Battle of the Internet giants IV: TAM`ing the profit pool

Transcription

May 17, 2016
China: Technology: Internet
Equity Research
Battle of the Internet giants IV: TAM’ing the profit pool
Turning positive on profits and focusing on the ‘Seven Pillars’
For the first time since 2010, we have a high degree of confidence in the
long term growth and potential (operating) profit pool for China Internet.
This is in contrast to 2010-15 when margins slipped on high competition,
there was a need to acquire customers, and an impetus to tackle new
entrants. As such, we believe now is the right time to examine the 2020E
industry profit pool verticals we call the ‘Seven Pillars’ – games, online
advertising, e-commerce, travel, local services, internet finance, and cloud.
BUY-RATED NAMES WITH KEY EXPOSURE TO SEVEN
PILLARS
Games
Online Ad.
E‐commerce
Travel
Local Services
Internet Finance
Cloud Computing
Tencent* Baidu
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Alibaba




JD.com




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

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
*Denotes stock is on our regional Conviction List
Four key takeaways
On TAM: Mobiles have exploded the overall total addressable market
Source: Company information, Goldman Sachs Global
Investment Research.
(TAM), with our estimates (ex-fins) suggesting a ~US$10tr opportunity by
2020. We believe the market has underappreciated the stickiness of PC
gaming and the attraction of mobile games. The next main sector growth
drivers should come from financial services and local services going online.
SEVEN PILLARS OF CHINA INTERNET
On profit pools: We believe there is immense online profit opportunity
4. Online Travel: A US$200bn opportunity by 2020E
(~US$70bn by 2020E) were these businesses to be run solely to maximize
profitability, as was the case with Ctrip in 2010, Baidu in 2011 and Alibaba
in 2013, when operating profit margins were at record levels.
5. Local services O2O: Building a second BABA, US$1.4tn
TAM (2020E)
1. Games: China, living in a virtual world
2. Online advertising: Social, online video and search are
growth engines
3. E-commerce: 3x increase to US$1.5tn by 2020E
6. Internet Finance: Tapping the underbanked China
consumer; a US$5.4tn opportunity (2020E)
7. Cloud computing: A ~US$20bn opportunity (2020E)
On reinvestment: With the profit pool dampened by investment into new
businesses, we have started moving towards SOTP valuations to reflect an
increasing degree of confidence in synergistic growth. Leveraging current
assets and positioning for the next major opportunities (internet finance,
O2O) will be key.
On who is best positioned: Those with social network assets appear best
RELATED RESEARCH
Tencent Holdings (0700.HK): Weixin: the north star (2);
multiple drivers intact; reiterate CL-Buy, April 13, 2016
China: Technology: Internet: Upcoming MSCI inclusions:
What to own; Tencent to CL-Buy, November 30, 2015
NetEase Inc. (NTES) Buy: Games leader and new growth
seeker; initiate at Buy, November 25, 2015
positioned, due to the growth opportunity, the significant barriers to entry,
the substantial upside to ad-loads, and the time spent on the app.
China: Technology: Internet: Shopping sans frontières: Buy
China online retail – BABA/JD/VIPS, November 6, 2015
Alibaba, Baidu, and Tencent could be major beneficiaries
China: Financial Services: Internet Finance Part 1: Clash of
the Titans unfolds; Midcap banks face risk of
marginalization, November 14, 2014
We are positive on Tencent (CL-Buy), Baidu (Buy), and Alibaba (Buy) given
their exposure to the three major growth drivers for the online advertising
industry into 2020E – social advertising, online video, and search. Also,
Alibaba dominates e-commerce via its unique monetization proposition,
Tencent is the dominant gaming platform in China, and Baidu the default
search engine in China. All three have exposure to local services, while
Baidu is ramping up its internet finance arm. Of the remaining pillars,
Baidu has online travel exposure via Ctrip (Buy) investment, while Alibaba
and Tencent lead in cloud computing, one of the fastest growth areas.
Piyush Mubayi
+852-2978-1677 piyush.mubayi@gs.com Goldman Sachs (Asia) L.L.C.
George Meng, CFA
+852-2978-0178 george.meng@gs.com Goldman Sachs (Asia) L.L.C.
David Jin, CFA
+852-2978-1466 david.jin@gs.com Goldman Sachs (Asia) L.L.C.
Fan Liu, CFA
+86(10)6627-3192 fan.liu@ghsl.cn Beijing Gao Hua Securities Company Limited
The Goldman Sachs Group, Inc.
China: Technology: Internet: Planes, Trains, and Hotel
Rooms; Buy Ctrip, Qunar, October 26, 2015
Goldman Sachs 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. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by nonUS affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
Global Investment Research
May 17, 2016
Table of contents
China Internet Opportunity in Pictures
3
China Internet in Numbers
5
PM Summary: ‘Seven Pillars’ drive a ~US$70bn profit pool in 2020E
6
The Seven Pillars of China Internet
10
11
2. Online advertising: Social, online video and search are growth engines
19
30
4. Online travel: A US$200bn opportunity by 2020E
35
5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E)
38
6. Internet finance: Tapping the underbanked China consumer; a US$5.4tr opportunity (2020E)
42
46
Appendix 1: China internet usage
51
Appendix 2: M&A summary
52
Appendix 3: Valuation and risks
56
Appendix 4: TAM table in details
57
Appendix 5: TAM detail in RMB
59
Disclosure Appendix
60
All prices in this report as of May 13, 2016, unless otherwise noted. The authors would like to thank Jason Huang, Elsie Cheng, Shaphan
Ng and Kenneth Bang for their valuable contributions to the report.
Exhibit 1: China Internet Comps
Company
China Internet
58.com
Alibaba
Autohome
Baidu
Changyou
Ctrip
JD.com
Jumei
NetEase
Qunar
Sina
Sohu
SouFun
Tencent
Tuniu
VIPShop
Weibo
Median (Sum for Mkt cap)
Ticker
WUBA
BABA
ATHM
BIDU
CYOU
CTRP
JD
JMEI
NTES
QUNR
SINA
SOHU
SFUN
0700.HK
TOUR
VIPS
WB
fx
$
$
$
$
$
$
$
$
$
$
$
$
$
HK$
$
$
$
Last
Target
+/-
Price
Price
Side
Rating
27%
30%
38%
-4%
28%
46%
80%
19%
26%
5%
4%
22%
24%
67%
46%
-6%
26%
Neutral
Buy
Not Rated
Buy
Sell
Buy
Buy
Neutral
Buy
Neutral
Neutral
Sell
Neutral
Buy*
Neutral
Buy
Neutral
50.50
77.16
24.80
159.75
17.67
43.01
22.64
5.29
153.40
35.75
45.50
39.52
5.58
155.10
8.97
12.00
23.30
64.0
100.0
220.0
16.9
55.0
33.0
9.5
182.0
45.0
48.0
41.0
6.8
193.0
15.0
17.5
22.0
Mkt Cap
Performance
P/E, non-GAAP
diluted
EV/Revenue
PEG
PE at TP
non-GAAP
2016E 2017E
2016E
2016E 2017E
NM
1.1x
0.6x
0.6x
1.1x
0.8x
NM
0.3x
1.9x
NM
NM
NM
NM
1.2x
NM
0.8x
0.7x
0.8x
NM
35.2x
35.0x 28.1x
36.7x 24.5x
8.8x
8.0x
103.3x 38.4x
NM
73.7x
25.4x 15.9x
16.6x 17.0x
NM 124.0x
29.7x 22.5x
NM
22.3x
NM
20.1x
35.6x 28.0x
NM
NM
27.4x 21.4x
41.3x 23.0x
32.3x 23.0x
(US$mn)
3Mo
YTD
2016E 2017E
5,803
196,758
2,904
56,520
934
21,017
31,092
799
20,281
5,272
2,683
1,529
2,376
188,386
1,190
7,663
5,195
550,401
14%
27%
4%
5%
9%
16%
-2%
-4%
11%
2%
9%
-11%
15%
16%
-18%
10%
93%
9%
-23%
-5%
-29%
-15%
-29%
-7%
-30%
-42%
-15%
-32%
-8%
-31%
-24%
2%
-44%
-21%
19%
-23%
NM
27.0x
16.2x
26.6x
9.2x
80.8x
NM
14.2x
14.0x
NM
28.1x
NM
NM
28.6x
NM
18.8x
43.7x
26.6x
27.8x
21.6x
12.6x
17.8x
8.4x
30.0x
50.5x
8.8x
14.3x
98.5x
21.3x
21.5x
16.5x
22.5x
NM
14.7x
24.4x
21.4x
4.2x
8.7x
2.6x
4.2x
0.7x
7.1x
0.7x
0.5x
3.2x
6.3x
1.2x
0.4x
1.3x
8.6x
0.4x
1.0x
8.0x
2.6x
2.9x
6.8x
2.2x
3.5x
0.7x
5.3x
0.5x
0.4x
2.5x
4.5x
1.0x
0.3x
0.9x
7.0x
0.3x
0.8x
5.6x
2.2x
Notes: *Denotes stock is on our regional Conviction List. All target prices are on a 12 month basis.
Source: DataStream, Goldman Sachs Global Investment Research.
Goldman Sachs Global Investment Research
2
May 17, 2016
China Internet Opportunity in Pictures
Exhibit 2: Seven Pillars of China Internet
Notes: TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. CAGR is for
2015-2020E (in USD).Top 2 players is by market share. For RMB version please see Appendix 5.
Source: iResearch, eMarketer, NBS, CNNIC, Analysys, Wind, Sina news, Goldman Sachs Global Investment Research.
Exhibit 3: We expect China’s internet penetration to increase from 50% in 2015 to 60% by
2020 (to 847mn, 97.6% of which would be mobile internet users vs. 90% in 2015)
(mn)
1,000
70%
Total Internet Users(mn)
900
Mobile Internet Users(mn)
800
Internet users penetration %(RHS)
60%
50%
700
600
40%
500
30%
400
300
20%
200
10%
100
-
0%
2008
2009
2010
2011
2012
2013
2014
2015 2016E 2017E 2018E 2019E 2020E
Source: CNNIC, iResearch, Goldman Sachs Global Investment Research.
3
May 17, 2016
Exhibit 4: The China internet opportunity in a global context
China
Population
1,376mn
13%
Internet penetration
Japan
50%
Population
GDP
eComm+Travel+Ads size
45%
91%
$721bn - No.1
50%
37%
127mn
$10,847bn
GDP
$4,121bn
Europe
$116bn - No.4
Population
822mn
74%
Korea
India
$383bn - No.3
Population
49mn
1,252mn
$16,947bn
US
Population
Population
GDP
321mn
92%
30%
87%
GDP
GDP
$48bn - No.5
$36bn - No.6
34%
GDP
$1,357bn
$2,060bn
5%
$17,943bn
26%
$559bn - No.2
9%
70%
7%
10%
1%
45%
47%
39%
31%
32%
14%
26%
13%
Internet Penetration
eCommerce
Travel
10%
66%
28%
Advertising
8%
Note: Data as of 2015.
Source: eMarketer, Phocuswright, InternetWorldStats, Goldman Sachs Global Investment Research.
4
May 17, 2016
China Internet in Numbers
CHINA INTERNET USER
CHINA INTERNET USER DEMOGRAPHICS
620mn mobile internet users = 2x US pop.
75% users between 10-39 years old
72% from urban cities
China has 620mn mobile internet users, 90% of the 688mn
total internet users. Internet penetration has surpassed
50%, and we expect it to grow to 60% with 847mn internet
users in 2020E.
ONLINE ADVERTISING
Online ad spend as % of total ad spend:
China: 45% vs. US: 33%
ADS
Age: 10‐39
75%
54% of internet users
are male, 67% are of
secondary/high school
educational level.
E-COMMERCE
Online penetration to reach 22% in 2020E
from
13% in 2015.
TAM: Rmb552bn in 2020E, 21% CAGR in 2015-20E. We
forecast search ad spend is currently ~33% of the market
and social ad spend to grow fastest at 31% CAGR (201520E).
Category penetration (2014):
GAMES
TRAVEL
China surpassed the US as the world's
largest gaming market, Rmb144bn TAM in 2015
vs. 45% in the EU and 43% in the US.
Mobile gaming should exceed PC online gaming in 2016.
eSport player population to grow at 23% CAGR (20152018E).
1. People booking trips online in China: 260mn  4th most
populated country: Indonesia.
2. Trips booked on mobile platforms 34% as of online.
LOCAL SERVICES/O2O
CLOUD COMPUTING
Online penetration to reach 12% in 2020E
China cloud market to grow at 18% CAGR to
Rmb127bn by 2020E
70% of movie tickets booked online in 2015, up from
45%/25% in 2014/2013. 51% of the bookings on mobile.
The top 3 (Maoyan, Weipiao, Gewara) ~55% market share.
IaaS, PaaS and SaaS in China expected to grow at
20%/23%/22% CAGR till 2020E. We expect AliCloud to
capture 28% market share in 2020E vs. 3% in 2015.
INTERNET FINANCE
TENCENT (0700.HK)
AliPay: 400mn+ real-name registered users
Books & Magazines: 40%
Apparel: 31%
Cosmetics: 22%
Phones: 19%
Digital: 17%
Home appliance: 10%
2014 OTA penetration in China: 28%
$
TenPay: 300mn users with bankcards linked
55.2% Weixin users open the app >10
times/day and time spent is 2x Facebook.
AliPay and TenPay combined is 67.5% of China's total third
party online payment transaction volumes.
MAU (end-2015): 549mn
Average Weixin user age: 26
86.2% of users are between 18-36 years old
90%+ smartphones installed Weixin in China
ALIBABA (BABA)
BAIDU (BIDU)
AT
B
407mn active buyers, avg. spend Rmb7,249 per annum
Achieved GMV RMB3tn milestone in FY2016. Single's Day
2015 attracted 115mn buyers, transacted GMV Rmb91bn
through AliPay; Rural Taobao penetrated over 12,000 of
China's 600,000 villages.
BA
T
BAT
No.1 search engine in China. 1,049k SME customers.
Mobiles 60% of 1Q16 rev.
150%
Paid Clicks
100%
Cost per click
50%
Search rev.
0%
-50%
2007 2008 2009 2010 2011 2012 2013 2014 2015
Notes: Data as of 2015, unless stated.
Sources: Company data, iResearch, eMarketer, CNNIC, Goldman Sachs Global Investment Research.
5
May 17, 2016
PM Summary: ‘Seven Pillars’ drive a ~US$70bn profit pool in 2020E
Exploring the ‘Seven Pillars’ that constitute the long term drivers of China Internet – games, digital
marketing, e-commerce, online travel, local services O2O, internet finance, and cloud computing – we
quantify the market potential to 2020E (revenue/profit pool) and look at the industry leaders in each pillar.
Focus shifting to long term pillars of growth after a year of M&A
Following a number of transformative China internet mergers in 2015 and a prudent private
equity market, the drag on margins from competition and disruptive companies on the
sector’s profit outlook has decreased, in particular for BAT (Baidu, Alibaba, and Tencent).1
In this report our focus is on how the 2020E industry profit pool by vertical looks, driven by
