexpenditure-87-46-18-22N/AFreecashflow17822541451542.
4%ValuationandleveragemetricsAverageP/E(adj)(x)39.
235.
626.
720.
930.
6P/E(reported)(x)63.
456.
241.
332.
848.
4EV/EBITDA(x)55.
844.
728.
321.
137.
5FCFyield(%)2.
53.
15.
56.
84.
5P/Sales(x)10.
48.
16.
35.
17.
5P/BV(x)7.
07.
45.
94.
66.
2Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)N/AN/AN/AN/AN/ASelectedoperatingmetrics($mn)CAGRAirticketrevenue271.
3346.
6436.
3544.
826.
2%Hotelreservationrevenue273.
3346.
6448.
1547.
226.
0%Otherrevenue16321728536931.
3%Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201377Asiaex-JapanInternet&MediaIndustryView:POSITIVEE-CommerceChinaDangdangInc.
(DANG)StockRating:UNDERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD9.
01PriceTargetUSD6.
00WhyUnderweightWehavelittlevisibilityonwhenthepricingwarwithmajorcompetitorswillendandareconcernedthecompanycouldenterintobroadergeneralmerchandise.
WearenotconfidentthatDangdangcanreturntoprofitabilityintheneartomediumterm.
UpsidecaseUSD12.
90Thisassumesmarginsimprovein2013amidabetterpricingenvironment.
ItalsoimpliestheindustrystartstoconsolidateandDangdangisabletogrowitsmarketshare.
A2pptincreaseinthegrossmarginwouldyieldahigherDCF-basedpriceofUS$12.
90.
DownsidecaseUSD3.
80Thisassumessalesslowduetomorecompetitionandthepricingwar,withmarginsfurtherdeterioratingin2013.
A2pptdropinthegrossmarginwouldyieldalowerDCF-basedpriceofUS$3.
80.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue8341,0491,2881,55823.
2%EBITDA-72-41-234N/AEBIT-79-50-34-8N/APre-taxincome-71-42-246N/ANetincome-71-42-246N/AEPS(adj)($)-0.
87-0.
50-0.
270.
12N/AEPS(reported)($)-0.
89-0.
53-0.
300.
07N/ANetcashpershare($)2.
291.
491.
932.
350.
8%Dilutedshares(mn)80.
280.
481.
281.
40.
5%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)13.
917.
719.
321.
018.
0Operatingprofitmargin(%)-9.
4-4.
8-2.
6-0.
5-4.
3EBITDAmargin(%)-8.
6-3.
9-1.
80.
2-3.
5Netmargin(%)-8.
5-4.
0-1.
90.
4-3.
5ROIC(%)N/A-607.
30.
0N/A-303.
6ROA(%)-13.
3-7.
1-4.
2-0.
4-6.
3ROE(%)-58.
5-26.
0-11.
33.
6-23.
0Balancesheetandcashflow($mn)CAGRTangiblefixedassets1937558362.
3%Intangiblefixedassets0000N/ACashandequivalents2622002372711.
1%Totalassets57567875893017.
4%Shortandlong-termdebt96522811-50.
9%Otherlong-termliabilities0000N/ATotalliabilities45652256466613.
4%Netdebt/(funds)-166-148-209-260N/AShareholders'equity11915619426430.
5%Changeinworkingcapital50-394210-40.
8%Cashflowfromoperations-21-693433N/ACapitalexpenditure-15-21-30-39N/AFreecashflow-7-486472N/AValuationandleveragemetricsAverageP/E(adj)(x)N/AN/AN/A77.
077.
0P/E(reported)(x)N/AN/AN/A128.
7128.
7EV/EBITDA(x)-7.
7-13.
8-22.
4131.
021.
7FCFyield(%)-0.
9-6.
68.
79.
92.
8P/Sales(x)0.
90.
70.
60.
50.
6P/BV(x)6.
14.
63.
82.
84.
3Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)-203.
3657.
7-188.
3290.
0139.
0Selectedoperatingmetrics($mn)Mediarevenue522653790948Merchandiserevenue284329375420Fulfilmentcost118134162196Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201378Asiaex-JapanInternet&MediaIndustryView:POSITIVEGiantInteractiveGroupInc.
(GA)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD8.
50PriceTargetUSD9.
20WhyOverweightWelikeGiantbasedonitsresilientgamerevenuewithconsistentlystablegrowthoverthepastthreeyears.
Weseeitsregularsemi-annualcashdividendpayoutwithpayoutratioofupto50%asveryattractive.
UpsidecaseUSD12.
70ThisassumesWorldofXianxiaandwebgamesinthepipelinearesuccessfulin2013,leadingtoahighertargetmultipleof11.
0x(inlinewithhistoricalaverage)withthesharepricerisingtoUS$12.
7.
DownsidecaseUSD5.
