China Internet: Riding the mobile internet wave

Equity Research 13 September 2013

China Internet

Riding the mobile internet wave

INDUSTRY UPDATE Asia ex-Japan Internet & Media

We reiterate our Positive view on the China Internet sector. The new revolution and transition to mobile should benefit most of the Chinese Internet companies we cover, especially those with clear mobile strategies and a market position such that top-line growth re-accelerates and potential gradual improvement in margins is forecast over the next 2-3 years. As likely beneficiaries of this transition, we upgrade our PT’s 1233% for Tencent, Qihoo, Ctrip and Baidu. We see five key trends for the sector in 2H13 and 2014: 1) increased competition/mobile game monetization; 2) rising consumption benefiting transaction-based models; 3) increased smart-TV competition; 4) challenge of transition to mobile adv; and 5) continued fight for user traffic/mobile access points. Our top three mobile Internet picks are Tencent, Qihoo and Ctrip (all rated OW), while others with good mobile exposure and potential upside catalysts on business model development & execution include: Baidu, NetEase, Sina, and Youku (all rated OW). Five key sector trends in 2H13 and 2014: 1) increased competition & monetization of smartphone games; 2) rising consumption benefiting transaction-based models (online travel booking, eCommerce, LBS-based O2O business opportunities); 3) competition between online video players extending to home entertainment/smart-TV arena; 4) transition to mobile advertising remains challenging and disruptive; and 5) continued fight for user traffic/mobile access points via individual apps, integrated platform and app store distribution approach. Key conclusions from 2Q13 results: 1) more beats & guide-ups than misses; 2) mobile strategies/initiatives a key focus; 3) margin trends point to stabilization/improvement; and 4) PC-based revenues remain resilient despite more traffic shifting to mobile. Risks to our view: 1) Recent outperformance (sector up 81.8% YTD vs NASDAQ up 23% and HSCI up 0.8%) could imply stock prices running ahead of fundamentals, but we remain positive on structural growth opportunities for the sector; 2) irrational & increasing competition could lead to margin disruption and erosion of creativity; and 3) further slowdown of the China economy could dampen advertising demand. FIGURE 1 Top picks in China mobile internet sector Company Rating

CP

PT

Tencent1

OW/Pos

402.2

388

450

12% Well-positioned to capture mobile Internet growth via its strength in mobile SNS, mobile gaming platform, and mobile Guangdiantong, as well as mobile payments.

Qihoo2

OW/Pos

90.8

86

100

10% Growth opportunity on monetizing mobile traffic via its app store distribution and upside risks to PC search penetration.

Ctrip2

OW/Pos

50.4

45

60

19% Likely beneficiary of structural leisure travel demand; further market share gain via mobile internet growth opportunities.

Old

Upside

New

Barclays Research Comment

%

Notes: Pricing as of 11 September 2013 (1 in HK$, 2 in US$). Source: Barclays Research estimates

Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. This research report has been prepared in whole or in part by equity research analysts based outside the US who are not registered/qualified as research analysts with FINRA. PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 88.

POSITIVE Unchanged For a full list of our ratings, price target and earnings changes in this report, please see table on page 2. Asia ex-Japan Internet & Media Alicia Yap, CFA +852 2903 4593 [email protected] Barclays Bank, Hong Kong Anand Ramachandran, CFA +65 6308 3895 [email protected] Barclays Bank, Singapore William Huang +852 2903 4766 [email protected] Barclays Bank, Hong Kong

Barclays | China Internet Summary of our Ratings, Price Targets and Earnings Changes in this Report (all changes are shown in bold) Company

Rating

Price

Old New 11-Sep-13

Price Target Old

New

EPS FY1 (E)

%Chg Old

EPS FY2 (E)

New %Chg

Asia ex-Japan Internet & Media

Pos Pos

Baidu, Inc. (BIDU)

OW OW

147.31

153.00 171.00

12

Ctrip.com International Ltd. (CTRP)

OW OW

50.35

45.00

60.00

33

1.41

E-Commerce China Dangdang Inc. (DANG)

UW UW

9.01

4.50

6.00

33

-0.61 -0.50

18

Qihoo 360 Technology Co., Ltd. (QIHU)

OW OW

90.85

86.00

100.00

16

1.34 1.35

Tencent Holdings Ltd. (700 HK / 0700.HK)

OW OW

402.20

388.00 450.00

16

8.73 8.74

5.03 5.05 1.41

0 -

Old

New %Chg

6.12

6.33

1.79

3

1.88

5

-0.52 -0.27

48

1

2.45

2.49

2

0

11.81 11.89

1

Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency. FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research. Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended Industry View: Pos: Positive; Neu: Neutral; Neg: Negative

Valuation Methodology and Risks Asia ex-Japan Internet & Media Baidu, Inc. (BIDU) Valuation Methodology: Our 12-month PT of US$171 is based on 27x our 2014E non-GAAP EPADS of US$6.33. Our target multiple of 27x implies 1.0x PEG to a two-year (2013-15E) earnings CAGR of 27%, which we believe is reasonable. Risks which May Impede the Achievement of the Barclays Research Price Target: The key downside risks to our price target for Baidu being achieved, in our view, include: 1) intensified PC search competition as Qihoo ramps up monetization and if Qihoo successfully acquires Sogou; 2) integration risks with 91 Wireless and Nuomi; and 3) margins and mobile revenue ramp failing to meet expectations. Ctrip.com International Ltd. (CTRP) Valuation Methodology: Our 12-month PT of US$60 is based on 32x our 2014E non-GAAP EPADS of US$1.88. Our target multiple implies about 1.0x PEG to a two-year (2013-15E) earnings CAGR of 32%. Risks which May Impede the Achievement of the Barclays Research Price Target: The key downside risks to our price target for Ctrip being achieved, in our view, include: 1) If competition intensifies further and the pricing war continues; 2) new competition could evolve from the eCommerce platform and niche app players; and 3) macro-related weakness could impact travel demand and sentiment. E-Commerce China Dangdang Inc. (DANG) Valuation Methodology: Our 12-month price target of US$6.00 for Dangdang is based on our DCF analysis in which we use a WACC of 18% and exit growth rate of 3%. Risks which May Impede the Achievement of the Barclays Research Price Target: The key upside risks that could prevent our price target for Dangdang from being achieved, in our view, include the following: 1) an earlier-than-expected return to profitability; 2) if the marketplace model grows to be a sizeable contributor to the top line and margins; and 3) if the company were to raise more funding or become of interest to potential acquirers. Qihoo 360 Technology Co., Ltd. (QIHU) Valuation Methodology: Our 12-month PT of US$100 is based on 40x our 2014E non-GAAP EPADS of US$2.49. Our 40x target multiple implies 0.6x PEG to two-year (2013-15E) earnings CAGR of 66%, which we believe is not too demanding considering the growth rate. Risks which May Impede the Achievement of the Barclays Research Price Target: The key downside risks to our price target for Qihoo being achieved, in our view, include: 1) Qihoo facing challenges to continue gaining search market share or its search advertising customer base growing more slowly than we expect; 2) a slowdown in the web games market; and 3) if competition intensifies and there is no clear visibility on the success of mobile Internet. Tencent Holdings Ltd. (700 HK / 0700.HK) Valuation Methodology: Our 12-month PT of HK$450 is based on 30x our 2014E non-GAAP EPS of HK$15.01. Our target multiple of 30x implies 1.0x PEG for a two-year (2013-15) earnings CAGR of 30%, which we believe is justified given Tencent's proven execution ability and its resilient and integrated user platform. Risks which May Impede the Achievement of the Barclays Research Price Target: The key downside risks to our price target for Tencent being achieved, in our view, include: 1) WeChat monetization ramp disappoints; 2) cannibalization of Tencent's web games revenues by WeChat; and 3) regulatory risks and conflicts with telcos. Source: Barclays Research.

13 September 2013

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Barclays | China Internet

INVESTMENT SUMMARY Five key trends for China’s Internet industry in 2H13 and 2014 We see five key trends that could dominate the China Internet space in 2H13 and 2014: 1.

Increased competition and monetization of smartphone/social-related mobile games adding further excitement in the online gaming industry.

2.

Rising consumption benefiting transaction-based models such as online travel booking, eCommerce, and LBS-based O2O business opportunities.

3.

Competition between online entertainment/smart-TV arena.

4.

The transition to mobile advertising remaining challenging and disruptive for portals, while PC-based brand advertising revenues seem to be holding up near-term.

5.

Continued fight for user traffic/mobile access points via individual apps, an integrated platform and app store distribution approach.

video

providers

extending

into

the

home

The following table summarises our five key trends for 2H13 and into 2014 and their respective impact on our coverage universe. FIGURE 2 Five key trends for 2H13/2014 and potential impact on Internet companies under our coverage Five key trends

Potential outcome and impact on companies

Who could benefit? What risks do the companies face?

1. Increased competition and monetization on mobile games to add further excitement to online gaming industry

Tencent is likely to be the biggest winner, leveraging its WeChat and mobile QQ; Qihoo is monetizing mobile games via revs share on app store distribution channel; PWRD is a fast mover with focused strategies; NTES might leverage YiChat as game distribution channel.

Platform: Tencent, Qihoo, Baidu;

2. Rising consumption benefiting transaction-based models such as online travel booking, eCommerce and LBS-based O2O business opportunities

Mobile travel bookings could ramp-up nicely, Ctrip, Tencent benefiting Ctrip and other OTAs that have good mobile apps. eCommerce mobile-based transactions continue to grow, with Alibaba and Tencent as significant potential winners.

Profitability of principal business depends on industry consolidation; traffic acquisition in mobile landscape could be challenging and likely a drag on profitability. Competition also shifting from ‘pricing’ to ‘speed and service’ of logistics delivery.

3. Competition between online video players extending into home entertainment/smartTV arena

Baidu iQiyi, LeTV, and Xiaomi lead the market on Baidu (iQiyi) smart-TV initiatives, as ‘multi-screens’ likely become the norm for most online video players for higher user penetration.

Content differentiation, TV affordability, and user loyalty remain challenges.

4. Transition to mobile advertising remaining challenging and disruptive for portals

Sina Weibo achieves higher momentum on weibo monetization via mobile, and Tencent released mobile Guang Dian Tong to further monetize performance-based advertising.

5. Continued fight for user traffic/mobile access points via individual apps, an integrated platform and app store distribution approach

Internet giants continue to strengthen their Tencent, Baidu, mobile traffic gateway via acquisitions (as shown Qihoo and Sina with recent action by Baidu and Alibaba) by gaining access to established apps (Weibo) or mobile app store distribution (91 Wireless).

Gaming stocks: NTES, PWRD

Companies that are neither platforms nor developers could miss out on the mobile games opportunity. Increasing numbers of web game developers are switching focus to develop mobile games, implying intensification of competitive landscape.

Tencent, Sina, Sohu, Traditional time-based banner ads, such that Sina, Sohu and NetEase Youku, Baidu and portals may suffer from budget Qihoo switching and mobile traffic dilution. Revenue monetization on mobile devices will continue to trail behind the mobile traffic shift; mobile gaming and location-based online-to-offline local services and transaction-based model could benefit more.

Source: Barclays Research estimates

13 September 2013

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Top picks for the China Internet Sector Our top picks are Tencent, Qihoo and Ctrip.

Tencent (0700.HK; OW; PT HK$450) We like Tencent because of its integrated platform strategy and resilient revenue stream with its: 1) dominant market share in online gaming; 2) open platform growth potential, leveraging faster growth of the social/web games industry; 3) market share gains in the online advertising business with broad-based solutions via online video, performance-based targeted ads, search and display; and 4) growth potential in its mobile payment and eCommerce platforms – we believe WeChat has significant potential to monetize through mobile games, O2O/LBS, and mobile advertising, and also that eCommerce is progressing well with an increasing contribution to Tencent’s top line. With steady gaming revenues and healthy growth via a rich game pipeline and effective expansion packs for core games, Tencent is able to fund its growth initiatives in WeChat, mobile games, online video and social advertising, as well as eCommerce expansion, in our view. We see this as a clear strategy and believe that with its sticky user base, integrated platform, and proven management execution, Tencent can once again deliver on its promising growth prospects as we transition from PC to mobile. Valuation: Our new price target of HK$450 (from HK$388) is based on 30x (from 26x) our 2014E non-GAAP EPS of HK$15.01 (from HK$14.92). Risks: Key downside risks to our price target include: 1) a slowdown in existing PC games; 2) significant investment and aggressive WeChat marketing promotional campaigns, which could put pressure on margins; and 3) if WeChat monetization fails to meet forecasted expectation or loses its appeal to users.

Qihoo (QIHU; OW; PT US$100) While Qihoo’s share price has seen a general re-rating over the past 12 months, we believe further catalysts could come from: 1) faster-than-expected revenues ramp from its mobile assistant app store distribution; 2) further search traffic share gains, leading to faster ramp in search revenues; and 3) faster-than-expected rebound in operating margins if revenues outperform our expectation for 2014 driven by faster-than-expected ramp in mobile revenues and search revenues . Valuation: Our new price target of US$100 (from HK$86) is based on 40x (from 35x) our 2014E non-GAAP EPADS of US$2.49 (from US$2.45). This implies a PEG of c0.60x to a two-year (201315E) earnings CAGR of 66%. Risks: Key downside risks to our price target include: 1) failure to gain further search traffic share; 2) a slowdown in the web games market; and 3) margins failing to rebound due to higher investment in the search business.

Ctrip (CTRP; OW; PT US$60) Similarly, although Ctrip’s share price has also seen a general re-rating over the past 12 months, we believe it will remain a solid play into the early cycle of mobile Internet growth given: 1) we expect it to gain market share at a faster rate than in the last two years as it further consolidates fragmented offline traditional travel agents, benefiting from rising smartphone penetration; 2) its comprehensive offering of online travel services, as well as scale, should give it better leverage to compete more efficiently and economically; and 3) while competition remains intense, the commoditisation of coupon rebate has meant pure pricing competition is not a differentiating factor for players in this space, hence Ctrip’s full service/one-stop shop service could allow it to compete at more flexible prices.

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Barclays | China Internet Valuation: Our new price target of US$60 (from US$45) is based on 32x (from 25x) our 2014E non-GAAP EPADS of US$1.88 (US$1.79). This implies a PEG of 1.0x to a two-year (2013-2015E) earnings CAGR of 32%. Risks: Key downside risks to our price target include: 1) irrational pricing wars; 2) eLong’s air ticket cash rebate program becoming more successful, forcing Ctrip to react more aggressively; and 3) a fall in operating margins due to increasing competition and aggressive sales & marketing.

Other names with good mobile exposure and potential upside catalysts on business model development & execution Baidu (BIDU; OW; PT US$171) Although Baidu continues to face challenges from the threat of Qihoo gaining stronger traction on PC search and the slow adoption of mobile ad budgets by small and mediumsize enterprises, we view its acquisitions of 91 Wireless, Nuomi and PPS (in July 2013, August 2013, and May 2013, respectively) as strengthening its mobile position and see potential upside catalysts to Baidu’s mobile story. Valuation: Our new price target of US$171 (from US$153) is based on 27x (from 25x) our 2014E non-GAAP EPADS of US$6.33 (from US$6.12). This implies a PEG of c1.0x to a two-year (2013-2015E) earnings CAGR of 27%. Risks: Key downside risks to our price target include: 1) Qihoo gaining more market share and competing more aggressively in the PC search area; 2) operating margins declining more than we currently expect, driven by higher traffic acquisition and sales and marketing expenses to defend Qihoo; 3) any failure of its light-app strategy; 4) integration risks related to recent acquisitions; and 5) further slowdown in China economy.

NetEase (NTES; OW; PT US$76) We remain positive on NTES given its: 1) solid corporate governance; 2) in-house development strength; 3) diversified game portfolio with a proven hit ratio; and 4) strong cash flow generation. We are also encouraged by management’s mobile internet strategies for mobile games, music and reading, and see potential upside catalysts to its YiChat cooperation with China Telecom. We believe NTES will leverage its YiChat platform to integrate its various mobile apps/content offerings and that this could make YiChat the company’s main distribution channel for its future mobile games. Valuation: Our price target of US$76 (unchanged) is based on 12x our 2014E non-GAAP EPADS of US$6.32. This implies 1.0x PEG to a three-year 2012-15E earnings CAGR of 12%. Risks: Key downside risks to our price target include: 1) continued slowdown in its World of Warcraft franchise; 2) new games failing to gain traction; and 3) flagship games starting to lose users. 4) YiChat fails to become an effective mobile platform.

Youku (YOKU; OW; PT US$28) With a differentiated content strategy balancing professional content and in-house production, we believe Youku aims to deliver reasonable top-line growth with manageable content costs, and will thus likely progress toward non-GAAP profitability by 4Q13. If mobile revenues gain traction more quickly, profitability could come earlier, offering upside risk to our forecasts. We remain positive on overall growth potential of online video advertising and believe Youku will continue to execute and deliver on its strategy, thus we recommend investors use any share price weakness as an opportunity to accumulate.

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Barclays | China Internet Valuation: Our price target of US$28 (unchanged) is based on DCF valuation methodology, and incorporates assumptions of 14.4% WACC and a 4% terminal growth rate. Risks: Key downside risks to our price target include: 1) profitability timing being further delayed; 2) top-line growth being negatively impacted by slower-than-expected economic recovery in China; and 3) an irrational increase in content costs as competitors once again bid aggressively for good content.

Sina (SINA; OW; PT US$84) Given that Sina Weibo remains an important medium for social media access, and its strength and dominant position in mobile penetration, we believe the company will continue to be a valuable asset as a traffic distribution channel. While execution risks remain on: 1) balancing the user experience with banner ads and promotional tweets monetization; 2) the effectiveness of Weibo ads; and 3) progress and ramp-up of the Weibo-Taobao account integration, we believe the new Alibaba-Weibo alliance would strategically benefit revenues and earnings growth, positioning Weibo to capture emerging growth opportunities in the social media/social commerce landscape. Valuation: Our price target of US$84 (unchanged) is based on SOTP analysis, valuing Sina at US$5.6bn, including: 1) Weibo valuation of US$3.7bn (US$56/sh), taking into consideration Sina’s 71% stake; 2) portal valuation of US$644mn (US$9.6/sh); and 3) cash of US$18.5/sh. Risks: Key downside risks include: 1) user churn and user time spend diminishing; 2) the Weibo-Taobao integration failing to gain traction from merchants and users; and 3) a further slowdown in the portal business.

Risks to our sector view Pricing getting ahead of fundamentals? As shown in Figure 101, the average share price performance of companies under our coverage universe has increased by 70.4% YTD, which compares to the NASDAQ up 23.1% and HSCI up 0.8%. We believe this strong performance can be attributed to: 1) better-thanexpected 1Q/2Q13 results with surprises on margin rebounds and guidance driven by low investor expectations, yet solid management execution on turning around their business fundamentals 2) less sensitivity to macro and government policies as all Internet companies are not state-owned enterprises nor they are in a cyclical business; 3) increased M&A activities; and 4) smartphone penetration ramp driving increased innovation and fast reaction from Internet companies. While recent performance may appear to be running ahead of fundamentals, we remain positive on the structural growth opportunities for the China Internet sector, with the new revolution and transition to mobile likely to benefit most of the Chinese Internet companies we cover. As such, we would advise investors to use any broad-based share price weakness as an opportunity to accumulate.

Irrational & increasing competition Any irrational competition such as that experienced in 2012, when leading OTAs were competing aggressively for market share by giving back large cash coupon rebates and online video operators were bidding up TV dramas to expensive prices, could lead to margin disruption and erosion of creativity. Rising competition, as evidenced by Qihoo entering the search engine business and online gaming companies trying to gain gamer traction on new game launches, could lead to higher S&M expense and R&D talents, in turn putting further pressure on margins.

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Other • Further slowdown of China economy that could dampen advertising demand; • Overhang on Variable Interest Entities (VIE) shareholder structure that could come back to worry investors if the US-listed ADRs were to face any de-listing issues.

• Further government censorship on social media comments and increased requirement for real-name registration.

China Internet Sector – valuation comparison FIGURE 3 China Internet Sector – valuation comparisons Company Lead category

Baidu Dangdang Tencent Renren Sina Sohu Youku Ctrip Qihoo Average Gaming Changyou Giant NetEase PerfectWorld ShandaGames TaoMee The9 NQ Mobile NetDragon Kingsoft YY Average

Ticker

Curr. Rating

TP

Last

Mkt cap (US$ mm)

PER FY12A

FY13E

Price to Sales

EPS-CAGR

FY14E

FY15E

FY12-15E

FY12A

FY13E

FY14E

Sales-CAGR FY15E

PEG

FY12-15E

FY14E

BIDU US DANG US 700 HK RENN US SINA US SOHU US YOKU US CTRP US QIHU US

USD USD HKD USD USD USD USD USD USD

OW UW OW EW OW OW OW OW OW

$171.0 $6.0 $450.0 $3.5 $84.0 $75.0 $28.0 $60.0 $100.0

$147.31 $9.01 $402.20 $3.50 $85.16 $66.14 $23.43 $50.35 $90.85

$51,525 $723 $95,826 $1,326 $5,675 $2,532 $3,886 $6,516 $11,154

30.0x nm 41.4x nm 608.3x 26.1x nm 39.2x 114.0x 143.3x

29.2x nm 36.3x nm nm 28.7x nm 35.6x 67.4x 39.4x

23.3x nm 26.7x nm 37.4x 24.2x 94.9x 26.7x 36.4x 43.0x

18.0x nm 21.7x nm 20.4x 19.3x 31.4x 20.9x 25.3x 22.6x

19% nm 25% nm 210% 12% nm 23% 65% 59%

14.4x 0.9x 13.1x 7.8x 11.1x 2.4x 9.0x 10.4x 35.2x 12.0x

10.0x 0.7x 9.7x 7.0x 8.9x 1.9x 5.2x 8.1x 17.8x 8.0x

7.3x 0.6x 7.4x 5.7x 6.8x 1.6x 3.4x 6.3x 11.5x 5.9x

5.8x 0.5x 6.0x 4.8x 5.4x 1.5x 2.5x 5.1x 8.3x 4.6x

36% 23% 30% 17% 27% 19% 47% 27% 60% 32%

1.2x nm 1.1x nm 0.2x 1.9x nm 1.1x 0.6x 1.0x

CYOU US GA US NTES US PWRD US GAME US TAOM US NCTY US NQ US 777 HK 3888 HK YY US

USD USD USD USD USD USD USD USD HKD HKD USD

OW OW OW EW UW NR NR NR NR NR NR

$46.0 $9.2 $76.0 $22.0 $3.5 NA NA NA NA NA NA

$31.45 $8.50 $74.03 $21.28 $4.10 $5.78 $2.55 $20.11 $17.60 $19.38 $47.29

$1,667 $2,036 $9,674 $1,037 $1,109 $212 $58 $1,046 $1,138 $2,930 $2,572

5.8x 9.5x 15.8x 10.4x 5.7x 26.0x nm 76.5x 28.6x 41.9x nm 24.4x

5.6x 8.9x 12.6x 10.6x 4.7x 37.3x nm 19.5x 13.8x 29.0x 41.7x 18.4x

5.0x 7.4x 11.7x 8.6x 4.6x 29.6x nm 15.5x 14.6x 23.3x 26.9x 14.7x

4.6x 6.8x 10.7x 7.8x 4.6x 36.1x nm 12.6x 14.1x 19.2x 18.8x 13.5x

10% 11% 14% 10% 7% -10% nm 83% 27% 30% 70% 25%

2.7x 6.0x 7.1x 2.3x 1.5x 5.3x 2.4x 11.4x 6.5x 13.2x 19.8x 7.1x

2.3x 5.3x 5.9x 2.1x 1.6x 4.9x 1.7x 5.6x 4.4x 8.9x 9.6x 4.7x

2.1x 4.3x 5.2x 1.8x 1.6x 4.4x 0.9x 4.0x 4.3x 7.1x 6.2x 3.8x

1.9x 3.8x 4.7x 1.6x 1.6x 4.5x 0.6x 3.3x 3.8x 5.9x 4.5x 3.3x

15% 17% 15% 12% -5% 5% 57% 52% 19% 31% 63% 26%

0.5x 0.7x 0.8x 0.9x 0.6x nm nm 0.2x nm nm 0.4x 0.6x

NA NA NA NA NA NA NA NA NA NA NA

$1.80 $15.87 $7.62 $10.59 $66.56 $3.42 $47.35 $15.92 $11.69 $49.14 $1.95

$110 $661 $238 $816 $1,923 $108 $3,829 $550 $575 $2,719 $10

nm 32.4x 58.6x 40.3x 25.5x 38.4x 26.3x 88.4x nm nm nm 44.3x 63.1x

nm 17.5x 24.0x 25.2x 22.7x nm 17.0x nm 36.5x 51.3x nm 26.7x 25.8x

20.7x 14.4x 21.2x 19.6x 19.7x nm 14.3x 37.9x 19.5x 27.3x nm 21.0x 23.8x

15.3x 22.4x 16.9x 16.5x 15.9x nm 12.9x na 11.5x 18.5x nm 16.2x 16.9x

nm 13% 51% 35% 17% nm 27% nm nm nm nm 29% 36%

0.4x 3.9x 3.7x 4.6x 8.3x 1.1x 8.9x 4.7x 2.9x 3.9x 0.1x 4.5x 7.4x

0.4x 2.9x 3.0x 3.6x 7.4x 1.3x 6.5x 3.2x 1.9x 1.7x 0.1x 3.1x 5.0x

0.4x 2.2x 2.5x 2.9x 6.5x 1.5x 5.5x 2.4x 1.2x 1.1x 0.1x 2.5x 3.8x

0.3x nm 2.4x 2.5x 5.6x 1.8x 4.8x nm 0.8x 0.8x 0.1x 2.1x 3.3x

4% 13% 16% 23% 14% -14% 23% 37% 51% 69% 0% 21% 26%

nm 1.1x 0.4x nm 1.2x nm 0.5x nm nm nm nm 0.8x 0.8x

Vertical AirMedia AMCN US USD NR Bitauto BITA US USD NR Jiayuan DATE US USD NR Phoenix NM FENG US USD NR 51Jobs JOBS US USD NR Sky Mobi MOBI US USD NR Soufun SFUN US USD NR eLong LONG US USD NR LITB LITB US USD NR VIPshop VIPS US USD NR Vision China VISN US USD NR Average Average (three categories in total)

Note: Prices as of the market close on 11 Sep 2013. All prices in US dollars except for Tencent, which is priced in Hong Kong dollars. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight; NR: not rated. Asia ex-Japan Internet industry view: Positive. Estimates for not rated companies are consensus estimates from Bloomberg. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: Bloomberg consensus estimates, Barclays Research estimates

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7


CONTENTS INVESTMENT SUMMARY ................................................................................ 3 Five key trends for China’s Internet industry in 2H13 and 2014 ..................................................... 3 Top picks for the China Internet Sector ................................................................................................ 4 Other names with good mobile exposure and potential upside catalysts on business model development & execution......................................................................................................................... 5 Risks to our sector view ............................................................................................................................ 6 China Internet Sector – valuation comparison .................................................................................... 7

BARCLAYS SMARTPHONE FORECASTS & CHINA INTERNET READTHROUGH ........................................................................................................... 9 KEY TREND 1: MOBILE GAMES – INCREASED COMPETITION WITH MONETIZATION RAMP .................................................................................11 KEY TREND 2: TRANSACTION-BASED TRAVEL & ECOMMERCE TO BENEFIT FROM MOBILE .................................................................................16 KEY TREND 3: ONLINE VIDEO – COMPETITION EXTENDS TO SMART-TV ........................................................................................................21 KEY TREND 4: ONLINE ADVERTISING – TRANSITION TO MOBILE REMAINS CHALLENGING ..............................................................................25 KEY TRENDS 5: CONTINUED FIGHT FOR ACCESS POINTS – APP AS PLATFORM VS APP STORE...........................................................................27 2Q13 RESULTS WRAP: POSITIVE SURPRISES OUTWEIGH NEGATIVE30 COMPANIES ......................................................................................................38 - TENCENT (700HK; OW; PT HK$450, +12%) ..........................................39 - QIHOO 360 TECHNOLOGY (QIHU US; OW; PT US$100; +10%) ......45 - CTRIP.COM INTERNATIONAL (CTRP US; OW; PT US$60; +19%) ....53 - BAIDU (BIDU US; OW; PT US$171, +16%) .............................................60 - E-COMMERCE CHINA DANGDANG (DANG US; UW; PT US$6.00; 33%%) ...............................................................................................................65 2Q13 RESULTS REVIEW .................................................................................68 APPENDIX 1: PRICE PERFORMANCE OF MAJOR INTERNET COMPANIES ......................................................................................................69 APPENDIX 2: BARCLAYS FORECASTS VS CONSENSUS; VALUATION COMPS ...............................................................................................................70 APPENDIX 3: CHINA HANDSET SALES ......................................................72 COMPANY DATA PAGES...............................................................................73

13 September 2013

8


BARCLAYS SMARTPHONE FORECASTS & CHINA INTERNET READ-THROUGH Please also refer to Dale Gai’s recent report: Smart Mobility Asia ex-Japan: China Smartphone Pulse - raising CY14 shipment on aggressive pricing.

Dale Gai, Barclays Asia ex-Japan Wireless Equipment & Products analyst, forecasts 2013 China smartphone sell-through of 360mn units – 160mn shipped in 1H13 and 200mn to be shipped in 2H13E. According to Dale, demand has stayed on track with our forecasts (unchanged since 1Q13) and he does not expect any major upside surprise in 2013 considering the inventory risks in low-end models. China Mobile has been the major driver of TD-SCDMA 3G smartphone penetration in 2013, and we expect steady 3G subscriber growth in China to stimulate 35-40% 3G smartphone penetration by end-2013. Figure 5 shows China smartphone sales by price segment in 1H13, when more than 50% of units sold were priced under RMB1,000 (US$150) at the retail level. Dale expects q/q and y/y declines in ASP in 2013 due to increasing low-end smartphone sales. Based on channel checks, he estimates an overall China smartphone ASP of RMB1,200 for 2Q13 (including global brands), but for local brands an ASP of only RMB750. Local brands are forecast to account for 75% of total units in China in 2013. Dale expects expect further volume growth in 2014, in view of increasing 3G subscriber numbers, and continued hardware upgrades for the mainstream RMB1,000 models. FIGURE 5 China smartphone sales by price segment, 1H13

FIGURE 4 China smartphone quarterly sell-through volumes, 1Q114Q14E millions of units

RMB3000 & above 12% RMB20002999 7%

RMB600 & below 25%

Source: SINO-MR, Company data, Barclays Research estimates

4Q14E

3Q14E

2Q14E

1Q14E

4Q13E

3Q13E

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

RMB15001999 8%

1Q11

180 160 140 120 100 80 60 40 20 0

RMB10001499 19%

RMB600999 29%

Source: SINO-MR, Barclays Research

Dale Gai also recently raised his China smartphone unit forecast for 2014E to 542mn (from 503mn), or up 8%. This is based on greater-than-expected y/y ASP erosion, driven by price competition. In addition, he expects 4G smartphone growth to remain small into next year, likely accounting for only 4% of total units in 2014E on his best-case scenario. On the other hand, he is conservative on supply chain margins due to competition. He expects more China smartphone vendors to offer disruptive pricing to gain market share, which is negative for overall profitability in the “food chain”. For example, Xiaomi’s recent launch of its mid-range model “Red Rice” (Hong-mi) with a high-end hardware specification, was priced at only RMB799 (US$130), 20% cheaper than the retail price of other white-box brands in China (using MediaTek’s CPUs) and two to three times cheaper than global OEMs. Disruptive pricing in Android devices is a double-edged sword, in Dale’s view. While a nearterm boost in demand is expected, competition in hardware upgrades could lead to earlier smartphone/tablet demand maturity when innovation slows. For more details on smartphone shipping forecasts, please refer to Smart Mobility Asia ex-Japan: China Smartphone Pulse - raising CY14 shipment on aggressive pricing. 13 September 2013

9

Barclays | China Internet FIGURE 6 Global smartphone shipment forecasts by pricing segment, 2010-15E (units, mn) FOB Price

2010

2011

2012

2013E

2014E

2015E

2012-15E CAGR

US$400 Total

Source: IDC, Gartner, Barclays Research estimates

FIGURE 7 Global smartphone FOB ASP (US$) trend, 2010-15E 2010 US$ y/y

307

2011

2012

2013E

344

334

321

312

303

12%

-3%

-4%

-3%

-3%

Source: IDC, Gartner, Barclays Research estimates

Read-through for China’s Internet sector We expect a sharp increase in demand for various mobile internet services and content as sub-Rmb1,000 smartphones continue to hit the market and the migration of China feature phone users to smartphones increases. Some of the changes and migration might occur earlier and faster than we currently expect, and Internet companies are proactively adapting to the rising demand. Given that we are in the midst of a transition from PC Internet to mobile internet, we expect the new ‘revolution’ brought about by rising smartphone penetration will drive both opportunities and challenges for existing Internet companies. We reiterate our Positive view on China’s Internet sector and believe the transition and revolution in mobile internet growth will benefit most of the Chinese Internet companies, especially those that have clear mobile strategies and whose market position is likely to see their top-line growth reaccelerate and a potential gradual margin improvement in the next 2-3 years (including Tencent, Qihoo, Ctrip and Baidu). We see five key trends for the sector in 2H13 and 2014: 1) increased competition and monetization of smartphone-/socialrelated mobile games adding further excitement to the online gaming industry; 2) rising consumption benefiting transaction-based models such as online travel booking, eCommerce and LBS-based O2O business opportunities; 3) competition between online video players extending to home entertainment/smart-TV arena; 4) transition to mobile advertising remains challenging and disruptive; and 5) continued fight for user traffic/mobile access points via individual apps, integrated platform and app store distribution approach.