the long term pillars (‘Seven Pillars’) of China Internet – games, online advertising, ecommerce, travel, local services O2O (online to offline), internet finance, and cloud. The
analysis enhances our confidence on China Internet’s long term growth and the potential
(operating) profit pool, with possible margin upside surprise. Key to capitalizing on this
opportunity will be individual company strategies pursued for the next phase of growth.
We have moved both the Alibaba and Baidu valuation methodology to SOTP to reflect the
growing degree of confidence in synergistic growth and to take a longer term view of the
valuation creation in the loss making businesses as they transform into profitable growth
drivers.2
Exhibit 5: Categorizing internet verticals by development stages
Survival of the fittest
Market concentration
Survival of the
"Richest"
M&A in private space
Strong firms go public/
gain share
- E-commerce,
- P2P lending, etc.
M&A in public space, moving
to market structure stability
- Online travel,
- Online gaming,
- Online video, etc.
- Taxi hailing, etc.
Consumer is "King"
Heavy discounting
- O2O e.g. Online Food
Delivery.
Start-ups boom
Business model recognized, PE
capital flows in
- Online new car/ used car transaction
platforms,
- FinTech, etc.
To Be or Not To Be
Online adoption begins
New business ideas, e.g.
Development phase
Source: Goldman Sachs Global Investment Research.
1
For details of the five largest China Internet deals in 2015, Baidu’s investments over the past 11 years, Alibaba’s
M&A history since April 2013, and Tencent’s 100+ investments in the past five years, please see Appendix 2.
2
See ‘Alibaba: Above expectation: Switch to SOTP to capture strategic investments’, May 6, 2016 and ‘Baidu:
Building BABA for local services; maintain Buy’, July 30, 2015.
6
May 17, 2016
Seven Pillars by 2020E: Over US$2tr online market, ~US$70bn profit
Over the last two years we have discussed many of the individual growth pillars for China
Internet. For the first time we combine research on each of these pillars (the ‘Seven Pillars’),
to reach an estimated total addressable market (TAM) ex-financials for China Internet of
Rmb65tr (US$10tr) in 2020. We estimate the total size of the online market (ex-fins) could
reach Rmb13.4tr (US$2.0tr) by then, implying 21% online penetration (8pp higher than
2015’s 12%). We exclude financials from our market sizing analysis as the TAM is too big
for the internet companies to meaningfully penetrate. Our China banks team model
~Rmb1,200tr (~US$180tr) total bankcard transaction value + total social financing (TSF, excl.
bonds and equities) by 2020E, with online penetration only expected to be 3.2% and 1.5%
respectively by then (Exhibit 6).
Taking our analysis one step further, we expect the total online profit pool (ex-fins) for
China Internet to reach Rmb393bn (US$59bn) by 2020. While this figure likely captures the
industry’s growth potential, it may also exclude spending on projects for the next phase of
growth. Our combined operating profit for BAT by end-2020E is Rmb308bn (vs. Rmb97bn
in 2015), equivalent to 78% of the total, which puts the overall pool into context. As shown
in Exhibit 7, we expect the top 3 profit contributors to be online adspend (Rmb169bn, 43%
of total), online games (Rmb106bn, 27% of total) and e-commerce (Rmb79bn, 20% of total).
For detailed information on each of the Seven Pillars, please see our segment analysis
(page 12 onward).
Exhibit 6: China Internet: TAM analysis into the ‘Seven Pillars’
The online opportunity (ex-finance) is potentially >Rmb13tn
Total Addressable Market
RMB bn
Latest update
David Jin, on March 23, 2016
2014
2015
2016E
2017E
2018E
2019E
2020E
Cagr 15-20
GDP
63,689
67,940
69,428
74,161
79,040
85,067
91,383
6.1%
TAM assessment, by category
1. RETAIL
E-Commerce
26,239
2,790
30,093
3,877
33,403
5,079
36,744
6,400
40,051
7,744
43,455
8,983
46,931
10,151
9%
21%
396
154
467
210
553
276
629
345
699
411
770
480
842
552
13%
21%
3. TRAVEL (OTA TGT.)
OTAs
1,308
366
1,444
527
1,590
634
1,744
758
1,908
901
2,089
1,056
2,270
1,231
9%
18%
4. LOCAL SERVICES (O2O)
Online
5,329
237
5,992
324
6,641
438
7,280
575
7,936
730
8,571
900
9,256
1,111
9%
28%
110
28
83
144
56
87
183
91
92
221
125
96
251
152
99
266
164
102
277
172
105
14%
25%
4%
3,049
44
3,593
56
4,107
72
4,577
90
4,995
100
5,361
114
5,675
127
10%
18%
3,701
5,138
6,682
8,389
10,137
11,799
13,449
21%
6,990
495,331
1.4%
110,612
0.0%
9,713
569,631
1.7%
125,461
0.1%
13,385
646,531
2.0%
142,303
0.1%
18,118
730,580
2.4%
159,272
0.3%
23,611
818,250
2.7%
178,264
0.7%
29,295
908,257
3.0%
199,520
1.1%
36,047
1,008,165
3.2%
223,311
1.5%
30%
12%
2pp
12%
1pp
36,432
57.2%
3,701
10%
9%
41,733
61.4%
5,138
12%
11%
46,477
66.9%
6,682
14%
12%
51,195
69.0%
8,389
16%
14%
55,839
70.6%
10,137
18%
15%
60,511
71.1%
11,799
19%
17%
65,252
71.4%
13,449
21%
18%
9%
2. ADSPEND
Online Adspend
5. ONLINE GAMES
Mobile
PC+browser
6. IT SPENDING
Cloud computing
Online, ex-finance
7. FINANCE
a. Total bankcard transaction
% online penetration
b. TSF excl. bond and equity
% of total bank loans
Total Addressable Mkt. (ex finance)
% of GDP
Online (ex finance)
% of TAM online
% of TAM online (ex ecomm)
21%
8pp
7pp
Companies with exposure
Alibaba, JD, VIPS, Jumei, Netease
Alibaba, Baidu, Tencent
Ctrip, Qunar, Alitrip, Tuniu
Meituan, Baidu Nuomi, Koubei
Tencent, Netease, Changyou
Alibaba, Baidu, Tencent, JD
Change in pp, '15-'20E
Source: Company data, iResearch, eMarketer, Goldman Sachs Global Investment Research.
7
May 17, 2016
Exhibit 7: China internet profit pool estimates
Online adspend, online games and e-commerce are the top 3 profit pool contributors by 2020E
2015
Profit pool (Rmb bn)
2020E
OP
Split
OP/TAM
0.3%
13
17%
ADSPEND
Online Adspend
43.1%
59
3.
TRAVEL (OTA TGT.)
OTAs
-0.4%
4.
LOCAL SERVICES (O2O)
Online
1.
2.
RETAIL
E-Commerce
5.
ONLINE GAMES
Mobile
PC+browser
6.
Cloud computing
Total, ex finance
7.
FINANCE
a. Online payment
b. SME lending
OP/TAM
OP
Split
Exposure/Comment
0.8%
79
20%
80%
46.2%
169
43%
Baidu, Tencent, Alibaba
(2)
-3%
1.0%
12
3%
5% take rate, 20% margin, incl. outbound
-9.4%
(30)
-41%
0.6%
7
2%
6% take rate, 10% margin
32.2%
46
11
35
63%
15%
47%
38.4%
106
43
63
27%
11%
6%
-20.0%
(11)
-15%
15.0%
19
5%
74
86%
2.9%
393
83%
1.4%
0.1%
12
14%
0.2%
80
17%
0.1%
2.3%
10
2
12%
2%
0.1%
1.4%
33
47
7%
10%
0.18% take rate, 57% margin
9% interest rate, 36% margin (incl. 2.5% credit cost)
TOTAL
Alibaba
Baidu
Tencent
BAT Total
86
OPM (%)
607.5%
19.7%
40.6%
55.2%
2015
OP
42
13
42
97
473
Split
58%
18%
57%
132%
2020E
OP
141
55
112
308
OPM (%)
748.4%
32.8%
42.1%
68.0%
Split
36%
14%
29%
78%
Source: Company data, Goldman Sachs Global Investment Research.
Exhibit 8: Online advertising has the highest profit pool because of high margin on
established business models; internet finance has the highest growth potential due to the
lowest online penetration
Seven Pillars snapshot, by profit pool size, growth profile, and online penetration
Online penetration:
2020E
120%
Cloud
computing
Online
gaming
100%
80%
Online
advertising
60%
Online
travel
40%
Local
E-commerce services
20%
0%
Internet
finance
Online market size
CAGR: '15-'20E
-20%
0%
5%
10%
15%
20%
25%
30%
35%
Note: *Bubble size represents 2020E operating profit pool for each Pillar (see Exhibit 7 for data).
Source: Company data, iResearch, eMarketer, Goldman Sachs Global Investment Research.
8
May 17, 2016
Who is best placed to benefit? Alibaba, Baidu, and Tencent
Online advertising: BAT, via search, social and e-commerce each has a unique ad
proposition. For search, Baidu (Buy) demonstrates consistent Paid Click and cost-per-click
trends and appears primed for better mobile monetization. With social ad spending in
China (Rmb85bn in 2020E) and social mobile monetization, we see Tencent (CL-Buy) as a
key beneficiary given its powerful social network asset, Weixin. Merchants place ads on the
Alibaba (Buy) platform for traffic acquisition, brand building and customer engagement.
What is common across BAT is their exposure to online video, the fastest growing vertical
and a major driver of traffic in China.
Games: We believe the market may underestimate the overall potential of player vs player
games, across PC and mobiles in China, and see growth into 2020E driven by shifting
genre and rising ARPU. Tencent remains the market leader in games for its strong
distribution capability, IP inventory and control of Weixin. We expect NetEase (Buy) to
leverage its strength in game development, while rising uncertainty on game launch plans
and increasing competition is likely to negatively impact Changyou (Sell).
E-commerce: Alibaba dominates China retail, via a unique monetization proposition that
has built up its enormous user base (423mn), and we expect the structural movement from
offline to online to continue driving growth in the industry. We believe JD.com (Buy) will
remain the second largest e-commerce player given its strong in-house logistics network.
Cloud computing: Although we believe cloud computing in China lags the US by four years,
we are confident spending on cloud will be one of the fastest growth areas within China
internet. Alibaba and Tencent are currently the two largest cloud service providers in China.
Online travel: We remain positive on the outlook for China’s online travel market, with
resilient travel spending growth and the secular story of rising online penetration. We see
Ctrip (Buy) as a key beneficiary given its leadership across business lines and solid margin
enhancement along with the ongoing integration with Qunar.
Local services: Online local services in China are likely to be better exploited by the internet
giants, in contrast to other parts of the world. BAT looks well positioned to capitalize on the
changing of user habits, enabling them to: 1) capture the trend of spending online across
multiple partners, 2) benefit from traffic to payment gateways, and 3) expand the
advertising customer base given the number of small merchants coming online.
Internet finance: We believe the role of payment solutions offered by internet companies
has been underappreciated by the market due to the low take rates (i.e. the commission
rate). However, customers are likely to largely come from the existing user bases of BAT,
thus these three could make headway in the underbanked China consumer by adding more
financials services online.
Exhibit 9: Market share in each of the Seven Pillars (2015)
Ecommerce
VIPS, 2%
Online Adspend
OTA
O2O
Other,
11%
Other, 30%
JD, 12%
Other, 23%
Ctrip, 26%
Alibaba, 27%
Alibaba, 9%
Baidu,
11%
Tuniu, 1%
Alibaba, 76%
Sina, 2%
Other, 73%
Baidu, 28%
Meituan
Dianping, 57%
Sohu, 3%
Netease, 1%
Tencent, 9%
Online games
Cloud
Alibaba, 3%
Internet Finance
Tencent, 2%
Other, 40%
Others, 33%
Tencent, 45%
Alipay, 48%
Other, 95%
Tencent, 20%
Changyou, 3%
Netease,
13%
Source: iResearch, Analysys, Company data.
9
May 17, 2016
In this section, we present our seven key pillars for investing in China Internet
1.
Games: China, living in a virtual world
2.
Online advertising: Social, online video and search are growth engines
3.
E-commerce: 3x increase to US$1.5tn by 2020E
4.
Online travel: A US$200bn opportunity by 2020E
5.
Local services O2O: Building a second BABA, US$1.4tn TAM (2020E)
6.
Internet finance: Tapping the underbanked China consumer; a US$5.4tr opportunity
(2020E)
7.
Cloud computing: A ~US$20bn opportunity (2020E)
Exhibit 10: Seven long-term pillars of the China Internet opportunity
Notes: TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. CAGR is for
2015-2020E (in USD). Top 2 players is by market share. For RMB version please see Appendix 5.
10
May 17, 2016
Tencent
Others
27%
Online
games
55%
Cloud
1% Online
ads
17%
Netease
Others
Online 16%
ads
8%
Online
games
76%
Note: Data shown is revenue split in 2015.
Key beneficiaries
 Tencent (CL-Buy):
World’s largest online
gaming company, with a
strong position in
mobile games in China
on account of Weixin
 NetEase (Buy):
Leveraging game
development strength
We believe the market has underestimated the overall potential of player vs player games
(PVP), across PC and mobiles in China. We stay bullish on the games sector with mobile
likely to overtake PC in 2016 and we believe it will drive growth into 2020E on the back of
shifting game genre and rising ARPU. We see Tencent (CL-Buy) remaining as the market
leader given its strong distribution capability, IP inventory and control of the dominant
social network in China. NetEase (Buy) leverages its strength in game development while
we see rising uncertainty for Changyou (Sell) concerning the game launching plan and
competition.
Online games were the first major internet vertical to be successfully monetized in China,
predating both advertising and e-commerce with the launch of the first online game in