70Thisassumesnewgamesinthepipelinefailtosucceedin2013,whichleadstoalowertargetmultipleof5.
0xandthesharepricefallingtoUS$5.
7.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Revenue34539047855016.
8%EBITDA22225632436518.
1%EBIT21023930534317.
9%Pre-taxincome19326433938225.
5%Netincome17224429533224.
5%EPS(adj)($)0.
900.
961.
151.
2411.
5%EPS(reported)($)0.
650.
921.
101.
3126.
3%Netcashpershare($)1.
772.
092.
613.
1120.
5%Dilutedshares(mn)242.
7247.
1250.
6253.
61.
5%DPS($)0.
420.
470.
570.
6214.
0%MarginandreturndataAverageGrossmargin(%)86.
687.
387.
687.
387.
2Operatingprofitmargin(%)60.
761.
363.
862.
462.
1EBITDAmargin(%)64.
365.
567.
966.
466.
0Netmargin(%)49.
862.
461.
860.
358.
6ROIC(%)212.
0253.
5198.
1182.
7211.
6ROA(%)29.
729.
829.
427.
929.
2ROE(%)41.
840.
337.
133.
838.
2Balancesheetandcashflow($mn)CAGRTangiblefixedassets5559728314.
7%Intangiblefixedassets510111233.
3%Cashandequivalents43151665378722.
3%Totalassets6907789481,11117.
2%Shortandlong-termdebt0000N/AOtherlong-termliabilities588921.
3%Totalliabilities1702691751781.
5%Netdebt/(funds)-431-516-653-787N/AShareholders'equity52059077493321.
5%Changeinworkingcapital-146-3-5N/ACashflowfromoperations23127132034814.
6%Capitalexpenditure-5-16-19-22N/AFreecashflow22625530132613.
0%ValuationandleveragemetricsAverageP/E(adj)(x)9.
58.
97.
46.
88.
1P/E(reported)(x)13.
19.
37.
76.
59.
1EV/EBITDA(x)7.
46.
14.
33.
55.
3FCFyield(%)11.
012.
214.
115.
113.
1P/Sales(x)6.
05.
34.
33.
84.
8P/BV(x)4.
03.
62.
82.
33.
1Dividendyield(%)4.
95.
56.
77.
36.
1Totaldebt/capital(%)N/AN/AN/AN/AN/ASelectedoperatingmetrics($mn)Totalrevenue345390478550Activepayingplays(k)2,235.
32,378.
82,641.
32,668.
8ARPUperquarter($)234.
3227.
0209.
4216.
9Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201379Asiaex-JapanInternet&MediaIndustryView:POSITIVENetEase,Inc.
(NTES)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD74.
03PriceTargetUSD76.
00WhyOverweightWelikeNetEasebasedon:1)itsstrongin-housedevelopmentcapabilityanditsBlizzardfranchise,2)strongcashflowgeneration,and3)steadyandsustainabletime-basedgamingmodel.
Wefavouritasacoreholdingforonlinegaming.
UpsidecaseUSD88.
00AssumingWoWreboundsandattractsstronger-than-expectedusergrowth,TXIIIandGhostcontinuetooutperform,and1-2morenewgames(suchasZhanhunandKungfuMaster)rampuptheirrevenuessuccessfullyin2013,earningscouldbe10%higherandthemultiplecouldexpandto15x.
DownsidecaseUSD47.
00AssumingFWJ,TXIIIandWWJ2starttodeteriorate,WoWcontinuestolosemomentum,andaddemandslowsdownin2013,earningsgrowthwouldslowandthemultiplecouldde-rateto8x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue1,3161,5231,7391,93413.
7%EBITDA6338249301,04318.
1%EBIT59673382492515.
8%Pre-taxincome6878169191,01714.
0%Netincome58470777285313.
5%EPS(adj)($)4.
695.
876.
326.
9213.
9%EPS(reported)($)4.
445.
515.
966.
5613.
9%Netcashpershare($)19.
9324.
2627.
9033.
1818.
5%Dilutedshares(mn)131.
5130.
3131.
2132.
20.
2%DPS($)1.
000.
000.
000.
00-100.
0%MarginandreturndataAverageGrossmargin(%)69.
874.
573.
073.
172.
6Operatingprofitmargin(%)45.
348.
247.
447.
847.
2EBITDAmargin(%)48.
154.
153.
553.
952.
4Netmargin(%)44.
446.
444.
444.
144.
8ROIC(%)-448.
3-539.
0-344.
2-286.
7-404.
6ROA(%)17.
018.
417.
717.
417.
6ROE(%)24.
525.
124.
022.
223.
9Balancesheetandcashflow($mn)CAGRTangiblefixedassets131-62-131-207N/AIntangiblefixedassets0-2-4-6N/ACashandequivalents2,6223,3223,8224,38718.
7%Totalassets3,0943,6694,1364,68214.