13 September 2013

10


KEY TREND 1: MOBILE GAMES – INCREASED COMPETITION WITH MONETIZATION RAMP As highlighted in our previous reports EtherWorld China: Mobile Internet: Opportunities and Threats (4 October 2012), EtherWorld China – Online games: Size and scale matter (7 January 2013), and China Internet: Key trends for 2H13 (14 June 2013), mobile games started to take off in China in 2Q13, with major gaming companies such as Tencent, Perfect World, Shanda Games and NetEase all releasing smartphone games. We expect competition to intensify as leading PC online gaming companies subsequently release higher-quality and more sophisticated mobile games in 2H13, which could result in longer lifecycle mobile games and greater monetization opportunities.

Tencent likely the biggest beneficiary, leveraging its WeChat and Mobile QQ We reiterate our view that Tencent is best positioned to leverage a shift in traffic from PC gaming to mobile gaming, as: 1) it has several mobile access points with a large and sticky user base, such as wireless QQ, WeChat, Mobile Qzone and Mobile Browser, allowing Tencent to capture mobile users and cross-sell its products; and 2) it is the largest PC gaming company in China, offering massively multiplayer online (MMO) games, casual games, web games and mobile games, and will likely attract third-party developers seeking interesting mobile games for their users with its open platform strategy. With c478mn smartphone monthly active users (MAU) for its Mobile QQ, 236m MAU for WeChat, and about 357mn MAU for Mobile Qzone as of 2Q13, Tencent has the highest traffic and most opportunity to promote mobile games to its users, in our view. In fact, with the release of the latest WeChat version 5.0, Tencent also officially launched its new mobile game platform with two new games, Timi Match Everyday and Classic Aircraft shooting, on 5 August. Tencent released another new game, Link Link (WeLink), on 22 August, followed by Rhythm Master (a music game) on 2 September. According to the latest data from appannie.com (as of 9 September), a third-party website that tracks app stores, Rhythm Master, Link Link and Timi Match currently rank first, second and fourth, respectively, on China’s IOS app store in terms of number of downloads in the “games” category and “overall” ranking (Figure 8). In terms of ranking by gross revenue, Timi Match ranks seventh and Rhythm Master dropped to eighth from fourth as of 5 September. FIGURE 8 Tencent WeChat games and pipeline WeChat games Current games Timi Match Classic Aircraft War Link Link Rhythm Master Forthcoming games Daily Racing WeGun WeRun Huan Le Dou Di Zhu Tower of Saviors Plant vs. Zombies II Moon Wolf Fruit Ninja Devil Maker

Launch date

Genre

Rank of downloads on iOS

Rank of downloads on Android

Rank of gross revs on iOS

05-Aug-13 05-Aug-13 22-Aug-13 02-Sep-13

Casual puzzle Casual shooting Casual puzzle Music & rhythm

4 6 2 1

12 NA NA 1

7 57 20 8

NA NA NA NA NA NA NA NA NA

Casual racing Casual shooting Casual running Casual card game Casual RPG Casual social game RPG Casual RPG RPG




Note: rank as of 9 Sep 2013. Source: Company data, Appannie.com, Barclays Research estimates

13 September 2013

11


Qihoo: monetizing via app store distribution channel Qihoo started to generate more meaningful revenues from mobile internet in 1Q13, we estimate approximately US$5-6mn, mainly through revenue sharing and application downloads via its mobile app store. Although the company has made no specific comment on the revenue contribution, we believe it is a positive sign that Qihoo has been making progress in monetizing its mobile traffic. Management commented on its 2Q13 call that the 360 App store has been one of the most popular app stores for the Android platform, and that its flagship product – 360 Mobile Safe – further expanded market share by reaching 338mn smartphone users by end-2Q13. In addition, our recent proprietary survey of smartphone users in China (see China Internet: Mobile Internet survey takeaways, 3 September 2013) showed that Qihoo’s 360 mobile assistant app store ranked among the most popular channels with penetration rates of 39.1% for users to search and download its apps, competing head-to-head with Baidu’s 91 Wireless app store at 38.5%. We estimate Qihoo’s app store-related revenue will contribute c14% and c22% of the company’s total revenue in 2013 and 2014, respectively (estimates raised in this report – see pages 45-53). FIGURE 9 Barclays Research mobile user survey – most popular download app stores Not use

4.6%

Other

19.0% 11.5%

UC Feiliu

4.0%

360

39.1%

QQ

13.8%

91 wireless 0.0%

38.5% 10.0%

20.0%

30.0%

40.0%

50.0%

Source: Barclays Research survey

The following table shows the top 10 mobile games by total downloads on Qihoo’s mobile assistant platform (mobile app store). FIGURE 10 Top 10 mobile games based on total monthly downloads Rank

Game name

Developer

Monthly no. of downloads

1

Temple Run 2

Imangi Studios

14,968,319

2

Fish Hunter 2

Chukong Technology

9,402,503

3

CarrotFantasy

Cairot Technology

7,756,461

4

Hardest Game Ever 2

Chien Ming Liang

5,974,714

5

Zhao Ni Mei

Fengbo Network

5,932,027

6

Skiing Adventure

YouDaoYi Network

4,991,336

7

Planet vs. Zombie

PopCap

4,715,366

8

Fruit Ninja

Halfbrick Studios

4,678,776

9

Dou Di Zhu

Lianzhong Technology

4,379,137

10

Car Car Car together

YinHeJuZhen Network

4,341,155

Note: Rank as of 10 Sep 2013. Source: Qihoo company data, Barclays Research

13 September 2013

12


Perfect World: fast mover with focused strategy Perfect World launched three mobile games in May 2013 (see Figure 11) – the card game “Legend of Chu & Han”, the strategy game “Rise of the King”, and a 2D turn-based game “Return of Condor Heroes”. It kicked off open beta testing for “Return of Condor Heroes” on 22 August and started to aggressively promote the game via various third party Appstores and game distributors. According to appannie.com, “Return of Condor Heroes” has been gaining good traction, ranking in the top 10 by gross revenue since its launch, with a latest ranking of fifth by gross revenue and 90th by downloads on China’s IOS app store (as of 10 September 2013). FIGURE 11 PWRD’s current mobile game portfolio Rank of downloads on Rank of downloads on iOS Android

Rank of gross revs on iOS

PWRD current games

Launch date

Genre

Legend of Chu & Han

May-2013

RPG

NA

NA

76

Rise of the King

May-2013

RPG

NA

NA

NA

Return of Condor Heroes

May-2013

RPG (Louis Cha’s novel)

90

NA

5

Note: rank as of 10 Sep 2013. Source: Company data, AppAnnie, Barclays Research

We expect PWRD to release these games overseas by leveraging its solid global distribution channels as well as its partnerships with overseas online game partners, and believe it will have more opportunity to ramp up monetization in these overseas markets.

Shanda Games: how long can “Million Arthur” sustain its performance in China? Shanda Games finished 2Q13 with total mobile game revenue of US$16.5mn, down from US$17.0mn in 1Q13, mainly due to a decline in revenue contribution from its mobile game “Million Arthur” in Korea as users spent less on in-game purchase of virtual items. However, this was partly offset by the first full-quarter contribution from “Million Arthur” in Taiwan. We note the game’s rank on Korea Googleplay fell to No.26 as of 30 August, and No. 46 as of 10 September based on the game’s gross revenues (source: Appannie), compared with its top-10 position three months ago. Given Korea is one of only a few “core” countries for mobile games monetization in the world, we view the rapid slowdown in revenue there for Million Arthur as disappointing and expect it to raise investor concerns over its game lifecycle since it was launched only in December 2012. Shanda launched “Million Arthur” in China on 18 July, and plans to migrate the game the Singapore and Malaysia markets later in 2H13. The game was the No.2 ranked game app by gross revenue on the iOS Appstore in China within 12 hours of its launch, and currently sits at No.3 based on iOS game grossing rank (source: Appannie, 10 September). However, given a highly competitive card-battle mobile game market in China, we believe the lifecycle and potential level of sustainability are considerable risks for Million Arthur in China, as we have seen in Korea.

NetEase: leveraging YiChat as its game distribution channel? We believe NetEase is well positioned and prepared to capture forthcoming mobile game opportunities due to: 1) its in-depth experience in PC game development and operation; 2) its understanding of gamers’ needs and preferences; 3) its strong traction and solid downloads of some of its successful mobile apps such as News (79mn download and 29m active users), Youdao dictionary (300mn downloads) and Reader (70mn downloads) data as of 2Q13, enabling it to cross-promote its upcoming mobile games; as well as 4) its recent tie-up with China Telecom on YiChat (a competing product for WeChat).

13 September 2013

13

Barclays | China Internet NTES launched its first smartphone game – a mobile version of “Fantasy WestWard Journey 2” (FWJII, Koudai Xiyou) on 2 July. On its 2Q13 results call, management noted the initial positive feedback for its pocket mobile version of FWJII and also noted plans to release a few more mobile games in the next few months. Given ad revenues from mobile are still small, and given its continued focus more on balancing its user experience with monetization, NTES does not plan to aggressively monetize its mobile app traffic in the near term. On 4 September, NetEase released a new smartphone game on China’s IOS platform – Taikongzhanji, an aircraft shooting game. This is a paid game that charges Rmb6 per download. As of 9 September, the game ranked No.2 on appannie.com in terms of China IOS paid game ranking (number of downloads). We expect NTES to gradually release its mobile games over the 6-12 months, potentially leveraging its YiChat platform as its main game distribution channel for Android phones.

Competition for mobile games likely to intensify in 2H13 and 2014 Over time, there could be a shift and change in the revenue sharing split, making it more favourable for platforms and less favourable for developers, in our view

Moving into 2H13 and into 2014, we see: 1) potential surprises/viral hits among upcoming mobile game releases by major online gaming companies; 2) migration of many existing PCbased web game developers to mobile game development or platforms, leading to more intense competition in mobile games – in this scenario, differentiated content and broad distribution channels are likely to prove the key to success; 3) large game platform operators such as Tencent and Qihoo leveraging their organic traffic and user base to become the partner of choice for mobile game distribution, and generating mobile game revenues via revenue-sharing models. Over time, the larger and stronger the platforms are, the stronger their pricing power will likely be, as with online PC game platforms. Hence, there could be some shift and change in revenue sharing split, making it more favourable for platforms and less favourable for developers, in our view. With the upcoming release of mobile games by major online gaming companies, we look forward to an even more exciting period in 2H13 as some of these releases could potentially become big hits, posing upside risks to our expectations and monetization assumptions.

FIGURE 12 Comparison of online gaming companies’ current mobile game development and operations GAME

PWRD

GA

CYOU

Tencent

Strategy focus

Game development & operation

Game development Game development

Distribution platform

iOS, in-house platform

iOS, FeiLiu Mobile, Qihoo, 91 Wireless

NA

NA

iOS, Qihoo, 91 Wireless

WeChat, Wireless QQ, iOS

Targeted market

Korea, China, Taiwan, Singapore, Malaysia etc.

China, and migrate successful titles into overseas market

China

China

China

China & overseas markets

R&D team (Est.)

150-200

150-200

100-150

100-150

NA

Over 2,000 (Est.)

2Q13 Total R&D (US$mn)

26.7

32.5

13.2

26.3

33.1

NA

Mobile game revs (US$mn)

16.5

NA

NA

NA

NA

NA

NA

NA

NA

NA

Mobile game revs % of total

9.4%

NA

Game development

NTES

Game development Game development & operation & operation

Source: Company data, Barclays Research

13 September 2013

14

Barclays | China Internet FIGURE 13 Comparison of online gaming companies’ mobile game core titles and pipeline GAME

PWRD

GA

CYOU

NTES

Tencent

Successful hit titles

Million Arthur

Legend of Condor Heroes

NA

NA

NA

Timi Match, Rhythm Master, WeMatch

Mobile game current portfolio

Million Arthur, Woool of Palatine, etc.

Legend of Chu and Han, Rise of the King, Return of the Condor Heroes, etc.

None

None

FWJ Koudai

Timi Match, Rhythm Master, WeMatch, Classic Aircraft War, QQ Yujian, etc.

Mobile game pipeline

Dragon Nest; Hell Lord; Guardian Cross; G-Home platform

One or two games per quarters; mobile version of Swordsman Online

One new title by 4Q13

One new title by 4Q13

Several new titles in 2H13

Several titles per month released on both WeChat and Wireless QQ platform


FIGURE 14 Comparison of current mobile game operations Tencent

Qihoo

Renren

Game platform operation



Timi Match, Rhythm Master, WeMatch

I'm MT Online, Legend of Q Martial, Da Zhang Meng

Soccer Manager, Renren Farm

Major titles

Timi Match, Rhythm Master, WeMatch, Classic Aircraft War, QQ Yujian, etc.

Only 3rd party games

3rd party games together with some in-house titles

Upcoming games

several titles per month released on both WeChat and Wireless QQ platform

Depending on 3rd party games

1~2 in-house games per quarter

Targeted market

China and overseas markets

China

China

Strategy focus Successful titles


The following tables show the top mobile games listed by revenue and sorted by platform (IOS and Android) and country (China, Korea and Japan), compiled by AppAnnie. FIGURE 15 Top mobile games based on gross revenue in China (iOS) Rank

Game name

Developers

1

I'm MT Online

LOCOJOY

2

Legend of Q Martial

3

Clash of Clans

4

FIGURE 16 Top mobile games based on number of downloads in China (Android) Game name

Developers

1

Classic Aircraft War

Tencent

Koram Game

2

Rhythm Master

Tencent

Supercell

3

Caveman Run

CrazyGame

Million Arthur

Meiyu Information

4

Takagism

Individual developer

5

Swords of Kingdom

LineKong Entertainment

5

Turbo Racing

ForeverFun

6

Rhythm Master

Tencent

6

Death Shooting-Hunt leader

WinnerStudio

7

Timi Match

Tencent

7

Happy Dou Di Zhu

Tencent

8

Power of Dragon

Com.Digitalcloud

8

Pop Star

PopDaddy Games

9

Da Zhang Meng

Air&Mud Studio

9

Tank War 2013

MyWorks

10

Shen Xian Dao

PinIdea Co.

10

Journey Wars Super Fighting

FreeWorks

Source: AppAnnie (8 Sep 2013), Barclays Research

13 September 2013

Rank

Source: AppAnnie (8 Sep 2013), Barclays Research

15


KEY TREND 2: TRANSACTION-BASED TRAVEL & ECOMMERCE TO BENEFIT FROM MOBILE In addition to mobile games, which we view as one of the easier monetization models for mobile traffic, we believe the transaction-based mobile model such as online travel booking and mobile eCommerce will likely benefit from rising smartphone penetration and increased mobile Internet usage penetration in China. This is one of the reasons for our positive view on Ctrip. We expect Ctrip to benefit from higher smartphone adoption, leading to higher mobile booking, which could in turn result in a re-acceleration of top-line growth. In addition, Ctrip noted during its 2Q13 earnings call that it believes margins for mobile booking are likely to be slightly higher than those for PC at normalized levels, due to lower S&M spend. We believe Ctrip to gain more market share at a faster rate hence to further consolidate the fragmented offline traditional travel agents.

Mobile travel bookings ramping up nicely According to data from Ctrip and eLong, bookings from mobile devices have grown rapidly over the past 2-3 quarters. Specifically, Ctrip noted in its 2Q13 results call that mobile bookings accounted for 20% of total hotel bookings as of 2Q13, up from 15% in 1Q13 and 10% in 4Q12, while mobile bookings accounted for 15% of total air ticket bookings as of 2Q13, up from 10% in 1Q13. eLong management also noted in its 2Q13 results call that mobile accounted for 20% of total hotel bookings in that quarter and it expects the percentage to increase to 25% in 3Q13. FIGURE 17 Mobile volume and app downloads comparison (Ctrip vs eLong) Ctrip

App downloads Online & mobile bookings % of total

Hotel PC booking

4Q12

1Q13

2Q13

20mn

35mn

50mn

50%

na

55%

na

na

45%

10%

15%

20%

Air PC booking

na

na

40%

Air mobile booking

na

10%

15%

1Q13

2Q13

3Q13E

na

25mn

na

15%

20%

25%

Hotel mobile booking

eLong

App downloads Mobile bookings % of total Source: Company data, Barclays Research

Both eLong and Ctrip are carrying out aggressive marketing campaigns to drive mobile app installation and activation, as noted by eLong management on its 2Q13 call. We expect smartphone penetration continues to increase over the next 12-18 months, and that the percentage of traffic and bookings coming from mobile will continue to rise, accounting for a more meaningful revenue contribution for the online travel agents (OTAs) of 50% in 2015, vs 15-20% now. We believe mobile traffic and mobile booking growth, especially among leisure travellers, could prove to be an important driver for volume growth in the next 2-3 years. We see Ctrip benefiting from higher user penetration and adoption, which is likely to help it gain more market share as the overall travel industry continues to consolidate. 13 September 2013

16


FIGURE 18 Mobile Internet survey – mobile travel app penetration

Not use

FIGURE 19 Mobile Internet survey – mobile travel app downloads market share

21.3%

Not use 18%

Others

Ctrip 34%

41.4%

Qyer

5.7%

Elong

11.5%

Ctrip

Others 34%

41.4%

0.0%

10.0%

20.0%

30.0%

40.0%

Qyer 5%

50.0%

Source: Barclays mobile Internet survey

Elong 9%

Source: Barclays mobile Internet survey

eCommerce mobile-based transaction another rising trend Consistent with other segments, mobile-based eCommerce transaction have continued to grow faster than overall eCommerce over the past few quarters, with total transaction value reaching Rmb37.5bn at end-2Q13, up 181% y/y and accounting for 8.6% of total online transaction value according to iResearch, a third-party research provider in China. We believe the rising penetration of mobile eCommerce transactions is underpinned by: 1) a more user-friendly experience on eCommerce smartphone apps; 2) more SKU or products displayed on mobile platforms; and 3) more safe and convenient payment options on mobile devices. FIGURE 20 China mobile quarterly eCommerce transactions (Rmb bn) and y/y growth 40 35 30 25 20 15 10 5

37.5 605% 554% 518% 462% 26.7 414% 24.3 374% 351% 17.9 260% 250% 13.4 181% 7.6 5.4 3.2 1.1 2.0

0

700%

FIGURE 21 China mobile quarterly eCommerce transaction breakdown 100%

0.7% 1.1% 1.6% 2.3% 2.9% 4.4% 5.6% 5.7% 7.6% 8.6%

600% 80%

500% 400%

60% 99.3% 98.9% 98.4% 97.7% 97.1% 95.6% 94.4% 94.3%

300%

92.4% 91.4%

40%

200% 100%

20%

Total mobile transactions Source: iResearch, Barclays Research

13 September 2013

2Q13

1Q13

4Q12

3Q12

2Q12

1Q12

4Q11

3Q11

2Q11

1Q11

0%

YoY growth

0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Desktop transactions

Mobile transactions

Source: iResearch, Barclays Research

17


FIGURE 22 China eCommerce quarterly total transaction value (Rmb bn) 120%

500 450

96%

100%

350 300

257.8

250 200

82% 352.1

80% 78%

165.4

182.7

300.9 65%

233.9 56% 202.5 45%

319.3 58%

100%

437.1

424.9

400

FIGURE 23 China eCommerce transaction breakdown (quarterly)

80%

80% 82%

60% 45%

79.0% 76.8% 75.2%

69.7%

76.3%

70.5% 69.0% 67.7% 65.9%

63.9%

29.5% 31.0% 32.3% 34.1%

36.1%

60% 40% 40%

150 100

20%

20% 21.0% 23.2% 24.8%

50 0

0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 Transaction value (Rmb bn)

30.3%

0% 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 1Q13 2Q13

YoY growth


23.7%

B2C

C2C


Alibaba Group continues to dominate the both the C2C (Consumer to Consumer) and B2C (Business to Consumer) markets in China. In B2C, Tmall finished 2Q13 with a transactionbased market share of 50.7%, compared to 51.3% in 1Q13, while Tencent’s market share came in at 5.6% vs 6.8% in 1Q13. FIGURE 25 China non-platform B2C market share breakdown (2Q13)

FIGURE 24 China B2C market share breakdown (2Q13) 1Haodian Others Amazon 1.4% 11.6% 2.2% Gome 1.9% VIPShop 2.0% Dangdang 1.8% Suning 5.0% Tencent 5.6% JD 17.1%


Vancl Gome 1.9% 3.9%

Tmall 50.7%

Others 13.2%

1Haodian 3.6% Dangdang 4.6% VIPShop 5.1% 51Buy 5.4%

JD 43.9%

Amazon Suning 5.5% 12.9%


While pricing competition eased slightly in 1H13, we expect it to pick up again in 2H13 as we enter the traditionally stronger shopping period. In addition, we note that some of the competition has shifted to “speed” of delivery service. Nonetheless, compared to 2012, the overall competitive environment has been scaled back somewhat. Alibaba’s Taobao Wireless remains a dominant mobile device player with a 76% market share in 2Q13, as measured by total transaction value on the mobile platform (source: iResearch). 360Buy Mobile had a 4.1% market share and was the second largest player, followed by Tencent eCommerce Wireless at 1.4% and Suning at 1.0%. Dangdang Mobile had a 0.6% market share in 2Q13. Our recent mobile survey also noted that Taobao’s mobile app has a penetration rate of 69% while Dangdang has a penetration rate of 13.8%.

13 September 2013

18

Barclays | China Internet Benefiting from rapidly-growing smartphone penetration, we expect mobile eCommerce to continue to grow faster than overall eCommerce in 2H13. Similar to online travel booking, we expect mobile eCommerce to be one of the biggest beneficiaries of rising smartphone penetration and rising consumer demand. eCommerce companies that have stronger mobile apps, such as Alibaba and Tencent, will likely be to command higher market share in the future, in our view. Nevertheless, consumers’ confidence in a mobile payment system and its ease of use are likely to be a near-term hurdle. FIGURE 26 Mobile eCommerce market share breakdown (2Q13) measured by total transaction value Amazon Dangdang 0.5%

Others 16.2%

FIGURE 27 Barclays Research mobile user survey – mobile eCommerce penetration rates Not use Other

0.6% Suning 1.0%

4.0%

Dangdang VIPShop

Tencent 1.4%

13.8% 5.2%

JD

JD 4.1%

22.4%

T-mall

Taobao Wireless 76.2%

31.6%

Taobao 0.0%


10.9%

69.0% 20.0%

40.0%

60.0%

80.0%


Mobile payment: significant opportunity for China’s online payment market While China’s banking and payment system still lag those of more developed countries, we view increased Internet penetration, a rising middle-income group that has higher disposable incomes, and increased adoption of online shopping behaviour as a significant opportunity for the country’s overall online payment industry, in particular for more established third-party operators such as Alibaba’s Alipay and Tencent’s Tenpay. According to iResearch, the total third-party online payment market in China reached Rmb3.7tn in 2012, up 66% from Rmb2.2tn in 2011; it is expected to grow further to Rmb5.7tn in 2013 and Rmb14.7tn by 2016, a three-year CAGR of 37%. Based on market share breakdown of online payments, Alipay is the largest with a market share of 49.2% in 2012 according to iResearch. We believe a sticky user base and wide range of functions will enable Alibaba to easily migrate Alipay users from PC to mobile in the next 5 years. Tencent’s Tenpay is the second-largest player with a market share of 20% in 2012, followed by UnionPay at 9.3% and 99Bill at 6.9%. The top four online payment providers accounted for more than 85% of the total market size.

13 September 2013

19


FIGURE 28 Total third-party online payment market size, 2012 16

140%

118%

14

Yeepay Ips 2.8% ChinaPNR 3.1% 6.7%

120%

100%

12

FIGURE 29 Third-party online payment market share breakdown, 2012

100%

10

66%

8

49%

6

11.7 8.5

4 2

0.5

1.0

2.2

3.7

99bill 6.9%

80% 56%

5.7

14.7

60%

26%

40%

37%

0%

Tenpay 20.0%

2016E

2015E

2014E

2013E

2012

2011

2010

2009

Alipay 49.2%

UnionPay 9.3%

20%

0

Transaction value (Rmb trillion)

Others 2.0%

y/y growth



Looking at the mobile landscape, China’s third-party mobile payment market reached Rmb151bn in 2012, up 89% y/y, and iResearch estimates it will grow 100% in 2013 to Rmb302bn. By 2016, the third-party mobile payment market is expected to reach Rmb1.36tn, implying a three-year CAGR of 65%. In the mobile landscape, Alipay seems to have an even stronger market position with a 75% market share in 2Q13 (according to iResearch), followed by Tenpay at just 5.8% and UnionPay at 5.4%. FIGURE 30 Total third-party mobile online payment market size 1,600

120% 100% 89%

1,400

78% 80%

1,000

61% 50%

800

57% 60%

36%

600

Umpay Qiandai 1.9% 2.1%

100%

1,200

1,358.3 40%

Other 6.4%

ChinaMobile 3.5% UnionPay 5.4% Tenpay 5.8%

865.3

400 200

FIGURE 31 Third-party online mobile payment market share, 2Q13

39.0

58.6

Alipay 75.0%

20%

537.0 79.9 151.1 302.3

0

Transaction value (Rmb bn) Source: iResearch, Barclays Research

13 September 2013

2016E

2015E

2014E

2013E

2012

2011

2010

2009

0%

y/y growth Source: iResearch, Barclays Research

20


KEY TREND 3: ONLINE VIDEO – COMPETITION EXTENDS TO SMART-TV Following the merger of Youku and Tudou (announced in March 2012), the online video industry continued to consolidate as Baidu took full control of iQiyi in late 2012 and then with iQiyi acquired PPS’s online video business in May 2013 (announced on 6 May). Given a relatively steady market share for PC-based online video players such as Youku Tudou, iQiyi PPS, Tencent and Sohu video and a stabilizing content price, we expect the PC-based online video competition landscape to be maintain relatively stable for the next few quarters, with growth mainly coming from a continued shift in advertising budgets from offline to online. Nevertheless, we believe a more exciting development in 2H13 and into 2014 will be “multiscreen” strategies, in which competition will extend to smart-TV/home entertainment where online video content providers will fight for “living room” mind share. We also expect smartphone/iPad ad budget allocation to be a focus area for competition in the video space.

1. Baidu iQiyi, LeTV and Xiaomi lead the market in Smart-TV initiative Baidu iQiyi: On 4 September, Baidu iQiyi announced that it plans to sell a 48-inch Smart TV jointly with TCL Multimedia Technology Group. The product is to go on sale effectively from the announcement, at RMB4,567 for the advanced series and RMB2,999 for the normal series. Both versions include the same 48-inch screen, while the advanced version would support larger storage space, clearer video image, and more premium video content than the normal version. According to the agreement, Baidu iQiyi would provide the content, while TCL is responsible for manufacturing products. As Baidu iQiyi already has a large inventory of professional produced video content such as TV dramas, movies and reality shows, we believe the new Smart-TV initiative could enable it to have an early-mover advantage in penetrating users’ home entertainment time spend, allowing users to consume content regardless of the screens/devices used and where the content is viewed (at home or outside the home). Overall, this will help to expand Smart-TV’s user base and increase its overall user time spend. While Smart-TV is still at an early stage and near-term user penetration could be limited by affordability, we believe the “multi-screen” approach will likely become the norm for most online video players as they continue to seek higher user penetration and higher user time spend. Over time, we expect their ability to offer “multi-screen” penetration will allow online video providers to capture a larger share of advertisers’ budgets. FIGURE 32 Overview of leading Smart-TV providers in China Smart-TV providers iQiyi TCL Smart TV Xiaomi 3D-capable Smart TV

Size

Launch date

Price range

TV manufacturer

48inch

03-Sep-13

Rmb4,567/Rmb2,999

TCL

47inch

05-Sep-13

Rmb2,999

Wistron Corp. (Taiwan)

LeTV Smart TV

40inch/60inch

05-July-13

Rmb6,999/Rmb1,999

Foxconn

Alibaba Smart TV

42inch/55inch

10-Sep-13

Rmb1999 and above

Skyworth

nm

01-Jun-12

Rmb299

N/A

PPTV smart TV box

Source: Company data, Sina Tech, Barclays Research

LeTV (not rated, 300104 SZ): LeTV announced in July that it planned to launch two SmartTV models (X60 and S40) in partnership with Sharp, Qualcomm and China Central Television’s online TV station (CNTV). Foxconn would manufacture the machines. According to company disclosures, the new Smart-TV models would feature Qualcomm S4 Prime processors with Wifi connectivity, and would be priced at RMB6,999 for the 60-inch X60 version and RMB1,999 for the 40-inch S40 version.

13 September 2013

21

Barclays | China Internet Xiaomi (private company): Xiaomi held a press conference in Beijing on 5 September to unveil a new flagship 47-inch, Android-powered 3D Smart TV, which is scheduled to go on sale in October in China at a retail price of RMB2,999. According to the company, the Xiaomi Smart-TV is described as super-thin, measuring just 4.8 centimetres, and will come in six colours. It also features a 3D high-definition LCD screen from LG or Samsung, and runs on a 1.7GHz, quadcore Qualcomm Snapdragon 600 processor. Xiaomi’s move to enter the TV market has come after Baidu iQiyi’s announcement of a similar offering, while Apple is widely reported to be working on a Smart-TV (Source: Donews Tech, 6 September). PPTV already launched a Smart-TV on 1 June 2013, while Alibaba announced on 10 September that it is to release a Smart-TV jointly with Skyworth. Despite rapid growth in online video sites growing 40.0% y/y in 2012 and 19.7% y/y in 1H13, the majority of time spent on video entertainment in China remains on the offline TV platform, such as traditional cable TV, digital TV. Hence, the extension to the Smart-TV market could allow Internet companies to capture the large offline TV market. Their SmartTVs’ ease-to-use functions and richer content vs traditional TV, supported by cloud transition and advanced processors, could even enable them to take over the traditional cable TV market in the long-run, in our view. Baidu iQiyi and Xiaomi have been fast movers in terms of expanding their business to the Smart-TV market. If user traction on Smart-TV is strong, this could prompt other companies, such as Youku Tudou, Tencent and Sohu, to enter the market.

2. Mobile monetization on video ads could start meaningfully in 2H13 Based on the latest 2Q13 results reported by Youku Tudou, the company continued to see growth momentum on mobile video traffic. Daily video views grew 100% y/y to 200mn, with more than 180mn monthly active users and 70 minutes of average video time spent. According to Youku Tudou’s internal data mining (which it disclosed on its 2Q13 call) on users’ behaviour, nearly 60% of online video users watch video daily on both their desktops and mobile devices and 75% on a monthly basis. In addition, both Youku and Tudou’s mobile apps have included a social recommendation function to enhance user interaction. Recall on 7 June, Youku Tudou announced that it had reached a strategic content-sharing alliance with Sina. Based on the agreement, Sina will have access to Youku Tudou’s video library and leverage Weibo’s strong PC and mobile platform to promote its licensed video content to Weibo users starting July 2013. The video promotion under this programme includes multiple forms such as: 1) a personalized recommendation section embedded between micro-blogging posts; 2) search results for movies and TV dramas providing direct thumbnail links to watch the video titles instantly; and 3) direct links to watch videos on Youku Tudou platforms on each title’s Weibo home page. We view the Youku-Sina partnership as strategic and positive for both companies. Since many Weibo users tend to post interesting video links, we believe meaningful Youku video traffic is coming via the Weibo platform. Summary: We believe Baidu’s strategic decision to acquire PPS and combine it with iQiyi will likely prompt further strategic agreements/partnerships in the industry while strengthening its overall video strategy and competitive position. While we expect iQiyi PPS to gain further traction from advertisers’ budget allocations, we remain confident on Youku Tudou’s strong brand and management execution track record. Hence, for investors who like pure play exposure to online video advertising growth, we believe Youku Tudou is still the best standalone video player. That said, if there were any irrational competition on content cost again, we think Youku Tudou is likely to be at a disadvantage given its balance sheet position compared to the stronger players from Baidu, Tencent and even Sohu (which has support from its online gaming business Changyou).