2000. This segment remains the largest revenue contributor for the Chinese internet giants,
and accounted for 55% of Tencent’s 2015 revenues.
Console ban and broadband penetration drove mass adoption
Around early 2000, online games in China took a turn away from the then prevalent trend
in Korea, Japan and the US—the rise of console-based games—due to a combination of
factors. These included the high price of consoles, government regulations banning
consoles, and the prevalence of piracy. The lack of consoles led to a greater concentration
in China of online-based games than in other markets.
Gamers initially went to internet cafes to play time based games, the access for which was
typically Rmb1/hour in 2005. The rollout of affordable broadband in China brought gaming
back home. Another China-specific dynamic is that the online experience can provide
children with the sought after social experience through playing massively multiplayer
online role-playing games (MMORPG).
China, a market where hard core PC games dominate
Tencent is currently the largest games publisher in China and one of the largest in the
world. Publishers are responsible for marketing and distribution and, in a few instances,
the funding of the games. The bigger the publisher, the greater the reach it offers the game
developer. Game developers on the other hand come up with the ideas for games, which
the design team then implements by working with the artists and the programmers.
In the early stages of the gaming industry in China (early 2000), game titles were sourced
from abroad; the most popular included titles from neighboring Korea, such as Legend of
Mir and World of Legend. Korea dominated the China Top Ten list in 2003-04. China
remains a market with hardcore gamers like Korea, but in contrast to Japan where the
story and art are given more weight by the gamer.
To tap into the China mass market, however, cultural nuances need to be factored in,
especially for role playing games (RPG). William Ding, founder and CEO of NetEase, said
“For Chinese people, home grown games are like tea, imported ones are like coffee”
(Source: Asia Times), implying that local Chinese people prefer games which incorporate
Chinese cultural aspects. The most popular games in the market growth phase (post 2003)
were localized and included Fantasy Westward Journey (FWJ - NetEase), Tian Long Ba Bu
(TLBB, Sohu) and ZhuXian (Perfect World). FWJ is based on a 16th century Chinese classic,
TLBB finds its inspiration in a martial arts book, and ZhuXian was adapted based on
Chinese culture.
11
May 17, 2016
During this early period, the freemium gaming models caught on as gaming companies
broadened their user base via existing games with monetization through the sale of virtual
items offered to enhance game play. This strategy was pioneered by Shanda Games with
Legend of Mir 2. The industry witnessed gamers paying via prepaid cards sold by the
gaming companies for time-based games as well as for products sold in freemium games.
Since 2012, the most successful PC games have remained well entrenched, and it has
become harder to launch new games successfully. Established games such as the world’s
most popular game, League of Legends, are complex, with hundreds of characters, each
with multiple and changing abilities. The time invested in these socially-engaging games is
the reason for their stickiness.
Exhibit 11: Global Gaming Revenue Comparison – Tencent continues to dominate the Top 10 ranking
COMPANY
1
2
3
4
5
6
7
8
9
10
Tencent
Microsoft*
Sony*
Activision Blizzard
Apple*
EA
Google*
NetEase
Warner Bros
King.com
Gaming revenue (US$mn)
% yoy
Mkt. share
Incr. sh.
2013
2014
2015
14/13
15/14
2013
2014
2015
2014
2015
5,231
4,876
4,739
4,583
2,373
3,661
1,385
1,353
-
8,061
5,029
5,127
4,401
3,479
4,109
2,369
1,601
1,593
1,786
10,270
6,839
5,793
4,665
4,384
4,273
2,961
2,876
2,214
2,000
54%
3%
8%
-4%
47%
12%
71%
18%
NM
NM
27%
36%
13%
6%
26%
4%
25%
80%
39%
12%
11%
11%
10%
10%
5%
8%
3%
3%
0%
0%
16%
10%
10%
9%
7%
8%
5%
3%
3%
3%
16%
11%
9%
7%
7%
7%
5%
5%
4%
3%
53.3%
0.3%
0.8%
-0.4%
2.2%
0.9%
1.9%
0.5%
3.1%
3.5%
19.1%
2.9%
1.1%
0.4%
1.4%
0.3%
0.9%
2.0%
1.0%
0.3%
Note: *Data from Newzoo.
Source: Company data, Newzoo.
The next leg for China gaming: US$41bn market by 2020E
China surpassed the US as the largest gaming market in the world for the first time in 2015
(source: Newzoo) and we expect it is on track to double in revenue from Rmb144bn
(US$22bn) in 2015 to Rmb277bn (US$41bn) in 2020E, a 14% CAGR. This implies that China
could account for 41% of the global gaming market by 2020.
Exhibit 12: US$41bn market potential for China’s online games
2016E
US$27bn
US$41bn
Web,
7%
Web,
11%
Mobile,
47%
2020E
PC
client,
22%
PC
client,
35%
Mobile,
53%
Source: iResearch, Goldman Sachs Global Investment Research.
12
May 17, 2016
Exhibit 13: Global gaming market
Asia-Pacific, and in particular China, is the largest gaming opportunity in the world
EASTERN EUROPE
Rev $2.7bn
+16%YoY
138mn Players
Avg spend $19.6
WESTERN EUROPE
Rev $15.6bn
+1%YoY
200mn Players
Avg spend $78
NORTH AMERICA
Rev $23.8bn
+7%YoY
195mn Players
Avg spend $122
ASIA PACIFIC
Rev $43.2bn
+18%YoY
826.5mn Players
Avg spend $52.3
MIDEAST&AFRICA
Rev $1.9bn
+35%YoY
230mn Players
Avg spend $8.3
LATIN AMERICA
Rev $3.9bn
+16%YoY
185mn Players
Avg spend $21.1
Note: Revenue data in US$ as of 2015. Players data as of 2014.
Source: Newzoo, Goldman Sachs Global Investment Research.
Business segments
PC client-based games
iResearch expects only single digit growth for PC games in the coming three years in China,
with PC-client games a shrinking proportion of overall online games. Despite this tepid rate,
we believe PC client-based games still have strong monetization potential, reflecting the
highest paying ratio and ARPU for PC client-based games, the longer life cycle of gamers,
and higher entry barriers relative to other segments. Multiplayer Online Battle Arena
Games (MOBA) has emerged as an important segment of PC games and League of Legend
remains the most popular title globally according to Newzoo (February 2016).
Exhibit 14: Revenue of PC client-based games in China
PC online game
Rmb bn
% of overall game revenue
90.0
80.0
70.0
60.0
50.0
58.6
62.2
65.8
Exhibit 15: Market share of PC client-based games by
distribution channel (2015)
69.1
72.6
75.6
77.8
80.2
80%
70%
60%
Changyou,
4%
Others, 16%
50%
48.5
NetEase, 15%
40%
40.0
30%
30.0
20.0
20%
10.0
10%
0.0
Tencent, 65%
0%
2012
2013
2014
2015 2016E 2017E 2018E 2019E 2020E
Source: iResearch.
Source: Analysys.
13
May 17, 2016
Mobile games
Mobile games growth is likely to slow down from a high base in China on intense
competition due to low entry barriers, in our view. According to TalkingData, the number of
mobile game content providers expanded from 13,000 in 1Q14 to 31,800 in 4Q15.
Nevertheless, we expect the migration of successful PC genres to mobiles will continue.
In 2015, MMORPG mobile games contributed 29% of new title releases according to
TalkingData (see Exhibit 17). Some of the well celebrated PC IPs made successful
transitions into mobile, namely: Fantasy Westward Journey (NetEase), Westward Journey
Online (NetEase), The Legend of MIR2 (Tencent) and MU Origin (XiaoMi). Media based
(internet novel/movies/TV drama) IP titles also gained popularity, especially during the
concurrent broadcast period but with an inherently shorter life span. RPG game yields
higher pay rates than other genres due to strong engagement (see Exhibit 16 ), and if they
are based on prevailing IP then they are likely to have a prevailing audience even though
this may not always guarantee success.
Major developers and publishers have announced 2016 new game pipelines focusing on
RPGs. At the “Tencent UP 2016” conference on March 25, 2016, the company announced it
would be launching more than 30 mobile games this year. Of the 12 unveiled titles, 6 are
premium IP-based RPG games: ZhengTu (Giant Interactive, PCU 2mn in May 2008), TLBB
Mobile (Changyou), ZhuXian (PerfectWorld) JianXia (Kingsoft), The World of Legend
(Shanda) and YuLongZaiTian (In-house). Except for NetEase, all major publishers have
stated they are willing to provide Tencent at least one game title.
NetEase plans on bringing more than 10 IP-based new RPG titles to the market in 2016.
Changyou is going to release the revamped TLBB mobile game later this year, relying on
Tencent for publication. As the competition intensifies, game developers are adopting a
more prudent approach rather than rush launching to market like in the past.
Exhibit 16: iOS mobile game pay rate by genre in China
Exhibit 17: New mobile game releases by genre in 2015
…steady up trending…
…RPG leading the way…
5.5%
RPG
Board game
Action
Board game
2%
TCG
Others
1%
5.0%
Casual
15%
4.5%
RPG
29%
4.0%
Action
15%
3.5%
Source: TalkingData.
Card game
16%
Feb-16
Jan-16
Dec-15
Nov-15
Oct-15
Sep-15
Aug-15
Jul-15
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
3.0%
Strategy
22%
Source: TalkingData.
14
May 17, 2016
Exhibit 18: Mobile game player average monthly
spending distribution
Exhibit 19: Mobile game player average playing time
distribution
…higher spending as mid-hard core games rise…
…playing longer hours…
40%
50%
2014
45%
2014
35%
2015
40%
2015
30%
35%
25%
30%
20%
25%
20%
15%
15%
10%
10%
5%
5%
0%
<RMB10
RMB11-50
RMB51-100
>RMB100
Source: iiMedia Research.
0%
<30mins
30-60mins
60-120mins
120-180mins 180-300mins
>300mins
Source: iiMedia Research.
Sports genres (FPS – First-Person Shooter, MOBA – Multiplayer Online Battle Arena, TCG –
Trading Card Game) were ranked highly on the AppAnnie ranking table throughout the
past year. WeMoba, HeroMoba, WeFire, CrossFire, West Arena, HearthStone and
FightForFreedom are some of the most popular sport games. iResearch estimates there
were 100mn mobile sports gamers in 2015 and that market could reach RMB24bn,
representing 16% of mobile game revenue, in 2018E.
Exhibit 21: Mobile sports gamers
Exhibit 20: Mobile sports games market size
Mobile eSport
(Rmb bn)
% of mobile game
30
25
12.5%
20
200
16.0% 16%
180
14%
160
14.4%
13.3%
12%
10%
15
8%
10
5
-
(mn)
18%
7
12
18
24
2015
2016E
2017E
2018E
Source: iResearch.
% YoY growth
25%
22%
21%
19%
140
20%
15%
120
100
10%
80
6%
60
4%
40
2%
20
0%
Mobile eSport population
-
5%
100
122
148
175
2015
2016E
2017E
2018E
0%
Source: iResearch.
As players are getting more sophisticated, and with the growing MMORPG and the broader
sports genres, we see higher ARPU and longer average life-span driving future industry
growth. In our view, more traditional PC players will join the arena while many
small/medium developers are likely to fall by the wayside given limited resources for R&D
and sales & marketing. We expect industry consolidation will be gradual, witnessed in the
distribution channels first and then among publishers and game developers.
15
May 17, 2016
Exhibit 22: Revenue of mobile games in China
Exhibit 23: Market share in China of mobile games by
Rmb bn
Mobile games revenue
250.0
63.1% 65.1%
60.5%
56.7%
195.7
49.9%
174.7
151.9
39.2%
125.2
200.0
150.0
25.0%
100.0
50.0
13.1%
16.6%
8.8
14.8
2012
2013
70%
60%
50%
Others, 45%
40%
30%
91.2
56.3
20%
27.6
NetEase,
15%
10%
0%
0.0
2014
Tencent, 38%
Changyou,
2%
2015 2016E 2017E 2018E 2019E 2020E
Source: Company data, iResearch.
Web games
We expect the market position of web games will continue to be marginalized as they are
not comparable with PC client-based games in terms of gamer-play experience. In addition,
the traffic migration away from PC has magnified the disadvantage of web games to
mobile games. The distribution channels are increasingly consolidated while developers
are still highly fragmented. The overseas market is the new focus. In 2015, self-developed
web games overseas revenue grew 68% to US$1.6bn, according to iResearch.
Exhibit 25: Market share in China of web games by
Exhibit 24: Revenue of web games in China
Rmb bn
PC browser/web games revenue
35.0
30.0
25.0
17.7%
20.0
15.1%
21.7 22.3
23.0
23.6
24.3
24.8
16%
12%
10.4%
9.8
10%
9.4%
8.8%
8%
8.2%
6%
4%
5.0
2%
0.0
0%
2012
2013
2014
Others, 26%
14%
12.2%
15.8
15.0
10.0
18%
18.7%
20.7
14.6%
20%
BaiduGame,
3%
KaiYing, 3%
YY, 3%
ChuangSi,
3%
YouZu, 4%
2015 2016E 2017E 2018E 2019E 2020E
Tencent, 30%
QuYou, 2%
37Game, 17%
4399.com, 5%
Qihu360, 4%
Source: Analysys.
16
May 17, 2016
Next sweet spots: eSport and VR
eSport (a form of sports which involves electronic systems) globally is growing rapidly and
it plays a strategically important role in strengthening player engagement and community
formation. This is apart from it generating derivative revenues from sideline business
(ticket sales, advertising, broadcasting license, toys, etc). Newzoo expects global revenue
to grow from US$325mn in 2015 to US$1,072mn in 2019.
To put these numbers in perspective,