8%Shortandlong-termdebt01611610N/AOtherlong-termliabilities16111213-6.
3%Totalliabilities4596346885808.
1%Netdebt/(funds)-2,622-3,160-3,661-4,387N/AShareholders'equity2,5173,0473,4614,11517.
8%Changeinworkingcapital34112-19-16N/ACashflowfromoperations6789559031,00113.
9%Capitalexpenditure-29-32-37-41N/AFreecashflow64992386695913.
9%ValuationandleveragemetricsAverageP/E(adj)(x)15.
812.
611.
710.
712.
7P/E(reported)(x)16.
713.
412.
411.
313.
4EV/EBITDA(x)11.
07.
86.
45.
07.
6FCFyield(%)6.
79.
68.
99.
88.
7P/Sales(x)7.
15.
95.
24.
75.
7P/BV(x)3.
93.
22.
82.
43.
1Dividendyield(%)1.
40.
00.
00.
00.
3Totaldebt/capital(%)0.
0-128.
8-75.
90.
0-51.
2Selectedoperatingmetrics($mn)Advertisingrevenue136171207244Onlinegamerevenue1,1701,3931,5801,734WVAS&otherrevenue39536784Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201380Asiaex-JapanInternet&MediaIndustryView:POSITIVEPerfectWorldCo.
,Ltd.
(PWRD)StockRating:EQUALWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD21.
28PriceTargetUSD22.
00WhyEqualWeightWeseeacoregamebusinessturnaroundforPWRDconsideringthesuccessfulcommerciallaunchofnewgamesandadiversifiedgameportfolio.
Itssolidcashpositionandhealthycashflowgenerationperquartershouldprovidesharepricesupport.
Thenear-termmarginspressuremakesuscautiousonpotentialgrowthatthebottomline.
UpsidecaseUSD34.
00Thisassumessomeofthenewgames,includingbothMMOsandmobile/webgamestobelaunchedin2013,aresuccessfullymonetized,leadingtoreacceleratedtop-linegrowth,higherearningsanditsmultipleexpandingto12x.
DownsidecaseUSD14.
00Thisassumesnewlyreleasedgamesin2013failtodeliversustainablerevenuescontribution,andexistingmajortitles(ZhuXian,PWRD2)continuetobede-monetized.
Thisleadsthemultipletode-rateto6x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Revenue44549357262512.
0%EBITDA11212115517115.
2%EBIT828711212113.
7%Pre-taxincome10610813614811.
5%Netincome88861071169.
7%EPS(adj)($)2.
052.
012.
482.
7310.
1%EPS(reported)($)1.
811.
762.
182.
359.
1%Netcashpershare($)5.
647.
8510.
9314.
1836.
0%Dilutedshares(mn)48.
549.
049.
249.
40.
6%DPS($)0.
450.
440.
550.
599.
3%MarginandreturndataAverageGrossmargin(%)80.
575.
774.
374.
276.
2Operatingprofitmargin(%)18.
517.
619.
519.
318.
7EBITDAmargin(%)25.
124.
627.
027.
326.
0Netmargin(%)19.
817.
518.
818.
618.
7ROIC(%)20.
819.
526.
032.
324.
7ROA(%)8.
37.
58.
68.
88.
3ROE(%)15.
512.
613.
313.
013.
6Balancesheetandcashflow($mn)CAGRTangiblefixedassets19421825427712.
7%Intangiblefixedassets3749566218.
7%Cashandequivalents39449760270021.
2%Totalassets9301,0601,1681,2359.
9%Shortandlong-termdebt120112640-100.
0%Otherlong-termliabilities101010100.
0%Totalliabilities287270246198-11.
6%Netdebt/(funds)-274-384-538-700N/AShareholders'equity6407869181,03317.
3%Changeinworkingcapital-19-11711N/ACashflowfromoperations11913218019217.
3%Capitalexpenditure-21-29-33-36N/AFreecashflow9810314715616.
8%ValuationandleveragemetricsAverageP/E(adj)(x)10.
410.
68.
67.
89.
3P/E(reported)(x)11.
812.
19.
89.
110.
7EV/EBITDA(x)6.
85.
33.
21.
94.
3FCFyield(%)9.
59.
914.
014.
812.
0P/Sales(x)2.
32.
11.
81.
72.
0P/BV(x)1.
61.
31.
11.
01.
3Dividendyield(%)2.
12.
12.
62.
82.
4Totaldebt/capital(%)N/AN/AN/AN/AN/ASelectedoperatingmetrics($mn)Totalrevenue445493572625ACUperquarter(k)691.
0715.
7802.
1834.
1Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201381Asiaex-JapanInternet&MediaIndustryView:POSITIVEQihoo360TechnologyCo.
,Ltd.
(QIHU)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD90.
85PriceTargetUSD100.