13 September 2013

22


3. Comparing the various video sites’ metrics Looking at the daily and monthly unique visitors’ metrics, Youku Tudou combined lead peers on web-based-only video services; however, if we include client-based video services, metrics for iQiyi PPS combined are very close to Youku Tudou. In fact, as of July 2013, iQiyi PPS had a larger market share measured by total user time spent at about 20.4%, followed by Youku Tudou at 18.5% (Figure 38). FIGURE 33 Rank of daily unique visitors (mn) for web-based video sites, July 2013 Rank

Company name

Daily UV (mn)

FIGURE 34 Rank of daily unique visitors (mn) for web plus client-based video sites, July 2013 Rank

Company name

Daily UV (mn)

1

Youku

34.85

1

Youku Tudou

58.84

2

Sohu

27.07

2

iQiyi PPS

50.87

3

Tudou

23.99

3

PPTV

32.66

4

iQiyi

22.60

4

Tencent

28.52

5

Tencent

18.22

6

PPTV

13.28

5

Sohu

27.07

7

Xunlei

13.11

6

Xunlei

13.11

8

Ku6

11.78

7

Ku6

11.78

9

PPS

5.68

8

Sina

6.78


Note: Youku Tudou, iQiyi PPS data may include user overlap between both Source: iResearch, Barclays Research

FIGURE 35 Rank of monthly unique visitors (mn) for web-based video sites, July 2013

FIGURE 36 Rank of monthly unique visitors (mn) for web plus clientbased video sites, July 2013

Rank

Company name

Monthly UV (mn)

Rank

Company name

Monthly UV (mn)

1

Youku

262.68

1

Youku Tudou

505.58

2

Sohu

261.69

2

iQiyi PPS

424.31

3

Tencent

245.45

3

Tencent

324.19

4

Tudou

242.90

4

Sohu

261.69

5

iQiyi

211.36

6

Ku6

157.86

5

PPTV

220.80

6

Ku6

157.86

7

Xunlei

138.96

8

Sina

107.99

7

Xunlei Kankan

138.96

8

PPTV

124.56

9

PPS


13 September 2013

94.55

Note: Youku Tudou, iQiyi PPS data may includes user overlap between both Source: iResearch, Barclays Research

23


FIGURE 37 Rank of monthly total time spent (mn) for web-based video sites, July 2013 Rank

Company name

Time spent (mn hours)

Market share (%)

1

Youku

593.07

19.5%

2

iQiyi

482.73

15.9%

3

Sohu

429.00

14.1%

4

Tudou

397.30

13.1%

5

PPTV

146.92

4.8%

FIGURE 38 Rank of monthly total time spent (mn) for web plus clientbased video sites, July 2013 Rank

Company name

Time spent (mn hours)

Market share (%)

1

iQiyi PPS

1,092.72

20.4%

2

Youku Tudou

990.37

18.5%

3

PPTV

593.78

11.1%

4

Tencent

549.04

10.2%

Sohu

429.00

8.0%

6

Xunlei

137.99

4.5%

5

7

Tencent

110.60

3.6%

6

Xunlei

137.99

2.6%

8

Ku6

49.28

1.6%

7

Ku6

49.28

0.9%

9

PPS

30.70

1.0%

8

Sina

23.77

0.4%



FIGURE 39 Monthly total unique visitors (mn) for leading video players (web-based only)

FIGURE 40 Monthly total time spent market share for leading video players (web + client based) 35%

300

30%

250

25% 20%

200

15%

150

Tencent

Tudou

Qiyi

Sohu

Youku

Youku Tudou

iQiyi PPS

PPTV in total

Sohu

Jul-13

Apr-13

Jan-13

Jul-12

Oct-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Jul-13

Apr-13

Jan-13

Oct-12

Jul-12

Apr-12

Jan-12

Oct-11

Jul-11

Apr-11

Jan-11

Oct-10

Jul-10

Jan-10

Apr-10

-

Oct-10

0%

Jul-10

50

Jan-10

5%

Apr-10

10%

100

Tencent in total



FIGURE 41 Web-based video time spent market share, July 2013

FIGURE 42 Web- and client-based total video time spent market share, July 2013

Others 23.3%

Youku 19.5% Others 31.9%

PPS 1.0%

iQiyi 9.0%

Tencent 3.6% Xunlei 4.5% PPTV 4.8%

Qiyi 15.9%

Tudou 13.1%


13 September 2013

Youku Tudou 18.5%

Sohu 14.1%

Sohu 8.0% Tencent 10.2%

PPS 11.4%

iQiyi & PPS 20.4% in total

PPTV 11.1%


24


KEY TREND 4: ONLINE ADVERTISING – TRANSITION TO MOBILE REMAINS CHALLENGING The slowdown in China’s GDP growth from 9.3% in 2011 to 7.8% in 2012 impacted the overall advertising budgets of a number of advertising companies in China’s Internet sector in 2012, as reflected in the disappointing earnings results last year. While the advertising outlook and sentiment has recovered somewhat this year, due to government transition successfully completed and uncertainties of policy changes now behind, we have not seen a significant pick-up in overall ad budgets. While the economic slowdown affected overall advertising sentiment and demand, the overall online advertising outlook remains relatively healthy and resilient, in our view, due to a continued shift of offline advertising budgets to online and more targeted/higher ROI (performance based) online ad models, such as search engine marketing and social media advertising. As a result, given the continued shift from offline budget to online, especially to newer online advertising formats such as video advertising, social advertising, and (to a lesser extent) mobile advertising, we believe online advertising demand has held up relatively well for online video sites such as Sohu TV, iQiyi and Youku Tudou and social networking players such as Sina Weibo and Tencent’s Qzone (based on robust revenue growth). In addition, performance-based advertising budgets, such as search engine marketing with Baidu and Tencent’s Guangdiantong (performance based targeted ad system), continue to garner stronger demand and hence faster growth compared with brand advertising budgets. While still at a nascent stage and although adoption by advertisers will take time, mobile advertising has also started to contribute an increasing portion of total online ad budgets for some companies (for example, Baidu noted that it generated more than 10% of total revenue from mobile in 2Q13). This should enable online advertising demand to hold up better and be more resilient to an economic slowdown in China, in our view.

Mobile transition remains challenging for online portal Within the online advertising segment, we believe brand advertising on the PC portal will be most negatively affected by the mobile transition, while online video will be best positioned to capture incremental traffic. The early transition of search advertising could be a challenge, but we expect search volume growth from mobile to be more than offset by the PC traffic cannibalization, and to lead to incremental revenues growth (meaning cannibalization on PC revenues would be more than offset by higher volume and revenues contribution from mobile). FIGURE 43 Brand advertising – news app Not use Other

3.4% 2.3%

Tencent

35.6%

iFeng

13.8%

Sohu

18.4%

Sina

46.0%

NetEase 0.0%

31.6% 10.0%

20.0%

30.0%

40.0%

50.0%


13 September 2013

25

Barclays | China Internet The majority of online portals have positioned the mobile transition via the release of their flagship news apps. Sina, NetEase and Tencent’s news apps stand out as having relatively higher user penetration, according to Barclay’s recent survey (Figure 43). Baidu: Baidu surprised the market by its disclosure that mobile revenue accounted for more than 10% of the company’s total revenues in 2Q13, due to the launch of its upgraded advertising platform. NetEase: We first noticed mobile banner ads on the NTES news app a few months ago. There is also a text link at the end of most news articles, which when clicked leads to the brand ad landing page showing an advertisement. We believe NTES is one of the earlier portals to introduce ads on its news app based on our personal usage and thus expect a gradual ramp of advertising revenues contribution from mobile. Phoenix New Media: Mobile advertising revenue grew 169% y/y in 2Q13, contributing almost 22% of total advertising revenue in 2Q13 (according to management). The number of daily active users on mobile devices rose 25% y/y or 10% q/q to over 20mn, with user engagement increasing meaningfully following the launch of a major upgraded version for the news app.

Online video has attracted reasonable ad budget for tablets Sohu: Following the launch of the new season of ‘The Voice of China’ on 12 July, Sohu video’s daily unique visitors and video views on both the PC and mobile platforms rose a further 20-30% in the past four weeks In July, starting with ‘The Voice of China’, Sohu began to offer advertisers to place ads on mobile/ipad and have already signed up some big name advertisers from luxury groups (such as Chanel) and the auto sector. The company commented in its 2Q13 earnings call that it sees strong momentum continuing, with ad revenues for 3Q13 growing over 60% y/y. The total user base of the Sohu News application increased more than 20% y/y in 2Q13.

Social media advertising on mobile likely be more effective than banner ads With more than 75% of total users accessing Weibo via mobile devices, according to the company, we see Sina Weibo as a potential beneficiary of the mobile transition, which has helped alleviate a slowdown in its PC portal ad business, and likely puts Sina in a better position than other online portals (like Sohu, NTES) to defend mobile traffic cannibalization. In 2Q13, Sina’s mobile ad revenues grew 43% q/q and accounted for 34% of Weibo brand ad revenues, compared to 34% in 1Q13 and 25% in 4Q12. FIGURE 44 Breakdown of Sina Weibo revenues US$mn

1Q13

2Q13

Brand advertising revs

18.80

25.00

Alibaba related revs Weibo VAS Total Weibo revs Mobile DAU as % of total

-

5.00

7.00

7.70

25.80

37.70

76.50%

NA


Tencent is also leveraging the success of Guangdiandong performance-based targeted ads and has extended that to its mobile ad network, leveraging the strength of Qzone, given 57% of total Qzone monthly active users are now accessing mobile Qzone as of 2Q13. As a result, we believe Sina and Tencent could be better positioned to defend the traffic shift to mobile in terms of their brand advertising budget share.

13 September 2013

26


KEY TRENDS 5: CONTINUED FIGHT FOR ACCESS POINTS – APP AS PLATFORM VS APP STORE With the rapid transition from predominantly PC-based to mobile-based traffic, many China Internet companies view improving and expanding their mobile platforms as a core business strategy and investment area for the next few years in our view. Hence, the competition to gain more mobile traffic “gateways” and harness their smartphone user bases has become increasingly intense, leading to increasing M&A activity and strategic investment/partnership announcements in the sector. Over the past few quarters, Alibaba, Tencent and Baidu have stepped up their efforts to strengthen their mobile Internet position via strategic investments in private and public companies. Listed companies such as Youku and Sina have also sought to strengthen their mobile position and recently (starting July 2013) struck a partnership to share revenues from video traffic on Weibo.

Individual apps as traffic gateway/access point While mobile traffic and mobile access points are being fragmented by direct access points to individual apps, some large/established individual apps could become platforms by themselves. For example, Sina Weibo is social media service, but the Weibo mobile app itself could become an important access point for many other services that need traffic. As shown in Figure 45, 76% of Weibo users access it via mobile devices, making the Weibo app a “must have” app to install. Time spent by users on Weibo could also become opportunities for advertisers to capture the “eyeball” (impression on ads) or become a traffic distribution source for other eCommerce platforms such as Alibaba Taobao and Tmall. Tencent has also positioned itself well ahead of peers, in our view, with three mobile apps – Mobile QQ, Mobile Qzone and WeChat – all capturing large proportion of its user base. Similar to Weibo, we believe all three of Tencent’s mobile apps could be considered important platforms of traffic re-distribution and cross-selling. FIGURE 45 MAU mobile penetration for leading highly-used platforms as of 2Q13 Million

Weibo

WeChat

QQ

Qzone

360 Safe

Baidu Search

CNNIC

Total registered users (MAU)

536 (DAU of 49.8)

400

818

626

461

591

591

Mobile monthly active users

DAU of 38

236

478

357

338

100

464

76%

59.0%

58.4%

57.0%

73.3%

16.9%

78.5%

Mobile % total

Source: Company data, iResearch, Barclays Research

Mobile app store as traffic gateway/access point In addition to individual apps, mobile app stores – where Chinese users go to search and download their apps – are also considered an important mobile gateway. Monetization efforts on app stores come from banner ads, revenue sharing on mobile games and revenue share on per download. As shown by our recent mobile survey, Qihoo’s mobile assistant app store and Baidu’s 91 Wireless app store rank as the two most popular third-party app stores in China, with penetration rates of 39.1% and 38.5%, respectively (Figure 47). Qihoo started to monetize its mobile traffic via revenue sharing and apps advertising at end2012, and we estimate the company generated approximately 5% of total revenues (or approximately US$5mn) from app stores in 1Q13, with the revenues contribution increasing to c10% in 2Q13 (US$15mn). We estimate app store-related revenue could reach c13% of total revenue in 2013, rising to 19% in 2014E. 13 September 2013

27

Barclays | China Internet 91 Wireless: For 1H13, 91 Wireless generated total revenue of Rmb346.7mn, up 187.6% y/y and accounting for 43-58% of the full-year guidance range of Rmb600-800mn (provided by management previously). In 2Q13, 56% of 91 Wireless revenue came from mobile games revenues share with third-party developers, which grew 205% y/y and 65% q/q to Rmb112mn, while c41% of revenues came from mobile advertising revenues, which grew 174% y/y and 18% q/q to Rmb82mn. FIGURE 46 Most popular download app stores’ market share

Other 14.5%

FIGURE 47 Most popular download app stores’ user penetration

Not use 3.5%

Not use

4.6%

Other

91 wireless 29.5%

19.0% 11.5%

UC

UC 8.8%

Feiliu Feiliu 3.1%

4.0%

360 QQ 10.6%

39.1%

QQ

360 30.0%

13.8%

91 wireless

38.5%

0.0% Source: Barclays Research mobile user survey

10.0%

20.0%

30.0%

40.0%

50.0%

Source: Barclays Research mobile user survey

Baidu: Although Baidu continues to face challenges in the adoption of mobile ad budgets by small- and medium-size enterprises, we view its acquisition of 91 Wireless, Nuomi and PPS as strengthening its mobile position, and believe there are upside catalysts to Baidu’s mobile story. In fact, our recent mobile survey shows that Baidu has a higher-than-expected penetration rate for a number of apps, such as mobile search, browsers and maps (at 73% vs 16.7% for AutoNavi). FIGURE 48 Mobile search penetration rates Not use

FIGURE 49 Mobile browser penetration rates Other

2.3%

Others

360

6.9%

Opera Yicha

2.3% 6.3% 2.9%

0.0% QQ

Sogou

9.8%

6.3% Baidu

Soso

4.6%

UC

Baidu 0.0%

92.5% 20.0%

40.0%


13 September 2013

21.8%

60.0%

80.0%

100.0%

52.9%

Built-in 0.0%

38.5% 10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


28


FIGURE 50 Mobile map app penetration rates Other

FIGURE 51 Mobile travel app penetration rates

0.6%

Not Use

Not use

21.3%

8.0%

Others NavInfo

41.4%

0.0%

Google Sogou

Qyer

12.6% 4.0%

5.7%

Elong

Baidu

11.5%

73.0%

Ctrip AutoNavi 0.0%

41.4%

16.7% 20.0%

40.0%


60.0%

80.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%


We believe Baidu has demonstrated that it is taking aggressive steps to strengthen its overall mobile Internet position, with: 1) mobile revenue comprising 10% of the company’s overall revenue in 2Q13; 2) the acquisition of 91 Wireless; 3) the acquisition of a majority stake in Nuomi; and 4) the expansion of its online video offering through the acquisition of PPS by iQiyi. While it is still early in the mobile transition, we are increasingly more positive on the company’s progress and its achievements in improving its overall search technology and customer adoption rate. Summary: As we enter the second decade of China’s Internet industry growth, we expect the fight for mobile access points to continue and the top three Internet giants Baidu, Alibaba and Tencent to continue to grow and widen the gap with other Internet players in the space. We believe more industry consolidation is likely, with many more private startups potentially being bought by leading Internet companies rather than seeking public listings. We expect the shift of Internet access from PC to mobile to continue, and we expect further investment activity to be focused on mobile-related business models or mobilerelated user traffic players.

13 September 2013

29


2Q13 RESULTS WRAP: POSITIVE SURPRISES OUTWEIGH NEGATIVE Looking back at the 2Q13 results, we provide a few key takeaways for Internet companies under our coverage:

• The number of companies delivering positive surprise results with 2Q beats and betterthan-expected 3Q guidance outweighed the number of companies that reported negative results.

• Traffic/penetration/monetization ramp on mobile was a key focus on results calls. • While reinvestment continues to put pressure on margins for some companies, the heavy investment cycle seems to be behind us, and we see signs of stabilizing or improving margins.

• The PC-based business model seems to hold up revenues relatively well despite cannibalization of PC traffic by the shift to mobile.

Positive surprises outweigh negatives Of the 14 companies we cover, eight delivered better-than-expected top-line results in 2Q13 and 11 beat on earnings, while six companies also delivered upbeat guidance for 3Q13. Compared to the 2Q12 results, sentiment and management’s tone and guidance were much better this year, in our view. FIGURE 52 2Q13 results and 3Q13 guidance ‘Beat or Miss’ comparison, and share price performance 2Q13 (A)

3Q13 guidance

Share price performance

Revenues

Earnings

Revenues

Earnings

1-Day post 2Q13 result

1-Month

YTD

BIDU

Beat

In-line

Beat

NA

3.2%

-1.8%

35.3%

CTRP

Beat

Beat

Beat

NA

19.5%

11.2%

107.5%

CYOU

In-line

Beat

Miss

Miss

-19.9%

-1.0%

12.9%

DANG

In-line

Beat

In-line

NA

-11.6%

-20.3%

94.9%

Beat

Beat

In-line

NA

-8.6%

4.8%

50.3%

GA GAME

Miss

Beat

Miss

NA

-10.5%

4.7%

31.6%

NTES

In-line

Beat

NA

NA

2.8%

21.6%

76.7%

PWRD

Beat

In-line

Beat

NA

-7.9%

-6.2%

91.9%

QIHU

Beat

Beat

Beat

NA

7.8%

20.1%

179.8%

RENN

In-line

Beat

Miss

NA

-11.4%

-12.2%

-2.0%

SINA

Beat

Beat

Beat

NA

3.2%

3.2%

60.4%

SOHU

Beat

Beat

Beat

Miss

-9.9%

7.1%

40.2%

Tencent

Beat

Miss

NA

NA

-0.5%

9.1%

56.6%

YOKU

In-line

Beat

In-line

NA

-8.3%

3.1%

31.6%

# Beat

8

11

6

0

# In-line

5

2

3

0

# Miss

1

1

3

2

Source: Company data, Bloomberg, Barclays Research

The solid 2Q13 results, as well as positive comments on guidance, led to Bloomberg consensus earnings upgrades and strong share price performance post-results.

13 September 2013

30


Mobile-related comments a focus on 2Q13 earnings calls In addition to solid fundamental results, one of the key takeaways from the 2Q13 results calls was the focus on and highlighting of mobile-related achievements. Most of the companies provided positive comments and feedback on their mobile internet progress, with an increased percentage of traffic coming from mobile devices, as well as noting that most mobile traffic growth exceeded expectations. In particular, many investors seemed surprised by the 10% mobile revenue achievement by Baidu. FIGURE 53 Recap: 2Q13 earnings call key highlights on mobile related comments Company

Update on mobile Internet business

BIDU

Mobile accounted for 10% of total revenues as a result of the launch of integrated PC and mobile bidding system. iQiyi PPS are the largest video platform by number of mobile users and video viewing time

CTRP

Over 50mn mobile app downloads by 2Q13, over 55% transactions booked through online & mobile channels; mobile accounted for 20% of hotel volumes and 15% of air ticketing volumes; peak transaction value per day achieved over Rmb50mn on mobile

CYOU

Secured right to make mobile games for 10 martial art novels written by Louis Cha, including TLBB; plans to release some mobile games in 2H13

DANG

Mobile traffic accounted for almost 40% of total traffic in 2Q13

GA

Plans to release the first mobile game in 2H13

GAME

Mobile contributed 9% of total revs in 2Q13; expect 3Q13 mobile game revs to grow 50% q/q and account for over 10% of total revs; announced the release of G-Home mobile game platform, and plans to release mobile version of Dragon Nest, Guardian Cross and Hell Lord in 2H13, with 36 games in the pipeline for next 12-18 months.

NTES

Mobile news app reached 120mn installation and 40mn daily active users by end-2Q13; Youdao Cloudnote reached 15mn users and Youdao Dictionary had 350mn cumulative users, of which 180mn are from mobile devices; jointly released YiChat with China Telecom

PWRD

Released three mobile games – Legend of Chu and Han, Rise of the King, and Return of the Condor Heroes – in 2Q13

QIHU

Launched LeiDian, a mobile search platform; total smartphone users that have 360 Mobile Safe reached 338mn

RENN

80% of total traffic was from mobile in 2Q13; mobile penetration of daily unique log-in users at 65%, with total mobile time spent penetration of 77% in 2Q13

SINA

Mobile adv revs grew 43% q/q and accounted for 34% of Weibo brand ad revs; average time spent on mobile up 14.5% in June vs March

SOHU

Sogou Pinyin mobile version reached 150mn monthly active users; Sohu News app increased over 20% q/q, and Sohu video app grew 60% and 70% q/q for daily active users and video views in 2Q13

Tencent

Monthly active users for Wireless QQ grew 230% y/y to 478mn, representing 58% of total QQ monthly users. Monthly active users for Qzone reached 357mn, representing 57% of total Qzone monthly users; WeChat achieved 100mn registered users in International market

YOKU

Mobile video views grew over 100% y/y to 200mn. Time spent on Youku's mobile platform reached 180mn hours. On a daily basis, smartphone users watched over 70mins video on mobile Youku vs. 50mins on PC

Source: Company reports, Barclays Research

Margin pressures ease slightly as mobile revenues ramp While reinvestment into mobile Internet-related R&D and the S&M push continues to put pressure on margins for most of the companies, compared to last year, we started to see improvement in some margins, hence we believe the heavy/aggressive investment cycle as related to mobile Internet could be behind us. We believe we could start to see signs of potential margins stabilizing or improving in the coming quarters, especially when more meaningful mobile revenues take off.

13 September 2013

31

Barclays | China Internet FIGURE 54 Quarterly non-GAAP operating margins comparison (1Q12 to 2Q13) 0700

BIDU

CYOU

DANG

NTES

RENN

SINA

SOHU

YOKU

CTRP

GA

GAME

PWRD

QIHU

Non-GAAP operating margins 1Q12

40.4%

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%

2Q12

39.6%

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%

3Q12

37.8%

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%

4Q12

35.5%

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%

1Q13

38.4%

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%

2Q13

35.1%

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%


PC-based revenues holding up during early cycle of mobile transition While there have been concerns that PC-based traffic and revenues will be cannibalized by mobile traffic ramp, so far, we believe PC-based revenues remain relatively resilient, especially for brand advertising on portals, PC gaming revenues and even Baidu’s PC search revenues. FIGURE 55 Revenues and non-GAAP earnings quarterly growth comparison (1Q12 to 2Q13) 0700

BIDU

CYOU

DANG

NTES

RENN

SINA

SOHU

YOKU

CTRP

GA

GAME

PWRD

QIHU

0.0%

202.1%

Total revenues (y/y growth) 1Q12

52.2%

80.6%

33.3%

63.9%

36.3%

56.1%

6.0%

30.0%

119.5%

23.9%

26.2%

10.9%

2Q12

56.2%

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%

3Q12

54.3%

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%

4Q12

53.4%

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%

1Q13

40.4%

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%

2Q13

36.6%

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-GAAP Net Income (y/y growth) 1Q12

26.9%

80.7%

10.6%

NM

35.4%

NM

-183.0% -46.0%

NM

-8.1%

24.6%

7.9%

-20.0% 290.5%

2Q12

26.0%

71.0%

30.1%

NM

20.5%

NM

-72.0%

-65.5%

NM

-33.8%

24.6%

-7.1%

-49.0%

56.5%

3Q12

28.3%

61.7%

41.2%

NM

2.8%

NM

-33.2%

-39.8%

NM

-26.2%

32.6%

-28.3%

-39.1%

23.9%

4Q12

40.3%

30.7%

6.5%

NM

11.0%

NM

-35.6%

-46.6%

NM

-10.9%

37.2%

-25.8%

-50.3%

10.2%

1Q13

23.1%

13.8%

17.1%

NM

12.7%

NM

-111.0%

1.1%

NM

-0.4%

7.8%

-27.6%

-36.3% -32.0%

2Q13

22.6%

0.7%

4.5%

NM

30.3%

NM

280.6%

37.6%

NM

45.7%

22.0%

21.7%

-42.3%

97.9%


Revisiting the industry growth outlook As we review the earnings results of the past few quarters, we conclude that: 1) search and online video advertising remains a bright spot with faster growth prospects; 2) online gaming growth has slowed but is still growing at a healthy rate; 3) eCommerce still benefits from structural growth and the outlook appears promising; 4) cash is king and provides investment flexibility; and 5) progress on mobile Internet strategies and penetration is key for share price performance and investor interest in the near to mid-term.

13 September 2013

32


Online advertising As noted below, most of the online advertising companies (especially true for brand ad companies such as Sina and Sohu portals) have delivered better growth this year after relatively weak advertising demand in 2012. In particular, Sohu, driven by more companyspecific reasons (easier y/y comp on online video and real estate verticals) was able to deliver a stronger growth rate in 1H13 and strong 3Q guidance. Qihoo, benefiting from new revenue streams from search and app store revenues, was able to re-accelerate top-line growth in 2Q13 and guides for stronger growth in 3Q. Renren, on the hand, continues to suffer from weak advertising demand, mainly due to increased competition from other stronger SNS players such as Sina Weibo and Tencent Qzone. FIGURE 56 Online portals and advertising companies’ advertising revenues comparison (actuals for 2012/1Q-2Q13; guidance for 3Q13) Brand adv revs

SINA

SOHU

NTES

Tencent

FENG

BIDU

RENN

QIHU

1Q12

8.6%

6.7%

12.9%

92.3%

71.3%

75.0%

14.8%

176.40%

2Q12

12.4%

2.3%

20.2%

71.7%

29.5%

59.7%

-10.5%

89.80%

3Q12

19.4%

1.7%

9.5%

69.0%

11.4%

49.6%

-13.7%

66.40%

4Q12

6.8%

5.6%

-6.9%

58.3%

28.4%

40.8%

-16.7%

49.30%

1Q13

20.0%

31.6%

15.7%

57.3%

29.1%

39.7%

5.0%

38.80%

2.0%

78.30%

y/y growth

2Q13

16.9%

44.6%

33.3%

47.5%

41.9%

38.3%

3Q13 (guided)

+25% to +27%

+54% to +61%

NA

NA

+47% to +54%

+40% to +43%

1Q12

-24.2%

-21.6%

-48.8%

-9.7%

-14.3%

-4.7%

-37.7%

1.30%

2Q12

31.3%

13.7%

42.4%

62.9%

14.5%

28.0%

61.8%

11.90%

3Q12

16.9%

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%

-3% to -7% +115% to +118%

q/q growth

2Q13

27.9%

24.9%

64.5%

52.7%

25.9%

26.6%

57.1%

43.80%

3Q13 (guided)

+25% to +27%

+22% to +25%

NA

NA

-1% to +4%

+15% to +19%

-5% to flat

+19% to +21%

Note: FENG refers to Phoenix New Media (Ticker: FENG). Data for SINA, SOHU, NTES, Tencent and FENG represents brand advertising revenue only. Data for BIDU represent total revenue. Data for RENN and QIHU represents advertising revenue but guidance is based on total revenue. Source: Company data, Barclays Research

Search Within the online advertising industry, search advertising and online video advertising continue to capture relatively faster growth. Although PC search queries seem to be slowing down as a result of traffic shifting to mobile, overall, the relatively low penetration of search marketing in China suggests that the structural growth potential is still promising, hence new entrant Qihoo and third (by traffic share) player Sogou will likely continue to fight for market share gains and revenues ramp. In addition, Baidu noted in its 2Q13 earnings call that its monetization ability on PC queries improved and led to higher monetization on PC despite less exciting traffic growth.

13 September 2013

33

Barclays | China Internet FIGURE 57 Search companies’ search revs comparison (actual for 2012/1Q-2Q13; guidance for 3Q13) Search

BIDU

QIHU

Sogou

1Q12

82.0%

NA

171.2%

2Q12

62.6%

NA

111.3%

3Q12

51.9%

NA

91.7%

4Q12

43.1%

NA

68.4%

1Q13

41.9%

NA

66.6%

y/y growth

2Q13

43.4%

NA

60.5%

+40% to +43%

NA

+45% to +50%

1Q12

-4.8%

NA

-5.8%

2Q12

26.9%

NA

32.9%

3Q12

15.8%

NA

22.7%

4Q12

2.2%

NA

9.7%

1Q13

-5.5%

NA

-6.9%

28.2%

158.3%

28.1%

+15% to +19%

NA

+8% to +12%

3Q13 (guided) q/q growth

2Q13 3Q13 (guided)


Online video Over the past 1-2 years, online video advertising growth has been driven by a continued shift in offline TV budgets to online video sites, and increased user demand for entertainment programmes. We believe the video ad format is transferable to mobile devices and, with rising smartphone penetration, it will likely contribute to faster growth and higher demand in the next few years. Nevertheless, near-term challenges remain on advertisers’ adoption. FIGURE 58 Rev comparison for major online video cos (actual for 2012/1Q-2Q13; guidance for 3Q13) Online video

Youku Tudou

Sohu

Tencent

iQiyi

LeTV

1Q12

119.5%

NA

NA

NA

163.3%

2Q12

99.2%

NA

NA

NA

134.2%

3Q12

94.2%

NA

NA

NA

107.7%

4Q12

107.7%

NA

significantly

NA

39.5%

1Q13

93.7%

NA

>100% yoy

NA

24.0%

2Q13

101.3%

NA

double yoy

NA

47.9%

+65% to +73%

NA

NA

NA

NA 13.7%

y/y growth

3Q13 (guided) q/q growth 1Q12

-12.7%

NA

NA

NA

2Q12

43.4%

NA

NA

NA

0.5%

3Q12

29.6%

NA

NA

NA

-0.5% 22.8%

4Q12

26.6%

Double-digit %

NA

NA

1Q13

-18.8%

Double-digit %

NA

NA

1.0%

2Q13

46.0%

NA

NA

NA

19.9%

+10% to +16%

NA

NA

NA

NA

3Q13 (guided)

Note: Youku Tudou started consolidation in Aug 2012. Source: Company data, Barclays Research

13 September 2013

34


Online gaming growth still healthy While online gaming companies have experienced slower growth over the past 2-3 years compared to 50-60% growth in 2007-08, overall, we still see the majority delivering a decent growth outlook, with the exception of Shanda Games. We believe it will be difficult for Shanda Games to turn around its business even though it might be focusing correctly on its mobile games strategy. We therefore see its continued declining trend for legacy MMO games as difficult to replace, hence our UW rating. FIGURE 59 Online game companies’ game revenues comparison (actual for 2012/1Q13; guidance for 3Q13) Online game

Tencent

NTES

GAME

CYOU

PWRD

GA

Kingsoft

y/y growth 1Q12

48.9%

31.4%

10.9%

37.1%

0.0%

26.2%

17.0%

2Q12

52.9%

10.8%

-14.4%

42.6%

-13.2%

21.1%

20.6%

3Q12

43.9%

-0.9%

-20.1%

30.5%

-1.9%

18.6%

27.7%

4Q12

34.4%

7.9%

-20.2%

29.0%

-12.4%

15.5%

27.4%

1Q13

34.1%

11.3%

-21.9%

31.4%

-13.1%

12.6%

39.5%

2Q13

31.0%

18.2%

-4.0%

22.7%

4.7%

11.3%

29.6%

NA

NA

+3% to +4%

+7% to +10%

+12% to +17%

NA

NA

3Q13 (guided) q/q growth 1Q12

19.4%

-0.7%

2.5%

3.4%

-7.5%

2.8%

1.2%

2Q12

4.6%

-4.0%

-18.6%

7.6%

-5.9%

3.8%

9.2%

3Q12

7.3%

-0.5%

-4.4%

10.1%

2.9%

2.8%

1.1%

4Q12

0.3%

13.6%

0.1%

5.2%

-2.3%

5.2%

14.1%

1Q13

19.1%

2.5%

0.3%

5.3%

-8.1%

0.2%

10.8%

2Q13

2.2%

1.9%

0.0%

0.5%

13.5%

2.7%

1.5%

NA

NA

+3% to +4%

-4% to -1%

+10% to +15%

NA

NA

3Q13 (guided)


eCommerce growth remains promising While we are positive on overall eCommerce structural growth potential, we see bigger eCommerce companies and platforms benefiting from economies of scale and believe that industry consolidation is likely to emerge in the next 1-2 years. We remain cautious on whether Dangdang will have sustainable scale to enable it to compete with bigger players.