The crowd-funded prize pool of 2015 DOTA 2 championship exceeded US$18mn, up
from US$10mn in 2014, and roughly half of the 2015 Wimbledon Championship prize
pool.

Total viewership of the 2014 League of Legends grand final was 27mn, comparable to
the 2014 NBA finals viewership of 18mn.
In China, eSport was first recognized as the category no. 99 sport by the General
Administration of Sport in 2003 and the Chinese National team was created in 2013. In 2014,
YinChuan (in China) was established as the permanent host city for World Cyber Arena
(WCA), the successor to World Cyber Games (WCG).
Tencent hosts the Tencent Game Arena Championship series for the 30 games they
operate based on its TGA platform and broadcasts through LongZhu.tv channel (one of the
top 4 eSport broadcast platforms). In March 15, 2016, Tencent invested RMB400mn in
DouYu, another one of the top 4 eSport broadcast platforms. Operating on a smaller scale
and lacking the vast social network audience base, NetEase works with Blizzard to host
eSport competitions for licensed titles such as Hearthstone and StarCraft.
As the world’s largest game company, Tencent is acting early in order to establish industry
standards and ecosystem for virtual reality (VR), which is the potential next game platform
generation after PC and smartphone. To attract partner developers, Tencent leverages its
Weixin/QQ user account network, distribution channel, and TenPay payment system as a
strong monetization solution proposition. It has released VR SDK (Software Development
Kit) 1.0 and hardware components (ministration, headsets and PC accessories) for partner
developers to facilitate the content development.
Exhibit 26: eSport player population in China
In Rmb
eSport player population
(mn)
% YoY growth
2,000
40%
1,800
35%
35%
1,600
30%
1,400
27%
1,200
25%
1,000
25%
22%
800
15%
600
10%
400
200
-
20%
5%
730
980
1,250
1,550
1,900
2014
2015
2016E
2017E
2018E
0%
Source: iResearch.
17
May 17, 2016
Exhibit 27: Worldwide, top mobile games (Mar 2016)
Exhibit 28: China, top mobile games (Mar 2016)
iOS + Google Play
iOS (<25% in China)
#
1
2
3
4
5
6
7
8
9
10
#
By Revenue
Clash Royale
Monster Strike
Clash of Clans
Game of War ‐ Fire Age
Puzzle & Dragons
Fantasy Westward Jouney
Clash of Kings
Candy Crush
Colopl Rune Story
Disney Tsum Tsum
1
2
3
4
5
6
7
8
9
10
Supercell
Mixi/Tencent
Supercell
Machine Zone
GungHo Online
Netease, Garena Online
Elex Tech
King, Tencent
Colopl, Morningtec, Sony
LINE
By Revenue
Fantasy Westward Jouney
Westward Journey Online
Clash Royale
Hero Moba
CrossFire
Naruto Mobile
We Fly
Legend of Mir 2
King of Fighters 98 Ultimate Match
Legend of the Qing Qiu Fox
Netease/Garena Online
Netease
Supercell
Tencent
Tencent
Tencent
Tencent
Tencent
Tencent/SmartAlec, OurPalm
Zilong
Source: App Annie.
Source: App Annie.
Exhibit 29: Tencent dominates Top 10 mobile games
Exhibit 30: ….. as well as Top 21
iOS – Tencent has 6 of Top 10 titles
iOS – Tencent has 10 of Top 21 titles
Top 10: Tencent
Top 21: Tencent
Top 10: Netease
9
Top 21: Netease
16
8
14
7
12
6
10
5
8
4
3
6
2
4
1
2
5-Mar
5-Apr
5-May
5-Jun
5-Jul
5-Aug
5-Sep
5-Oct
5-Nov
5-Dec
5-Jan
5-Feb 5-Mar
5-Apr
5-May
Source: App Annie.
5-Mar
5-Apr
5-May
5-Jun
5-Jul
5-Aug
5-Sep
5-Oct
5-Nov
5-Dec
5-Jan
5-Feb 5-Mar
5-Apr
5-May
Source: App Annie.
China IP going global
The Chinese gaming companies’ past strategy was to bring global titles to China. With the
recent success of domestically produced mobile games, companies are looking at
international opportunities for their ‘made in China’ games. Tencent also acquired a 14.6%
stake in San Francisco-based game developer Glu Mobile in April 2015 for US$126mn. In
December 2015, Tencent announced a partnership with Glu Games to distribute its
successful Chinese games to the rest of the world. Tencent’s other investments in US game
developers include Riot Games, Activision Blizzard (which acquired King Digital) and Epic
Games - the creator of Unreal Engine, a popular game engine for VR games.
Exhibit 31: Overseas market size for Chinese online games
(US$mn)
China developed online game overseas sales
% YoY growth
6,000
250%
219%
5,000
200%
4,000
150%
3,000
100%
2,000
69%
58%
72%
50%
1,000
-
570
1,820
3,080
5,310
2012
2013
2014
2015
0%
Source: iResearch
18
May 17, 2016
2. Online advertising: Social, online video and search are growth engines
Baidu
Online
video
8%
O2O
6%
Online
ad
86%
Alibaba
Others
19%
Cloud
3%
Commis
sion &
others
30%
Online
ad
48%
Baidu ad revenue is net of intersegment
elimination.
Key beneficiaries
 BAT (all rated Buy): Via
search, social and
ecommerce, each has a
unique ad proposition.
What is common is their
exposure to video.
We believe social advertising, online video, and search are the three growth drivers for
the online advertising industry into 2020E. For search, Baidu has demonstrated consistent
Paid Click and cost-per-click trends with market leaders Google and Yandex. Baidu looks
primed for better mobile monetization as the gap between mobile and desktop cost-perclick narrows. Given China’s large social media user base, we expect social ad spending
to reach RMB85bn in 2020 with mobile ad spending becoming an important theme in
advertising. Applying Facebook’s successful social mobile monetization, we believe
Tencent could benefit most given its powerful social asset, Weixin. Lastly, online video is
the fastest growing vertical and major driver of traffic in China. iQiyi (Baidu owned),
Youku (Alibaba owned) and Tencent are the top three players in mobile online video.
Overall, we are positive on Tencent (CL-Buy), Baidu (Buy), and Alibaba (Buy), given their
exposure to aforementioned growth engines.
Advertising spend migrates to the internet and now mobiles
Consistent with the rest of the world, online advertising continues to take a growing share
of total media ad spend. This category surpassed TV in 2014. China total online ad
spending was Rmb210bn (US$33bn) in 2015, or 45% of total media spending, and as
shown in Exhibit 33 is on track to exceed more than half of total ad spend in China in 2017.
The declining nature of advertising spending on traditional media gives us confidence that
advertising spend on digital will continue to rise.
Within digital, the fastest growing segment is mobile ad spending. We forecast this
segment will grow 62% in 2016E to Rmb153bn (US$23bn), and will be captured by ad
spend on search/display and social. By end 2016, we expect mobile will capture more than
half the total online advertising spend, overtaking TV as a standalone category.
Exhibit 32: State of the Nation – China’s economy and internet spending
We forecast China online shopping GMV to reach 11% of GDP in 2020E
Rmb bn
China GDP, nominal (RMB bn)
Total retail sales
%yoy
as % of GDP
Online shopping GMV
%yoy
as % of retail sales
as % of GDP
2013
58,530
9.8%
23,781
13.1%
40.6%
1,893
59.4%
8.0%
3.2%
2014
63,689
8.8%
26,239
10.3%
41.2%
2,790
47.4%
10.6%
4.4%
2015
67,940
6.7%
30,093
14.7%
44.3%
3,877
39.0%
12.9%
5.7%
2016E
69,428
2.2%
33,403
11.0%
48.1%
5,079
31.0%
15.2%
7.3%
2017E
74,161
6.8%
36,744
10.0%
49.5%
6,400
26.0%
17.4%
8.6%
2018E
79,040
6.6%
40,051
9.0%
50.7%
7,744
21.0%
19.3%
9.8%
2019E
85,067
7.6%
43,455
8.5%
51.1%
8,983
16.0%
20.7%
10.6%
2020E
91,383
7.4%
46,931
8.0%
51.4%
10,151
13.0%
21.6%
11.1%
Source: CEIC, CNNIC, Goldman Sachs Global Investment Research.
19
May 17, 2016
Exhibit 33: China advertising spending forecasts
RMB bn
Total Advertising Market
Television
Internet advertising
Mobile Internet
Newspaper
Magazine
Radio
Out of Home
YoY growth
Television
Internet
Mobile Internet
Newspaper
Magazine
Radio
Out of Home
% of Total Advertising Market
Television
Internet
Mobile Internet
Newspaper
Magazine
Radio
Out of Home
2014
396
126
154
51
37
6
25
48
2015
467
133
210
94
35
6
29
54
2016E
553
142
276
153
34
6
33
61
2017E
629
146
345
215
33
6
36
64
2018E
699
147
411
277
31
5
38
67
2019E
770
148
480
340
29
5
39
68
2020E
842
149
552
402
28
5
39
69
17%
6%
40%
346%
-11%
-6%
14%
21%
18%
6%
36%
85%
-6%
1%
15%
14%
18%
7%
31%
62%
-3%
1%
15%
13%
14%
2%
25%
40%
-4%
-8%
9%
5%
11%
1%
19%
29%
-6%
-2%
5%
4%
10%
1%
17%
23%
-5%
-4%
3%
2%
9%
1%
15%
18%
-5%
-4%
1%
1%
32%
39%
13%
9%
1%
6%
12%
29%
45%
20%
8%
1%
6%
12%
26%
50%
28%
6%
1%
6%
11%
23%
55%
34%
5%
1%
6%
10%
21%
59%
40%
4%
1%
5%
10%
19%
62%
44%
4%
1%
5%
9%
18%
66%
48%
3%
1%
5%
8%
Source: eMarketer, iResearch, Goldman Sachs Global Investment Research.
Exhibit 34: China split of online spending forecasts
Total online advertising
Total internet advertising spend
% yoy change
2014
154.0
40%
2015
209.7
36%
2016E
275.6
31%
2017E
344.8
25%
2018E
410.5
19%
2019E
480.3
17%
2020E
552.3
15%
Breakdown
Ecommerce ads
Keywords search
Brand ads
Video clips
Rich media
Text link & email ads
Classified
Others
40.0
52.5
27.4
12.3
5.1
1.2
3.4
11.9
59.1
70.9
32.1
17.2
5.0
2.3
5.2
17.8
78.8
92.3
40.5
23.2
5.5
1.4
9.9
24.0
102.1
114.5
46.2
29.7
6.6
1.0
13.4
31.4
123.2
135.9
50.1
35.7
7.4
1.2
16.4
40.6
145.5
158.5
55.2
42.7
8.2
1.4
20.2
48.5
168.5
181.7
60.8
50.3
8.8
1.7
24.3
56.3
Breakdown, % of total
Ecommerce ads
Keywords search
Brand ads
Video clips
Rich media
Classified
Others
26.0%
34.1%
17.8%
8.0%
3.3%
0.8%
2.2%
7.7%
28.2%
33.8%
15.3%
8.2%
2.4%
1.1%
2.5%
8.5%
28.6%
33.5%
14.7%
8.4%
2.0%
0.5%
3.6%
8.7%
29.6%
33.2%
13.4%
8.6%
1.9%
0.3%
3.9%
9.1%
30.0%
33.1%
12.2%
8.7%
1.8%
0.3%
4.0%
9.9%
30.3%
33.0%
11.5%
8.9%
1.7%
0.3%
4.2%
10.1%
30.5%
32.9%
11.0%
9.1%
1.6%
0.3%
4.4%
10.2%
34%
52%
18%
56%
0%
40%
81%
77%
48%
35%
17%
40%
-1%
87%
55%
50%
33%
30%
26%
35%
10%
-40%
89%
35%
29%
24%
14%
28%
19%
-25%
36%
31%
21%
19%
8%
20%
13%
19%
22%
30%
18%
17%
10%
20%
11%
17%
23%
19%
16%
15%
10%
18%
8%
15%
20%
16%
Breakdown, % yoy change
Ecommerce ads
Keywords search
Brand ads
Video clips
Rich media
Classified
Others
Source: iResearch, Company data, Goldman Sachs Global Investment Research.
20
May 17, 2016
Improved mobile infrastructure enabling connected smartphones as
China is weaned away from its Wi-Fi dependence
China’s internet sector is at an inflection point in terms of user behavior due to the strong
growth in 4G subscribers, in our view. The 4G penetration is leading to:

Smartphones that are connected to the internet all the time, unlike Wi-Fi which
requires the user to be near a hotspot.

Smartphones with larger screens.

iOS gaining market share as the high end of China Mobile users shift to iPhones, now
available on TD-LTE.
China Mobile ended 2015 with 1.1k TD-LTE base stations. Its 377mn 4G subs represent 45%
penetration of its total mobile subscribers. By the end of the March 2016 quarter, the run
rate of 4G additions had accelerated from 520k/day. According to Donald Lu, our Chinese
telcos analyst, the company is on track to meet the GS mid-2016 50% penetration target3.
Donald expects data tariffs will continue to decline following Premier Li’s recommendation
for tariff cuts, a trend that mirrors what we observed with Chinese telecom voice tariffs a
decade ago. We expect lower tariffs and cheaper smartphones will drive data usage higher.
Exhibit 36: 4G subscriber additions in China
Exhibit 35: 4G drives connected smartphone growth
China’s 4G data consumption 5x-10x higher than Wi-Fi, and
still a fraction of what is consumed in developed Asia
400
375
350
325
300
275
250
225
200
175
150
125
100
75
50
25
0
50%
China Mob, 4G cumm. (k)
(LHS)
China Mob. - % LTE (RHS)
China - % LTE (RHS)
45%
('000)
30,000
40%
25,000
China Mobile 4G
35%
30%
25%
20%
15%
10%
5%
0%
15,000
10,000
5,000
0
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Sep-14
Nov-14
Jul-14
May-14
Mar-14
Jan-14
Feb-16
Dec-15
Oct-15
Aug-15
Jun-15
Apr-15
Feb-15
Dec-14
Oct-14
Aug-14
Jun-14
Apr-14
Feb-14
Source: Company data.
20,000
With the LTE rollouts in China, network speeds have surged from 1.4 Mbps and 0.8 Mbps
for the uplink and downlink, respectively, to 91 Mbps and 8.3 Mbps. Meanwhile, outdoor
speeds have increased by a factor of 50x.
As time spent on smartphones continues to rise, we believe businesses that have a proven
ability to generate revenues and profits from smartphone usage will be principal
beneficiaries. These include both ad based and subscription based models:




3
Paid clicks of search companies gain on the margin in the form of higher amount paid
per click, which we believe mostly benefits Baidu.
We expect social networks to gain mobile advertising market share in China, consistent
with trends observed globally.
Online video was one of the growth drivers of Google’s traffic growth in 2015, which
showcases the growth potential for the online video based advertising revenue of
Baidu and Alibaba.
E-commerce companies should gain, in particular those selling apparel as device
connectivity is necessary.
See ‘China Mobile: Reinstate rating at Buy (CL); still in the sweet spot of 4G adoption’, December 3, 2015.
21
May 17, 2016
Social, search, video and classified are driving advertising spend
In the section below, we explore the three key areas driving ad spend, i.e., search, social
and online video:
1. Search: Baidu’s trends consistent with Google and Yandex
The major disconnect in time spent vs. advertising spending is between internet (desktop
and mobile) and TV. While internet and mobiles combined account for two-fifths of the
general time spent by users in China, these segments account for a seventh of the
advertising revenue collected in the country, according to eMarketer.
At Baidu, mobile has been successful, accounting for 52.7% of total revenues in 2015. The
gap between mobile and desktop cost-per-click (CPC) continues to narrow, and we expect
will be the driver of further improvement in the click through rate (CTR). Management
confirmed that mobile monetization continues to improve, narrowing the gap with PCs.
While mobile usage cannibalizes desktop traffic, we believe a search engine’s revenue
growth is a function of several factors including: a) commercial coverage, b) CTR, and c)
CPC. A useful benchmark is Korea where the number of clicks on mobile and desktop are
similar, but the CTR for mobile search is much lower than that of desktop.
We also consider the impact of verticals on CPC trends. We estimate that verticals with the
highest CPCs ex-China are finance, insurance and retail, based on the value of the traffic to
these segments. In China, the major verticals for ad spend are medical & healthcare,
tourism & ticketing, education, and online game. The top five industries contribute
approximately 49% of total online marketing revenues in 2015, according to Baidu. The
transformation of China to a consumer-based economy and the emergence of internet
finance, a high CPC vertical, should benefit search ad spend, in our view.
Exhibit 37: Smartphones drove the acceleration in CPC;
the next stage in China is connected smartphones
Exhibit 38: Baidu’s CPC likely to improve on narrowing of
mobile discount (to desktop) and improved CTR
Search Paid Click (PC) growth trends
Search Cost Per Click (CPC) trend
Baidu
Yandex
Baidu
Google
60%
20.0%
50%
15.0%
Yandex
Google
10.0%
40%
5.0%
30%
0.0%
20%
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
1Q13
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
-15.0%
2Q13
-10.0%
0%
1Q13
10%
2Q13
-5.0%
22
May 17, 2016
2. Social: Applying the powerful Facebook/Google mobile dynamic implies a
US$6-7bn advertising revenue opportunity in China
Social media in China has more than 500mn users nationwide. Over 40% of under 21 year
old users share personal opinions; for those over 21, the percentage drops 5bps. The
sharing of photographs is the second most common item shared, followed by dining and
travel experiences.
Exhibit 39: China: Content shared via social media by internet users, by age
October 2015
45.0%
<21
21+
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
Personal
thoughts
Photographs Dining/travel
Humor
General
knowledge
Gaming
Media article
Celebrity
Other
Source: eMarketer.
With the large user base and broad content coverage, mobile ad spend moving to social
platforms has been one of the most powerful themes in advertising. According to
eMarketer, social network advertising spend were estimated at US$25.1bn globally in 2015,
15% of which was spent in China (US$3.4bn or Rmb22bn). This represents 10% of total
China digital budgets based on our analysis of online advertising market. By the end of
2020, we estimate total social ad spending to reach Rmb85bn in China, or 15.4% of digital
budgets, based on ~900mn social network users and ad spend per user of Rmb95 (US$14)
in 2020E.
The powerful Facebook/Google mobile dynamic
Facebook’s social mobile monetization continues to gain market share in mobile
advertising. The company’s December 2015 quarter revenue grew 52% yoy, driven almost
entirely by mobile Newsfeed (+82% yoy). Mobile accounted for 80% of the December 2015
quarter advertising revenue vs. 69% a year ago and 53% two years ago. Also, usage
intensity continues to inch upward, with a DAU/MAU ratio of 65.2% vs. 63.9% same period
a year ago.
In our view, social advertising has the same potential in China. Looking at GS forecasts for
the social/search split in the US (i.e. Facebook/Google), we expect Tencent could benefit
the most with its powerful social asset, Weixin (a social networking tool that allows
smartphone users to send messages and share news, photos, videos and web links).
Among the other social assets it owns, Weixin stands out in terms of depth as well as the
time spent on it by users. Although we estimate the time spent by user to be as twice that
of Facebook, ad loads on Weixin are still a small fraction of Facebook, especially when
adjusted for user coverage.4 As the company expects to improve its targeting on Weixin,
we expect Tencent to take meaningful share in social advertising.
4
For more detail see ‘Tencent: Weixin: the north star (2); multiple drivers intact; reiterate CL-Buy’ April 13, 2016.
23
May 17, 2016
Exhibit 40: The shift of ad spend on mobile to social
networks is one major theme we see in China internet
Exhibit 41: Facebook’s newsfeed vs. Google’s mobile
search revenue
Tracking Facebook’s ad revenue vs. Google
Facebook vs. Google (in US$bn)
FB Nwsfd./(FB Nssfd + Google Mob. Search)
FB - Newsfeed
5,000
FB / Google
100%
77%
80%
57%
60%
36%
63% 66% 62% 66%
4,000
3,000
2,000
32%
26% 29%
44% 46% 47%
36% 39% 40% 38% 40%
1,000
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
3Q13
2Q13
1Q13
4Q15
3Q15
2Q15
1Q15
4Q14
3Q14
2Q14
1Q14
4Q13
0
3Q13
18%
1Q13
0%
42%
90%
47%
22%
20%
2Q13
40%
84%
Exhibit 42: Weixin revenue potential: Benchmarking to Facebook and Google
Rmb mn
Mobile search (Baidu)
% yoy
Social/Search ad spend based on FB/GOOG
Implied Weixin advertising potential
in US$ mn
Annual (US$mn)
@ 50% ad load
@ 25% ad load
1Q15
5,422
74%
66%
3,573
558
2Q15
7,004
118%
77%
5,399
844
3Q15
8,262
88%
84%
6,927
1,082
4Q15
8,887
71%
90%
7,976
1,246
3,730
1,865
933
1Q16E
7,847
45%
84%
6,567
980
2Q16E
10,508
50%
86%
9,065
1,353
3Q16E
11,770
42%
90%
10,576
1,578
4Q16E
12,334
39%
90%
11,159
1,666
5,577
2,788
1,394
2017E
56,913
34%
92%
52,225
7,795
7,795
3,897
1,949
Source: Company data, Goldman Sachs Investment Research.
The Facebook risk
Facebook’s December 2015 advertising revenue growth reflected 14% higher MAU and
37% higher ARPU on higher relevancy, the result of successful use of targeting tools and
video. The US advertising ARPU for Facebook grew 56% yoy in the three months ending
December 2015 and is gaining market share from other media.
For China in particular, we believe the strength of Facebook’s respective business models
might be moderately disruptive and the landscape would change to some degree if the
Great Firewall of China (GFW) is lowered. WeChat, the dominant social network in China, is
currently insulated to some extent from international competitors like Facebook which
would need to have its content reviewed by the government to gain access to the sizable
China market.
We believe a risk to the Chinese incumbents would be any potential entry of Facebook into
China, even in a highly regulated fashion, given the large number of students abroad, the
Chinese diaspora worldwide, and their respective local-global social networks. According
to WSJ, the Chinese diaspora numbers 40-50mn people in 2014. Conversely, this large
diaspora could also work in promoting Chinese companies as they expand internationally,
as has been seen by WeChat/Weixin.
24
May 17, 2016
Exhibit 43: Chinese diaspora can be leveraged by companies to enter new markets
Diaspora is estimated at 40-50mn in 2014
Canada
1.3mn
EU
1.4m
Russia
1.0mn
Japan
0.7mn
US
3.4m
Africa
~1.0mn
Peru
1.3mn
ASEAN
33mn
Aus
0.9mn
Source: WSJ.
3. Online video: The quickest growing vertical and major traffic draw
In China, online video is a large source of traffic due to the popularity of games and the
quality of TV networks. According to Analysys.cn, Youku (Alibaba owned), iQiyi, Sohu and
online video app of Tencent ranked No.1, No.2, No3, and No.5 in terms of PC active users
in September 2015. Mobile contributed ~50% of the online video ad revenues, and the top
three players in mobile (based on 2015 market share) are iQiyi, Youku, and Tencent. In
terms of financial performances, Baidu reported iQiyi 2015 revenue at Rmb5.3bn, +84% yoy,
yet non-GAAP operating margin widened to negative 45.0% from negative 38.6% a year
ago. We believe that while there’s solid growth in revenue, losses will continue in the near
to median-term due to fierce competition and heavy investments in content.
In the US, online video has emerged as the driver of traffic. According to Google’s CFO on
the quarterly earnings calls in FY2015, YouTube’s robust revenue growth is mainly
attributed to its strong video advertising. YouTube’s time watch accelerated 60% yoy in
2Q15, the quickest pace in recent years. While time spent watching YouTube in the living
room has doubled in 2015, watch time on YouTube mobile increased by more than 50%
yoy in 2Q15, with the average time spent at 40 min/session. Further, YouTube on mobile
now reaches more 18-49 year olds in the US than any cable network, according to Google,
which we believe explains the 40% yoy growth in advertisers running video ads and the
per advertiser spend rising +60% yoy for the top 100 videos in 2Q15.
The monetization model for video is unlikely to change dramatically, in our view, and will
remain principally advertising based, with subscriptions continuing to account for less than
10% of revenue. The heavy spending on content suggests that this segment will remain
loss making, potentially awaiting industry rationalization.
Online video content strategy
The great push to acquire content: Tencent’s overall strategy is to use its hubs (i.e.,
social and communications) to target and grow spokes. Hubs provide tremendous traffic,
which has made Tencent a partner of choice for online vertical companies. Tencent
typically identifies a spoke based on a broader user need, including content – online video,
literature, online music and publishing – which we think bodes well for both content and
app store owners in the longer term as it brings traffic.
25
May 17, 2016
Tencent has been ramping up content with channel providers. For content providers, the
usage stats on Tencent video may make it far more compelling for them to work with
China’s largest social network, and may challenge revenue share deals with independent
producers for the rest of the industry, in our view. Also, Tencent’s relatively stronger
position in variety shows has worked to its advantage even as Baidu’s iQiyi has been
gaining in animated content. User-generated content (UGC) still appears to be difficult to
monetize.
We highlight that Tencent has expanded its content offering to include sports streaming,
with the headline-making 5-year NBA partnership at a cost of US$500mn commencing
2H15. According to the NBA, basketball is one of China’s most popular team sports.
iQiyi prioritizes PGC (professionally generated content, including TV shows, movies, etc.),
which differs from Youku Tudou which targets an open platform to expand both its PGC
and UGC base. iQiyi aims for "high value, high impact" content according to its CEO Gong
Yu, as it could attract more traffic to the iQiyi platform. At the same time, both companies
have been striving to increase self-produced content. Popular content includes Qi Pa Shuo
(talk show) and Xin Li Zui (crime & thriller TV drama) for iQiyi and "Surprise!", Youku's
comedy TV drama. Youku Tudou now has over 50% traffic to PGC and UGC; Youku's top 10
independent channels earned monthly advertising revenue sharing ranging from Rmb95k
to Rmb746k in June 2015.
Exhibit 44: Bringing Hollywood to China: 2015 witnessed a rush to sign up content
Chinese deals with Western media content providers
Chinese video
platforms
Tencent
Western media content
• NBA digital partnership, including the rights to live NBA games, and the content surrounding the games.
The two companies will jointly manage NBA.com/China. In our model we have built in a cost of
US$500mn over the five year period.
• The Hollywood Reporter has a multi-year deal with the company across syndicated videos and features.
• Exclusive provider of HBO series
• Deal with Warner Music
• Deal with Sony
• Deal with Fox on videos of National Geographic Channel
Alibaba
Baidu
• Alibaba Pictures
i. Licenses content from Lionsgate
ii. Partnership with Paramount for Mission Impossible
• Youku:
i. Paramount Pictures: 100 movies from their library to Youku's subscription service
ii. Disney: Marvel movies and TV series under an exclusive marketing partnership
iii. Adapting western shows including Yes Boss!
iv. Deal with Sony
• American Film Market to distribute 1000+ movie titles on iQiyi
• Deal to distribute 90 Korean movies on iQiyi
China Media
Capital
• Oriental DreamWorks is a venture with DreamWorks Animation
• Global content investment fund with Warner Brothers
• CMC also has a JV with TVB - listed HK free-to-air channel which tends to dominate TV ratings in Hong
Kong
Fosun Group
• Invested in Studio 9
China Film
Group
Sohu
Provincial TV
stations
1 of the 2 state-owned film distributors in China (the other is Huaxia Film Distribution)
• To retain distribution rights in China for 17 action / animation movies over the next 6 years (total cost
US$900mn). First film to be produced will be 3D film - Beast of Burden - at a cost of US$20mn and
released in 2017
• Deal with Fox
• Deal with BBC
• The company with highest number of exclusive play rights of American dramas (76 seasons as of Sep 8,
vs. #2 Tencent having 50 seasons)
Buy rights of foreign variety shows (especially Korean) and introduce the China version
• Zhejiang TV: "Running Man" from Korea, "Voice of China" from Holland
• Hunan TV: "I Am a Singer" from Korea, etc.
26
May 17, 2016
The State Administration of Press, Publication, Radio, Film and Television (SAPPRFT)
issued new 2015 regulations for streaming foreign TV series and movies under which a
screening or distribution license for each foreign TV show or film has to be obtained before
airing the program. The applicant has to submit foreign films to SAPPRT for approval.
Approval should take about 30 days from submission date. If approved, the applicant will
obtain the license and the movie has to display a certification logo at the start of the film (a
green screen with a dragon). Movies that are not licensed are prohibited from distribution
or broadcasting. The quota for the number of total foreign movies screened in China per
year is 34, which has been in place since 2012.
Independent content production on the rise: A growing number of successful content
professionals are leaving video companies to set up their own businesses, a recent
example being iQiyi’s ex-Chief Content Officer, Ma Dong, who led the production of Qi Pa
Shuo. iQiyi’s CEO, Gong Yu, commented that the company had reached an agreement with
Ma Dong’s team to purchase future Qi Pa Shuo content. Similarly, we note that Youku
announced on August 6, 2015 that it plans to invest Rmb10bn over the next three years to
promote independent content production. This is a similar model to YouTube’s Content ID
initiative which has 8,000 partners through which Google promotes various genres of
popular content with independent content producers. According to Google, the number of
such channels earning over Rmb600k/yr is growing quickly. Content is equally fragmented
in China, as the verticals have become sufficiently deep.
Online classifieds: US$3.6bn opportunity by 2020E
We estimate the market size of China’s online classified sector, and forecast that:

China’s online classified market will grow to US$3.6bn in 2020E, a 36% 2015-2020E
CAGR, which is a superior growth rate compared to most of the established markets
like France (5%) and developing markets like Brazil (11%).