00WhyOverweightWearepositiveonQihoobasedon:1)agradualramp-upofitssalesnetworkleadingtofurthersearchrevenueupside;2)mobileinternetopportunitiesviaitsrisingmobilesecuritypenetrationandpotentialsuccessofitsappstorestrategy;and3)non-GAAPmarginsexpandingtoatargetednormalisedrateof40%.
UpsidecaseUSD134.
00Thiscaseassumes2014Erevenuegrowsfasterthanourestimatedrivenbyrampofonlinesearchtraffic,andpotentialcontributionfrommobileInternetstrategies,leadingtotargetmultipleexpandingto40x.
DownsidecaseUSD69.
00Thiscaseassumesamorecompetitiveonlinesearchmarketwithpotentialslowdownonexistingbusiness,whichwouldhurtQihoo'sadvertisingrevenuegrowthin2014E,leadingtoslower-than-expectedgrowth.
Targetmultiplede-ratesto20x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Revenue3296491,0081,39661.
9%EBITDA6717735252498.
9%EBIT50128270409101.
4%Pre-taxincome6313527541487.
6%Netincome4711122934895.
2%EPS(adj)($)0.
801.
352.
493.
6065.
3%EPS(reported)($)0.
380.
871.
762.
6490.
4%Netcashpershare($)3.
134.
366.
569.
4244.
3%Dilutedshares(mn)122.
2127.
5130.
2131.
52.
5%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)90.
087.
085.
084.
586.
6Operatingprofitmargin(%)15.
219.
726.
829.
322.
7EBITDAmargin(%)20.
327.
234.
937.
630.
0Netmargin(%)14.
217.
122.
824.
919.
7ROIC(%)85.
8120.
4118.
293.
1104.
4ROA(%)11.
916.
821.
421.
718.
0ROE(%)20.
425.
029.
127.
425.
5Balancesheetandcashflow($mn)CAGRTangiblefixedassets12616128244952.
7%Intangiblefixedassets127112323.
3%Cashandequivalents3835568551,23947.
9%Totalassets6909591,4542,09244.
8%Shortandlong-termdebt0000N/AOtherlong-termliabilities11110.
0%Totalliabilities21126933636520.
0%Netdebt/(funds)-383-556-855-1,239N/AShareholders'equity4786901,1171,72753.
4%Changeinworkingcapital4799383168.
3%Cashflowfromoperations11830650667779.
2%Capitalexpenditure-74-131-208-293N/AFreecashflow43175299384106.
8%ValuationandleveragemetricsAverageP/E(adj)(x)114.
067.
436.
425.
360.
8P/E(reported)(x)237.
2104.
551.
634.
4106.
9EV/EBITDA(x)167.
862.
330.
519.
770.
1FCFyield(%)0.
41.
52.
53.
21.
9P/Sales(x)35.
217.
811.
58.
318.
2P/BV(x)23.
216.
810.
66.
914.
4Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)0.
00.
00.
00.
00.
0Selectedoperatingmetrics($mn)Onlineadsrevenue222390636887IVASrevenue103259372509Revsfromsalesof3rdpartyanti-virussoftware0000Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201382Asiaex-JapanInternet&MediaIndustryView:POSITIVERenrenInc.
(RENN)StockRating:EQUALWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD3.
50PriceTargetUSD3.
50WhyEqualWeightRenrenisaleadingSNSplatform,capturinggrowingsocialaddemand.
ButitisfacingstrongcompetitionfromPengyouandWeibo.
AlthoughweviewNuomiasagoodstrategicinvestment,theloss-makinggroup-buybusinessmayhurtmarginsnearterm.
UpsidecaseUSD4.
80ThisassumesthatfasteradvertisingcustomergrowthandARPUgrowthtranslateintofasterrevenuegrowthin2013,causingthesharepricetorisetoUS$4.
80.
DownsidecaseUSD2.
30ThisassumesadvertisingdemandslowsduetofewercustomersandARPUgrowthaswellasmoreinvestmentneededformobile,Nuomiand56.
com,resultinginmarginpressure.
ThesharepricecoulddeclinetoUS$2.
30.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue17619523928417.
2%EBITDA-76-110-55-28N/AEBIT-92-137-83-54N/APre-taxincome-74-73-57-38N/ANetincome-75-72-57-32N/AEPS(adj)($)-0.
16-0.
14-0.
10-0.
04N/AEPS(reported)($)-0.
20-0.
19-0.
15-0.
08N/ANetcashpershare($)2.
362.
201.
991.
88-7.
2%Dilutedshares(mn)383.
9374.
5376.
3381.
0-0.
3%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)62.
260.
355.
962.
060.
1Operatingprofitmargin(%)-52.
1-70.
5-34.
7-19.
1-44.
1EBITDAmargin(%)-42.
9-56.
7-23.
1-9.
7-33.
1Netmargin(%)-42.