13 September 2013

35

Barclays | China Internet FIGURE 60 Revenue, transaction value and implied market share for major eCommerce players eCommerce

DANG

VIPS

Tencent

MCOX

LITB

Tmall

JD

1Q12

57.6%

250.7%

NA

-35.1%

32.1%

NA

NA

2Q12

52.7%

233.5%

NA

-40.0%

74.2%

NA

NA

3Q12

41.7%

197.0%

NA

-42.8%

82.0%

NA

NA

4Q12

31.1%

184.8%

NA

-39.1%

95.8%

NA

NA

1Q13

23.1%

206.8%

154.2%

-66.8%

98.7%

NA

NA

2Q13

23.7%

159.7%

156.5%

-65.8%

52.6%

NA

NA

3Q13 (guided)

+23%

+134% to +137%

NA

NA

+33% to +37%

NA

NA

1Q12

-12.0%

-3.7%

NA

-41.9%

11.5%

NA

NA

2Q12

11.5%

33.6%

13.9%

14.8%

28.3%

NA

NA

y/y growth

q/q growth

3Q12

6.6%

15.3%

32.2%

-12.6%

7.9%

NA

NA

4Q12

25.4%

92.1%

48.5%

4.5%

26.8%

NA

NA

1Q13

-17.4%

3.7%

13.6%

-68.3%

-1.5%

NA

NA

2Q13

12.0%

13.1%

15.0%

18.3%

-5.4%

NA

NA

+6%

+4% to +5%

NA

NA

-3% to -6%

NA

NA

3Q13 (guided)

Transaction value (Rmb bn) estimated by iResearch 1Q12

1.1

0.6

2.0

NA

NA

32.0

14.1

2Q12

1.2

1.1

3.6

NA

NA

51.1

18.0

3Q12

1.3

1.4

4.5

NA

NA

55.3

21.8

4Q12

3.8

2.2

8.1

NA

NA

81.3

22.0

1Q13

3.1

2.3

8.2

NA

NA

61.6

21.0

2Q13

2.8

3.2

8.8

NA

NA

80.1

27.0

Market share (based on iResearch's estimated transaction value) 1Q12

1.8%

1.0%

3.2%

NA

NA

51.5%

22.7%

2Q12

1.3%

1.2%

4.0%

NA

NA

57.1%

20.1%

3Q12

1.3%

1.4%

4.5%

NA

NA

54.6%

21.8%

4Q12

2.2%

1.6%

6.0%

NA

NA

60.4%

16.4%

1Q13

2.6%

1.9%

6.8%

NA

NA

51.3%

17.5%

2Q13

1.8%

2.0%

5.6%

NA

NA

50.8%

17.1%

Source: Company data, iResearch, Barclays Research

Cash is king and provides investment flexibility Another trend we see for the Internet companies is strong cash flow generation ability with solid balance sheets, which provides flexibility for most of them to re-invest in new growth areas such as mobile strategies. On the one hand, we note that over the past 10-12 years, bigger internet companies, such as Baidu, Alibaba, and Tencent, have become stronger due to their strong cash flow generation, while their balance sheet and earnings ability have enabled them to fund and make strategic investments in start-ups. Over the past 12 months, we have also started to see larger-scale M&A activity, with Baidu paying US$1.9bn for 91 Wireless and Alibaba paying US$586mn for an 18% stake in Sina Weibo. 13 September 2013

36

Barclays | China Internet FIGURE 61 Cash, netcash, cash flow and capex comparison for Internet stocks in our coverage (as of 2Q13) US$mn

Cash

Debt

Net cash

Net cash % mkt cap

Op cashflow (2Q13)

Capex (2Q13)

BIDU

5,605.0

1,912.8

3,692.2

7.8%

522.2

89.3

CTRP

1,125.8

252.8

873.0

14.3%

NA

NA

CYOU

803.7

323.0

480.8

30.5%

96.6

NA

DANG

210.4

-

210.4

32.4%

NA

5.8

GA

543.8

-

543.8

27.9%

NA

NA

GAME

485.1

40.0

445.1

41.1%

58.9

5.1

NTES

3,164.1

161.1

3,003.0

31.3%

171.1

5.6

PWRD

421.8

49.3

372.5

37.3%

NA

NA

QIHU

379.0

-

379.0

3.7%

86.4

13.4

836.5

-

836.5

65.3%

NA

NA

SINA

RENN

1,237.0

-

1,237.0

23.0%

43.6

10.9

SOHU

1,210.2

323.0

887.2

34.9%

NA

NA

Tencent

7,650.6

1,909.9

5,740.7

6.2%

810.4

238.5

543.8

-

543.8

13.7%

-10.3

22.3

YOKU

Source: Company data, Barclays Research estimates

Recap of Barclays Mobile Internet survey We conducted a user survey in the four major Chinese cities of Shenzhen, Guangzhou, Shanghai and Beijing in July and August 2013 and collected a total of 174 user questionnaires. Given that our survey was done in first-tier cities only and the relatively small sample size, we note that the results may not adequately represent the entire mobile user base and could have some bias towards high-end users. Nonetheless, we believe our survey provides us with proprietary first-hand information and allows us to cross-check and analyze our data vis-à-vis company comments and the limited third-party research data. Our proprietary survey of smartphone users in China shows that: 1) Tencent leads in social networking apps with its three pillars, WeChat, Mobile QQ and Mobile Qzone, as WeChat stands out as one of the most used apps among smartphone users with a penetration rate of c82%; 2) Baidu leads in mobile search and maps with penetration rates of c93% and 73%, respectively; 3) Qihoo leads in mobile security with a penetration rate of c63%; 4) the Qihoo mobile assistant app store and the 91 Wireless app store rank closely with each other with penetration rates of 39.1% and 38.5%; and 5) Alibaba’s Taobao and Tmall apps maintain their dominant market share among the most used e-commerce apps with penetration rates of 69% and c32%, respectively. For more detail about our survey results, please refer to China Internet: Mobile Internet survey takeaways, 3 September 2013.

13 September 2013

37


Companies COMPANIES

13 September 2013

38


TENCENT (700HK; OW; PT HK$450, +12%) 700 HK / 0700.HK Stock Rating

OVERWEIGHT Industry View

POSITIVE Price Target

HKD 450.00 Price (11-Sep-2013)

HKD 402.20 Potential Upside/Downside

+12%

Smartphone monetization finally emerging We maintain our Overweight rating and raise our 12-month price target for Tencent to HK$450 from HK$388 to reflect the initial traction and success of the company’s WeChat games monetization. We continue to view Tencent as strategically positioned to capture emerging mobile Internet growth opportunities, and we are confident in the company’s ability to monetize through mobile games, advertising, payment and commerce. Based on the initial feedback on four WeChat games Tencent launched recently, we have revisited our WeChat assumptions and believe our previous 400mn user base scenario for 2014 was too conservative. On what we see as a more reasonable scenario for 2014 of 500mn users, we are raising our 2013 and 2014 revenue/non-GAAP EPS estimates by 0.2%/0.2% and 1.1%/0.6%, respectively. Our new price target of HK$450 is based on 30x (up from 26x) our revised 2014E non-GAAP EPS of HK$15.01 (increased from HK$14.92). Our target multiple of 30x implies about 1.0x PEG for our two-year (2013-15) earnings CAGR of 30%, which we believe is justified given Tencent’s proven execution ability and its resilient and integrated user platform. In addition, with WeChat’s potential ability to monetize its International user base, we believe there is upside risk to the overseas success, and hence paying 30x for a ‘global’ presence company with a proven business model is not unrealistic. Revisit our WeChat assumption: Following the initial success of the four WeChat games, with two of the four games ranking in the top 10 by gross revenue on Apple’s IOS store (according to appannie.com), we have revisited our WeChat assumptions and believe our previous assumption of a 400mn user base for 2014E was too conservative. We are raising our base-case scenario assumption to 500mn users for 2014E. We assume 17.5% (up from 15%) of users are gamers and maintain our expectation that 5% of those pay for games (a 5% “paying ratio”). Scenario analysis: Based on our base-case assumption, our estimate for total WeChat revenue for 2014 increases to Rmb4.14bn (from Rmb2.95bn). Of this, we estimate gaming accounts for 76%, emoticon 15% and mobile payment revenues 9%. Our downside-case scenario assumes WeChat users will stay at 400mn in 2014 (unchanged) with a lower paying ratio, and this implies revenue of Rmb2.11bn, 49% below our base-case for 2014. Our upside-case scenario assumes WeChat users grow to 600mn in 2014 with a higher paying ratio and ARPU, and this implies revenue of Rmb7.83bn, 89% above our base case for 2014. Risks: While we believe there could be upside risks to our WeChat assumptions, we are becoming more cautious on the potential downside risks from cannibalization of Tencent’s web game revenue by WeChat. The main reason for this is the increasing number of web game developers that are switching their focus away from PC web games and are now developing smartphone games, resulting in fewer new web games being released by these developers. As Tencent’s Qzone web game open platform relies heavily on third-party developers to launch games on the platform, a reduction in the number of new games available would impact Tencent’s community platform revenue in the future, in our view.

13 September 2013

39


Revisiting WeChat monetization assumptions Our previous WeChat monetization assumption was based on a user base of 400mn for 2014. Based on the initial feedback on the four WeChat games, we estimate WeChat’s user base is either approaching 400mn or already at that level, and hence raise our user base assumption for 2014 to 500mn.

WeChat games revenue assumptions We also raise our gamer base assumption to 17.5% (from 15%). Hence, with 500mn users, we estimate 87.5mn of them will be gamers. We maintain our gamer paying ratio at 5% and ARPU at Rmb60 (or cUS$10) per month. Hence, we estimate game revenues of Rmb3.15bn for 2014.

Sticker/emoticon revenue assumptions The number of paid emoticon categories on WeChat increased to six as of 5 September (up from five when it was launched). Although there are only six emoticon categories available for purchase in WeChat’s sticker shop currently, we expect Tencent to gradually introduce a greater variety of emoticons in the shop. For reference, LINE has 191 stickers available for purchase. Each WeChat sticker costs cRmb6 (HK$8.00/US$0.99). Our base-case scenario assumes a payout ratio of 3% with ARPU of Rmb10.5 per user per quarter for stickers. This would yield cRmb630mn in 2014E.

O2O/mobile payment revenue assumptions WeChat 5.0 allows users to link their bank accounts or credit cards to its system and supports immediate mobile payment via scanning QR codes on WeChat. We have been more conservative in our assumptions because this feature is new and there is no comparable case study for competitors in the mobile space, such as KakaoTalk or LINE. We also believe mobile payments are likely to be more gradually adopted by users as online payment is still not mature in China and Chinese users may not have confidence in an online payment system. Our base-case scenario assumes c4% of total WeChat registered users are likely to adopt the WeChat payment mechanism in 2014, with an average spend per user of Rmb150 per quarter. We also assume a take rate of 3% would yield O2O (online to offline)/e-commerce payment-related revenue of Rmb360mn in 2014.

13 September 2013

40

Barclays | China Internet FIGURE 62 Tencent – summary of our base, downside and upside cases vs our previous base case estimates for 2014 US$mn

Old est.

New est.

Downside case

Upside case

73,618

73,291

73,093

73,489

2,952

4,140

2,112

7,830

76,570

77,431

75,205

81,319

29%

30%

26%

37%

Gross profit

41,315

41,803

40,577

43,929

Gross margins

54.0%

54.0%

54.0%

54.0%

GAAP operating income

25,138

25,280

24,531

26,574

GAAP operating margin

32.8%

32.6%

32.6%

32.7%

Non-GAAP operating income

26,889

27,049

26,249

28,431

35.1%

34.9%

34.9%

35.0%

-329

-329

-329

-329

Share of loss of jointly controlled entity

-80

-80

-80

- 80

Share of losses of associates

-60

-60

-60

-60

Profit before tax

24,668

24,811

24,061

26,105

Income tax expense

-4,317

-4,342

-4,327

-4,357

-15

-15

-15

-15

Revenues (ex WeChat) WeChat revenues Total revenues Revs growth

Non-GAAP Op margin Finance income, net

Minority interests GAAP net income

20,336

20,454

19,719

21,732

Non-GAAP net income

22,099

22,234

21,496

23,517

y/y growth

36%

36%

32%

44%

SBC / Amortization / options

1,531

1,781

1,777

1,785

Non-GAAP EPS (Rmb)

11.81

11.89

11.49

12.57

Non-GAAP EPS (HK$)

14.92

15.01

14.51

15.88

1878

1878

1878

1878

450 (price target)

290

556

30x

20x

35x

Diluted shares Fair value (HK$ per share) Implied multiple (2014E) Source: Company data, Barclays Research estimates

Scenario analysis Downside case: Our downside-case scenario assumes a WeChat user base of 400mn, with WeChat revenue of Rmb2.11bn in 2014E. Of this, we estimate Rmb1.68bn would come from games, Rmb288mn from emoticon revenues and Rmb144mn from O2O payment revenue. Our downside-case scenario assumes ARPU for gamers of Rmb40 per month. We assume 2% of paying members for emoticon, ARPU of Rmb8 per quarter and 3% of O2O user penetration. Upside case: Our upside-case scenario assumes that WeChat users grow to 600mn in 2014, with total WeChat revenue of Rmb7.83bn. Of this, we estimate Rmb4.98bn would come from games, Rmb756mn from emoticon revenues and Rmb432mn from O2O payment revenues. Our upside-case scenario assumes the paying ratio increase to 7.5% while ARPU remains stable at Rmb60 per month. We assume the percentage of emoticon paying members increases to 5% and O2O user penetration increases to 5%. 13 September 2013

41


Global competitors – KakaoTalk and LINE KakaoTalk According to TechinAsia (source: sgentrepreneurs.com, 25 December 2012), Kakao generated monthly revenue of US$4.1mn in August 2012, US$12.2mn in September 2012 and US$35.3mn in October 2012, grossing cUS$51.6mn in just three months post the release of its game platform. On the other hand, another article (source: Thenextweb.com; dated 16, July 2013) reported that KakaoTalk achieved gross revenue of US$311mn in 1H13. The article also noted that the gross revenues are shared by KakaoTalk, game developers and mobile appstores such as Apple and Google.

NHN’s LINE During its 2Q13 results announcement, NHN reported that LINE generated revenue of KRW111.9bn, up 63% q/q and +230% y/y, attributed to new hit games such as Windrunner (developed by Wemade Entertainment), solid sticker sales and revenue from new services, such as LINE Play (avatar service) and LINE Manga (comics). NHN’s management also guided for revenue of KRW400bn for LINE in 2013. As noted in the company’s earnings briefing, Japan still accounts for 80% of LINE’s revenue and is expected to continue to account for the lion’s share of its revenue near-term. In terms of split, roughly 50% of LINE revenue comes from games, 30% from stamps and the balance from other services (including LINE Play). There are 47mn users in Japan out of the 200mn total registered user base for LINE. FIGURE 63 Total user base – WeChat vs LINE and KakaoTalk 450 400 350 300 250 200 150 100 50

Kakao

LINE

Jul-13

May-13

Mar-13

Jan-13

Nov-12

Sep-12

Jul-12

May-12

Mar-12

Jan-12

Nov-11

Sep-11

Jul-11

May-11

Mar-11

Jan-11

Nov-10

Sep-10

0

WeChat


For more detail on background and historical trend for user base for Kakao and LINE, please refer to our report, Tencent: WeChat assumptions; 2Q13 preview, 12 August 2013.

13 September 2013

42


Estimate revisions Based on our new WeChat assumptions, we have revised our estimates accordingly. We raise our mobile revenue assumption to Rmb4.27bn in 2014, up from Rmb4.17bn. Our nonmobile revenue estimate for 2014 increases to Rmb3.52bn, from Rmb3.32bn, to reflect our higher assumptions for emoticon and O2O revenues. We raise our PC online games revenue estimates to Rmb34.7bn for 2014 (from Rmb34.3bn) and to Rmb39.3bn for 2015 (from Rmb38.8bn) to reflect strong growth of in-house games League of Legends and Legend of Yulong. We increase our eCommerce revenue estimates slightly to Rmb15.3bn for 2014 (from Rmb15.2bn) and Rmb22.2bm for 2015 (from Rmb21.2bn). FIGURE 64 Tencent – revisions to Barclays Research estimates Revenues (Rmb mn)

Non-GAAP EPS (HK$)

Net Profit (Rmb mn)

Old

New

% Chg

Old

New

% Chg

Old

New

% Chg

2013E

59,358

59,456

0.2%

10.99

11.01

0.2%

14,988

15,020

0.2%

2014E

76,570

77,431

1.1%

14.92

15.01

0.6%

20,336

20,454

0.6%

2015E

93,624

95,658

2.2%

18.96

18.45

-2.7%

25,950

25,140

-3.1%


Valuation: raise PT to HK$450 We raise our 12-month price target to HK$450 (from HK$388) based on 30x (from 26x, raised to reflect the higher WeChat monetization assumption) our revised 2014 non-GAAP EPS estimate of HK$15.01 (from HK$14.92). Our new target multiple of 30x implies 1.0x PEG to two-year (2013-15E) earnings CAGR of 30%, which we believe is reasonable. We remain positive on Tencent’s overall strategic direction for its mobile open platform initiatives and believe it is well positioned to capture the emerging opportunities in mobile Internet growth in the next few years, leveraging its sticky, integrated mobile user platform on WeChat. Tencent remains one of our top picks and a core Internet holding, in our view. FIGURE 65 Tencent: one-year forward P/E band

FIGURE 66 Tencent: one-year forward P/E ratio

800

45 50x

700 600

40x

500 400

30x

300

20x

200 10x

100 0

40 35 30

+1 SD

25 20

Avg PE

15

-1 SD

10 5

Source: Company data, Bloomberg, Barclays Research estimates

13 September 2013

Jun-04 Jan-05 Aug-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13

Mar-13

Jan-12

Aug-12

Jun-11

Apr-10

Nov-10

Sep-09

Jul-08

Feb-09

Dec-07

Oct-06

May-07

Mar-06

Jan-05

Aug-05

Jun-04

-


43


Risks The key downside risks to our price target being achieved, in our view, include: 1) WeChat monetization ramp disappoints; 2) WeChat cannibalizing PC games; and 3) regulatory risks and conflicts with telcos.

Income statement FIGURE 67 Tencent – consolidated income statement (Rmb million, except per share data) Year to 31 Dec

2012A

1Q13A

2Q13A

3Q13E

4Q13E

2013E

2014E

2015E

35,719

10,666

10,752

11,520

11,585

44,524

55,375

65,054

22,849

7,135

7,289

7,748

7,480

29,652

34,723

39,314

-

338

305

390

566

1,599

4,271

5,289

9,147

2,551

2,509

2,746

2,909

10,715

12,858

15,430

-

643

649

636

630

2,558

3,522

5,021

Online advertising

3,382

850

1,297

1,400

1,285

4,832

6,094

7,552

eCommerce transactions

4,428

1,913

2,199

2,438

3,030

9,581

15,340

22,243

365

119

136

119

146

519

623

810

Total revenues

43,894

13,548

14,385

15,477

16,047

59,456

77,431

95,658

YoY change

54.0%

40.4%

36.6%

33.8%

32.0%

35.5%

30.2%

23.5%

Revenues VAS Online gaming Mobile game Community and open platforms Non-mobile game

Others

Cost of revenues VAS

12,064

3,593

3,835

3,974

3,939

15,342

18,310

20,817

Online advertising

1,733

504

601

651

617

2,372

2,768

3,021

eCommerce transactions

4,193

1,782

2,073

2,292

2,818

8,965

14,176

20,241

218

75

81

71

87

315

374

405

Total cost of revenues

18,207

5,954

6,590

6,989

7,462

26,994

35,628

44,484

Gross profit

25,687

7,594

7,794

8,489

8,585

32,462

41,803

51,174

58.5%

56.1%

54.2%

54.8%

53.5%

54.6%

54.0%

53.5%

Other operating exp/(income)

(552)

(627)

(406)

(117)

(122)

(1,272)

(761)

(451)

Selling and marketing

2,993

962

1,234

1,347

1,380

4,923

5,078

6,218 14,827

Others

Gross margin

General and administration

7,765

2,196

2,401

2,574

2,648

9,819

12,206

Total operating expenses

10,207

2,531

3,229

3,804

3,905

13,470

16,523

20,594

Operating profit

15,480

5,063

4,565

4,685

4,680

18,992

25,280

30,580

Operating margin

35.3%

37.4%

31.7%

30.3%

29.2%

31.9%

32.6%

32.0%

Finance income, net

(329)

(348)

(82)

14

(82)

(82)

(232)

(329)

Share of loss of jointly controlled entity

(54)

131

46

(20)

(20)

137

(80)

100

Share of losses of associates

(26)

(12)

(15)

(15)

(15)

(57)

(60)

(50)

Profit before tax

15,052

5,100

4,610

4,568

4,562

18,840

24,811

30,301

Income tax expense

(2,266)

(1,029)

(926)

(914)

(912)

(3,781)

(4,342)

(5,151)

(53)

(27)

(4)

(4)

(4)

(39)

(15)

(10)

12,733

4,044

3,680

3,650

3,646

15,020

20,454

25,140

32.5%

30.2%

29.1%

26.2%

25.3%

27.4%

28.7%

28.7%

Minority interest Net income Net margin Diluted EPS (RMB)

6.83

2.17

1.98

1.96

1.95

8.05

10.93

13.37

Diluted EPS (HKD)

8.41

2.71

2.50

2.47

2.47

10.17

13.81

16.88

14,286

4,038

4,152

4,055

4,062

16,307

22,234

27,477

7.67

2.16

2.23

2.18

2.18

8.74

11.89

14.61

Non-GAAP net income Non-GAAP diluted EPS (RMB) Non-GAAP diluted EPS (HK$) Diluted shares average (m)

9.44

2.70

2.82

2.75

2.75

11.01

15.01

18.45

1,863

1,867

1,863

1,864

1,866

1,865

1,871

1,881


13 September 2013

44


QIHOO 360 TECHNOLOGY (QIHU US; OW; PT US$100; +10%) QIHU Stock Rating



USD 100.00 Price (11-Sep-2013)

USD 90.85 Potential Upside/Downside

+10%

Strong execution proven; riding on its app store strategy We maintain our Overweight rating and raise our 12-month price target for Qihoo to US$100 from US$86 on the back of our positive view of China smartphone shipment growth and increased traffic at the company’s mobile assistant app store. We believe Qihoo is well-positioned to benefit from the early cycle of mobile internet growth given its immediate ability to monetize through its app store. As a result of stronger-than-expected traction for some of its mobile games distribution, we are raising our revenue estimates for 2013 and 2014 by 1.8% and 3.3%, respectively, and our non-GAAP EPADS estimates by 1.8% for both years. Qihoo has demonstrated once again that it is able to execute along its well-planned strategy and, given our estimated earnings growth for the company in the next two years (a CAGR of 66% for 2013-15E), we believe applying a higher target multiple is justified. Our new price target of US$100 is based on 40x (up from 35x) our revised 2014E non-GAAP EPADS of US$2.49 (increased from US$2.45). Qihoo has done it again with its app store: With 338mn total smartphone users for its mobile security product as at end-2Q13, up from 120mn in 2Q12 and 275mn in 1Q13, we see promising growth in the near to mid term from its mobile monetization capability. Based on the strong performance of recently launched mobile games on Qihoo’s platform (such as PWRD’s Return of Condor Heroes and Meng Wo Ai’s LuALu), we are raising our app store revenue estimate to 14% of total revenue in 2013 (from 13%) and to 22% of total revenue in 2014 (from 19%). Mobile video app to capture more traffic: According to local press reports (Sohu Tech, 10 September 2013), Qihoo has announced that it plans to release a 360 mobile movie app on 16 September. According to the reports, the app would also enable users to customize their movie subscription based on their interests, and would support non-WiFi film-watching. If the upcoming user feedback is positive, this might be one more mobile access point for Qihoo to monetize its mobile traffic, in our view. Search market share: The latest iResearch IUT tracking suggests Qihoo’s PV-based traffic share is now 11.8% (1 September), while CNZZ’s latest daily tracking suggests Qihoo’s usage-based market share is at 17.7% (10 September). We consider this to be in line with management comments made during its 2Q13 earnings call. With a search traffic share of close to 20% as of August according to management, despite the revenue initiative only starting two quarters ago, we believe there is still a large gap between traffic share gains and revenue share. We forecast search revenue to contribute 13.2% of 2013 revenue, or US$85.7mn (vs zero revenue in 2012 – only started monetization in 1Q13) and forecast y/y growth of 184% to US$243mn in 2014 (25% of total revenue). Valuation and risks: Qihoo’s share price has risen 206.0% ytd vs NASDAQ up 23.4%, and is now trading at 67.4x 2013E and 36.4x 2014E P/E, above its historical one-year forward average P/E ratio of 24.4x and the China Internet peer average of 23.8x for 2014E. While we believe the valuation is supported by Qihoo’s search and app store catalysts, we caution that the share price has risen sharply within a short timeframe, and that any negative news or disappointment in the company’s fundamentals could lead to significant share price volatility.

13 September 2013

45


Leading position in the mobile security and app store space While many of the big Internet companies were focusing on migrating and investing in mobile Internet-related resources and struggling to transition their existing PC-based monetization models to mobile devices, we believe Qihoo’s management took the view that it would be difficult to transfer many of its business models, especially online advertising, and its PC-based directory paid-link advertising revenues to mobile. The best strategic approach in order to monetize the emerging growth of mobile traffic was to leverage the company’s strong security protection offering. However, given that the directory business and even mobile browsers had not yet been such important online access points as PCs, we believe Qihoo thought the best way to make money on mobile traffic was to capture that traffic and control access points, identifying the ‘important’ access point for mobile as ‘app stores’. The open platform model of Google’s Android system has created opportunities for China’s smartphone ecosystem and many Internet and telecom carriers have started to develop and build their own app stores, with the aim that users will rely on their store to search and download apps. Qihoo also believes that offering security protection for mobile users for free will enable it to gain a large user base, through which it can push its mobile assistant app store to users. Although a late comer, Qihoo’s mobile assistant app started to gain more traction in 2012. Qihoo started to monetize its mobile traffic via revenue sharing and apps advertising at the end of 2012. We estimate the company generated c5% of its total revenue (or cUS$5mn) from the app store in 1Q13, with the revenue contribution increasing to c10% in 2Q13E (or US$15mn). We are raising our app store-related revenue estimates to 14% of total revenue for 2013 (from 13%) and to 22% of total revenue for 2014 (from 19%). In our recent mobile usage survey in July and August, we asked users where they download their apps from and which channel/app store they use to search for apps. 91 Wireless and Qihoo’s 360 mobile assistant ranked among the most popular channels, with penetration rates of 38.5% and 39.1%, respectively (Figure 69). This suggests to us that Qihoo now has a leading market position in terms of app store awareness. We consider Qihoo’s strategy to be successful so far and believe the recent acquisition of 91 Wireless by Baidu provides support to Qihoo’s app store approach, as the acquisition positions Baidu to compete in the same space as Qihoo. Under the Baidu umbrella, 91 Wireless’s market position will likely be strengthened, in our view.

13 September 2013

46


FIGURE 68 Barclays Research mobile user survey – most popular download app stores’ market share

Other 14.5%

Not use 3.5%

FIGURE 69 Barclays Research mobile user survey – most popular download app stores’ user penetration Not use

91 wireless 29.5%

4.6%

Other

19.0% 11.5%

UC

UC 8.8%

Feiliu Feiliu 3.1%

4.0%

360 QQ 10.6% 360 30.0%

QQ

13.8%

91 wireless 0.0%


39.1%

38.5% 10.0%

20.0%

30.0%

40.0%

50.0%


Qihoo’s app store appears to be priority choice for game distribution According to local press reports (Game portal NetEase Tech, Youxi.com and eeyy.com, 10 September), one of the popular mobile games, “Lu A Lu” developed by Meng Wo Ai Technology, began unlimited closed-beta testing on Qihoo 360 Appstore, and ranked first among daily game app downloads with accumulative downloads of 1.39mn within four days’ of operation. The 1.39mn downloads for this game is more than double of the sum of downloads for two existing hit mobile games – “I’m MY Online” and “Sword of Kingdom”, suggesting Qihoo Appstore’s has a large user penetration and is increasingly becoming an effective game distribution platform for mobile game developers. Meanwhile, Perfect World’s in-house mobile game “Return of Condor Heroes” launched a beta version in May and kicked off open-beta testing on 22 August; it was ranked No.3 as of 11 September, based on games’ gross revenues (source: Appannie). According a Tencent Tech report (dated 26 August), Qihoo together with 91 Wireless, UC and PP Assistant are the major revenue distribution channels for “Legend of Condor Heroes” with a daily contribution of cRmb200,000.

Qihoo to launch online video/movie app initiative? According to local press reports (Sohu Tech, 10 September), Qihoo announced plans to release a 360 mobile movie app and has formed a partnership with a new movie, “Silent Witness”. The company’s Vice President, Yu Guangdong, reportly commented that 360 Movie could potentially be another entertainment product distribution platform on mobile, following Qihoo’s appstore and security platforms. It would include various movie categories, 62 channels, and a inventory of more than 150k movies. The app would also enable users to customize their movie subscription based on their interests, and support non-WiFi film-watching. If the forthcoming user feedback is positive, thi might be one more mobile access point for Qihoo to monetize its mobile traffic, in our view.

Recent CB fund raising improves balance sheet and investment flexibility Qihoo recently closed its US$600mn convertible bond placement, improving its cash position to close to US$1bn, from US$378mn at end-2Q13. The convertible senior note is due on 15 September 2018 at an exercise price of US$110.96 and has an annual interest rate of 2.50%.

13 September 2013

47

Barclays | China Internet In our view, the successful CB offering indicates investor confidence in Qihoo’s business strategy, particularly its solid position in the mobile Internet space and rapid ramp in search monetization. During its 2Q earnings call, management noted that it plans to continue to explore M&A or acquisition opportunities, but does not have any specific plans.

Online search continues to gain market share According to the latest published monthly data (July 2013) and weekly data (till 1 Sept 2013) from iResearch iUserTracker, Qihoo 360’s search numbers continued to grow, with monthly total page views topping 3.5bn (up 22.7% m/m), including 2.7bn views generated from the 360 search box and 768mn views from independent search URLs (so.com). The latest available weekly data (1 Sep) suggests Qihoo Search’s market share reached 11.8%. Meanwhile, Baidu Search’s market share remains stable at 80.5%, broadly flattish in recent weeks, while Qihoo continues to take market share from smaller players such as Soso, Google and even Sogou, according to iResearch tracking data. CNZZ’s published data suggests more aggressive market share gains for Qihoo, which finished the latest week with usage-based market share of 17.7% as of 10 Sep 2013, compared to 11.3% at the beginning of this year (Figure 73). In terms of monthly search usage market share breakdown in August 2013, Qihoo had an 18.2% share, compared to Baidu’s 63.2% and Sogou’s 10.4%. With a search traffic share of close to 20%, and given that Qihoo only kicked off its search monetization in 1Q13, we believe there is still a large gap between traffic share gains and revenue share growth potential. As a result, we expect Qihoo to further improve and enhance its search monetization via: 1) growing and expanding its search advertiser base; 2) improving its coverage ratio and search relevancy to enhance its monetization capability; and 3) continuing to ramp search traffic, mainly via organic traffic growth and Qihoo’s browser penetration, which should translate into higher traffic and higher click-through rates. FIGURE 71 Qihoo Search latest page view-based market share

FIGURE 70 Qihoo Search monthly total page views (millions) 4,000 3,500

Soso 0.6%

3,000

Qihoo360 11.8%

Others 1.1%

Sogou 3.7%

2,500 2,000

Google 2.2%

1,500 1,000 500

Jul-13

Jun-13

May-13

Apr-13

Mar-13

Feb-13

Jan-13

Dec-12

Nov-12

Oct-12

Sep-12

Aug-12

Jul-12

0

Baidu 80.5%

Monthly total page-views Source: iResearch, Barclays Research

13 September 2013

Source: iResearch (as of week of 1 Sep 2013), Barclays Research

48


FIGURE 72 Online search usage market share breakdown, Aug 2013 Soso 3.6%

Google 2.9%

FIGURE 73 Qihoo’s daily search usage market share trend 19.0%

Others 1.8%

18.0% 17.0%

Sogou 10.4%

16.0% 15.0% 14.0%

Qihoo 18.2%

13.0% Baidu 63.2%

12.0% 11.0%

Source: CNZZ (as of month August 2013), Barclays Research

13 September 2013

10-Sep-13

20-Aug-13

30-Jul-13

09-Jul-13

18-Jun-13

28-May-13

07-May-13

16-Apr-13

26-Mar-13

05-Mar-13

12-Feb-13

22-Jan-13

01-Jan-13

10.0%

Source: CNZZ (as of 10 Sep 2013), Barclays Research

49


Estimate revisions We raise our app store revenue assumption for Qihoo to 14% of total revenues for 2013 and 22% of total revenues for 2014, up from 13% and 19%, respectively. This is on the back of the strong performance of recently released mobile games on Qihoo’s platform. These changes drive our non-GAAP FD EPS estimates for 2013-15 marginally by 1-2%. FIGURE 74 Qihoo – revisions to Barclays Research estimates Net Revenues (US$ mn) Old

New

% Chg

Non-GAAP FD EPS (US$) Old

New

GAAP Net Profit (US$ mn) % Chg

Old

New

% Chg

2013E

647

649

0.4%

1.34

1.35

0.4%

111

111

0.4%

2014E

990

1,008

1.8%

2.45

2.49

1.8%

225

229

1.9%

2015E

1,351

1,396

3.3%

3.53

3.60

1.8%

336

348

3.3%


We raise our web games revenue forecasts (in which revenue sharing from app store games is recorded) to US$211.7mn from US$209.2mn for 2013, to US$320mn from US$301.9mn for 2014, and to US$455mn from US$410.2mn for 2015.