We estimate classified spending as a percentage of private consumption will account
for 5bps of the total population and 9bps of the internet population in 2020E. If we
include autos, jobs and property, classified spending as a % of private consumption
would be 8bps for the total population and 14bps for the internet population in 2020E.
For comparison, the range in selected markets (including both established and
developing markets) was 6bps-13bps in 2014.
Exhibit 45: Market sizing of online classifieds in China
A bottom-up approach: US$3.6bn market size for China’s classified sector in 2020E
Online Classified Market (USD mn)
1. General classifiend spending
%yoy
WubaGanji
Other
Classified spend / Capita (USD)
Classified spending / Consumer expense
Adjusted for internet penetration
2015
819
2016E
1,481
2017E
2,007
2018E
2,451
2019E
3,011
2020E
3,627
406
413
0.60
0.02%
0.03%
731
750
1.07
0.03%
0.06%
1,149
858
1.45
0.04%
0.07%
1,676
775
1.76
0.04%
0.07%
2,206
805
2.15
0.05%
0.08%
2,649
978
2.59
0.05%
0.09%
2. Autos
3.Jobs
4. Property
Classifieds, incl. Autos+Jobs+Property
367
312
672
2,169
462
352
722
3,016
540
399
797
3,743
618
446
872
4,386
693
459
900
5,063
729
473
927
5,756
Classified spend / Capita (USD)
Classified spending / Consumer expense
Adjusted for internet penetration
1.58
0.05%
0.09%
2.18
0.06%
0.12%
2.70
0.07%
0.12%
3.15
0.07%
0.13%
3.62
0.08%
0.13%
4.10
0.08%
0.14%
Source: Company data, Euromonitor, Goldman Sachs Global Investment Research.
27
May 17, 2016
Exhibit 46: Market sizing of online classifieds in selected markets, 2014
Classified spending as % of private consumption stands at 6bps-13bps
Private Consumption per capita, US$
Population, mn
Classified monetization*
General
Vehicles
Real Estate
Jobs
Other
Norway
Sweden
UK
France
Brazil
Australia
New Zealand
37,285
95%
5
11 bps
1.0 bps
3.0 bps
2.7 bps
2.9 bps
1.5 bps
26,688
96%
10
7 bps
1.1 bps
1.9 bps
1.6 bps
1.6 bps
1.1 bps
28,925
92%
65
7 bps
0.6 bps
1.9 bps
1.5 bps
2.1 bps
0.6 bps
25,224
82%
64
7 bps
0.5 bps
1.2 bps
2.5 bps
2.0 bps
1.0 bps
6,311
54%
203
6 bps
0.4 bps
1.2 bps
1.0 bps
2.6 bps
0.6 bps
33,834
87%
24
13 bps
0.4 bps
2.9 bps
5.6 bps
3.4 bps
0.6 bps
24,533
83%
5
13 bps
0.2 bps
5.1 bps
3.8 bps
4.0 bps
0.1 bps
Note: *Classified spending as % of private consumption of internet population.
Source: Company data, IMF, ITU, Goldman Sachs Global Investment Research.
Exhibit 47: Classified market
We expect classified spend to rise to US$4.5/user for the sample of countries below, vs. US$4.1 for China
Established
France
2015E
Population, mn
Italy
2020E
2015E
Russia
2020E
2015E
Spain
2020E
2015E
Norway
2020E
2015E
Sweden
2020E
2015E
Poland
2020E
2015E
2020E
64
66
60
61
144
144
46
46
5
5
10
10
39
38
PC per capita (US$)
20,128
21,108
16,800
16,822
3,762
5,585
14,879
16,239
29,525
32,115
21,898
25,097
7,113
8,570
83%
84%
63%
71%
66%
83%
75%
80%
96%
97%
98%
100%
64%
66%
Classified spending per internet user, US$
15.7
19.2
7.1
10.2
1.9
4.0
6.8
10.3
31.5
36.1
15.6
21.1
3.3
5.8
Classified market, US$ mn
834
1,062
270
445
181
474
234
377
157
192
149
214
82
147
Investment phase
Brazil
2015E
Mexico
2020E
2015E
India
2020E
2015E
Total
Indonesia
2020E
2015E
2020E
Malaysia
2015E
2020E
Other
2015E
2020E
2015E
2020E
204
212
121
127
1,276
1,361
255
273
31
34
503
531
2,758
2,908
PC per capita (US$)
4,978
5,693
6,344
7,836
1,115
1,684
1,859
2,506
4,765
6,500
3,303
3,983
3,505
4,208
57%
66%
50%
61%
19%
27%
19%
29%
69%
72%
41%
46%
35%
42%
Classified spending per internet user, US$
3.0
4.1
4.3
6.4
0.5
1.1
0.8
1.4
2.0
4.4
2.1
3.5
3.3
4.5
Classified market, US$ mn
348
578
256
496
119
420
38
111
44
108
446
868
3,159
5,492
Population, mn
Source: IMF, ITU, Company data, Goldman Sachs Global Investment Research.
28
May 17, 2016
Exhibit 48: China is one of the largest online classified markets in the world
Internet penetration, 2015E
Comparing classified markets
120%
100%
Sweden
France
80%
60%
Norway
Spain
Russia
Poland
Italy
Brazil
China
Mexico
40%
20%
0%
2.0 bps
India
Indonesia
4.0 bps
6.0 bps
8.0 bps
10.0 bps 12.0 bps 14.0 bps 16.0 bps 18.0 bps 20.0 bps
Classified monetization, 2015E
Source: ICT, IMF, Goldman Sachs Global Investment Research.
29
May 17, 2016
Alibaba
Others
Cloud 14%
3%
Ecommerce
83%
JD
Others
7%
Ecommerce
93%
Key beneficiaries
 Alibaba (Buy):
Dominates China retail,
via a unique
monetization
proposition that has
built an enormous user
base.
 JD.com (Buy): The
largest direct sales
retailer in China with
industry-leading
logistics capabilities.
 VIPS (Buy): Operates a
unique flash sales
discount model with
strong foothold in the
online discount retail
space.
China has the largest e-commerce market in the world, and we expect the structural
movement from shopping offline to online will continue to drive growth in the industry.
Within the product categories that have the highest online penetration, we expect online
GMV growth to slow down (e.g. apparel), upgrade to take place, B2C business model to
obtain a larger market share, and branded products to be preferred.
According to NBS, China’s online retail sales reached Rmb3.88tn in 2015, up 33.3% yoy and
represented 12.9% of total retail sales, up from 10.6% in 2014. The number of online
shoppers grew 14% yoy to 413m in 2015, reaching 60% of internet users and 30% of the
China population, according to CNNIC.
Despite the headwinds faced by offline retailers in China YTD in 2016, we believe China’s
online retail sales are on track to hit Rmb10tn by 2020E, representing a CAGR of 21% from
2015 to 2020.
Among different categories, we believe those with relatively higher online penetrations
already will likely see a slowdown in online GMV growth (such as apparel), but the
structural change from offline to online will continue, although at a slower pace. In 2015,
online apparel sales were up 21.4%, compared with 40.8% yoy growth for online food &
beverage sales, according to NBS.
We believe B2C will continue to outgrow C2C in the next few years and brands will gain
market share over non-branded products. In women’s apparel for example, Tao brands
(those brands originated from Taobao marketplace) dominated Singles’ Day sales on
Alibaba in 2013, capturing the first 4 of the Top 5 positions. Two years later in 2015, only
one Tao brand was still among Top 5 on the Singles Day.
Exhibit 49: Top Tmall Women's Apparel Store Ranking on Singles’ Day
Ranking by store sales on Single’s Day, Tao brands are shaded
Ranking
No.1
No.2
No.3
No.4
No.5
No.6
No.7
No.8
No.9
No.10
2015
Uniqlo
Hstyles (韩都衣舍)
La Chapelle Fashion(拉夏贝尔)
Only
Ochirly
Vero Moda
Liebo (裂帛)
Le Teen (乐町)
Inman (茵曼)
Artka
2014
Uniqlo
Artka
Inman (茵曼)
Bosideng
Ochirly
To Youth (初语)
Elf Sack (妖精的口袋)
ONLY
Liebo (裂帛)
2013
Inman (茵曼)
Artka
Liebo (裂帛)
Ochirly
Bosideng (波司登)
ONLY
Goelia (歌莉娅)
Vero Moda
To Youth (初语)
Source: Ebrun, Company data.
However, we don’t think that the rising brand recognition online will result in the downfall
of online retail platforms like Alibaba and JD. Most brands will still need to rely on the
major online platforms to compete with other brands. In the mobile era, the likelihood for
consumers to install a dedicated App for any given brand is even lower than visiting a
brand’s own website, in our view.
30
May 17, 2016
Due to the consumption upgrade, we believe more consumers will assign a higher weight
on factors other than price when making purchasing decisions. Even for younger
consumers that cannot afford established brands yet, the importance of pricing is also
decreasing, in our view. Instead, we believe content marketing is becoming more
important for lower priced products. In particular, internet celebrities, also known as
internet KOLs (Key Opinion Leaders), are becoming very influential when their fans are
making purchasing decisions. For example, 5 out of the Top 10 women’s apparel sellers on
Taobao marketplace in 2015 were internet celebrities. During the 18 June promotion in
2015, these internet celebrity sellers took up 7 out of the Top 10 spots.
Exhibit 50: 2015 Top Taobao Women's Apparel Store Ranking
Ranking by store sales, internet celebrities’ stores are shaded
Rank
Store
No.1
No.2
No.3
No.4
No.5
No.6
No.7
No.8
No.9
No.10
Rumere (戎美)
Jupevendue (吾欢喜的衣橱)
Mao Gu Xiao Xiang (毛菇小象)
CC Studio (CC Studios 家皮草)
Tone Elegancy (小米虫子)
Zhao Da Xi (大喜自制独立复古女装)
Yu MOMO (于momo潮流女装)
dimplehsu
LIN EDITION LIMIT
MIUCO
Internet celebrity
Zhang DaYI (张大奕)
CC
Zhao Daxi (赵大喜)
Yu Mengjiao (于梦娇)
Zhang Chaolin (张超林)
Source: Ebrun, Company data.
For 2016, the focus for Taobao Marketplace’s development will be community, content and
local lifestyle, according to Alibaba’s CEO Daniel Zhang. He also acknowledged the power
of internet celebrities on Taobao’s platform.
China’s online retail market to reach Rmb10tn by 2020, 24% CAGR
We estimate that China’s online retail market will more than double to Rmb10tn by
2020E from Rmb3.9tn in 2015, representing a CAGR of 21%. Online accounted for 12.9% of
total retail in China in 2015, or >14% excluding categories that can’t be sold online, such as
fuel and dining. This penetration has been achieved despite only a quarter of the
population buying goods online, whereas in the US the figure is currently 52% (active
buyers), according to eMarketer. Online retail sales of Rmb10tn in 2020 would account for
22% of estimated total retail sales (or c.30% of addressable categories), and we expect half
the population will be shopping online by 2025, on par with the US.
31
May 17, 2016
Geographical and category expansion driving growth
The increased reach of online retail is being driven by geographical expansion, while
category expansion is increasing spending per capita. Internet finance and O2O could help
further lower the hurdles. As a result, previously underpenetrated regions (such as lower
tier cities and rural areas in China) and product categories (such as Food & Beverage) offer
new areas for growth. 
We view BABA and JD as long-term beneficiaries of both geographical and
category expansion because they target the general population. BABA and JD
together accounted for 88% of the online retail GMV in 2015 and each has unique
advantages that create value for both consumers and merchants/suppliers. While we
believe others/new entrants could gain traction in niches, we do not believe this will
disrupt BABA and JD across product categories. 
VIPS, as the online discount retail leader focused on female customers, appears
attractively positioned in a growing niche.
On a global basis, China has the world’s largest e-commerce market. China online GMV
reached Rmb3,877bn (US$606bn) in 2015, followed by the US as the second largest market
at US$349bn (Exhibit 55). By 2018, the market size of e-commerce in China will be even
larger than the sum of the US, UK, Japan and Germany combined.
Exhibit 51: China consumer expenditure increasing…
Exhibit 52: …but still low as a percentage of GDP
China online consumer expenditure as % of GDP
China online consumer expenditure as % of GDP
Consumer Expenditure
(RMB tn)
% yoy (RHS)
China Consumer Expenditure as % of GDP
50.0%
45.00
39.36
40.00
36.04
35.00
30.67
30.00
25.00
20.00
15.00
10.00
16.78
14.03
18.90
21.02
23.36
25.60
28.05
30.0%
20%
14%
13%
5.00
11%
11%
10.0%
10%
10%
9%
9%
8%
36.0%
35.4%
34.3%
3.0
2.0
35.8%
34.7%
34.0%
1.0
0.7
0.4
0.9
0.9
0.9
0.4