6-37.
2-23.
9-11.
3-28.
7ROIC(%)-39.
5-66.
8-35.
7-22.
5-41.
1ROA(%)-6.
6-10.
3-6.
0-3.
6-6.
6ROE(%)-5.
6-5.
3-4.
2-1.
7-4.
2Balancesheetandcashflow($mn)CAGRTangiblefixedassets3237667633.
1%Intangiblefixedassets869899973.
8%Cashandequivalents905822748718-7.
4%Totalassets1,2041,1411,0751,039-4.
8%Shortandlong-termdebt0000N/AOtherlong-termliabilities0000N/ATotalliabilities9714214615617.
2%Netdebt/(funds)-905-822-748-718N/AShareholders'equity1,107999929883-7.
3%Changeinworkingcapital2619215-16.
6%Cashflowfromoperations-11-7-1026N/ACapitalexpenditure-41-35-33-26N/AFreecashflow-52-42-431N/AValuationandleveragemetricsAverageP/E(adj)(x)N/AN/AN/AN/AN/AP/E(reported)(x)N/AN/AN/AN/AN/AEV/EBITDA(x)-6.
0-4.
9-11.
1-23.
3-11.
4FCFyield(%)-3.
9-3.
2-3.
30.
1-2.
6P/Sales(x)7.
77.
05.
74.
86.
3P/BV(x)1.
21.
31.
41.
51.
4Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)0.
00.
00.
00.
00.
0SelectedoperatingmetricsActiveusers167194205215TotalARPU($)175.
67177.
96189.
19200.
54Numberofadvertisers287.
0295.
0317.
0339.
2Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201383Asiaex-JapanInternet&MediaIndustryView:POSITIVEShandaGamesLtd.
(GAME)StockRating:UNDERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD4.
10PriceTargetUSD3.
50WhyUnderweightWehavelittlevisibilityonanynewgamesGAMEhasinthepipelinegivenitsconsistentlyunsuccessfulnewgamelaunches(excludingDN)inthepasttwoyears.
Webelievethelossofcoremanagementandunderwateroptionsfurtherreduceitscompetitiveedge.
UpsidecaseUSD6.
70ThisassumesMillionArthurisverysuccessfulinChinaandothercountries,andthetwoexistingcoregames(MirIIandWoool)starttorebound,leadingtohigherrevenuegrowthandthemultipleexpandingto7x.
DownsidecaseUSD2.
50Thisassumesnoneofthenewgamesissuccessfulin2013,andMirIIandWooolcontinuetoslow,leadingtothemultiplede-ratingto3x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Revenue745722722720-1.
1%EBITDA2562653103086.
3%EBIT2192302752737.
5%Pre-taxincome2512582912894.
8%Netincome1772102192207.
5%EPS(adj)($)0.
720.
860.
890.
897.
4%EPS(reported)($)0.
640.
780.
810.
828.
6%Netcashpershare($)1.
31-0.
090.
440.
53-26.
2%Dilutedshares(mn)277.
4268.
6268.
8269.
2-1.
0%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)63.
568.
071.
872.
068.
8Operatingprofitmargin(%)29.
431.
938.
237.
934.
3EBITDAmargin(%)34.
336.
743.
042.
739.
2Netmargin(%)23.
829.
130.
330.
528.
4ROIC(%)51.
258.
8104.
760.
768.
9ROA(%)12.
922.
521.
021.
119.
4ROE(%)29.
576.
277.
350.
058.
2Balancesheetandcashflow($mn)CAGRTangiblefixedassets303232321.
9%Intangiblefixedassets92858585-2.
6%Cashandequivalents599165268232-27.
1%Totalassets1,2918911,0301,031-7.
2%Shortandlong-termdebt23618915191-27.
3%Otherlong-termliabilities262626260.
0%Totalliabilities604574706531-4.
2%Netdebt/(funds)-36323-117-142N/AShareholders'equity679305309482-10.
8%Changeinworkingcapital92-41112-173N/ACashflowfromoperations32022237999-32.
4%Capitalexpenditure-15-15-15-15N/AFreecashflow30520736483-35.
1%ValuationandleveragemetricsAverageP/E(adj)(x)5.
74.
74.
64.
64.
9P/E(reported)(x)6.
45.
25.
05.
05.
4EV/EBITDA(x)3.
04.
43.
33.
23.
5FCFyield(%)26.
818.
833.
07.
521.
5P/Sales(x)1.
51.
61.
61.
61.
6P/BV(x)1.
73.
63.
62.
32.
8Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)N/A6.
9N/AN/A6.
9SelectedoperatingmetricsTotalrevenue($mn)745722722720GAAPoperatingmargin30.
333.
239.
239.
1Non-GAAPoperatingmargin29.
431.
938.
237.
9Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201384Asiaex-JapanInternet&MediaIndustryView:POSITIVESinaCorporation(SINA)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD85.