Valuation: raise PT to US$100 Qihoo’s share price has outperformed significantly year-to-date, up 206.0% vs NASDAQ up 23.4%, and compared with an average of +72.4% for the 14 Chinese Internet companies we cover. It has also re-rated several times since the release of its search engine. However, we believe given the gap between the fast ramp of search traffic share and the more gradual ramp of search revenue share, we see near- to mid-term catalysts coming from: 1) further surprises on earnings beats, especially if the ramp of search revenues progresses even faster and stronger than we currently expect; 2) further rising smartphone penetration that will likely lead to higher user penetration of its mobile security product and higher monetization capability of its app store model; and 3) margins could continue to surprise if the top line continues to outperform, given the scalability of the search business and a higher-margin profile of the mobile app store model (recorded on a net revenue basis). We remain Overweight on Qihoo and believe there could still be upside risk to our estimates if search revenues gain better traction and ramp faster than we currently expect, and if mobile app stores gain greater traction. We raise our price to US$100 from US$86, based on 40x (up from 35x, raised to reflect the transition to the mobile trend) our revised 2014E non-GAAP EPADS of US$2.49 (increased from US$2.45). Our 40x target multiple implies 0.6x PEG to two-year (2013-15E) earnings CAGR of 66%, which we believe is not too demanding considering the growth rate. In our view, despite the recent re-rating of the stock due to solid execution on search monetization and faster-than-expected monetization on mobile Internet, Qihoo still offers one of the fastest revenue growth prospects among the Internet companies we cover. As indicated in Figure 3, Qihoo is one of very few Chinese Internet companies in our coverage universe that still enjoys over 50% earnings growth. Given the relatively early stage in its monetization ramp in both fast growth segments (search and mobile app store monetization), we forecast GAAP earnings growth of 140% y/y in 2013 and 106% in 2014 in support of its higher target multiple. While our 40x target multiple is higher than one standard deviation above the historical one-year forward P/E, and looks relatively expensive compared to the historical trading range, we believe Qihoo could continue to surprise on the upside in both earnings and guidance.

13 September 2013

50


FIGURE 75 Qihoo 360: 1-year forward P/E band

FIGURE 76 Qihoo 360: 1-year forward P/E ratio 60

120

50x

100

40x

80

50 40

60

30x

30

40

20x

20

20

10x

10

+1 SD Avg P/E ‐1 SD

Jul-13

May-13

Jan-13

Mar-13

Sep-12

Nov-12

Jul-12

May-12

Jan-12

Mar-12

Nov-11

Jul-11

Sep-11

Mar-11

Jul-13

May-13

Jan-13

Mar-13

Nov-12

Jul-12

Sep-12

May-12

Jan-12

Mar-12

Nov-11

Jul-11

Sep-11

Mar-11

May-11


May-11

0

0


Risks We see the following downside risks to our price target: 1) Qihoo facing challenges to continue gaining search market share or its search advertising customer base growing more slowly than we expect; 2) a slowdown in the web games market; and 3) if competition intensifies and there is no clear visibility on the success of mobile Internet.

13 September 2013

51


Income statement FIGURE 77 Qihoo 360 Technology – consolidated income statement (US$ million, except per share data) US$ million

2012

1Q13

2Q13

3Q13E

4Q13E

2013E

2014E

2015E

887.2

Internet services Online advertising

221.5

63.0

90.6

110.8

126.0

390.4

635.8

203.7

57.0

75.0

82.8

89.6

304.4

392.2

461.2

0.0

6.0

15.5

27.9

36.3

85.7

243.3

425.8

103.3

46.9

60.9

71.0

80.2

259.1

372.1

508.9

Webgame

84.1

36.8

48.7

58.6

67.6

211.7

320.0

455.2

Non Webgame

19.2

10.1

12.2

12.4

12.7

47.4

52.1

53.6

328.9

109.9

151.7

181.9

206.2

649.5

1007.9

1396.0

Directory site Search IVAS

Total Internet services Total revenue

329.0

109.9

151.7

181.9

206.2

649.5

1007.9

1396.0

96.0%

58.6%

108.4%

116.4%

100.3%

97.4%

55.2%

38.5%

Internet services

32.8

13.9

17.8

24.6

27.8

84.1

151.2

216.4

Total cost of revenue

32.8

13.9

17.8

24.6

27.8

84.1

151.2

216.4

YoY growth Cost of revenue

Gross profit Internet services GM

296.1

96.0

133.8

157.3

178.4

565.3

856.6

1179.6

296.2

96.0

133.8

157.3

178.4

565.3

856.6

1179.6

90.0%

87.3%

88.2%

86.5%

86.5%

87.0%

85.0%

84.5%

Selling and marketing

58.2

27.1

24.0

36.4

37.1

124.6

157.6

209.4

General and administration

34.3

11.9

12.9

15.3

18.6

58.7

90.1

114.5

Research and development

156.3

50.2

60.3

67.3

76.3

254.1

339.2

446.7

248.7

89.2

97.2

118.9

132.0

437.3

586.9

770.6

50.1

6.8

36.6

38.4

46.4

128.0

269.8

409.0

100.7

18.8

54.5

52.9

62.9

189.0

365.5

534.7

30.6%

17.1%

36.0%

29.1%

30.5%

29.1%

36.3%

38.3%

Interest income

6.7

1.4

1.8

1.6

1.6

6.4

7.2

8.0

Other expense

-2.3

0.0

-0.1

-0.5

-0.5

-1.1

-2.0

-3.0

Gross profit Gross margin Operating expenses

Total operating expenses Income (loss) from operating (GAAP) Income (loss) from operating (Non-GAAP) Non-GAAP operating margin

Exchange gain (loss)

0.0

0.4

1.4

0.5

0.5

2.8

0.0

0.0

Income (loss) before income tax and equity investment

62.7

8.8

38.4

40.0

48.0

135.2

275.1

414.1

Income tax (benefit)

11.4

2.2

4.3

6.0

7.2

19.7

41.3

62.1

Equity method investment

-4.8

-1.0

-0.9

-0.9

-0.9

-3.7

-3.6

-3.6

Net income (loss)

46.5

5.6

33.2

33.1

39.9

111.8

230.2

348.4

0.3

0.0

-0.2

-0.2

-0.2

-0.7

-0.9

-0.9

46.7

5.6

33.0

32.9

39.7

111.1

229.3

347.5

Noncontrolling interest Net income (loss) attributed to Qihoo 360 Non-GAAP Net income to Qihoo 360 Non-GAAP Net margin Non-GAAP diluted EPS (US$)

97.4

17.5

51.0

47.4

56.2

172.1

325.1

473.2

29.6%

15.9%

33.6%

26.1%

27.3%

26.5%

32.3%

33.9%

0.80

0.14

0.40

0.37

0.44

1.35

2.49

3.60

Basic ordinary shares (m)

176.0

178.0

179.0

179.9

180.8

179.4

183.1

184.9

Diluted ordinary shares (m)

184.0

189.0

191.0

192.0

192.9

191.2

195.3

197.3


13 September 2013

52


CTRIP.COM INTERNATIONAL (CTRP US; OW; PT US$60; +19%) CTRP Stock Rating



USD 60.00 Price (11-Sep-2013)


+19%

Smartphone penetration to drive accelerated growth We reiterate our Overweight rating on Ctrip and raise our price target to US$60 from US$45. We believe Ctrip remains a solid player into the early cycle of mobile internet growth for the following reasons: 1) we see Ctrip gaining market share at a faster rate as it further consolidates its position vs. the fragmented offline traditional agents on the back of rising smartphone penetration; 2) its “one-stop shop” comprehensive offering of online travel services and its scale should provide better leverage for the company to compete more efficiently and economically; and 3) while competition remains intense, diminishing margins have meant pure pricing competition is not a competitive differentiation for all players, and hence Ctrip’s full service/one-stop shop service could allow it to compete in a more flexible way. We raise our 2014 and 2015 revenue/non-GAAP EPS forecasts by 4%/5% and 5%/10%, respectively, to reflect faster top-line growth driven by higher mobile volume and market share gains. Our new price target of US$60 is based on 32x (up from 25x) our revised 2014E non-GAAP EPADS of US$1.88. Our target multiple implies about 1.0x PEG to a two-year 2013-2015E earnings CAGR of 32%, which we believe is not unreasonable given what we view as the company’s faster growth profile and stronger fundamentals, similar to its high growth period from 2005-2007 where Ctrip also traded at a relatively high multiple (30-50x), reflecting its growth outlook during that period. Mobile traction: With mobile tracking at >50mn downloads and accounting for >20% of hotel booking volumes and c15% of ticketing booking volumes as at 2Q13, according to management, Ctrip noted on its 2Q13 results call that mobile transactions by more loyal users and business travellers have increased. We estimate faster mobile volume growth could also benefit margin expansion longer term due to lower traffic acquisition costs for online marketing. Qunar partnership likely to have positive impact on packaged tour traffic and revenues: Ctrip and Qunar entered into a cooperative agreement on 2 August 2013 in which Ctrip will provide its packaged tour inventories on Qunar’s platform. We would not be surprised if Ctrip were to explore opportunities to provide its hotel and air ticketing inventories on Qunar’s platform in the future. Consolidation and market share gains: During the early cycle of the PC Internet boom in China, Ctrip leveraged its full-service offering (call centre + online booking platform) as well as its efficient execution ability to gain market share from fragmented offline travel agents. The emergence of online platforms such as Qunar and Taobao led to slower market share gains for Ctrip during 2010-2012 (as reflected in slowing top-line growth). However, as one of the early movers in developing and providing a comprehensive mobile app, we believe Ctrip could prove once again its ability to further consolidate smaller offline agents as it increases its mobile app penetration. As a result, we believe a re-acceleration of top-line growth for Ctrip is likely over the next 12-24 months, boosted by faster market share gains. Risks: 1) If competition intensifies further and the pricing war continues; 2) new competition could evolve from the eCommerce platform and niche app players; and 3) macro-related weakness could impact travel demand and sentiment.

13 September 2013

53


Mobile travel bookings ramping up nicely As disclosed by Ctrip, bookings from mobile devices have grown rapidly over the past 2-3 quarters. The company noted on its 2Q13 earnings call that mobile bookings accounted for 20% of total hotel bookings as of 2Q13, up from 15% in 1Q13 and 10% in 4Q12, while mobile bookings accounted for 15% of total air ticket bookings as of 2Q13, up from 10% in 1Q13. As smartphone penetration continues to increase over the next 12-18 months, we expect the percentage of traffic and bookings coming from mobile will continue to rise and account for a more meaning revenue contribution (c50% in 2015). We believe mobile traffic and mobile booking growth, especially among leisure travellers, could prove an important driver for further volume growth in the next two to three years. We expect Ctrip to benefit from higher user penetration and adoption, and that this is likely to help it increase its market share as the overall travel industry continues to consolidate. According to our mobile user survey in July and August, the Ctrip mobile app has a penetration rate of c41%, followed by 11.5% for eLong. We see this as being relatively consistent with the progress of app downloads for Ctrip. FIGURE 78 Barclays Research mobile user survey – mobile travel app penetration rates

FIGURE 79 China Internet – mobile travel app downloads and mobile booking volumes for Ctrip and eLong

Ctrip Not use

21.3%

App downloads Others

41.4%

Qyer

5.7%

Online & mobile bookings % of total Hotel PC booking Hotel mobile booking

Elong

Air PC booking

11.5%

Air mobile booking Ctrip 0.0%

20.0%

30.0%

40.0%

50.0%

App downloads Mobile bookings % of total


1Q13

2Q13

20mn

35mn

50mn

50%

na

55%

na

na

45%

10%

15%

20%

na

na

40%

na

10%

15%

1Q13

2Q13

3Q13

na

25mn

na

15%

20%

25%

eLong

41.4% 10.0%

4Q12


Qunar partnership: positive impact on packaged tour revenue On 2 August, Ctrip and Qunar announced that they had entered into a cooperative agreement for the package tour business, alleviating their previous competitive position. Based on our checks on the Qunar website (as of 11 Sept), we believe Ctrip, Tuniu and 17u are the three leading agencies for packaged tours on Qunar’s platform (Figure 80). Currently Qunar’s platform has more than 131,000 tour packages covering 1,268 agencies, with Ctrip, Tuniu and 17u featuring most frequently. Based on our 11 September online checks (and with an absence of more precise datapoints from the company), we estimate Ctrip could be the second-largest agency offering package tours on Qunar’s platform, behind Tuniu, and it may contribute close to 15-20% of total package tour products for Qunar.

13 September 2013

54

Barclays | China Internet FIGURE 80 Number of package tours offered on Qunar’s website for selective major routes Starting City

Tuniu

Ctrip

17u

Beijing

3,845

1,108

770

Shanghai

4,722

1,359

1,282

Shenzhen

1,130

590

19

Guangzhou

1,087

622

31

Hangzhou

2,207

640

106

Nanjing

2,328

677

124

Source: Qunar website, Barclays Research estimates, as of 11 Sep 2013

Promising structural growth for travel industry According to the China National Tourism Administration (CNTA), China’s domestic expenditure on tourism reached cRmb1,931bn in 2011, +53.5% y/y from 2010. This growth rate of 53.5% is the highest over the past 12 years. Despite a lack of available official data, we believe growth remained strong in 2012 and so far in 2013 given rising middle-class incomes and growing demand for leisure travel. Given the better service, convenience and ease of comparing prices it can provide, online travel booking is becoming an increasingly important medium for price-sensitive leisure travellers, in our view (Figure 81). FIGURE 81 China’s domestic expenditure on tourism 53.5%

2,500

60% 50%

2,000

36.8%

40% 24.7%

1,500

23.5%

17.9% 12.6%

12.2%

12.1% 10.9% 10.1%

30%

16.4%

20%

1,000

1,931

500

-11.2% 318

352

388

344

471

529

623

777

875

1,018

10% 0%

1,258

-10%

0

Domestic tourism expenditure

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

-20%

y/y growth

Source: China’s National Tourism Administration, CEIC, Barclays Research

Meanwhile, revenues for China’s online travel market reached Rmb173bn (US$28bn) in 2012, +32% from 2011 according to iResearch. iResearch expects the online travel market to grow to Rmb408bn (US$67bn) by 2016, implying a CAGR of 24% for 2012-2016. Among the online travel industry, China’s online travel agency (OTA) market reached Rmb9.4bn in 2012 with penetration of 5.4%, and is expected to grow to Rmb23.5bn by 2016 with penetration of 5.8%, implying a CAGR of 26%. The rising online booking penetration, especially from those coming from mobile internet booking, would likely lead to Ctrip taking more market share from offline agencies or smaller OTAs in the next few years (Figure 82 and 83).

13 September 2013

55


FIGURE 82 China online travel market (Rmb bn) and y/y growth 60% 50% 38.5%

337.0

150 100 48.6 61.8 94.9

131.4

220.0

275.0

21.1%

Overall online travel market size

6.16

y/y growth

Source: China National Tourism Administration, iResearch estimates, Barclays Research

11.84

7.86 9.40

14.95

3.0% 2.0% 1.0%

0

2016E

2015E

2014E

2013E

2012

2011

2010

5 2.94 3.76

0% 2009

18.87

20% 10%

0 2008

23.50 10

0.0% 2008

50

173.0

4.0%

30%

OTA market size

2016E

200

15

2015E

27.0%

6.0% 5.0%

40%

2014E

250

31.6% 27.2% 25.0% 22.5% 408.0

20

2013E

300

7.0% 5.8% 5.4% 5.4% 5.5% 5.5% 5.6%

2010

350

6.5% 6.0% 5.9%

2012

400

25

2011

53.6%

2009

450

FIGURE 83 China online travel agent (OTA) market (Rmb bn) and penetration

OTA % of online travel market

Source: China National Tourism Administration, iResearch estimates, Barclays Research

During the early cycle of the PC Internet boom in China, Ctrip leveraged its full-service offering (call centre + online booking platform) as well as its efficient execution ability to take market share from the fragmented offline travel agents. This translated to 50%+ topline growth and 60% earnings growth during 2005-07 vs 15-20% over 2011-12. Ctrip traded at a 30-50x one-year forward P/E multiple during this period. The number of travel agencies grew at a mid-to-high-single-digit level over 2005-07, down from a double-digit growth rate over 2000-05. This suggests to us that Ctrip and other leading OTAs took market share from smaller offline agencies, which contributed to Ctrip’s market share gains and revenue growth that was 2-3x higher than the industry average. FIGURE 85 Ctrip earnings and y/y growth (2005-07)

FIGURE 84 Ctrip revenues and y/y growth (2005-07) 180

164.38

160

56.4%

58%

70

56%

60

54%

50

52%

40

50%

30

48%

20

46%

10

44%

0

66.52

70%

67.3%

64.4%

140 53.7%

120

99.94

100 80

64.68

49.4%

60

0 2005

2006 Net revenues


13 September 2013

2007 yoy growth

60% 50%

37.83

40%

27.98 30.6%

30% 20%

40 20

80%

10% 0% 2005

2006

Non-GAAP net income

2007 yoy growth


56


FIGURE 86 Ctrip one-year forward P/E band (2005-07)

FIGURE 87 Ctrip one-year forward P/E ratio (2005-07) 60

$35

50x $30

50

$25

40x

$20

30x

$15

20x

+1 SD

30

Avg P/E -1 SD

20

$10

10x

$5

40

10

Jul-07

Oct-07

Jan-07

Apr-07

Jul-06

Oct-06

Jan-06

Apr-06

Jul-05

Oct-05

Jan-05

Jul-07

Oct-07

Apr-07

Jan-07

Jul-06

Oct-06

Apr-06

Jan-06

Jul-05

Oct-05

Apr-05

Jan-05


Apr-05

-

$0


The emergence of online platforms such as Qunar and Taobao led to slower market share gains for Ctrip during 2010-12, as reflected in its slower revenue growth. However, as one of the early movers in developing and providing a comprehensive mobile app, we believe Ctrip could prove once again its ability to further consolidate smaller offline agents as it increases its mobile app penetration. As a result, we believe a re-acceleration of top-line growth for Ctrip is likely over the next 12-24 months, boosted by faster market share gains. Growth in the number of travel agencies continued to decelerate in 2012 (see Figure 88) and we expect it to record further y/y declines in the next few years as market consolidation by the leading OTAs continues. FIGURE 88 Number of travel agencies in China 30%

30,000 25% 23%

25,000 20,000

18%

17%

22,691

17%

16% 13,361

15,000 8,993

10,000 4,986

6,222

11,552 10,532 10%

17,957 14,927

18,943

23,867 24,311

20%

16,245

12% 9%

15%

11%

11%

7,326

25%

20,110 20,399

10%

5% 6%

5,000

5% 2%

1%

# of Travel Agency in total

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

0%

1997

0

5%

YoY growth

Source: China National Tourism Administration, iResearch, Barclays Research

13 September 2013

57


Estimate revisions Packaged tours: Based on our expectation that Ctrip’s packaged tour business will benefit from the partnership with Qunar, we raise our package tour estimates for 2014 and 2015, with y/y growth of 35% and 33%, respectively, up from 29% and 27% previously. Hotel revenues: We raise our hotel volume assumptions to reflect faster volume pick-up, benefiting from smartphone penetration. We now estimate hotel revenue grow at 29% and 22% y/y in 2014 and 2015, respectively, up from 22.5% and 24% previously. Air ticketing revenues: We also raise our air ticketing volume assumption to reflect faster volume pick-up, benefiting from smartphone penetration. We estimate air ticket revenues grow at 25.9% and 24.9% y/y in 2014 and 2015, respectively, up from 22.7% and 22.8% previously. Margins: We also assume operating leverage kicks in on faster revenue growth, and now model non-GAAP operating margins of 27.3% and 27.7% for 2014 and 2015, respectively, up from 26.8% and 26.6% previously. These changes drive our non-GAAP FD EPADS estimates for 2013-15 higher by 0.2-10%. FIGURE 89 Ctrip – revisions to Barclays Research estimates Net revenues (US$ mn)

Non-GAAP FD EPADS (US$)

Net profit (US$ mn)

Old

New

% Chg

Old

New

% Chg

Old

New

% Chg

2013E

854.9

858.3

0.4%

1.41

1.41

0.2%

131.1

131.3

0.1%

2014E

1,058.6

1,102.6

4.2%

1.79

1.88

5.3%

170.8

181.3

6.2%

2015E

1,309.9

1,380.9

5.4%

2.19

2.41

10.0%

204.26

231.24

13.2%


Following the better-than-expected 2Q13 results and stronger-than-expected 3Q13 guidance, as well as our view that top-line growth will accelerate further, driven by mobile adoption with further market-share gains, we turn much more positive and confident on Ctrip’s growth outlook. We see a very healthy trend for online travel demand and we expect Ctrip to have a dominant position in this market in the next few years.

Valuation: raise PT to US$60 On the back of our more positive outlook, we raise our price target to US$60 (from US$45) based on a 32x target multiple (up from 25x, raised to reflect the transition to the mobile trend) on our revised 2014E non-GAAP EPADS of US$1.88 (previously US$1.79). Our new target multiple of 32x is in line with our revised two-year earnings CAGR (2013-15E) of 32%, also suggesting 1.0x PEG. We believe this higher multiple is warranted, given the stabilizing margin trend and potentially improving margin outlook, as well as faster growth driven by faster mobile adoption and overall structural leisure travel demand growth.

Risks We see the following downside risks to our price target: 1) Many existing as well as new players have started to compete more aggressively to capture the growing demand for travel from China’s expanding middle-class population. Ctrip continues to face strong competition from eLong, Qunar, Taobao Travel and other OTAs, as well as increased direct sales from suppliers (airlines and hotels). 2) Pricing competition on hotel coupon discounting and air coupon rebates will likely continue. Any further increase in intensity of competition or irrational pricing competition could put pressure on Ctrip’s market-share gains and likely further pressure margins, as Ctrip defends its market position. 3) Any unexpected macro events such as earthquakes, war or a slowdown in the economy could affect travel demand. 13 September 2013

58


Income statement FIGURE 90 Ctrip.com International – consolidated income statement (US$ million, except per share data) Year to 31 Dec, US$m

2012A

1Q13A

2Q13A

3Q13E

4Q13E

2013E

2014E

2015E

Hotel reservation

273.3

72.5

83.3

94.6

95.4

346.6

448.1

547.2

Air-ticketing

271.3

73.5

85.1

96.6

90.5

346.6

436.3

544.8

Packaged tour

110.7

37.9

30.5

48.1

34.6

151.5

204.9

272.6

32.1

8.2

10.7

11.1

12.0

42.2

53.4

66.3

Corporate Travel Others Total revenues Less: Business tax and related surcharges

20.4

5.7

5.6

6.1

5.6

23.0

26.4

30.4

707.7

197.8

215.1

256.5

238.1

909.9

1,169.3

1,461.3

40.2

10.9

12.3

14.6

13.6

51.5

66.6

80.4

Net revenues

667.5

186.9

202.8

241.9

224.5

858.3

1,102.6

1,380.9

YoY Growth

18.9%

27.4%

27.9%

26.6%

25.1%

26.7%

28.5%

25.2%

166.6

49.0

50.4

67.3

59.4

226.7

291.4

364.7

Cost of services Gross profit

501.0

137.9

152.5

174.6

165.1

631.7

811.3

1,016.2

75.0%

73.8%

75.2%

72.2%

73.5%

73.6%

73.6%

73.6%

Product development

125.1

37.5

44.8

47.9

50.0

180.1

215.3

255.5

Sales and marketing

149.0

40.9

42.2

48.4

44.0

175.5

233.7

269.3

52.5

15.8

15.5

18.1

19.1

68.4

90.6

109.1

Gross margin

General and administrative Share-based compensation Total operating expenses Operating profit

69.3

18.0

18.1

19.4

20.2

75.6

99.2

131.2

395.9

112.1

120.5

133.8

133.2

501.0

608.9

765.0

105.1

25.8

31.9

40.8

31.8

130.6

202.3

251.1

26.1%

23.4%

24.7%

24.9%

23.2%

24.1%

27.3%

27.7%

Interest income

26.6

3.6

7.0

4.9

5.2

20.7

23.0

25.2

Other income

20.9

1.2

3.9

3.3

1.2

9.6

5.7

21.9

Operating margin (non-GAAP)

Profit before tax and MI

152.6

30.6

42.9

49.0

38.2

161.0

231.0

298.3

Income tax expense

(47.3)

(9.9)

(11.5)

(14.7)

(11.5)

(47.5)

(71.3)

(89.5)

3.8

3.9

3.6

3.8

4.0

15.4

16.7

16.7

Minority interests

114.7

24.7

34.3

39.3

32.5

131.3

181.3

231.2

GAAP basic EPADS (US$)

Net profit

0.84

0.19

0.26

0.30

0.25

1.00

1.39

1.75

GAAP diluted EPADS (US$)

0.79

0.18

0.24

0.27

0.22

0.90

1.22

1.54

Non-GAAP net profit Net margin (non-GAAP) Non-GAAP diluted EPADS (US$) Weighted average share count (m)

183.97

42.68

52.39

58.68

52.73

206.89

280.58

362.42

27.6%

22.8%

25.8%

24.3%

23.5%

24.1%

25.4%

26.2%

1.28

0.30

0.36

0.40

0.36

1.41

1.88

2.41

144.36

144.06

146.30

147.32

148.06

146.43

148.91

150.40


13 September 2013

59


BAIDU (BIDU US; OW; PT US$171, +16%) BIDU Stock Rating



USD 171.00 Price (11-Sep-2013)


+16%

Repositioning its mobile strategy Although Baidu potentially faces headwinds – such as Qihoo gaining more share in PC search and getting traction from small and medium-size enterprises on mobile ad budgets – we view its acquisition of 91 Wireless, Nuomi and PPS as all strengthening its mobile position and believe there are upside catalysts to Baidu’s mobile story. In addition, its video business, iQiyi, continues to ride on the emerging “multi-screen” strategy with early entrance into smart TV competition that should help strengthen iQiyi’s brand and expand its user reach. We believe the key questions in the next few quarters will revolve around integration progress and realization of synergies with the new businesses it has acquired and management execution. We are adjusting our estimates to reflect the consolidation of 91 Wireless starting in 4Q13 and Nuomi starting in the latter half of 4Q13. We raise our 12-month price target to US$171 (from US$153) based on 27x (from 25x) our revised 2014E non-GAAP EPADS of US$6.33 (from US$6.12). Our target multiple of 27x implies 1.0x PEG on a two-year (2013-15E) earnings CAGR of 27%, which we believe is reasonable. App store as important mobile access point: With its acquisition of 91 Wireless, we think investors can be confident that Baidu has secured an important mobile access point. As noted in our sector discussion earlier, other than independent apps like WeChat and Weibo, the alternative way of capturing sizeable mobile traffic is having an app store. With 91, Baidu can expand its ability to monetize mobile traffic via pay per app downloads and share mobile game revenues. Leveraging the strength of 91 Wireless to encourage developers to build on Baidu’s cloud infrastructure could enable Baidu to develop its search functionality, including in-app search features, as well as encourage long-tail app developers to convert their apps into the “light app” approach where Baidu is cultivating the necessary infrastructure. O2O synergies with map: Integrating Nuomi’s group buying business into Baidu map will strengthen its map offering, leveraging its LBS function and user base and allowing Baidu to more aggressively penetrate local merchants’ O2O business. Upside to mobile search revenues: While we believe advertisers have been slow to adopt mobile search advertising, we believe Baidu is doing a good job in educating and encouraging small and medium-size enterprises to try out mobile. Hence, we believe it is a matter of time before we see more meaningful portions of advertising budgets shifting to mobile. After the surprising disclosure that 10% of total revenue were from mobile in 2Q13, given how quickly the overall space is progressing, we would not be surprised if mobile search revenues ramp faster and more smoothly than we previously expected and hence we see potential upside risk to 3Q13 guidance and our estimates in this segment. Risks: 1) Intensified PC search competition as Qihoo ramps up monetization and if Qihoo successfully acquires Sogou (Sohu.com Inc.: Adjusting estimates and price target, 31 May 2013) 2) integration risks with 91 Wireless and Nuomi; and 3) margins and mobile revenues ramp failing to meet expectations.

13 September 2013

60


Strengthening mobile position via acquisitions 1. Baidu iQiyi leads the market in smart TV initiative On 4 Sep, Baidu’s iQiyi announced it would sell 48-inch smart TVs jointly with TCL Multimedia Technology Group (1070 HK, Not Rated). They will effectively cost Rmb4,567 for an advanced series and Rmb2,999 for the normal series. According to the agreement, iQiyi will provide the content, while TCL is responsible for product manufacturing. As iQiyi already has a large inventory of professionally produced video content such as drama, movies and reality shows, we believe the new initiative in smart TVs could enable iQiyi to gain an early mover advantage in penetrating users’ home entertainment time, allowing users to consume its content regardless of the screen/device and regardless of whether the user is out and about or at home. This will help expand its user base and increase the time users spend on iQiyi content.

2. 91 Wireless acquisition allows Baidu to enter app store and mobile game operations On 13 Aug, Baidu announced it has signed a definitive merger agreement to acquire a 100% equity interest in 91 Wireless for a total consideration of US$1.9bn. We view the completion of the agreement on this transaction as strategically positive and sound for the following reasons: 1) the 91 app store will allow Baidu to gain an important mobile traffic access point/gateway, strengthening its ability to control mobile traffic; 2) Baidu can leverage the 91 app store’s distribution ability to influence the way developers create and monetize their apps; 3) Baidu could leverage the strength of 91 Wireless to encourage developers to build on Baidu’s cloud infrastructure, allowing Baidu to develop its search functionality, which would includes in-app search features; 4) Baidu can expand its ability to monetize mobile traffic via pay per app downloads and share mobile game revenues (diversifying away from a reliance on SME and business, towards consumers’ wallets); and 5) 91 app store will also become a convenient distribution channel for Baidu to promote and push its own mobile apps such as map, mobile browsers, and its search app. For more details, please refer to our previously published reports: Baidu - Acquiring 91 Wireless; taking a step forward on mobile app store and mobile search initiatives (July 16) and Baidu – 91 Wireless acquisition officially signed (August 14).

3. Nuomi acquisition allows Baidu to penetrate into local services market On 22 Aug, Baidu announced it was acquiring a 59% equity interest in Nuomi for a total consideration of US$160mn, implying a total valuation of US$271mn. Nuomi, as one of the top three groupbuy sites in China, generated approximately US$120mn in general merchandise sales with 3.8mn active paying users in 2Q13. Thirty percent of sales transacted on Nuomi derived from mobile devices in 2Q. We view the transaction as strategically positive, as we think this investment could: 1) create clear synergy with Baidu Map’s LBS function, and offers a way to monetize Baidu’s mapping/LBS services on mobile; 2) strengthen Baidu’s mobile Internet position, together with the consolidation of 91 Wireless; and 3) enable Baidu to penetrate the eCommerce market, particularly the huge number of local services merchants in China, and diversify Baidu’s business and revenue streams. However, on the negative side, given that Nuomi is still loss-making and groupbuy is a low-margin business, we expect the investment in Nuomi to further pressure Baidu’s margins post the transaction.

13 September 2013

61

Barclays | China Internet We estimate Nuomi will generate total net revenues (only recognizing commissions as revenues) of US$26mn in 2013. For the full year 2012, Nuomi recorded total net revenues of US$16.1mn while total operating expenses (as disclosed by Renren on its earnings result call) were approximately US$42.2mn, implying a total operating loss of around US$26mn. For 1Q13, Renren reported Nuomi’s expenses were US$11.8mn while it only recorded net revenues of US$5.1mn, suggesting an operating loss of US$6.7mn. Renren did not disclose the details of Nuomi’s expenses in 2Q13. Assuming the investment in Nuomi stays relatively stable each quarter, total expenses for 2013 could range between US$45mn and US$50mn, which could translate to a negative impact on Baidu’s overall margins of approximately 1%. However, being part of a big family, Baidu will likely use its resources (like large traffic numbers, map penetration, etc) to help Nuomi grow its market share quickly and effectively. This should translate into higher transaction value and revenues so that, over time, the operating losses gradually improve.

Estimate revisions Based on the latest results update and Baidu’s acquisition of 91 Wireless and Nuomi, we revise our forecasts accordingly to reflect the consolidation of 91 Wireless starting 4Q13 and reflect a half-quarter contribution from Nuomi in 4Q13. We raise our 4Q13 estimates to reflect our assumption for the 91 Wireless contribution. We add a US$43mn revenue contribution from 91 Wireless and add US$3.95mn revenue from the half quarter (as we believe the transaction is likely to close in mid-to-end November) contribution from Nuomi. We estimate 91 Wireless will contribute approximately 3% of Baidu’s total revenues for 2014 and 2015. Since we estimate that 91 Wireless was already profitable, the transaction should be accretive to earnings for 2014 and 2015. On the other hand, we estimate Nuomi will account for 0.5% of Baidu’s total revenues for 2014 and 0.6% for 2015, and given it is still loss making but still small-scale, we estimate the negative margin impact from Nuomi is relatively limited, and hence we adjust our sales and marketing expense estimates slightly to reflect the higher cost component for the Nuomi business. FIGURE 91 Baidu – revisions to Barclays Research estimates Net revenues (US$ mn)

Non-GAAP FD EPS (US$)

GAAP net profit (US$ mn)

Old

New

% Chg

Old

New

% Chg

Old

New

% Chg

2013E

4,734

4,778

0.9%

5.03

5.05

0.5%

1,690

1,696

0.3%

2014E

6,325

6,562

3.8%

6.12

6.33

3.4%

2,016

2,080

3.2%

2015E

8,006

8,326

4.0%

7.96

8.20

3.0%

2,628

2,702

2.8%


Valuation: raising PT to US$171 With our revised estimates, we raise our12-month price target from US$153 to US$171. Our new price target of US$171 is based on 27x 2014E non-GAAP EPADS of US$6.33 (from US$6.12 previously). We believe our 27x target multiple is reasonable and is in line with the company’s two-year earnings CAGR of 27% for 2013-15E, and implies 1.0x PEG.

13 September 2013

62


FIGURE 92 Baidu: one-year forward P/E band

FIGURE 93 Baidu: one-year forward P/E ratio

$350

140

$300 $250 $200

50x

120

40x

100

30x

$150

80 60

20x

$100

10x

$50 $0

+1 SD 40

Avg PE

20

-1 SD

Source: Bloomberg, Barclays Research estimates

Aug-13

Aug-12

Aug-11

Aug-10

Aug-09

Aug-08

Aug-07

Aug-06

Aug-05

Aug-13

Aug-12

Aug-11

Aug-10

Aug-09

Aug-08

Aug-07

Aug-06

Aug-05

-

Source: Bloomberg, Barclays Research estimates

As a result of stronger 3Q guidance, faster-than-expected ramp on mobile monetization, and the proposed acquisition of 91 Wireless, we believe Baidu has stepped up its efforts to reposition itself to capture growth in the mobile Internet segment. While it is still early in its mobile transition, we are turning more positive on the company’s progress and its achievements in improving its overall search technology and customer adoption rate. We believe this could be the beginning of the company’s mobile inflection point. Hence, we maintain our Overweight rating with a new PT of US$171.

Risks Competition in PC search likely to intensify: As Qihoo’s search revenues ramp up aggressively, Baidu will likely face more intense competition in desktop search, which could further pressure its traffic acquisition costs as well as S&M spend, as Baidu will need to step up its efforts to defend market share and retain employees. In addition, if the reported newsflow of Qihoo acquiring Sogou materializes, this could allow Qihoo to achieve 25% traffic share and become a more meaningful competitor to Baidu. Mobile revenue ramp and margin trend failing to meet expectations: While we think it is encouraging that Baidu now generates 10% of its total revenues from mobile, we believe the sudden jump can be attributed to: 1) an aggressive push from the sales team; and 2) aggressive discounts or incentives to drive more and faster adoption from advertisers. Currently, as users’ behaviour on and experience of mobile devices continues to evolve, we believe most of the click-through rates on mobile are likely to be lower quality and hence there is the risk that advertisers find ROI on mobile traffic is low and thus decide to spend less or opt out of the mobile keywords option. If this were to happen, mobile revenues could suffer. Furthermore, given the continued investment phase, and as it is defending its competitive position, Baidu will likely need to spend aggressively on S&M and traffic acquisition, which will likely weigh on its margins, and, if the revenue ramp fails to materialize or the macro environment worsens, there is downside risk to margins and earnings.

13 September 2013

63


Income statement FIGURE 94 Baidu – consolidated income statement (US$ million, except per share date) Year to 31 Dec

2012A

1Q13A

2Q13A

3Q13E

4Q13E

2013E

2014E

2015E

Online marketing services

3,570.7

958.5

1,228.4

1,436.0

1,459.6

5,093.9

6,786.8

8,592.7

9.7

2.5

3.5

3.5

50.6

60.2

269.6

360.3

3,580.4

961.0

1,231.9

1,439.5

1,510.2

5,154.1

7,056.4

8,953.1

252.4

69.7

88.8

100.8

105.7

365.0

493.9

626.7

3,328.0

891.3

1,143.1

1,338.7

1,404.5

4,777.6

6,562.5

8,326.3

55.4%

42.0%

43.4%

44.5%

48.5%

43.6%

37.4%

26.9%

Traffic acquisition costs

309.8

98.2

143.4

179.9

202.4

623.8

1,051.1

1,427.5

Bandwidth costs

171.6

65.2

74.5

86.4

90.6

316.7

415.9

502.7

Depreciation of servers and other equipment

172.1

53.6

58.2

69.1

74.0

254.9

372.4

472.8

91.4

35.2

39.6

46.1

49.1

170.0

223.6

272.8

Others Total gross revenues Less: Business tax and surcharges Total net revenues YoY growth

Operational expenses Total cost of revenues

779.5

267.6

340.2

416.0

456.8

1,480.9

2,267.4

2,941.9

2,548.5

623.7

802.9

922.7

947.7

3,296.8

4,295.1

5,384.4

71.2%

64.9%

65.2%

64.1%

62.8%

64.1%

60.9%

60.1%

Selling, general and administrative

392.7

131.8

172.0

204.4

226.5

734.8

947.2

1,080.3

Research and development

346.2

118.1

144.1

167.0

184.2

613.5

830.1

995.5

Gross profit Gross margin

Share-based compensation Total operating expenses Operating income Operating margin (GAAP) Interest income Other income/(expense), net

34.1

17.9

13.6

21.6

22.7

75.7

141.1

179.1

773.1

267.8

329.8

393.0

433.4

1,424.0

1,918.4

2,254.8

1,775.4

355.9

473.1

529.7

514.2

1,872.8

2,376.7

3,129.6

49.6%

37.0%

38.4%

36.8%

34.1%

36.3%

33.7%

35.0%

120.7

29.7

36.9

37.3

37.7

141.7

154.6

160.9

72.9

1.0

4.5

2.9

3.0

11.4

(13.0)

(18.8)

Profit before tax

1,921.8

385.8

514.5

569.8

554.6

2,024.6

2,517.0

3,270.4

Tax

(250.8)

(62.6)

(83.8)

(96.9)

(94.3)

(337.6)

(440.5)

(572.3)

Net income

1,681.3

328.9

430.8

473.8

461.3

1,695.6

2,080.1

2,701.7

46.9%

34.2%

35.0%

32.9%

30.5%

32.9%

29.5%

30.2%

GAAP net margin Non-GAAP Net income

1,715.4

346.8

444.4

495.4

483.9

1,771.3

2,221.3

2,880.8

Non-GAAP net margin

47.9%

36.1%

36.1%

34.4%

32.0%

34.4%

31.5%

32.2%

GAAP basic EPS (US$)

4.79

0.95

1.23

1.35

1.32

4.85

5.95

7.72

GAAP diluted EPS (US$)

4.81

0.95

1.23

1.35

1.31

4.84

5.93

7.69

Non-GAAP diluted EPS (US$)

4.90

1.00

1.26

1.41

1.38

5.05

6.33

8.20

349.79

349.90

349.94

350.44

350.94

350.31

351.08

351.28

Weighted average diluted shares (m) Source: Company data, Barclays Research estimates

13 September 2013

64


E-COMMERCE CHINA DANGDANG (DANG US; UW; PT US$6.00; -33%%) DANG Stock Rating

UNDERWEIGHT Industry View


USD 6.00 Price (11-Sep-2013)


-33%

Transition to marketplace model improving margins but sacrificing top-line growth We maintain our Underweight rating on Dangdang but raise our 12-month price target to US$6.00 (from US$4.50) to reflect gross margin improvements. Similar to 1Q13, Dangdang’s proactive approach to shift its low-margin self-procurement general merchandise business to a commission-based marketplace model seems to be working and preserving its cash position effectively, at least in the near term. However, with the growth rate for its total gross merchandise value (GMV) decelerating from 175% y/y in 1Q13 and 178% in 2Q13 to 3Q13 guidance of 165% despite contributions from its newly launched flash sales platform “Wei Ping Hui”, we are cautious over whether the margin improvement driven by shifting to a commission-based marketplace model might eventually reach a ceiling. In addition, as the eCommerce market has yet to achieve stability and market share gain remains a near- to mid-term priority for other eCommerce peers, we believe a more aggressive push by competitors in online book pricing would put Dangdang’s ability to sustain its margins under pressure and could challenge its return to profitability. Our new price target of US$6.00 is based on our DCF model, and our discount rate and perpetual growth rate assumptions are unchanged (we use a WACC of 18% and an exit growth rate of 3%). 3Q13 guidance in line: After reporting 2Q13 results that were broadly in-line with Bloomberg consensus expectations and our estimates, Dangdang guided for 3Q13 total revenue to grow 23% y/y (the same as 2Q13) to Rmb1.584bn (US$259mn). This was c2% higher than our estimate but in-line with consensus estimates at that time. The company guided for the gross merchandise value of the marketplace business to grow 165% y/y (vs 175% in 2Q13) to Rmb905mn, driven by a continued shift of more items to the marketplace, cross-selling and targeted marketing efforts. We now forecast a GMV for the marketplace business of Rmb908mn. Margins flattish sequentially: Gross margin came in at 17.1% in 2Q13, down 0.1% q/q compared to 17.2% in 1Q13 and 13.1% in 2Q12, benefitting from the continued transition to the marketplace model. However, aggressive promotions in the summer could lead to short-term fluctuations in margins. On the improving margin trend, we reduce our loss per share expectations for 2013 and 2014 by 13% and 43%, respectively. This leads to our higher price target of US$6.00. In-house apparel brand suspended due to lack of brand awareness: According to local press reports (Sina Tech, 11 Sep), Dangdang’s chairman announced that the company would temporarily suspend expansion plans for its in-house apparel brand, “Dangdang You Ping”, as a result of a lack of brand awareness and economies of scale. The brand was only launched in May 2013. Lack of design & manufacturing capacity, or platform and cashreservation support would restrict the company’s ability to penetrate other arenas easily, in our view. Risks: 1) An earlier-than-expected return to profitability; 2) if the marketplace model grows to be a sizeable contributor to the top line and margins; and 3) if the company were to raise more funding or become of interest to potential acquirers.

13 September 2013

65


Estimate revisions Following Dangdang’s 2Q13 results, 3Q13 guidance and the latest business update, we revise our estimates. FIGURE 95 Dangdang – revisions to Barclays Research estimates Revenues (US$mn)

2013E

Non-GAAP EPS (US$)

Net Profit (US$mn)

Old

New

% Chg

Old

New

% Chg

Old

New

% Chg

1,025

1,049

1.0%

(0.61)

(0.50)

NA

(50.80)

(42.31)

NA

2014E

1,239

1,288

3.0%

(0.52)

(0.27)

NA

(44.44)

(24.12)

NA

2015E

1,454

1,558

6.4%

0.05

0.12

NA

0.30

5.71

NA


• We raise our growth assumptions for marketplace revenue to US$16.4mn, US$66.1mn and US$123.9mn for 3Q13, full-year 2013 and 2014, implying y/y growth of 150%, 134% and 87%, respectively, but lower our assumptions for general merchandise revenue to US$73.8mn, US$329.4mn and US$374.6mn for 3Q13, full-year 2013 and 2014, implying y/y growth of 14%, 14.3% and 13.7%, respectively.

• We raise our gross margin assumption for 3Q13 to 17.6% from 17.1%, and now expect a gradual margin improvement from 17.7% in 2013 to 19.3% in 2014.

Valuation: raise PT to US$6.00 We raise our price target to US$6.00 from US$4.50 because of our revised assumption of a higher revenue contribution from the high-margin marketplace business, along with a lower contribution from the low-margin self-procurement general merchandise model. As a result of the company’s improving margin prospects, we reduce our loss per share expectation by 13% in 2013 and 43% in 2014. We reiterate our Underweight rating given our concerns over the sustainability of the company’s margin improvement story and the competitive landscape remaining very intense. We use DCF to value the company due to the earnings fluctuations caused by the intensive price war with other eCommerce players, the company’s low margins and its aggressive approach to investments, which have led to big losses in recent quarters. Our discount rate and perpetual growth rate assumptions are unchanged (we use a WACC of 18% and an exit growth rate of 3%).

Risks The key upside risks to our price target for Dangdang include the following: 1) an earlierthan-expected return to profitability; 2) if the marketplace model grows to be a sizeable contributor to the top line and margins; and 3) if the company were to raise more funding or become of interest to potential acquirers.

13 September 2013

66


Income statement FIGURE 96 Dangdang – consolidated income statement (US$ million, except per share data) Year to 31 Dec Product revenue

2012A

1Q13A

2Q13A

3Q13E

4Q13E

2013E

2014E

2015E

805.9

205.4

232.9

244.8

296.9

982.5

1,164.6

1,367.5

Media

522.1

139.1

154.0

171.0

187.3

653.1

789.9

947.9

General merchandise

283.8

66.3

78.9

73.8

109.6

329.4

374.6

419.6

27.8

9.4

10.4

16.4

29.8

66.1

123.9

190.8

Other revenue Total net revenues YoY Growth Cost of revenues Gross profit

833.7

214.7

243.3

261.2

326.7

1,048.6

1,288.4

1,558.3

45.0%

24.8%

28.0%

27.5%

26.1%

25.8%

22.9%

20.9%

717.4

177.9

201.7

215.4

266.2

863.3

1,040.1

1,230.8

116.3

36.8

41.7

45.9

60.6

185.4

248.3

327.5

13.9%

17.2%

17.1%

17.6%

18.5%

17.7%

19.3%

21.0%

Fulfillment

118.2

29.7

29.1

31.9

42.5

133.5

162.4

196.3

Marketing

31.5

7.0

12.5

9.4

14.7

43.7

45.3

53.0

Gross margins

Technology and content

24.6

7.9

7.7

8.9

9.3

33.9

39.3

46.7

General and administrative

22.1

5.2

5.7

6.5

7.2

24.7

35.0

39.0

Total operating expenses

194.8

49.8

54.5

56.7

73.7

235.3

282.1

335.0

(Loss) income from operations

(78.5)

(12.9)

(12.9)

(10.8)

(13.1)

(49.9)

(33.8)

(7.6)

-9.4%

-6.0%

-5.3%

-4.1%

-4.0%

-4.8%

-2.6%

-0.5%

Interest income

5.0

0.7

0.1

0.7

0.7

2.1

3.2

4.6

Other (expenses) income, net

2.3

0.5

2.3

1.3

1.3

5.5

6.5

4.9

(71.2)

(11.7)

(10.4)

(8.9)

(11.2)

(42.3)

(24.1)

5.7

-

-

-

-

-

-

-

-

(71.2)

(11.7)

(10.4)

(8.9)

(11.2)

(42.3)

(24.1)

5.7

Operating margin (GAAP)

(Loss) income before income taxes Income tax benefit Net (loss) income Net margin (GAAP)

-8.5%

-5.5%

-4.3%

-3.4%

-3.4%

-4.0%

-1.9%

0.4%

Non-GAAP net income

(69.4)

(11.3)

(10.0)

(8.5)

(10.7)

(40.5)

(21.9)

9.5

GAAP basic EPADS (US$)

(0.89)

(0.15)

(0.13)

(0.11)

(0.14)

(0.53)

(0.30)

0.07

GAAP diluted EPADS (US$)

(0.89)

(0.15)

(0.13)

(0.11)

(0.14)

(0.53)

(0.30)

0.07

Non-GAAP diluted EPADS (US$)

(0.87)

(0.14)

(0.12)

(0.11)

(0.13)

(0.50)

(0.27)

0.12

Weighted average diluted shares (m) - basic

80.16

80.17

80.20

80.40

80.60

80.34

81.11

81.31

Weighted average diluted shares (m) - diluted

80.16

80.17

80.20

80.42

80.63

80.36

81.18

81.40


13 September 2013

67


2Q13 RESULTS REVIEW FIGURE 97 2Q13 China Internet stocks’ results review Stock Code

0700

BIDU

CYOU

DANG

NTES

RENN

SINA

SOHU

YOKU

CTRP

GA

GAME

PWRD

QIHU

Currency RMB USD Sales 14,384.5 1,143.1 Gross profit 7,794.2 802.9 R&D NA 144.1 S&M 1,234.1 172.0 G&A 2,400.9 NA Op income 4,565.1 473.1 Effective tax rate 20% 16% Net income 3,680.4 430.8 Non-GAAP NI 4,152.0 444.4 EPS 1.98 1.23 Non-GAAP EPS 2.23 1.26 Cash balance 35,186 3,700 Cash per share 18.9 10.6 Shares (diluted) 1,862.8 349.7 SBC 259.8 13.6 SBC as % revs 1.8% 1.2%

USD 182.4 151.4 26.3 18.5 13.3 93.3 14% 75.2 75.6 1.41 1.41 481 9.0 53.5 0.4 0.2%

USD 243.3 41.7 7.7 12.5 5.7 (12.9) 0% (10.4) (10.0) (0.13) (0.12) 210 2.6 80.2 0.4 0.2%

USD 369.0 283.4 33.1 50.6 12.3 174.6 11% 178.4 191.4 1.37 1.47 3,003 23.1 130.2 12.9 3.5%

USD 49.6 31.7 22.2 30.2 14.0 (34.7) -1% (9.3) (3.8) (0.02) (0.01) 836 2.2 375.4 5.2 10.4%

USD 157.5 84.3 32.5 33.9 9.0 (18.2) -30% (11.5) 14.2 (0.17) 0.21 1,237 18.5 66.8 31.6 20.1%

USD 338.9 225.4 63.0 71.5 25.2 64.4 23% 21.5 22.5 0.56 0.58 887 23.0 38.5 1.2 0.4%

USD 122.8 31.0 10.8 26.9 12.3 (19.0) 0% (17.1) (7.3) (0.10) (0.04) 544 3.3 165.6 7.9 6.4%

USD 202.8 152.5 44.8 42.2 15.5 31.9 27% 34.3 52.4 0.24 0.36 873 6.0 146.3 18.1 8.9%

USD 95.8 84.2 13.2 8.8 5.6 58.3 3% 62.9 62.5 0.24 0.25 544 2.2 247.1 2.6 2.7%

USD 175.6 113.4 26.7 27.0 12.5 47.3 -7% 60.6 64.8 0.23 0.24 482 1.8 267.8 1.1 0.6%

USD 115.4 87.2 32.5 31.8 12.0 10.9 20% 13.2 15.9 0.27 0.33 372 7.6 49.0 2.8 2.4%

USD 151.7 133.8 60.3 24.0 12.9 36.6 11% 33.0 51.0 0.17 0.40 379 2.0 191.0 18.0 11.8%

YoY growth Sales Gross profit R&D S&M G&A Op income Net income Non-GAAP NI EPS Non-GAAP EPS Cash balance Cash per share

36.6% 25.4% NM 102.4% 28.9% 15.9% 18.7% 22.6% 18.6% 22.5% 17.5% 17.5%

43.4% 29.1% 78.8% 91.8% NM 6.8% -0.4% 0.7% -0.7% 0.3% 26.5% 26.5%

23.8% 28.0% 22.3% 67.7% 57.1% 25.3% 27.3% 119.2% 70.9% 17.6% 14.0% NM 8.8% NM 4.5% NM 8.9% NM 4.5% NM 3.4% -7.1% 3.4% -7.4%

19.4% 33.3% 34.3% 67.9% 27.2% 25.5% 29.5% 30.3% 31.0% 31.8% 28.3% 29.7%

10.7% 19.7% 13.7% 20.5% 24.6% 28.4% 40.0% 0.5% 31.0% 14.8% NM NM NM NM NM 280.6% NM NM NM 363.5% -9.3% 72.7% -5.9% 72.7%

32.5% 101.3% 44.6% NM 50.6% 95.1% 47.4% 113.1% 57.4% 81.8% 49.4% NM 99.9% NM 37.6% NM 99.2% NM 37.4% NM 12.8% -0.5% 12.7% -30.6%

32.3% 18.6% -1.7% 8.4% 118.9% 32.2% 20.2% 1.7% 0.7% 117.0% 62.5% 12.6% 13.0% 8.8% 117.5% 31.8% 145.9% 31.2% 65.7% 102.4% 27.2% -6.6% 10.8% -8.3% 69.3% 20.7% 15.8% -15.7% -55.3% 153.2% 82.0% 26.6% 24.3% -47.2% 134.6% 45.7% 22.0% 21.7% -42.3% 97.9% 86.7% 17.2% 30.2% -47.5% NM 46.2% 18.7% 27.5% -42.6% 90.6% 13.2% 87.3% 67.5% 9.4% -41.6% 13.6% 82.1% 75.4% 8.7% -62.5%

QoQ growth Sales Gross profit R&D S&M G&A Op income Net income Non-GAAP NI EPS Non-GAAP EPS

6.2% 2.6% NM 28.2% 9.3% -9.8% -9.0% 2.8% -8.8% 3.1%

28.3% 28.7% 22.0% 30.5% NM 32.9% 31.0% 28.1% 30.1% 26.6%

2.7% 2.6% 31.1% 42.3% 3.1% -8.2% -3.2% -3.0% -3.2% -3.0%

13.3% 13.0% -3.7% 79.8% 9.3% NM NM NM NM NM

6.5% 11.8% 10.2% 91.8% 0.6% -0.6% 4.2% 5.9% 3.9% 5.6%

6.5% 25.0% 5.8% 30.5% -7.4% 8.2% 36.4% 15.9% 24.1% -14.3% NM NM NM NM NM NM NM NM NM NM

10.2% 10.4% 22.3% 22.1% 14.2% -9.1% -6.5% -6.0% -6.6% -6.1%

47.8% NM 17.6% 31.0% -8.3% NM NM NM NM NM

8.6% 10.6% 19.5% 3.1% -1.9% 23.9% 38.7% 22.8% 35.5% 20.9%

3.9% 6.7% 5.4% 80.0% 10.7% 0.3% 11.8% 13.2% 13.7% 12.8%

1.5% 1.9% 6.9% -0.8% 7.3% -0.4% 55.1% 47.7% 56.5% 49.0%

14.8% 13.3% 11.5% 104.3% 10.7% -49.0% -37.6% -32.9% -37.9% -33.3%

38.0% 39.4% 20.2% -11.3% 8.6% 437.4% 494.4% 190.9% 292.1% 187.8%

Expense ratio R&D S&M G&A

NA 8.6% 16.7%

12.6% 15.1% NM

14.4% 10.1% 7.3%

3.1% 5.1% 2.3%

9.0% 13.7% 3.3%

44.7% 60.9% 28.3%

18.6% 21.1% 7.4%

8.8% 21.9% 10.0%

22.1% 20.8% 7.6%

13.7% 9.2% 5.9%

15.2% 15.4% 7.1%

28.1% 27.5% 10.4%

39.8% 15.8% 8.5%

Margins Gross margins Non-GAAP GM Operating margins Non-GAAP OpM Net margins Non-GAAP NM

54.2% 54.2% 31.7% 35.1% 25.6% 29.1%

65.2% 65.2% 38.4% 39.5% 35.0% 36.1%

83.0% 83.0% 51.1% 51.3% 41.2% 41.4%

17.1% 17.1% -5.3% -5.1% -4.3% -4.1%

66.5% 25.2% 66.5% 25.2% 19.0% -15.5% 19.4% -9.0% 6.4% -13.9% 6.6% -5.9%

75.2% 75.2% 15.7% 24.7% 16.9% 25.8%

87.9% 87.9% 60.8% 63.5% 65.6% 65.2%

64.6% 64.6% 26.9% 30.1% 34.5% 35.1%

75.5% 75.5% 9.5% 11.9% 11.4% 13.8%

88.2% 88.2% 24.1% 36.0% 21.8% 33.6%

20.6% 21.5% 5.7%

73.2% 64.0% 53.6% 73.2% 64.0% 56.4% 50.7% -70.0% -11.6% 53.4% -59.5% 8.5% 49.4% -18.8% -7.3% 52.1% -7.7% 9.3%


13 September 2013

68


APPENDIX 1: PRICE PERFORMANCE OF MAJOR INTERNET COMPANIES FIGURE 98 Share price performance – one month

FIGURE 99 Share price performance – three months

40%

120% 105%

32%

100%

22%

10% 1% 2% 2% 2%

5% 6% 6%

80%

40%

-10%

20% 0%

35% 30% 20%21% 12%12%14% 2% 3% 4%

Note: Prices as of 11 Sep 2013 Source: Bloomberg, Barclays Research


FIGURE 100 Share price performance – six months

FIGURE 101 Share price performance – year to date 190% 184%

200% 180% 160%

60% 40% 20%


13 September 2013

YY

QIHU

SINA

CTRP

VIPS

BIDU

QIHU

YY

CTRP

DANG

PWRD

VIPS

SINA

BIDU

700HK

NTES

SOHU

YY

QIHU

CTRP

DANG

PWRD

VIPS

SINA

BIDU

700HK

SOHU

NTES

GAME

YOKU

GA

RENN

CYOU

0% LONG

0%

GAME

20%

80%

102% 90% 76% 68% 47%47% 34%35%37% 31% 14% 1% 5%

YOKU

40%

100%

GA

60%

120%

102% 90% 76% 68% 47%47% 34%35%37% 31% 14% 1% 5%

RENN

80%

150% 132%

140%

CYOU

100%

180%

LONG

120%

190% 184%

200% 160%

150% 132%

140%

700HK

NTES

PWRD

YOKU

DANG

GA

LONG

RENN

SOHU

NTES

QIHU

YY

CTRP

GA

700HK

BIDU

SINA

GAME

CYOU

SOHU

PWRD

VIPS

0% YOKU

RENN

-8% -12% -20% -14%

LONG

52% 49%51%51%

60%

0%

DANG

63%

CYOU

20%

16% 14% 12% 8% 8%

GAME

30%


69


APPENDIX 2: BARCLAYS FORECASTS VS CONSENSUS; VALUATION COMPS FIGURE 102 China Internet coverage – Barclays forecasts for 3Q13E and 4Q13E vs consensus 3Q13E Ticker BIDU CYOU CTRP DANG GA GAME NTES PWRD QIHU RENN SINA SOHU YOKU 700 HK

Cur. USD USD USD USD USD USD USD USD USD USD USD USD USD CNY

Revenue (m) Guidance YoY Barclays 1422 to 1460 40% to 43% 1,439.38 180 to 186 9% to 12% 182.28 230 to 239 20% to 25% 241.19 259 23% 257.96 NA NA 97.42 182-184 3% to 4% 182.55 NA NA 397.25 127 to 133 12% to 17% 132.50 181 to 183 115% to 118% 181.86 47 to 49 3% to 7% 49.62 176 to 180 19% to 22% 182.59 358 to 370 25% to 30% 362.23 135 to 142 65% to 73% 137.36 NA NA 15,477.40

Consensus 1,431.00 183.67 240.00 261.40 96.96 182.33 391.43 130.20 182.60 48.20 179.11 365.57 139.63 15,409.00

Guidance NA 1.33 to 1.38 NA NA NA NA NA NA NA NA NA 0.50 to 0.55 NA NA

EPS Barclays 1.41 1.36 0.40 (0.16) 0.24 0.23 1.45 0.51 0.37 (0.06) 0.33 0.52 (0.03) 2.18

Consensus 1.44 1.37 0.40 (0.11) 0.23 0.24 1.43 0.40 0.36 (0.08) 0.31 0.52 (0.04) 2.15

4Q13E Revenue (m) EPS Barclays Consensus Barclays Consensus 1,463.04 1,449.00 1.36 1.34 187.58 192.17 1.41 1.40 221.77 222.56 0.35 0.36 319.34 329.60 (0.16) (0.11) 103.63 101.84 0.24 0.24 188.37 189.00 0.22 0.24 409.92 414.86 1.55 1.54 142.90 136.00 0.68 0.50 203.78 202.22 0.43 0.40 50.00 48.65 (0.07) (0.10) 189.25 183.44 0.34 0.35 357.87 375.86 0.58 0.52 155.37 151.00 0.01 (0.00) 15,948.90 16,428.00 2.16 2.14

Note: As of 11 Sep 2013. Source: Barclays Research estimates, Bloomberg for consensus

FIGURE 103 China Internet coverage – Barclays forecasts for 2013E and 2014E vs consensus

Ticker BIDU CYOU CTRP DANG GA GAME NTES PWRD QIHU RENN SINA SOHU YOKU 700 HK

Cur. USD USD USD USD USD USD USD USD USD USD USD USD USD CNY

2013E Revenue (m) Barclays Consensus 5,030.98 5,064.00 729.82 736.54 854.88 860.75 1,037.95 1,049.00 390.21 387.40 722.08 726.14 1,522.73 1,567.00 492.60 486.44 647.01 643.71 194.80 198.33 655.30 641.67 1,366.95 1,388.00 498.58 500.38 59,358.20 59,766.00

EPS Barclays Consensus 5.03 5.09 5.64 5.66 1.41 1.37 (0.58) (0.47) 0.96 0.93 0.86 0.78 5.87 5.68 2.01 1.59 1.34 1.18 (0.14) (0.20) 0.91 0.85 2.31 2.42 (0.28) (0.30) 8.73 8.87

2014E Revenue (m) Barclays Consensus 6,699.93 6,689.00 809.44 824.08 1,058.63 1,064.00 1,250.65 1,285.00 477.61 437.10 721.75 782.86 1,738.94 1,781.00 572.50 572.13 989.73 990.00 238.69 248.38 857.70 802.83 1,545.59 1,641.00 751.61 735.81 76,569.56 77,329.00

EPS Barclays Consensus 6.12 6.24 6.27 6.15 1.79 1.73 (0.61) (0.22) 1.15 1.01 0.89 0.85 6.32 6.26 2.48 1.98 2.45 2.00 (0.10) (0.23) 2.28 1.86 2.73 3.29 0.18 0.30 11.81 11.07

Note: As of 11 Sep 2013. Source: Barclays Research estimates, Bloomberg for consensus

13 September 2013

70


FIGURE 104 China Internet Sector – valuation comparisons Company Lead category

Baidu Dangdang Tencent Renren Sina Sohu Youku Ctrip Qihoo Average Gaming Changyou Giant NetEase PerfectWorld ShandaGames TaoMee The9 NQ Mobile NetDragon Kingsoft YY Average

Ticker

Curr. Rating

TP

Last

Mkt cap (US$ mm)