16PriceTargetUSD84.
00WhyOverweightWebelieveSinashouldbenefitfromimprovingadvertisingoutlookin2013,improvedemployeemoraleandthemonetizationrampposttherecentrestructuringofportalandWeibo.
UpsidecaseUSD97.
00Basedonourscenario,applying55xtoestimated10%higheronourcurrentWeiboearningsfor2014andapplying20xmultipletoportalearnings.
DownsidecaseUSD64.
00Basedonourscenario,applying30xtoestimated20%loweronourcurrentWeiboearningsfor2014andapplying15xmultipletoportalearnings.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue5296558581,06626.
3%EBITDA2151192347154.
1%EBIT-94135280N/APre-taxincome3519159306106.
8%Netincome3216144272104.
6%EPS(adj)($)0.
140.
912.
284.
17208.
1%EPS(reported)($)0.
470.
242.
154.
05105.
0%Netcashpershare($)10.
7018.
3019.
3720.
8324.
9%Dilutedshares(mn)66.
766.
867.
067.
20.
2%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)53.
856.
862.
067.
760.
1Operatingprofitmargin(%)-1.
60.
615.
826.
210.
3EBITDAmargin(%)4.
07.
822.
432.
516.
7Netmargin(%)6.
02.
516.
825.
512.
7ROIC(%)-0.
82.
215.
232.
412.
3ROA(%)-0.
50.
85.
410.
44.
0ROE(%)0.
94.
811.
319.
89.
2Balancesheetandcashflow($mn)CAGRTangiblefixedassets77787460-7.
8%Intangiblefixedassets1684848474.
4%Cashandequivalents7141,2721,3471,44926.
6%Totalassets1,4832,1522,2662,38817.
2%Shortandlong-termdebt0505050N/AOtherlong-termliabilities22220.
0%Totalliabilities33738142048112.
6%Netdebt/(funds)-714-1,223-1,297-1,399N/AShareholders'equity1,1371,2841,3521,4137.
5%Changeinworkingcapital-22-37-39-15N/ACashflowfromoperations336818021487.
2%Capitalexpenditure98961061134.
8%Freecashflow-66-2874101N/AValuationandleveragemetricsAverageP/E(adj)(x)595.
593.
337.
320.
4186.
6P/E(reported)(x)181.
2350.
539.
521.
0148.
1EV/EBITDA(x)232.
886.
322.
612.
288.
5FCFyield(%)-1.
2-0.
51.
31.
80.
4P/Sales(x)11.
08.
96.
75.
48.
0P/BV(x)5.
04.
44.
24.
04.
4Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)0.
06.
26.
26.
54.
7Selectedoperatingmetrics($mn)Advertisingrevenue413361388419MobileVASrevenue70625351Otherrevenue47677685Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201385Asiaex-JapanInternet&MediaIndustryView:POSITIVESohu.
comInc.
(SOHU)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD66.
14PriceTargetUSD73.
00WhyOverweightWelikeSohubecauseofitsmorediversifiedrevenuemodel.
WeexpectSogoutocontinuetogainmarketsharewithonlinevideoattractingmoreadvertisersaswellasupsidefromChangyouDMD.
UpsidecaseUSD100.
00ThisassumesChangyou'snewgametitlesandDMDdeliversandCYOUmultipleexpandsto10xandthatSogouandthePortalbusinessalsoperformbetterthanexpectedwiththePortalmultipleexpandingto15xandSogoumultipleexpandingto20x.
DownsidecaseUSD55.
00AssumingChangyou'scoregamesslowdown;hencemultiplede-ratedto5x,andPortalandSogoubusinessfacechallengingaddemandenvironmentandlosessharetoothercompetitorswithmultiplede-ratedto8xforPortaland10xforSogou.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue1,0671,3671,5461,74417.
8%EBITDA32531637647413.
4%EBIT22325331038419.
8%Pre-taxincome25328234342218.
5%Netincome78819412115.
8%EPS(adj)($)2.
542.
312.
733.
4210.
5%EPS(reported)($)2.
032.
102.
443.
1215.
4%Netcashpershare($)19.
8620.
3121.
0323.
405.
6%Dilutedshares(mn)38.
538.
639.
239.
20.
6%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)65.
465.
366.
366.
365.
8Operatingprofitmargin(%)20.
918.
520.
022.
020.
4EBITDAmargin(%)30.
523.
124.
427.
226.
3Netmargin(%)7.
35.
96.
17.
06.
6ROIC(%)10.
911.
313.
014.
412.
4ROA(%)8.
08.
59.
811.
09.
3ROE(%)9.
06.
47.
99.
98.
3Balancesheetandcashflow($mn)CAGRTangiblefixedassets17940248655946.
2%Intangiblefixedassets2292372372371.
1%Cashandequivalents1,0059759381,0310.