PER FY12A

FY13E

Price to Sales

EPS-CAGR

FY14E

FY15E

FY12-15E

FY12A

FY13E

FY14E

Sales-CAGR FY15E

PEG

FY12-15E

FY14E

BIDU US DANG US 700 HK RENN US SINA US SOHU US YOKU US CTRP US QIHU US

USD USD HKD USD USD USD USD USD USD

OW UW OW EW OW OW OW OW OW

$171.0 $6.0 $450.0 $3.5 $84.0 $75.0 $28.0 $60.0 $100.0

$147.31 $9.01 $402.20 $3.50 $85.16 $66.14 $23.43 $50.35 $90.85

$51,525 $723 $95,826 $1,326 $5,675 $2,532 $3,886 $6,516 $11,154

30.0x nm 41.4x nm 608.3x 26.1x nm 39.2x 114.0x 143.3x

29.2x nm 36.3x nm nm 28.7x nm 35.6x 67.4x 39.4x

23.3x nm 26.7x nm 37.4x 24.2x 94.9x 26.7x 36.4x 43.0x

18.0x nm 21.7x nm 20.4x 19.3x 31.4x 20.9x 25.3x 22.6x

19% nm 25% nm 210% 12% nm 23% 65% 59%

14.4x 0.9x 13.1x 7.8x 11.1x 2.4x 9.0x 10.4x 35.2x 12.0x

10.0x 0.7x 9.7x 7.0x 8.9x 1.9x 5.2x 8.1x 17.8x 8.0x

7.3x 0.6x 7.4x 5.7x 6.8x 1.6x 3.4x 6.3x 11.5x 5.9x

5.8x 0.5x 6.0x 4.8x 5.4x 1.5x 2.5x 5.1x 8.3x 4.6x

36% 23% 30% 17% 27% 19% 47% 27% 60% 32%

1.2x nm 1.1x nm 0.2x 1.9x nm 1.1x 0.6x 1.0x

CYOU US GA US NTES US PWRD US GAME US TAOM US NCTY US NQ US 777 HK 3888 HK YY US

USD USD USD USD USD USD USD USD HKD HKD USD

OW OW OW EW UW NR NR NR NR NR NR

$46.0 $9.2 $76.0 $22.0 $3.5 NA NA NA NA NA NA

$31.45 $8.50 $74.03 $21.28 $4.10 $5.78 $2.55 $20.11 $17.60 $19.38 $47.29

$1,667 $2,036 $9,674 $1,037 $1,109 $212 $58 $1,046 $1,138 $2,930 $2,572

5.8x 9.5x 15.8x 10.4x 5.7x 26.0x nm 76.5x 28.6x 41.9x nm 24.4x

5.6x 8.9x 12.6x 10.6x 4.7x 37.3x nm 19.5x 13.8x 29.0x 41.7x 18.4x

5.0x 7.4x 11.7x 8.6x 4.6x 29.6x nm 15.5x 14.6x 23.3x 26.9x 14.7x

4.6x 6.8x 10.7x 7.8x 4.6x 36.1x nm 12.6x 14.1x 19.2x 18.8x 13.5x

10% 11% 14% 10% 7% -10% nm 83% 27% 30% 70% 25%

2.7x 6.0x 7.1x 2.3x 1.5x 5.3x 2.4x 11.4x 6.5x 13.2x 19.8x 7.1x

2.3x 5.3x 5.9x 2.1x 1.6x 4.9x 1.7x 5.6x 4.4x 8.9x 9.6x 4.7x

2.1x 4.3x 5.2x 1.8x 1.6x 4.4x 0.9x 4.0x 4.3x 7.1x 6.2x 3.8x

1.9x 3.8x 4.7x 1.6x 1.6x 4.5x 0.6x 3.3x 3.8x 5.9x 4.5x 3.3x

15% 17% 15% 12% -5% 5% 57% 52% 19% 31% 63% 26%

0.5x 0.7x 0.8x 0.9x 0.6x nm nm 0.2x nm nm 0.4x 0.6x

NA NA NA NA NA NA NA NA NA NA NA

$1.80 $15.87 $7.62 $10.59 $66.56 $3.42 $47.35 $15.92 $11.69 $49.14 $1.95

$110 $661 $238 $816 $1,923 $108 $3,829 $550 $575 $2,719 $10

nm 32.4x 58.6x 40.3x 25.5x 38.4x 26.3x 88.4x nm nm nm 44.3x 63.1x

nm 17.5x 24.0x 25.2x 22.7x nm 17.0x nm 36.5x 51.3x nm 26.7x 25.8x

20.7x 14.4x 21.2x 19.6x 19.7x nm 14.3x 37.9x 19.5x 27.3x nm 21.0x 23.8x

15.3x 22.4x 16.9x 16.5x 15.9x nm 12.9x na 11.5x 18.5x nm 16.2x 16.9x

nm 13% 51% 35% 17% nm 27% nm nm nm nm 29% 36%

0.4x 3.9x 3.7x 4.6x 8.3x 1.1x 8.9x 4.7x 2.9x 3.9x 0.1x 4.5x 7.4x

0.4x 2.9x 3.0x 3.6x 7.4x 1.3x 6.5x 3.2x 1.9x 1.7x 0.1x 3.1x 5.0x

0.4x 2.2x 2.5x 2.9x 6.5x 1.5x 5.5x 2.4x 1.2x 1.1x 0.1x 2.5x 3.8x

0.3x nm 2.4x 2.5x 5.6x 1.8x 4.8x nm 0.8x 0.8x 0.1x 2.1x 3.3x

4% 13% 16% 23% 14% -14% 23% 37% 51% 69% 0% 21% 26%

nm 1.1x 0.4x nm 1.2x nm 0.5x nm nm nm nm 0.8x 0.8x

Vertical AirMedia AMCN US USD NR Bitauto BITA US USD NR Jiayuan DATE US USD NR Phoenix NM FENG US USD NR 51Jobs JOBS US USD NR Sky Mobi MOBI US USD NR Soufun SFUN US USD NR eLong LONG US USD NR LITB LITB US USD NR VIPshop VIPS US USD NR Vision China VISN US USD NR Average Average (three categories in total)

Note: Prices as of the market close on 11 Sep 2013. All prices in US dollars except for Tencent, which is priced in Hong Kong dollars. Stock ratings: OW: Overweight; EW: Equal Weight; UW: Underweight; NR: not rated. Asia ex-Japan Internet industry view: Positive. Estimates for not rated companies are consensus estimates from Bloomberg. For full disclosures on each rated company, including details of company-specific valuation methodology and risks, please refer to: http://publicresearch.barcap.com. Source: Bloomberg consensus estimates, Barclays Research estimates

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APPENDIX 3: CHINA HANDSET SALES FIGURE 105 China handset sales units and market share trend Vendor 1Q10 2Q10 China total handset shipment (mn units) Samsung 10.5 9.6 Lenovo 2.2 2.5 Yulong 0.1 0.1 Huawei 2.1 2.0 ZTE 2.7 2.6 Apple 0.2 0.3 Tianyu 2.3 2.4 Nokia 20.3 17.8 Others 46.0 38.1 Market 86.4 75.4 Shipment y/y Samsung Lenovo Yulong Huawei ZTE Apple Tianyu Nokia Others Market Market share Samsung Lenovo Yulong Huawei ZTE Apple Tianyu Nokia Others

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

9.7 3.2 0.1 2.1 2.7 0.3 2.4 19.5 68.8 108.8

11.0 3.5 1.0 2.6 2.7 0.9 2.8 20.7 66.8 112.1

10.4 3.7 1.7 3.4 2.8 1.2 1.9 22.3 69.1 116.6

9.6 3.6 1.8 4.0 4.3 2.1 2.0 15.7 67.9 111.0

12.3 3.6 1.9 4.3 4.7 2.3 1.8 14.8 62.3 108.0

13.3 5.2 2.1 6.5 6.1 2.1 2.0 13.7 57.0 108.1

10.8 5.8 3.0 6.0 6.2 5.7 1.7 8.7 53.7 101.6

10.5 6.8 3.8 5.4 6.4 4.9 2.1 6.9 50.6 97.4

10.9 7.2 4.9 5.6 5.3 3.9 2.5 4.9 54.9 100.2

11.6 8.1 5.8 5.9 5.4 5.0 2.7 3.7 59.5 107.8

14.5 7.5 7.0 7.2 5.7 6.8 3.3 3.0 54.3 109.2

16.4 10.4 7.4 6.5 6.2 5.7 3.7 3.6 49.4 109.3

-0.6% 44.5% 1509.4% 96.8% NM 579.2% -17.5% -11.5% 78.2% 47.1%

27.1% 11.0% 1713.5% 102.6% NM 664.4% -24.3% -24.0% -9.4% -0.7%

21.0% 48.2% 103.3% 151.5% 124.5% 120.0% -28.0% -33.5% -14.6% -3.5%

3.7% 56.9% 77.4% 75.4% 120.2% 359.4% -12.1% -61.0% -22.3% -12.9%

9.1% 88.4% 115.5% 37.6% 49.4% 132.9% 5.8% -56.1% -25.5% -12.2%

-11.2% 100.8% 155.3% 30.9% 11.9% 71.0% 36.8% -66.8% -11.8% -7.3%

-13.4% 55.7% 177.1% -9.7% -10.5% 138.1% 34.7% -72.7% 4.4% -0.3%

34.3% 28.7% 134.3% 19.2% -8.2% 19.7% 98.1% -66.1% 1.1% 7.5%

56.7% 53.0% 93.6% 19.0% -4.3% 18.4% 78.9% -47.8% -2.4% 12.2%

8.6% 3.3% 1.6% 3.6% 3.9% 1.9% 1.8% 14.2% 61.2%

11.4% 3.3% 1.8% 4.0% 4.4% 2.1% 1.7% 13.7% 57.7%

12.3% 4.8% 1.9% 6.1% 5.6% 1.9% 1.9% 12.7% 52.7%

10.6% 5.7% 2.9% 5.9% 6.1% 5.6% 1.6% 8.6% 52.9%

10.7% 7.0% 3.9% 5.6% 6.6% 5.0% 2.1% 7.1% 51.9%

10.9% 7.2% 4.9% 5.6% 5.3% 3.8% 2.5% 4.9% 54.8%

10.7% 7.5% 5.4% 5.5% 5.0% 4.6% 2.5% 3.5% 55.2%

13.2% 6.9% 6.4% 6.6% 5.2% 6.3% 3.0% 2.7% 49.7%

15.0% 9.5% 6.8% 5.9% 5.6% 5.3% 3.4% 3.3% 45.2%

19.2% 56.4%

14.6% 93.1%

11.2% 46.2%

14.5% 64.8%

2.4% 122.0%

-10.1% 91.0%

0.9% 18.6%

7.9% 23.9% 143.7% 69.8%

31.2% 0.9% 90.1% 42.9%

25.1% 4.1% 195.2% 83.8%

25.1% 2.8% 232.7% 33.3% 3.3% 146.8% 70.0%

-1.2% 68.5% 1781.1% 61.6% NM 460.8% -17.4% 9.9% 50.3% 34.9%

12.2% 2.5% 0.1% 2.5% 3.1% 0.3% 2.6% 23.5% 53.2%

12.8% 3.3% 0.1% 2.7% 3.4% 0.4% 3.1% 23.6% 50.6%

8.9% 3.0% 0.1% 2.0% 2.5% 0.3% 2.2% 17.9% 63.2%

9.8% 3.1% 0.9% 2.3% 2.4% 0.8% 2.5% 18.4% 59.6%

8.9% 3.2% 1.4% 2.9% 2.4% 1.1% 1.6% 19.1% 59.3%

Source: Gartner, Barclays Research

FIGURE 106 China smartphone sales units and market share trend Vendor 1Q10 2Q10 China smartphone shipment (mn units) Samsung 0.2 0.1 Lenovo 0.1 0.0 Yulong 0.1 Huawei 0.0 ZTE Apple Tianyu OPPO Others 4.8 4.9 Market 5.3 5.4 Smartphone mix 6.2% 7.2% Shipment y/y Samsung Lenovo Yulong Huawei ZTE Apple Tianyu OPPO Others Market Market share Samsung Lenovo Yulong Huawei ZTE Apple Tianyu OPPO Others

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

0.3 0.1 0.1 0.0 0.0 0.3

0.6 0.2 1.0 0.1 0.1 0.9

1.3 0.2 0.9 0.9 0.4 1.2

2.3 0.1 0.8 1.1 0.8 2.1

6.2 7.1 6.5%

7.0 10.0 8.9%

7.7 12.5 10.7%

8.3 15.7 14.1%

4.2 0.4 0.8 2.4 1.8 2.3 0.1 0.0 9.8 21.7 20.1%

6.9 1.0 0.9 3.5 3.1 2.1 0.1 0.0 10.2 27.8 25.7%

6.9 2.4 1.8 3.5 2.7 5.7 0.2 0.2 10.1 33.6 33.1%

7.0 4.4 3.3 3.5 3.4 4.9 0.7 0.5 11.7 39.4 40.4%

7.9 7.0 4.6 5.0 4.1 3.9 0.4 1.0 14.1 47.9 47.9%

9.0 7.7 5.6 5.3 4.6 5.0 2.3 1.3 15.7 56.6 52.5%

12.5 7.2 6.9 7.1 5.2 6.8 3.0 2.0 19.8 70.6 64.6%

14.7 10.2 7.4 6.5 6.2 5.7 3.6 2.6 22.2 79.1 72.3%

469.5% 154.9% NM 51822.2%

2252.4% 208.6% 642.3% NM

1268.6% 353.8% 618.7% 5103.5% 5346.0% 664.4%

1040.3% 498.3% -8.5% 2699.4% 2923.9% 120.0%

452.1% 1513.2% 114.1% 273.1% 637.1% 359.4%

205.6% 3118.6% 306.3% 203.8% 313.8% 132.9%

31.6% 665.9% 498.0% 54.0% 51.8% 138.1% 1572.7% 2763.8% 53.6% 103.7%

80.5% 193.6% 278.0% 103.5% 90.8% 19.7% 1775.6% 736.3% 97.0% 110.1%

111.0% 134.2% 122.0% 85.9% 78.8% 18.4% 400.5% 468.7% 88.6% 100.8%

15.9% 13.6% 10.0% 9.4% 8.2% 8.7% 4.1% 2.4% 27.6%

17.7% 10.2% 9.8% 10.1% 7.4% 9.7% 4.3% 2.8% 28.1%

18.6% 12.9% 9.4% 8.2% 7.8% 7.3% 4.6% 3.3% 28.0%

255.7%

139.1%

309.3%

442.3%

NM 2088.5%

NM 2307.1%

NM 5962.0%

NM 2318.4%

59.7% 134.2%

70.3% 189.6%

59.0% 206.9%

46.5% 178.7%

31.4% 168.3%

42.2% 151.4%

89.1% 1847.3% 507.6% 110.3% 122.1% 71.0% 183.2% 8943.9% 43.6% 120.8%

4.1% 1.1%

1.8% 0.8% 2.0%

4.3% 1.1% 1.5% 0.7% 0.5% 4.2%

6.0% 1.7% 10.4% 1.2% 1.0% 9.5%

10.0% 1.2% 6.8% 7.5% 3.0% 9.9%

14.6% 0.9% 5.2% 7.3% 5.3% 13.3%

0.0% 87.1%

0.0% 69.8%

0.0% 61.1%

0.0% 52.7%

19.2% 1.7% 3.5% 11.0% 8.4% 10.4% 0.6% 0.1% 45.1%

24.7% 3.6% 3.4% 12.5% 11.0% 7.5% 0.5% 0.2% 36.7%

20.6% 7.3% 5.4% 10.4% 8.1% 17.0% 0.5% 0.7% 29.9%

17.7% 11.1% 8.5% 8.8% 8.7% 12.3% 1.8% 1.2% 29.8%

16.5% 14.6% 9.7% 10.5% 8.5% 8.0% 0.8% 2.2% 29.3%

0.0% 0.0%

0.0%

89.7%

89.7%

Source: Gartner, Barclays Research

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Company data pages COMPANY DATA PAGES

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Barclays | China Internet Asia ex-Japan Internet & Media

Industry View: POSITIVE

Baidu, Inc. (BIDU) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: OVERWEIGHT 2012A 3,328 2,019 1,775 1,922 1,681 4.90 4.81 9.64 349.8 0.00

2013E 4,778 2,300 1,873 2,025 1,696 5.05 4.84 14.69 350.3 0.00

2014E 6,562 2,967 2,377 2,517 2,080 6.33 5.93 21.69 351.0 0.00

2015E 8,326 3,636 3,130 3,270 2,702 8.20 7.69 30.13 351.2 0.00

CAGR 35.8% 21.7% 20.8% 19.4% 17.1% 18.7% 17.0% 46.2% 0.1% N/A

71.2 49.6 56.4 47.0 218.4 21.5 28.7

64.0 36.3 44.6 32.9 192.6 17.2 22.4

60.9 33.7 42.0 29.5 178.5 16.5 20.8

60.1 35.0 40.6 30.2 217.2 17.1 20.9

Average 64.0 38.6 45.9 34.9 201.7 18.1 23.2

Balance sheet and cash flow ($mn) Tangible fixed assets 635 Intangible fixed assets 866 Cash and equivalents 5,278 Total assets 7,330 Short and long-term debt 1,904 Other long-term liabilities 0 Total liabilities 1,410 Net debt/(funds) -3,373 Shareholders' equity 5,978 Change in working capital 125 Cash flow from operations 1,925 Capital expenditure -401 Free cash flow 1,524

702 1,004 7,051 9,416 1,905 0 1,579 -5,146 7,894 418 2,590 -584 2,006

1,206 1,048 9,540 12,587 1,927 0 1,940 -7,613 10,704 225 3,033 -507 2,526

1,447 1,072 12,508 15,945 1,927 0 2,237 -10,581 13,765 180 3,564 -461 3,103

CAGR 31.6% 7.4% 33.3% 29.6% 0.4% N/A 16.6% N/A 32.1% 12.9% 22.8% N/A 26.7%

29.2 30.4 20.2 3.9 10.0 6.5 0.0 N/A

23.3 24.9 14.8 4.9 7.3 4.8 0.0 N/A

18.0 19.2 11.3 6.0 5.8 3.8 0.0 N/A

Average 25.1 26.3 17.5 4.4 9.4 5.9 0.0 N/A

Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%)

Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)

30.0 30.6 23.8 3.0 14.4 8.6 0.0 N/A

Price (11-Sep-2013) USD 147.31 Price Target USD 171.00 Why Overweight? We believe Baidu has stepped up its efforts and repositioned itself to capture mobile Internet growth. While it is still early in the mobile transition, we are turning more positive on the company's progress and achievements in improving its overall search technology and customer adoption rate, as well as a re-acceleration in its growth story. Upside case USD 201.00 This case assumes a faster ramp in mobile search monetization and a smaller-than-expected impact from Qihoo, suggesting upside to our estimates and margins, with the multiple likely rising to 45x. Downside case USD 120.00 This case assumes mobile search monetization grows slower than expected, and Qihoo commands a 20% traffic share and generates meaningful search revenues from internal and Google ad systems, with the multiple likely dropping to 25x. Upside/Downside scenarios

POINT® Quantitative Equity Scores

Value

Quality

Sentiment Selected operating metrics (mn) Number of customers TAC/gross revenue (%) Total ARPU ($)

367.3 8.7 60.57

480.2 12.1 65.11

580.9 14.9 71.70

681.0 15.9 77.45

Low

High

Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here.

Source: Company data, Barclays Research Note: FY End Dec

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Changyou.com Ltd. (CYOU) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: OVERWEIGHT

2012A 623 386 348 361 282 5.42 5.29 7.95 53.6 3.00

2013E 730 433 369 381 300 5.64 5.61 11.15 53.6 0.00

2014E 809 468 396 408 334 6.27 6.25 14.40 53.8 0.00

83.2 55.8 61.9 45.3 287.9 25.7 55.3

83.1 50.5 59.3 41.1 107.5 25.1 34.1

84.9 49.0 57.8 41.3 124.1 24.4 32.5

Balance sheet and cash flow ($mn) Tangible fixed assets 65 Intangible fixed assets 189 Cash and equivalents 665 Total assets 1,115 Short and long-term debt 239 Other long-term liabilities 139 Total liabilities 445 Net debt/(funds) -426 Shareholders' equity 525 Change in working capital -16 Cash flow from operations 340 Capital expenditure -67 Free cash flow 273

124 189 717 1,230 120 76 345 -597 885 12 402 -86 315

116 189 831 1,340 57 13 302 -774 1,038 12 447 -90 357

CAGR 104 16.9% 189 0.0% 1,245 23.2% 1,750 16.2% 0 -100.0% 13 -55.0% 275 -14.8% -1,245 N/A 1,475 41.1% 18 N/A 508 14.3% -94 N/A 414 14.8%

5.0 5.0 1.9 21.1 2.1 1.6 0.0 21.4

Average 5.3 5.3 2.1 20.1 2.2 2.0 2.4 76.0


2015E CAGR 889 12.5% 528 11.0% 438 7.9% 450 7.6% 368 9.2% 6.88 8.2% 6.88 9.2% 23.05 42.6% 54.0 0.3% 0.00 -100.0%

85.4 49.3 59.4 41.4 156.7 20.6 25.2

Average 84.2 51.1 59.6 42.3 169.1 24.0 36.8

Price (11-Sep-2013) USD 31.45 Price Target USD 44.00 Why Overweight? We are positive on Changyou, given 1) its defensive earnings; and 2) substantial upside if new games outperform expectations. With a steady performance from TLBB and strong recurring cash flows, we see limited downside to earnings. Upside case USD 60.00 This assumes new games perform better than expected, DMD regains traction with higher APA and ARPU, which would lead to higher earnings with the multiple expanding to 10.0x. Downside case USD 23.00 Assuming new games fail and TLBB remains the major revenue contributor with the multiple de-rated to 3x as investors are concerned about whether Changyou can deliver a repeat performance. Upside/Downside scenarios

POINT® Quantitative Equity Scores Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)

5.8 5.9 3.2 16.2 2.7 3.2 9.5 240.9

5.6 5.6 2.5 18.7 2.3 1.9 0.0 41.6

4.6 4.6 0.8 24.4 1.9 1.2 0.0 0.0

Selected operating metrics ($k) Aggregated APA 2,583 2,011 2,130 2,155 Total ARPU ($) 1,174.00 1,590.83 1,522.28 1,601.38 DMD revenue ($mn) 5 5 7 7

Value

Quality

Sentiment

Low

High



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Ctrip.com International Ltd. (CTRP) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($) Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Balance sheet and cash flow ($mn) Tangible fixed assets Intangible fixed assets Cash and equivalents Total assets Short and long-term debt Other long-term liabilities Total liabilities Net debt/(funds) Shareholders' equity Change in working capital Cash flow from operations Capital expenditure Free cash flow Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)


2012A 668 121 105 153 115 1.28 0.79 4.47 144 0.00

2013E 858 149 131 161 131 1.41 0.90 4.94 146 0.00

2014E 1,103 221 202 231 181 1.88 1.22 7.51 149 0.00

2015E 1,381 272 251 298 231 2.41 1.54 10.99 150 0.00

CAGR 27.4% 31.0% 33.7% 25.0% 26.3% 23.3% 24.6% 34.9% 1.4% N/A

75.0 15.7 18.1 17.2 29.3 6.4 17.7

73.6 15.2 17.4 15.3 52.1 7.7 20.6

73.6 18.3 20.1 16.4 145.7 8.8 22.0

73.6 18.2 19.7 16.7 -1,812.5 9.1 21.9

Average 73.9 16.9 18.8 16.4 -396.4 8.0 20.5

180 184 899 1,873 253 9 563 -646 1,042 86 266 -87 178

126 186 940 1,899 217 10 716 -723 1,003 31 271 -46 225

125 186 1,317 2,345 198 13 904 -1,119 1,278 115 432 -18 414

127 186 1,832 2,944 180 15 1,127 -1,652 1,654 137 537 -22 515

CAGR -11.2% 0.5% 26.8% 16.3% -10.7% 20.6% 26.0% N/A 16.7% 17.0% 26.5% N/A 42.4%

39.2 63.4 55.8 2.5 10.4 7.0 0.0 N/A

35.6 56.2 44.7 3.1 8.1 7.4 0.0 N/A

26.7 41.3 28.3 5.5 6.3 5.9 0.0 N/A

20.9 32.8 21.1 6.8 5.1 4.6 0.0 N/A

Average 30.6 48.4 37.5 4.5 7.5 6.2 0.0 N/A

544.8 547.2 369

CAGR 26.2% 26.0% 31.3%

Price (11-Sep-2013) USD 50.35 Price Target USD 60.00 Why Overweight? We expect further market share gains for Ctrip and expect accelerated top-line growth, due to: 1) improving operation and execution; and 2) fast adoption of mobile migration. Furthermore, we see rising smartphone penetration driving faster top-line volume growth in the next 1-2 years, likely translating into higher profit growth. Upside case USD 82.00 This assumes margins improve to 30% in 2013 amid higher growth from mobile volumes, a less competitive environment, or competitors discontinuing their coupon programmes. This also assumes earnings re-accelerate and the P/E multiple expands to 37x. Downside case USD 38.00 This assumes margins deteriorate to 18% as a result of stronger competition, which would drive our target P/E multiple lower to 20x. Upside/Downside scenarios


Value

Quality

Sentiment Selected operating metrics ($mn) Air ticket revenue Hotel reservation revenue Other revenue

271.3 273.3 163

346.6 346.6 217

436.3 448.1 285

Low

High



13 September 2013

76



E-Commerce China Dangdang Inc. (DANG) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: UNDERWEIGHT

2012A 834 -72 -79 -71 -71 -0.87 -0.89 2.29 80.2 0.00

2013E 1,049 -41 -50 -42 -42 -0.50 -0.53 1.49 80.4 0.00

2014E 1,288 -23 -34 -24 -24 -0.27 -0.30 1.93 81.2 0.00

2015E 1,558 4 -8 6 6 0.12 0.07 2.35 81.4 0.00

CAGR 23.2% N/A N/A N/A N/A N/A N/A 0.8% 0.5% N/A


13.9 -9.4 -8.6 -8.5 N/A -13.3 -58.5

17.7 -4.8 -3.9 -4.0 -607.3 -7.1 -26.0

19.3 -2.6 -1.8 -1.9 0.0 -4.2 -11.3

21.0 -0.5 0.2 0.4 N/A -0.4 3.6

Average 18.0 -4.3 -3.5 -3.5 -303.6 -6.3 -23.0

Balance sheet and cash flow ($mn) Tangible fixed assets Intangible fixed assets Cash and equivalents Total assets Short and long-term debt Other long-term liabilities Total liabilities Net debt/(funds) Shareholders' equity Change in working capital Cash flow from operations Capital expenditure Free cash flow

19 0 262 575 96 0 456 -166 119 50 -21 -15 -7

37 0 200 678 52 0 522 -148 156 -39 -69 -21 -48

55 0 237 758 28 0 564 -209 194 42 34 -30 64

83 0 271 930 11 0 666 -260 264 10 33 -39 72

CAGR 62.3% N/A 1.1% 17.4% -50.9% N/A 13.4% N/A 30.5% -40.8% N/A N/A N/A

N/A N/A -7.7 -0.9 0.9 6.1 0.0 -203.3

N/A N/A -13.8 -6.6 0.7 4.6 0.0 657.7

N/A N/A -22.4 8.7 0.6 3.8 0.0 -188.3

77.0 128.7 131.0 9.9 0.5 2.8 0.0 290.0

Average 77.0 128.7 21.7 2.8 0.6 4.3 0.0 139.0

522 284 118

653 329 134

790 375 162

948 420 196

Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%) Selected operating metrics ($mn) Media revenue Merchandise revenue Fulfilment cost

Price (11-Sep-2013) USD 9.01 Price Target USD 6.00 Why Underweight? We have little visibility on when the pricing war with major competitors will end and are concerned the company could enter into broader general merchandise. We are not confident that Dangdang can return to profitability in the near to medium term. Upside case USD 12.90 This assumes margins improve in 2013 amid a better pricing environment. It also implies the industry starts to consolidate and Dangdang is able to grow its market share. A 2ppt increase in the gross margin would yield a higher DCF-based price of US$12.90. Downside case USD 3.80 This assumes sales slow due to more competition and the pricing war, with margins further deteriorating in 2013. A 2ppt drop in the gross margin would yield a lower DCF-based price of US$3.80. Upside/Downside scenarios


Value

Quality

Sentiment

Low

High



13 September 2013

77



Giant Interactive Group Inc. (GA) Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($) Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Balance sheet and cash flow ($mn) Tangible fixed assets Intangible fixed assets Cash and equivalents Total assets Short and long-term debt Other long-term liabilities Total liabilities Net debt/(funds) Shareholders' equity Change in working capital Cash flow from operations Capital expenditure Free cash flow


2012A 345 222 210 193 172 0.90 0.65 1.77 242.7 0.42

2013E 390 256 239 264 244 0.96 0.92 2.09 247.1 0.47

2014E 478 324 305 339 295 1.15 1.10 2.61 250.6 0.57

2015E 550 365 343 382 332 1.24 1.31 3.11 253.6 0.62

CAGR 16.8% 18.1% 17.9% 25.5% 24.5% 11.5% 26.3% 20.5% 1.5% 14.0%

86.6 60.7 64.3 49.8 212.0 29.7 41.8

87.3 61.3 65.5 62.4 253.5 29.8 40.3

87.6 63.8 67.9 61.8 198.1 29.4 37.1

87.3 62.4 66.4 60.3 182.7 27.9 33.8

Average 87.2 62.1 66.0 58.6 211.6 29.2 38.2

55 5 431 690 0 5 170 -431 520 -14 231 -5 226

59 10 516 778 0 8 269 -516 590 6 271 -16 255

72 11 653 948 0 8 175 -653 774 -3 320 -19 301

83 12 787 1,111 0 9 178 -787 933 -5 348 -22 326

CAGR 14.7% 33.3% 22.3% 17.2% N/A 21.3% 1.5% N/A 21.5% N/A 14.6% N/A 13.0%

6.8 6.5 3.5 15.1 3.8 2.3 7.3 N/A

Average 8.1 9.1 5.3 13.1 4.8 3.1 6.1 N/A

Price (11-Sep-2013) USD 8.50 Price Target USD 9.20 Why Overweight? We like Giant based on its resilient game revenue with consistently stable growth over the past three years. We see its regular semi-annual cash dividend payout with payout ratio of up to 50% as very attractive. Upside case USD 12.70 This assumes World of Xianxia and webgames in the pipeline are successful in 2013, leading to a higher target multiple of 11.0x (in line with historical average) with the share price rising to US$12.7. Downside case USD 5.70 This assumes new games in the pipeline fail to succeed in 2013, which leads to a lower target multiple of 5.0x and the share price falling to US$5.7. Upside/Downside scenarios


Value Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)

9.5 13.1 7.4 11.0 6.0 4.0 4.9 N/A

8.9 9.3 6.1 12.2 5.3 3.6 5.5 N/A

7.4 7.7 4.3 14.1 4.3 2.8 6.7 N/A

Quality

Sentiment

Low Selected operating metrics ($mn) Total revenue Active paying plays (k) ARPU per quarter ($)

345 2,235.3 234.3

390 2,378.8 227.0

478 2,641.3 209.4

550 2,668.8 216.9

High



13 September 2013

78



NetEase, Inc. (NTES)


Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

2012A 1,316 633 596 687 584 4.69 4.44 19.93 131.5 1.00

2013E 1,523 824 733 816 707 5.87 5.51 24.26 130.3 0.00

2014E 1,739 930 824 919 772 6.32 5.96 27.90 131.2 0.00

2015E 1,934 1,043 925 1,017 853 6.92 6.56 33.18 132.2 0.00

CAGR 13.7% 18.1% 15.8% 14.0% 13.5% 13.9% 13.9% 18.5% 0.2% -100.0%


69.8 45.3 48.1 44.4 -448.3 17.0 24.5

74.5 48.2 54.1 46.4 -539.0 18.4 25.1

73.0 47.4 53.5 44.4 -344.2 17.7 24.0

73.1 47.8 53.9 44.1 -286.7 17.4 22.2

Average 72.6 47.2 52.4 44.8 -404.6 17.6 23.9


131 0 2,622 3,094 0 16 459 -2,622 2,517 34 678 -29 649

-62 -2 3,322 3,669 161 11 634 -3,160 3,047 112 955 -32 923

-131 -4 3,822 4,136 161 12 688 -3,661 3,461 -19 903 -37 866

-207 -6 4,387 4,682 0 13 580 -4,387 4,115 -16 1,001 -41 959

CAGR N/A N/A 18.7% 14.8% N/A -6.3% 8.1% N/A 17.8% N/A 13.9% N/A 13.9%

15.8 16.7 11.0 6.7 7.1 3.9 1.4 0.0

12.6 13.4 7.8 9.6 5.9 3.2 0.0 -128.8

11.7 12.4 6.4 8.9 5.2 2.8 0.0 -75.9

10.7 11.3 5.0 9.8 4.7 2.4 0.0 0.0

Average 12.7 13.4 7.6 8.7 5.7 3.1 0.3 -51.2

136 1,170 39

171 1,393 53

207 1,580 67

244 1,734 84

Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%) Selected operating metrics ($mn) Advertising revenue Online game revenue WVAS & other revenue

Price (11-Sep-2013) USD 74.03 Price Target USD 76.00 Why Overweight? We like NetEase based on: 1) its strong in-house development capability and its Blizzard franchise, 2) strong cash flow generation, and 3) steady and sustainable time-based gaming model. We favour it as a core holding for online gaming. Upside case USD 88.00 Assuming WoW rebounds and attracts strongerthan-expected user growth, TXIII and Ghost continue to outperform, and 1-2 more new games (such as Zhanhun and Kungfu Master) ramp up their revenues successfully in 2013, earnings could be 10% higher and the multiple could expand to 15x. Downside case USD 47.00 Assuming FWJ, TXIII and WWJ2 start to deteriorate, WoW continues to lose momentum, and ad demand slows down in 2013, earnings growth would slow and the multiple could de-rate to 8x. Upside/Downside scenarios


Value

Quality

Sentiment

Low

High



13 September 2013

79



Perfect World Co., Ltd. (PWRD) Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: EQUAL WEIGHT

2012A 445 112 82 106 88 2.05 1.81 5.64 48.5 0.45

2013E 493 121 87 108 86 2.01 1.76 7.85 49.0 0.44

2014E 572 155 112 136 107 2.48 2.18 10.93 49.2 0.55

2015E 625 171 121 148 116 2.73 2.35 14.18 49.4 0.59

CAGR 12.0% 15.2% 13.7% 11.5% 9.7% 10.1% 9.1% 36.0% 0.6% 9.3%


80.5 18.5 25.1 19.8 20.8 8.3 15.5

75.7 17.6 24.6 17.5 19.5 7.5 12.6

74.3 19.5 27.0 18.8 26.0 8.6 13.3

74.2 19.3 27.3 18.6 32.3 8.8 13.0

Average 76.2 18.7 26.0 18.7 24.7 8.3 13.6


194 37 394 930 120 10 287 -274 640 -19 119 -21 98

218 49 497 1,060 112 10 270 -384 786 -1 132 -29 103

254 56 602 1,168 64 10 246 -538 918 17 180 -33 147

277 62 700 1,235 0 10 198 -700 1,033 11 192 -36 156

CAGR 12.7% 18.7% 21.2% 9.9% -100.0% 0.0% -11.6% N/A 17.3% N/A 17.3% N/A 16.8%


10.4 11.8 6.8 9.5 2.3 1.6 2.1 N/A

10.6 12.1 5.3 9.9 2.1 1.3 2.1 N/A

8.6 9.8 3.2 14.0 1.8 1.1 2.6 N/A

7.8 9.1 1.9 14.8 1.7 1.0 2.8 N/A

Average 9.3 10.7 4.3 12.0 2.0 1.3 2.4 N/A

Selected operating metrics ($mn) Total revenue ACU per quarter (k)

Price (11-Sep-2013) USD 21.28 Price Target USD 22.00 Why Equal Weight? We see a core game business turnaround for PWRD considering the successful commercial launch of new games and a diversified game portfolio. Its solid cash position and healthy cash flow generation per quarter should provide share price support. The near-term margins pressure makes us cautious on potential growth at the bottom line. Upside case USD 34.00 This assumes some of the new games, including both MMOs and mobile/web games to be launched in 2013, are successfully monetized, leading to reaccelerated top-line growth, higher earnings and its multiple expanding to 12x. Downside case USD 14.00 This assumes newly released games in 2013 fail to deliver sustainable revenues contribution, and existing major titles (Zhu Xian, PWRD2) continue to be de-monetized. This leads the multiple to de-rate to 6x. Upside/Downside scenarios


Value

Quality

Sentiment 445 691.0

493 715.7

572 802.1

625 834.1

Low

High

Source: POINT. The scores are valid as of the date of this report and are independent of the fundamental analysts' views. To view the latest scores, click here. Source: Company data, Barclays Research Note: FY End Dec

13 September 2013

80



Qihoo 360 Technology Co., Ltd. (QIHU) Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)


2012A 2013E 2014E 2015E CAGR 329 649 1,008 1,396 61.9% 67 177 352 524 98.9% 50 128 270 409 101.4% 63 135 275 414 87.6% 111 229 348 95.2% 47 0.80 1.35 2.49 3.60 65.3% 0.38 0.87 1.76 2.64 90.4% 3.13 4.36 6.56 9.42 44.3% 2.5% 122.2 127.5 130.2 131.5 0.00 0.00 0.00 0.00 N/A


90.0 87.0 85.0 15.2 19.7 26.8 20.3 27.2 34.9 14.2 17.1 22.8 85.8 120.4 118.2 11.9 16.8 21.4 20.4 25.0 29.1


126 12 383 690 0 1 211 -383 478 4 118 -74 43

Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%) Selected operating metrics ($mn) Online ads revenue IVAS revenue Revs from sales of 3rd party anti-virus software

84.5 29.3 37.6 24.9 93.1 21.7 27.4

Average 86.6 22.7 30.0 19.7 104.4 18.0 25.5

CAGR 161 282 449 52.7% 7 11 23 23.3% 556 855 1,239 47.9% 959 1,454 2,092 44.8% 0 0 0 N/A 1 1 1 0.0% 269 336 365 20.0% -556 -855 -1,239 N/A 690 1,117 1,727 53.4% 79 93 83 168.3% 306 506 677 79.2% -131 -208 -293 N/A 175 299 384 106.8%

114.0 67.4 237.2 104.5 167.8 62.3 0.4 1.5 35.2 17.8 23.2 16.8 0.0 0.0 0.0 0.0

36.4 51.6 30.5 2.5 11.5 10.6 0.0 0.0

25.3 34.4 19.7 3.2 8.3 6.9 0.0 0.0

Average 60.8 106.9 70.1 1.9 18.2 14.4 0.0 0.0

Price (11-Sep-2013) USD 90.85 Price Target USD 100.00 Why Overweight? We are positive on Qihoo based on: 1) a gradual ramp-up of its sales network leading to further search revenue upside; 2) mobile internet opportunities via its rising mobile security penetration and potential success of its app store strategy; and 3) non-GAAP margins expanding to a targeted normalised rate of 40%. Upside case USD 134.00 This case assumes 2014E revenue grows faster than our estimate driven by ramp of online search traffic, and potential contribution from mobile Internet strategies, leading to target multiple expanding to 40x. Downside case USD 69.00 This case assumes a more competitive online search market with potential slowdown on existing business, which would hurt Qihoo's advertising revenue growth in 2014E, leading to slower-than-expected growth. Target multiple de-rates to 20x. Upside/Downside scenarios


Value

Quality

Sentiment 222 103 0

390 259 0

636 372 0

887 509 0

Low

High



13 September 2013

81



Renren Inc. (RENN) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: EQUAL WEIGHT 2012A 176 -76 -92 -74 -75 -0.16 -0.20 2.36 383.9 0.00

2013E 195 -110 -137 -73 -72 -0.14 -0.19 2.20 374.5 0.00

2014E 239 -55 -83 -57 -57 -0.10 -0.15 1.99 376.3 0.00

2015E 284 -28 -54 -38 -32 -0.04 -0.08 1.88 381.0 0.00

CAGR 17.2% N/A N/A N/A N/A N/A N/A -7.2% -0.3% N/A


62.2 -52.1 -42.9 -42.6 -39.5 -6.6 -5.6

60.3 -70.5 -56.7 -37.2 -66.8 -10.3 -5.3

55.9 -34.7 -23.1 -23.9 -35.7 -6.0 -4.2

62.0 -19.1 -9.7 -11.3 -22.5 -3.6 -1.7

Average 60.1 -44.1 -33.1 -28.7 -41.1 -6.6 -4.2


32 86 905 1,204 0 0 97 -905 1,107 26 -11 -41 -52

37 98 822 1,141 0 0 142 -822 999 19 -7 -35 -42

66 99 748 1,075 0 0 146 -748 929 2 -10 -33 -43

76 97 718 1,039 0 0 156 -718 883 15 26 -26 1

CAGR 33.1% 3.8% -7.4% -4.8% N/A N/A 17.2% N/A -7.3% -16.6% N/A N/A N/A

N/A N/A -6.0 -3.9 7.7 1.2 0.0 0.0

N/A N/A -4.9 -3.2 7.0 1.3 0.0 0.0

N/A N/A -11.1 -3.3 5.7 1.4 0.0 0.0

N/A N/A -23.3 0.1 4.8 1.5 0.0 0.0

Average N/A N/A -11.4 -2.6 6.3 1.4 0.0 0.0

167 175.67 287.0

194 177.96 295.0

205 189.19 317.0

215 200.54 339.2

Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%) Selected operating metrics Active users Total ARPU ($) Number of advertisers

Price (11-Sep-2013) USD 3.50 Price Target USD 3.50 Why Equal Weight? Renren is a leading SNS platform, capturing growing social ad demand. But it is facing strong competition from Pengyou and Weibo. Although we view Nuomi as a good strategic investment, the loss-making group-buy business may hurt margins near term. Upside case USD 4.80 This assumes that faster advertising customer growth and ARPU growth translate into faster revenue growth in 2013, causing the share price to rise to US$4.80. Downside case USD 2.30 This assumes advertising demand slows due to fewer customers and ARPU growth as well as more investment needed for mobile, Nuomi and 56.com, resulting in margin pressure. The share price could decline to US$2.30. Upside/Downside scenarios


Value

Quality

Sentiment

Low

High



13 September 2013

82



Shanda Games Ltd. (GAME) Income statement ($mn) Revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($) Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%)

Stock Rating: UNDERWEIGHT 2012A 745 256 219 251 177 0.72 0.64 1.31 277.4 0.00

2013E 722 265 230 258 210 0.86 0.78 -0.09 268.6 0.00

2014E 722 310 275 291 219 0.89 0.81 0.44 268.8 0.00

2015E 720 308 273 289 220 0.89 0.82 0.53 269.2 0.00

CAGR -1.1% 6.3% 7.5% 4.8% 7.5% 7.4% 8.6% -26.2% -1.0% N/A

63.5 29.4 34.3 23.8 51.2 12.9 29.5

68.0 31.9 36.7 29.1 58.8 22.5 76.2

71.8 38.2 43.0 30.3 104.7 21.0 77.3

72.0 37.9 42.7 30.5 60.7 21.1 50.0

Average 68.8 34.3 39.2 28.4 68.9 19.4 58.2

Price (11-Sep-2013) USD 4.10 Price Target USD 3.50 Why Underweight? We have little visibility on any new games GAME has in the pipeline given its consistently unsuccessful new game launches (excluding DN) in the past two years. We believe the loss of core management and underwater options further reduce its competitive edge. Upside case USD 6.70 This assumes Million Arthur is very successful in China and other countries, and the two existing core games (Mir II and Woool) start to rebound, leading to higher revenue growth and the multiple expanding to 7x. Downside case USD 2.50 This assumes none of the new games is successful in 2013, and Mir II and Woool continue to slow, leading to the multiple de-rating to 3x. Upside/Downside scenarios


30 92 599 1,291 236 26 604 -363 679 92 320 -15 305

32 85 165 891 189 26 574 23 305 -41 222 -15 207

32 85 268 1,030 151 26 706 -117 309 112 379 -15 364

32 85 232 1,031 91 26 531 -142 482 -173 99 -15 83

CAGR 1.9% -2.6% -27.1% -7.2% -27.3% 0.0% -4.2% N/A -10.8% N/A -32.4% N/A -35.1%


5.7 6.4 3.0 26.8 1.5 1.7 0.0 N/A

4.7 5.2 4.4 18.8 1.6 3.6 0.0 6.9

4.6 5.0 3.3 33.0 1.6 3.6 0.0 N/A

4.6 5.0 3.2 7.5 1.6 2.3 0.0 N/A

Average 4.9 5.4 3.5 21.5 1.6 2.8 0.0 6.9

Selected operating metrics Total revenue ($mn) GAAP operating margin Non-GAAP operating margin

745 30.3 29.4

722 33.2 31.9

722 39.2 38.2

720 39.1 37.9


Value

Quality

Sentiment

Low

High



13 September 2013

83



Sina Corporation (SINA) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: OVERWEIGHT 2012A 529 21 -9 35 32 0.14 0.47 10.70 66.7 0.00

2013E 655 51 4 19 16 0.91 0.24 18.30 66.8 0.00

2014E 858 192 135 159 144 2.28 2.15 19.37 67.0 0.00

2015E 1,066 347 280 306 272 4.17 4.05 20.83 67.2 0.00

CAGR 26.3% 154.1% N/A 106.8% 104.6% 208.1% 105.0% 24.9% 0.2% N/A

53.8 -1.6 4.0 6.0 -0.8 -0.5 0.9

56.8 0.6 7.8 2.5 2.2 0.8 4.8

62.0 15.8 22.4 16.8 15.2 5.4 11.3

67.7 26.2 32.5 25.5 32.4 10.4 19.8

Average 60.1 10.3 16.7 12.7 12.3 4.0 9.2


77 16 714 1,483 0 2 337 -714 1,137 -22 33 98 -66

78 84 1,272 2,152 50 2 381 -1,223 1,284 -37 68 96 -28

74 84 1,347 2,266 50 2 420 -1,297 1,352 -39 180 106 74

60 84 1,449 2,388 50 2 481 -1,399 1,413 -15 214 113 101

CAGR -7.8% 74.4% 26.6% 17.2% N/A 0.0% 12.6% N/A 7.5% N/A 87.2% 4.8% N/A


595.5 181.2 232.8 -1.2 11.0 5.0 0.0 0.0

93.3 350.5 86.3 -0.5 8.9 4.4 0.0 6.2

37.3 39.5 22.6 1.3 6.7 4.2 0.0 6.2

20.4 21.0 12.2 1.8 5.4 4.0 0.0 6.5

Average 186.6 148.1 88.5 0.4 8.0 4.4 0.0 4.7


Selected operating metrics ($mn) Advertising revenue Mobile VAS revenue Other revenue

413 70 47

361 62 67

388 53 76

419 51 85

Price (11-Sep-2013) USD 85.16 Price Target USD 84.00 Why Overweight? We believe Sina should benefit from improving advertising outlook in 2013, improved employee morale and the monetization ramp post the recent restructuring of portal and Weibo. Upside case USD 97.00 Based on our scenario, applying 55x to estimated 10% higher on our current Weibo earnings for 2014 and applying 20x multiple to portal earnings. Downside case USD 64.00 Based on our scenario, applying 30x to estimated 20% lower on our current Weibo earnings for 2014 and applying 15x multiple to portal earnings. Upside/Downside scenarios


Value

Quality

Sentiment

Low

High



13 September 2013

84



Sohu.com Inc. (SOHU) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: OVERWEIGHT 2012A 1,067 325 223 253 78 2.54 2.03 19.86 38.5 0.00

2013E 1,367 316 253 282 81 2.31 2.10 20.31 38.6 0.00

2014E 1,546 376 310 343 94 2.73 2.44 21.03 39.2 0.00

2015E 1,744 474 384 422 121 3.42 3.12 23.40 39.2 0.00

CAGR 17.8% 13.4% 19.8% 18.5% 15.8% 10.5% 15.4% 5.6% 0.6% N/A

65.4 20.9 30.5 7.3 10.9 8.0 9.0

65.3 18.5 23.1 5.9 11.3 8.5 6.4

66.3 20.0 24.4 6.1 13.0 9.8 7.9

66.3 22.0 27.2 7.0 14.4 11.0 9.9

Average 65.8 20.4 26.3 6.6 12.4 9.3 8.3

179 229 1,005 2,076 239 0 552 -765 1,084 95 403 -155 557

402 237 975 2,329 192 0 584 -783 1,387 -28 232 -162 394

486 237 938 2,457 113 0 610 -825 1,332 2 293 -163 456

559 237 1,031 2,691 113 0 640 -918 1,346 4 356 -175 531

CAGR 46.2% 1.1% 0.9% 9.0% -22.1% N/A 5.1% N/A 7.5% -66.7% -4.0% N/A -1.6%


26.1 32.5 5.5 21.9 2.4 2.4 0.0 43.5

28.7 31.4 5.6 15.5 1.9 1.8 0.0 19.9

24.2 27.1 4.6 17.6 1.6 1.9 0.0 11.0

19.3 21.2 3.4 20.5 1.5 1.9 0.0 10.0

Average 24.6 28.1 4.8 18.8 1.8 2.0 0.0 21.1

Selected operating metrics ($mn) Advertising revenue Search revenue Online game revenue Other revenue

290 124 575 78

414 189 668 96

458 248 738 101

513 316 808 107

Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%) Balance sheet and cash flow ($mn) Tangible fixed assets Intangible fixed assets Cash and equivalents Total assets Short and long-term debt Other long-term liabilities Total liabilities Net debt/(funds) Shareholders' equity Change in working capital Cash flow from operations Capital expenditure Free cash flow

Price (11-Sep-2013) USD 66.14 Price Target USD 73.00 Why Overweight? We like Sohu because of its more diversified revenue model. We expect Sogou to continue to gain market share with online video attracting more advertisers as well as upside from Changyou DMD. Upside case USD 100.00 This assumes Changyou's new game titles and DMD delivers and CYOU multiple expands to 10x and that Sogou and the Portal business also perform better than expected with the Portal multiple expanding to 15x and Sogou multiple expanding to 20x. Downside case USD 55.00 Assuming Changyou's core games slowdown; hence multiple de-rated to 5x, and Portal and Sogou business face challenging ad demand environment and loses share to other competitors with multiple de-rated to 8x for Portal and 10x for Sogou. Upside/Downside scenarios


Value

Quality

Sentiment

Low

High



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Tencent Holdings Limited (0700.HK) Income statement (RMBmn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) (RMB) EPS (reported) (RMB) Net cash per share (RMB) Diluted shares (mn) DPS (RMB) Margin and return data Gross margin (%) Operating profit margin (%) EBITDA margin (%) Net margin (%) ROIC (%) ROA (%) ROE (%)


2012A 43,894 18,093 15,480 15,052 12,733 7.67 6.83 15.24 1,863.3 1.29

2013E 59,456 22,326 18,992 18,840 15,020 8.74 8.05 16.53 1,864.8 1.55

2014E 77,431 29,606 25,280 24,811 20,454 11.89 10.93 19.79 1,870.8 2.12

2015E 95,658 35,951 30,580 30,301 25,140 14.61 13.37 24.83 1,880.8 2.59

CAGR 29.6% 25.7% 25.5% 26.3% 25.5% 24.0% 25.1% 17.7% 0.3% 26.2%

58.5 35.3 41.2 29.0 101.2 18.5 34.6

54.6 31.9 37.5 25.3 85.6 18.3 33.4

54.0 32.6 38.2 26.4 100.1 22.0 38.2

53.5 32.0 37.6 26.3 101.8 22.9 37.9

Average 55.2 33.0 38.6 26.7 97.2 20.4 36.0

18,281 4,850 44,939 100,409 7,908 9,025 41,258 -37,031 58,240 2,402 31,612 -7,801 23,811

24,441 4,908 51,003 118,611 4,308 9,025 45,257 -46,695 72,413 2,168 38,272 -9,624 28,648

CAGR 48.9% 1.3% 7.9% 16.4% -29.3% 0.0% 11.0% N/A 20.6% -14.8% 20.9% N/A 16.8% Average 31.5 34.6 21.9 3.8 9.1 11.2 0.6 51.4

Price (11-Sep-2013) HKD 402.20 Price Target HKD 450.00 Why Overweight? We are positive on Tencent’s overall strategic direction of its mobile open platform initiatives and believe it is well positioned to capture the emerging opportunities of mobile Internet growth in the next few years, leveraging its sticky, integrated mobile user platform on WeChat. Upside case HKD 556.00 This assumes WeChat monetization is tracking faster than our base-case scenario, translating into higher revenue and earnings growth with our target multiple expanding to 35x. Downside case HKD 290.00 This assumes WeChat monetization is tracking slower than our base-case scenario, translating into slower revenue and earnings growth and our target multiple de-rating to 20x. Upside/Downside scenarios

Balance sheet and cash flow (RMBmn) Tangible fixed assets 7,403 13,128 Intangible fixed assets 4,719 4,792 Cash and equivalents 40,601 43,043 Total assets 75,256 88,153 Short and long-term debt 12,208 12,208 Other long-term liabilities 9,025 9,025 Total liabilities 33,108 38,497 Net debt/(funds) -28,393 -30,835 Shareholders' equity 41,298 48,775 Change in working capital 3,508 4,015 Cash flow from operations 21,654 26,060 Capital expenditure -3,691 -6,019 Free cash flow 17,963 20,041 Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)

41.4 46.4 30.3 3.0 13.1 14.3 0.4 88.8

36.3 39.4 24.4 3.4 9.7 12.1 0.5 64.9

26.7 29.0 18.2 4.0 7.4 10.2 0.7 35.8

21.7 23.7 14.7 4.8 6.0 8.2 0.8 16.2

Selected operating metrics (RMBmn) IVAS revenue 35,719 MVAS revenue 3,723 Online ads revenue 3,382

44,524 4,132 4,832

55,375 4,516 6,094

65,054 4,968 7,552


Value

Quality

Sentiment

Low

High



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Youku Tudou Inc. (YOKU) Income statement ($mn) Net revenue EBITDA EBIT Pre-tax income Net income EPS (adj) ($) EPS (reported) ($) Net cash per share ($) Diluted shares (mn) DPS ($)

Stock Rating: OVERWEIGHT 2012A 288 -62 -77 -69 -68 -0.26 -0.51 4.55 132.6 0.00

2013E 499 -68 -86 -79 -75 -0.24 -0.46 3.66 166.4 0.00

2014E 755 35 13 16 13 0.25 0.07 3.44 173.2 0.00

2015E 1,040 147 116 119 101 0.75 0.57 3.90 177.5 0.00

CAGR 53.4% N/A N/A N/A N/A N/A N/A -5.0% 10.2% N/A

16.5 -26.7 -21.6 -23.6 N/A -3.0 -2.3

22.8 -17.2 -13.7 -15.1 N/A -3.1 -3.0

36.0 1.7 4.7 1.8 4.7 2.0 3.2

43.6 11.2 14.1 9.7 15.2 6.0 8.7

Average 29.7 -7.7 -4.1 -6.8 10.0 0.5 1.7

Balance sheet and cash flow ($mn) Tangible fixed assets 32 Intangible fixed assets 209 Cash and equivalents 604 Total assets 1,732 Short and long-term debt 1 Other long-term liabilities 0 Total liabilities 231 Net debt/(funds) -603 Shareholders' equity 1,502 Change in working capital -10 Cash flow from operations 22 Capital expenditure -73 Free cash flow -50

25 85 609 1,673 0 0 338 -609 1,335 55 115 -153 -38

24 151 596 1,817 0 0 439 -596 1,378 9 144 -156 -12

CAGR 13 -26.7% 229 3.1% 692 4.6% 2,080 6.3% 0 -100.0% 0 N/A 563 34.7% -692 N/A 1,517 0.3% 34 N/A 271 130.6% -174 N/A 97 N/A

94.9 321.0 56.4 -0.3 3.4 2.9 0.0 0.0

Average 63.2 181.0 2.0 -0.1 5.0 2.7 0.0 0.0


Price (11-Sep-2013) USD 23.43 Price Target USD 28.00 Why Overweight? We expect online video to take share from TV ad budgets, and with Youku’s dominant position given its strong brand and execution, we expect the company to increase market share over time. Upside case USD 42.00 This assumes faster customer adds and higher ARPU per customer, leading to revenue growing faster in 2013 to yield a DCF value of US$42. Downside case USD 15.00 Assuming ad demand is affected by a global slowdown with less ability to raise prices and customer growth at a slower rate. This translates into only 50% revenue growth for 2013, which would yield a DCF value of US$15. Upside/Downside scenarios

POINT® Quantitative Equity Scores Valuation and leverage metrics P/E (adj) (x) P/E (reported) (x) EV/EBITDA (x) FCF yield (%) P/Sales (x) P/BV (x) Dividend yield (%) Total debt/capital (%)

N/A N/A -32.0 -1.6 9.0 2.1 0.0 0.1

N/A N/A -29.1 -1.0 5.2 2.9 0.0 0.0

31.4 41.0 13.0 2.3 2.5 2.7 0.0 0.0

Selected operating metrics (mn) Number of customers 332.3 447.9 546.7 634.1 Total ARPU ($) 1,525.00 1,867.86 2,329.08 2,818.18

Value

Quality

Sentiment

Low

High



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ANALYST(S) CERTIFICATION(S): We, Alicia Yap, CFA and William Huang, hereby certify (1) that the views expressed in this research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this research report and (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report. The POINT® Quantitative Equity Scores (POINT Scores) referenced herein are produced by the firm’s POINT quantitative model and Barclays hereby certifies that (1) the views expressed in this research report accurately reflect the firm's POINT Scores model and (2) no part of the firm's compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this research report.

IMPORTANT DISCLOSURES CONTINUED Barclays Research is a part of the Corporate and Investment Banking division of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). For current important disclosures regarding companies that are the subject of this research report, please send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 14th Floor, New York, NY 10019 or refer to http://publicresearch.barclays.com or call 212-526-1072. The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by investment banking activities. Research analysts employed outside the US by affiliates of Barclays Capital Inc. are not registered/qualified as research analysts with FINRA. These analysts may not be associated persons of the member firm and therefore may not be subject to NASD Rule 2711 and incorporated NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst’s account. Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting payment or reimbursement by any covered company of their travel expenses for such visits. In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to https://live.barcap.com/publiccp/RSR/nyfipubs/disclaimer/disclaimer-research-dissemination.html. In order to access Barclays Research Conflict Management Policy Statement, please refer to: http://group.barclays.com/corporates-and-institutions/research/research-policy. The Corporate and Investment Banking division of Barclays produces a variety of research products including, but not limited to, fundamental analysis, equity-linked analysis, quantitative analysis, and trade ideas. Recommendations contained in one type of research product may differ from recommendations contained in other types of research products, whether as a result of differing time horizons, methodologies, or otherwise. Primary Stocks (Ticker, Date, Price) Baidu, Inc. (BIDU, 11-Sep-2013, USD 147.31), Overweight/Positive, F/J Changyou.com Ltd. (CYOU, 11-Sep-2013, USD 31.45), Overweight/Positive, J Ctrip.com International Ltd. (CTRP, 11-Sep-2013, USD 50.35), Overweight/Positive, J E-Commerce China Dangdang Inc. (DANG, 11-Sep-2013, USD 9.01), Underweight/Positive, J Giant Interactive Group (GA, 11-Sep-2013, USD 8.50), Overweight/Positive, C/J NetEase, Inc. (NTES, 11-Sep-2013, USD 74.03), Overweight/Positive, J Perfect World Co., Ltd. (PWRD, 11-Sep-2013, USD 21.28), Equal Weight/Positive, C/J Qihoo 360 Technology Co., Ltd. (QIHU, 11-Sep-2013, USD 90.85), Overweight/Positive, J Renren Inc. (RENN, 11-Sep-2013, USD 3.50), Equal Weight/Positive, J Shanda Games Ltd. (GAME, 11-Sep-2013, USD 4.10), Underweight/Positive, J Sina Corp. (SINA, 11-Sep-2013, USD 85.16), Overweight/Positive, C/J Sohu.com Inc. (SOHU, 11-Sep-2013, USD 66.14), Overweight/Positive, J Tencent Holdings Ltd. (0700.HK, 11-Sep-2013, HKD 402.20), Overweight/Positive, A/C/D/J/L Youku Tudou Inc. (YOKU, 11-Sep-2013, USD 23.43), Overweight/Positive, J

Other Material Conflicts The Corporate and Investment Banking division of Barclays is providing investment banking services to Qualcomm, Inc (QCOM) in relation to their proposed definitive agreement to sell Omnitracs, Inc., a subsidiary of Qualcomm Incorporated, to Vista Equity Partners. The Corporate and Investment Banking division of Barclays is providing investment banking services to Qualcomm Asia Pacific (QCOM) in relation to the potential sale of a 49% interest of its India BWA entities to Bharti Airtel Ltd (BRTI.NS).

Disclosure Legend: A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the previous 12 months. 13 September 2013

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IMPORTANT DISCLOSURES CONTINUED B: An employee of Barclays Bank PLC and/or an affiliate is a director of this issuer. C: Barclays Bank PLC and/or an affiliate is a market-maker and/or liquidity provider in securities issued by this issuer or one of its affiliates. D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within the next 3 months. F: Barclays Bank PLC and/or an affiliate beneficially owned 1% or more of a class of equity securities of the issuer as of the end of the month prior to the research report's issuance. G: One of the analysts on the coverage team (or a member of his or her household) owns shares of the common stock of this issuer. H: This issuer beneficially owns 5% or more of any class of common equity securities of Barclays Bank PLC. I: Barclays Bank PLC and/or an affiliate has a significant financial interest in the securities of this issuer. J: Barclays Bank PLC and/or an affiliate trades regularly in the securities of this issuer. K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation from this issuer within the past 12 months. L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate. M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or an affiliate. N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC and/or an affiliate. O: Barclays Capital Inc., through Barclays Market Makers, is a Designated Market Maker in this issuer's stock, which is listed on the New York Stock Exchange. At any given time, its associated Designated Market Maker may have "long" or "short" inventory position in the stock; and its associated Designated Market Maker may be on the opposite side of orders executed on the floor of the New York Stock Exchange in the stock. P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for remuneration, other than normal course investment advisory or trade execution services. Q: The Corporate and Investment Banking division of Barclays Bank PLC, is a Corporate Broker to this issuer. R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months. S: Barclays Capital Canada Inc. is a market-maker in an equity or equity related security issued by this issuer.

Guide to the Barclays Fundamental Equity Research Rating System: Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below) relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage universe"). In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative (see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully read the entire research report including the definitions of all ratings and not infer its contents from ratings alone. Stock Rating Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12month investment horizon. Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month investment horizon. Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where the Corporate and Investment Banking Division of Barclays is acting in an advisory capacity in a merger or strategic transaction involving the company. Industry View Positive - industry coverage universe fundamentals/valuations are improving. Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating. Negative - industry coverage universe fundamentals/valuations are deteriorating. Below is the list of companies that constitute the "industry coverage universe": Asia ex-Japan Internet & Media Baidu, Inc. (BIDU)

Changyou.com Ltd. (CYOU)

CJ CGV (079160.KS)

Ctrip.com International Ltd. (CTRP)

Daum Communications (035720.KQ)

E-Commerce China Dangdang Inc. (DANG)

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IMPORTANT DISCLOSURES CONTINUED Giant Interactive Group (GA)

NetEase, Inc. (NTES)

NHN Corp. (035420.KS)

Perfect World Co., Ltd. (PWRD)

Qihoo 360 Technology Co., Ltd. (QIHU)

Renren Inc. (RENN)

Shanda Games Ltd. (GAME)

Sina Corp. (SINA)

Sohu.com Inc. (SOHU)

Television Broadcasts Ltd. (0511.HK)

Tencent Holdings Ltd. (0700.HK)

Youku Tudou Inc. (YOKU)

Distribution of Ratings: Barclays Equity Research has 2419 companies under coverage. 44% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 50% of companies with this rating are investment banking clients of the Firm. 40% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Firm. 13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 43% of companies with this rating are investment banking clients of the Firm. Guide to the Barclays Research Price Target: Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price target over the same 12-month period. Guide to the POINT® Quantitative Equity Scores: The POINT Quantitative Equity Scores (POINT Scores) are based on consensus historical data and are independent of the Barclays fundamental analysts’ views. Each score is composed of a number of standard industry metrics. A high/low Value score indicates attractive/unattractive valuation. Measures of value include P/E, EV/EBITDA and Free Cash Flow. A high/low Quality score indicates financial statement strength/weakness. Measures of quality include ROIC and corporate default probability. A high/low Sentiment score indicates bullish/bearish market sentiment. Measures of sentiment include price momentum and earnings revisions. These scores are valid as of the date of this report. To view the latest scores, which are updated monthly, click here. For a more detailed description of the underlying methodology for each score, please click here. Barclays offices involved in the production of equity research: London Barclays Bank PLC (Barclays, London) New York Barclays Capital Inc. (BCI, New York) Tokyo Barclays Securities Japan Limited (BSJL, Tokyo) São Paulo Banco Barclays S.A. (BBSA, São Paulo) Hong Kong Barclays Bank PLC, Hong Kong branch (Barclays Bank, Hong Kong) Toronto Barclays Capital Canada Inc. (BCCI, Toronto) Johannesburg Absa Capital, a division of Absa Bank Limited (Absa Capital, Johannesburg) Mexico City Barclays Bank Mexico, S.A. (BBMX, Mexico City) Taiwan Barclays Capital Securities Taiwan Limited (BCSTW, Taiwan) Seoul Barclays Capital Securities Limited (BCSL, Seoul) Mumbai Barclays Securities (India) Private Limited (BSIPL, Mumbai) Singapore Barclays Bank PLC, Singapore branch (Barclays Bank, Singapore) 13 September 2013

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