9%Totalassets2,0762,3292,4572,6919.
0%Shortandlong-termdebt239192113113-22.
1%Otherlong-termliabilities0000N/ATotalliabilities5525846106405.
1%Netdebt/(funds)-765-783-825-918N/AShareholders'equity1,0841,3871,3321,3467.
5%Changeinworkingcapital95-2824-66.
7%Cashflowfromoperations403232293356-4.
0%Capitalexpenditure-155-162-163-175N/AFreecashflow557394456531-1.
6%ValuationandleveragemetricsAverageP/E(adj)(x)26.
128.
724.
219.
324.
6P/E(reported)(x)32.
531.
427.
121.
228.
1EV/EBITDA(x)5.
55.
64.
63.
44.
8FCFyield(%)21.
915.
517.
620.
518.
8P/Sales(x)2.
41.
91.
61.
51.
8P/BV(x)2.
41.
81.
91.
92.
0Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)43.
519.
911.
010.
021.
1Selectedoperatingmetrics($mn)Advertisingrevenue290414458513Searchrevenue124189248316Onlinegamerevenue575668738808Otherrevenue7896101107Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201386Asiaex-JapanInternet&MediaIndustryView:POSITIVETencentHoldingsLimited(0700.
HK)StockRating:OVERWEIGHTIncomestatement(RMBmn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)HKD402.
20PriceTargetHKD450.
00WhyOverweightWearepositiveonTencent'soverallstrategicdirectionofitsmobileopenplatforminitiativesandbelieveitiswellpositionedtocapturetheemergingopportunitiesofmobileInternetgrowthinthenextfewyears,leveragingitssticky,integratedmobileuserplatformonWeChat.
UpsidecaseHKD556.
00ThisassumesWeChatmonetizationistrackingfasterthanourbase-casescenario,translatingintohigherrevenueandearningsgrowthwithourtargetmultipleexpandingto35x.
DownsidecaseHKD290.
00ThisassumesWeChatmonetizationistrackingslowerthanourbase-casescenario,translatingintoslowerrevenueandearningsgrowthandourtargetmultiplede-ratingto20x.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue43,89459,45677,43195,65829.
6%EBITDA18,09322,32629,60635,95125.
7%EBIT15,48018,99225,28030,58025.
5%Pre-taxincome15,05218,84024,81130,30126.
3%Netincome12,73315,02020,45425,14025.
5%EPS(adj)(RMB)7.
678.
7411.
8914.
6124.
0%EPS(reported)(RMB)6.
838.
0510.
9313.
3725.
1%Netcashpershare(RMB)15.
2416.
5319.
7924.
8317.
7%Dilutedshares(mn)1,863.
31,864.
81,870.
81,880.
80.
3%DPS(RMB)1.
291.
552.
122.
5926.
2%MarginandreturndataAverageGrossmargin(%)58.
554.
654.
053.
555.
2Operatingprofitmargin(%)35.
331.
932.
632.
033.
0EBITDAmargin(%)41.
237.
538.
237.
638.
6Netmargin(%)29.
025.
326.
426.
326.
7ROIC(%)101.
285.
6100.
1101.
897.
2ROA(%)18.
518.
322.
022.
920.
4ROE(%)34.
633.
438.
237.
936.
0Balancesheetandcashflow(RMBmn)CAGRTangiblefixedassets7,40313,12818,28124,44148.
9%Intangiblefixedassets4,7194,7924,8504,9081.
3%Cashandequivalents40,60143,04344,93951,0037.
9%Totalassets75,25688,153100,409118,61116.
4%Shortandlong-termdebt12,20812,2087,9084,308-29.
3%Otherlong-termliabilities9,0259,0259,0259,0250.
0%Totalliabilities33,10838,49741,25845,25711.
0%Netdebt/(funds)-28,393-30,835-37,031-46,695N/AShareholders'equity41,29848,77558,24072,41320.
6%Changeinworkingcapital3,5084,0152,4022,168-14.
8%Cashflowfromoperations21,65426,06031,61238,27220.
9%Capitalexpenditure-3,691-6,019-7,801-9,624N/AFreecashflow17,96320,04123,81128,64816.
8%ValuationandleveragemetricsAverageP/E(adj)(x)41.
436.
326.
721.
731.
5P/E(reported)(x)46.
439.
429.
023.
734.
6EV/EBITDA(x)30.
324.
418.
214.
721.
9FCFyield(%)3.
03.
44.
04.
83.
8P/Sales(x)13.
19.
77.
46.
09.
1P/BV(x)14.
312.
110.
28.
211.
2Dividendyield(%)0.
40.
50.
70.
80.
6Totaldebt/capital(%)88.
864.
935.
816.
251.
4Selectedoperatingmetrics(RMBmn)IVASrevenue35,71944,52455,37565,054MVASrevenue3,7234,1324,5164,968Onlineadsrevenue3,3824,8326,0947,552Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201387Asiaex-JapanInternet&MediaIndustryView:POSITIVEYoukuTudouInc.
(YOKU)StockRating:OVERWEIGHTIncomestatement($mn)2012A2013E2014E2015ECAGRPrice(11-Sep-2013)USD23.
43PriceTargetUSD28.
00WhyOverweightWeexpectonlinevideototakesharefromTVadbudgets,andwithYouku'sdominantpositiongivenitsstrongbrandandexecution,weexpectthecompanytoincreasemarketshareovertime.
UpsidecaseUSD42.
00ThisassumesfastercustomeraddsandhigherARPUpercustomer,leadingtorevenuegrowingfasterin2013toyieldaDCFvalueofUS$42.
DownsidecaseUSD15.
00Assumingaddemandisaffectedbyaglobalslowdownwithlessabilitytoraisepricesandcustomergrowthataslowerrate.
Thistranslatesintoonly50%revenuegrowthfor2013,whichwouldyieldaDCFvalueofUS$15.
Upside/DownsidescenariosPOINTQuantitativeEquityScoresSource:POINT.
Thescoresarevalidasofthedateofthisreportandareindependentofthefundamentalanalysts'views.
Toviewthelatestscores,clickhere.
Netrevenue2884997551,04053.
4%EBITDA-62-6835147N/AEBIT-77-8613116N/APre-taxincome-69-7916119N/ANetincome-68-7513101N/AEPS(adj)($)-0.
26-0.
240.
250.
75N/AEPS(reported)($)-0.
51-0.
460.
070.
57N/ANetcashpershare($)4.
553.
663.
443.
90-5.
0%Dilutedshares(mn)132.
6166.
4173.
2177.
510.
2%DPS($)0.
000.
000.
000.
00N/AMarginandreturndataAverageGrossmargin(%)16.
522.
836.
043.
629.
7Operatingprofitmargin(%)-26.
7-17.
21.
711.
2-7.
7EBITDAmargin(%)-21.
6-13.
74.
714.
1-4.
1Netmargin(%)-23.
6-15.
11.
89.
7-6.
8ROIC(%)N/AN/A4.
715.
210.
0ROA(%)-3.
0-3.
12.
06.
00.
5ROE(%)-2.
3-3.
03.
28.
71.
7Balancesheetandcashflow($mn)CAGRTangiblefixedassets32252413-26.
7%Intangiblefixedassets209851512293.
1%Cashandequivalents6046095966924.
6%Totalassets1,7321,6731,8172,0806.
3%Shortandlong-termdebt1000-100.
0%Otherlong-termliabilities0000N/ATotalliabilities23133843956334.
7%Netdebt/(funds)-603-609-596-692N/AShareholders'equity1,5021,3351,3781,5170.
3%Changeinworkingcapital-1055934N/ACashflowfromoperations22115144271130.
6%Capitalexpenditure-73-153-156-174N/AFreecashflow-50-38-1297N/AValuationandleveragemetricsAverageP/E(adj)(x)N/AN/A94.
931.
463.
2P/E(reported)(x)N/AN/A321.
041.
0181.
0EV/EBITDA(x)-32.
0-29.
156.
413.
02.
0FCFyield(%)-1.
6-1.
0-0.
32.
3-0.
1P/Sales(x)9.
05.
23.
42.
55.
0P/BV(x)2.
12.
92.
92.
72.
7Dividendyield(%)0.
00.
00.
00.
00.
0Totaldebt/capital(%)0.
10.
00.
00.
00.
0Selectedoperatingmetrics(mn)Numberofcustomers332.
3447.
9546.
7634.
1TotalARPU($)1,525.
001,867.
862,329.
082,818.
18Source:Companydata,BarclaysResearchNote:FYEndDecValueQualitySentimentLowHighBarclays|ChinaInternet13September201388ANALYST(S)CERTIFICATION(S):We,AliciaYap,CFAandWilliamHuang,herebycertify(1)thattheviewsexpressedinthisresearchreportaccuratelyreflectourpersonalviewsaboutanyorallofthesubjectsecuritiesorissuersreferredtointhisresearchreportand(2)nopartofourcompensationwas,isorwillbedirectlyorindirectlyrelatedtothespecificrecommendationsorviewsexpressedinthisresearchreport.
ThePOINTQuantitativeEquityScores(POINTScores)referencedhereinareproducedbythefirm'sPOINTquantitativemodelandBarclaysherebycertifiesthat(1)theviewsexpressedinthisresearchreportaccuratelyreflectthefirm'sPOINTScoresmodeland(2)nopartofthefirm'scompensationwas,isorwillbedirectlyorindirectlyrelatedtothespecificrecommendationsorviewsexpressedinthisresearchreport.
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comorcall212-526-1072.
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