0.4
0.2
33.0%
0.0%
31.0%
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
(1.0)
(1.4)
(2.0)
2010 2011 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020E
Source: Euromonitor.
Exhibit 53: 413mn people in China shopped online
(2015)…
Exhibit 54: …contributing c.13% to total retail sales;
estimated to reach c.22% (Rmb10tn) by 2020
China online shoppers and as % of internet users
Online shopping GMV
Online Shopper (mn)
%yoy
600
55.7%
500
60.0%
63.5%
66.0%
503
68.0%
540
572
70.9%
600
461
48.9%
413
400
300
78.0%
13,000
58.0%
11,000
38.0%
302
24.4%
28.0%
19.7%
14.3%
11.5%
9.2%
100
18.0%
7.3%
5.9%
5.0%
Online shopping GMV
as % of retail sales (RHS)
15,000
68.0%
48.0%
361
200
(RMB bn)
as % of Internet User
69.5%
-
(0.2)
(0.3)
Source: Euromonitor.
700
4.0
36.4%
32.0%
9%
-
38.6%
37.3%
36.7%
37.0%
35.0%
20.0%
Change yoy (pp) (RHS)
38.2% 38.0% 38.2%
38.0%
40.0%
33.08
39.0%
19.3%
18.0%
8,983
12.9%
13.0%
7,744
6,400
8.0%
5,079
5,000
3,000
23.0%
10,151
10.6%
8.0%
21.6%
17.4%
15.2%
9,000
7,000
20.7%
8.0%
3,877
2,790
1,893
3.0%
1,000
-
Source: CNNIC, iResearch.
2020E
2019E
2018E
2017E
2016E
2015
2014
(1,000)
2013
2020E
2019E
2018E
2017E
2016E
2015
2014
2013
-2.0%
-2.0%
Source: NBS, iResearch, Goldman Sachs Global Investment Research.
32
May 17, 2016
Exhibit 55: China is the world largest online retail
market…
Exhibit 56: …and is likely to have the highest online
shopping penetration (as % of total retail) in 2016-18E
Comparison of online retail market size globally (US$bn)
-
2013
2014
2015E
2016E
2017E
2018E
200
70
62
52
400
600
800
1,000
1,200
1,400
US$ bn
313
264
82
71
63
China
94
79
73
19.3%
20.0%
China
17.4%
18.0%
15.2%
16.0%
450
306
Online shopping penetration comparison globally
US
US
14.0%
12.9%
UK
UK
606
349
104
88
83
115
97
92
125
106
99
12.0%
Japan
758
394
Germany
Japan
8.0%
8.0%
Germany
6.0%
955
443
10.6%
10.0%
Brazil
4.0%
India
2.0%
1,156
494
0.0%
2013
2014
2015E
2016E
2017E
2018E
Notes: Data for China in 2015 is actual.
Notes: Data for China in 2015 is actual.
Source: NBS, eMarketer, Goldman Sachs Global Investment Research.
Source: NBS, eMarketer, Goldman Sachs Global Investment Research.
We compare and contrast the business of the four online retail companies under our
coverage in the table below.
Exhibit 57: Comparison of the four e-commerce companies under our coverage
Alibaba
JD
VIPShop
Jumei
3P
1P+3P
1P+3P
3P->1P
100%
1P+3P
10-15%
17% (49% a year ago)
76.10%
11.93%
1.64%
0.29%
Commercial real estate
e.g. Manhattan Mall
Wal-Mart
T.J.Maxx
Ross
Sasa (HK)
Boots (UK)
48% ownership in Cainiao
Lease and self-own
Lease and self-own
Mainly lease
Last mile delivery
3P partners, Asset-light
In-house + 3P
In-house + 3P
3P partners
Largest category
Apparel
3C
Apparel
Cosmetics
Import + Export
Import
Import
Import
E-Commerce Model
Calendar 3Q15 3P GMV as % of total GMV
2015 GMV (China) as % of China online
shopping GMV
Offline analogy
Logistics Centers/warehouses
Cross Border B2C
Notes: 1P = Direct sales, 3P = Marketplace.
33
May 17, 2016
Exhibit 58: From net GMV to non-GAAP net profit
How Rmb100 spent by a consumer flows to the bottom line (calendar 2015, net GMV indexed to 100)
Alibaba
Actual
GSe
GMV
(Net GMV indexed to 100)
JD
Vipshop
Tmall
Taobao
1P
3P
55.46
77.87
70.46
57.75
Total GMV = 133.38
- 25% unpaid orders & return items
Jumei
Total GMV = 128.21
- 22% unpaid orders & return items
Tmall
Taobao
1P
3P
1P
3P
1P
3P
41.60
58.40
54.96
45.04
94.00
6.00
85.02
14.98
- VAT & surcharges
Net GMV
(indexed to 100)
China Retail
@ 9.3% take rate
- VAT & surcharges
@ 23.5% take rate
- VAT & surcharges
@ 13.6% take rate
- Allowance & surcharges
100
@ 4% take rate
China Retail Revenue
= 3.97
Revenue & Gross Profit
Other Revenue
= 0.81
1P Revenue
= 44.69
Revenue = 4.78
3P Revenue
= 4.2
Revenue = 48.89
Gross profit = 3.47
Sales & Marketing
0.44
Product
Development
0.30
General &
Administrative
0.23
3P Revenue
= 1.41
Fulfillment
4.00
Sales & Marketing
2.09
Technology & Content
0.88
-
Fulfillment
7.26
Sales & Marketing
4.08
1.66
10.91
Sales & Marketing
7.50
1.58
-
-
0.60
Fulfillment
-
-
General &
Administrative
Gross profit = 19.2
-
-
-
Revenue = 73.34
Gross profit = 19.33
-
3P Revenue
= 2.03
1P Revenue
= 71.31
Revenue = 80.25
Gross profit = 6.99
-
SG&A
1P Revenue
= 78.84
-
General &
Administrative
2.18
General &
Administrative
1.30
Non-GAAP OP = 2.5
Non-GAAP OP = -3.21
Non-GAAP OP = 5.3
Non-GAAP OP = -2.1
Non-GAAP NP = 2.26
Non-GAAP NP = -0.59
Non-GAAP NP = 4.27
Non-GAAP NP = -2.77
3.47
2.99
12.07
8.28
Profits
Gross Profit ex fulfillment
34
Note: All data as of 4Q15, except Jumei which is as of 3Q15.
May 17, 2016
4. Online travel: A US$200bn opportunity by 2020E
Ctrip
The transformation in the travel industry in 2015 was the most dramatic with competition
abating post the Ctrip-Qunar integration. We maintain our positive view on China’s online
travel market, on the resilient travel spending growth and secular story of rising online
penetration. We have a Buy on Ctrip in our China online travel coverage, as we expect it
to maintain leadership across business lines, with solid margin enhancement along with
the ongoing integration with Qunar.
OTA
100%
China’s travel market: outbound is the fastest-growing segment
Qunar
According to the China National Tourism Administration, China’s total travel market was
worth Rmb5.1tr in 20155, with 67% domestic travel, 8% inbound travel and 25% outbound
travel (Exhibit 59).
OTA
100%
1.
Domestic travel contributed 94% of the total traffic but 67% of the total expenditure
because of the low travel spending per trip (US$138) as many trips were short-distance.
2.
Outbound travel has the highest average spending (US$1,677 per trip) which includes
long-distance transportation costs (e.g. air tickets) and local expenditures. As a result,
its expenditure contribution (25%) is significantly higher than its traffic contribution
(3%). Besides, we expect China’s outbound travel to grow at the fastest pace in terms
of total spending among the three segments (20% total spending CAGR in 2015-20E).
3.
Inbound travel contributed 3% to total traffic, 8% to total expenditure in 2015. We
expect inbound travel to have the lowest revenue growth (3% CAGR in 2015-20E).
Key beneficiaries
 Ctrip (Buy): Well
positioned in China
following sector M&A
Exhibit 59: Domestic travel remains the biggest segment but we see outbound travel growing at the fastest pace
China’s travel market at a glance, all data are 2015 unless otherwise stated
Traffic (mn trips)
Outbound,
122, 3%
Spending (Rmb bn)
Inbound,
134, 3%
ASP (US$/trip)
Inbound,
380, 8%
Outbound travel
2,000
122mn leisure trips, Rmb1.3 trillion spending in 2015
Average spending at US$1,677/trip in 2015
20% spending CAGR in 2015-20E, according to GSe
~35% arranged by travel agents
1,677
1,600
1,200
Outbound,
1,266, 25%
800
Domestic,
3,420, 67%
Domestic,
4,000, 94%
458
400
138
0
Domestic
Outbound
Inbound
Revenue CAGR
(2015-20E)
25%
Top ten cities (by traffic, 2015):
Hong Kong, Seoul, Tokyo, Phuket, Bangkok, Singapore,
Taipei, Chiang Mai, Bali, Jeju Island.
HK + Macau + Taiwan reprensented 71% of total traffic.
20%
20%
15%
12%
10%
Domestic travel
5%
4.0bn trips, Rmb3.4 trillion spending in 2015
Average spending at US$138/trip in 2015
12% revenue CAGR in 2015-20E, according to GSe
0%
3%
Domestic
Outbound
Inbound
Domestic travel trends:
More local tours, higher diversification.
80% of domestic tours are self-guided.
Top destinations: Beijing, Xiamen, Sanya, Shanghai,
Kunming, Harbin, Lijiang, Xi'An, Guangzhou, Guilin.
Inbound travel
134mn trips, Rmb0.4 trillion spending in 2015
Average spending at US$458/trip in 2015
3% revenue CAGR in 2015-20E, according to GSe
~30% arranged by travel agents
Top destinations (traffic, 2014):
Beijing, Xi'An, Shanghai, Guilin, Guangzhou, Eastern
China, Yangtze Gorges, etc.
81% are Hong Kong/Macau/Taiwan travellers.
Source: China National Tourism Administration, Goldman Sachs Global Investment Research.
5
Includes domestic, inbound, and outbound travel, and covers transportation, accommodation, restaurants, shopping,
etc.
35
May 17, 2016
Following the below-expectation guidance for both Tuniu (release on February 29 guided
1Q16 revenue to grow 60% yoy at mid-point, 17% below the previous GSe) and Ctrip
(release on March 16 guided 1Q16 consolidated revenue at Rmb4.1bn vs. the previous GSe
of Rmb4.7bn), the softer-than-expected year-to-date outbound traffic to Europe has caught
investors' attention. However, we believe 1Q softness is a one-off, with growth likely to reaccelerate from 2Q.6
Online travel transactions to see 18% CAGR to 2020E
Online travel, which includes air ticketing, hotel accommodation, attraction tickets and
packaged tours, is the second largest segment in China’s internet sector, with total
transactions of Rmb527bn (US$85bn) in 2015. While that is below e-commerce
(Rmb3.9tn/US$625bn) total transactions, according to iResearch, it is larger than online
advertising (Rmb209bn/US$34bn) and online gaming (Rmb132bn/US$21bn).
We believe China’s online travel market penetration was 37% in 2014 and expect this to rise
to 54% (90% for air ticketing, 76% for hotel bookings, 26% for tour, etc.) by 2020E, driving
total transactions to more than double to Rmb1.23tr (~US$200bn).
Exhibit 60: Breakdown of China’s online travel market
Online travel
(Rmb bn)
TAM analysis
Air
Ticketing
Hotel
Booking
Leisure
Packaged Tour
Attraction
Ticketing
Total
TAM: 2015
447
314
538
145
1,444
TAM: 2020E
720
416
964
170
2,270
TAM split%: 2015
31%
22%
37%
10%
100%
TAM split%: 2020E
32%
18%
42%
7%
100%
Online transaction: 2015
343
114
63
7
527
Online transaction: 2020E
648
318
248
16
1,231
Penetration% (2015)
77%
36%
12%
5%
37%
Penetration% (2020E)
90%
76%
26%
10%
54%
2015-20E TAM CAGR
10%
6%
12%
3%
9%
2015-20E online transaction CAGR
14%
23%
32%
20%
18%
Average commission rate%
3.0%
12.0%
7.0%
8.0%
5.5%
9
24
13
1
47
Online penetration
Growth profile
Incremental revenue
pie: 2020E-2015 *
* Theoretical long-term average gross commission rate, GSe
Source: Jinlv, iResearch, Goldman Sachs Global Investment Research.
We expect the ongoing trend of travel bookings moving online in China should continue
due to:

Rising mobile penetration, driven by 4G subscriber growth raising the number of
connected smartphones in the country. For example, we estimate that ~80% of Ctrip’s
4Q15 bookings came from mobile, vs. only ~30% in 4Q13.

Benefits from booking travel online include a broader range of products, more
attractive pricing, and online reviews as a useful resource for decision making.

Rising purchasing power of the millennials, who transact online more frequently
and currently account for 77% of China’s online travelers, according to CNNIC’s report
on the Online Travel Booking Market of China in 2014.
6
See ‘China online travel: Outbound travel to Europe: 1Q miss appears one-off, growth likely to re-accelerate into
2Q’, March 21, 2016.
36
May 17, 2016
We summarize the business models of Ctrip, Qunar, and Tuniu, the three Chinese online
travel companies’ business models in the chart below.
Exhibit 61: Snapshot of Ctrip/Qunar/Tuniu businesses
Category
Business
Revenue mix
2015
Hotel *
Air-ticketing
Package tour
Others
Market share among
online competitors
Total Bookings
2015
Business model
Outbound% revenue
contribution, 4Q15
Key financials
2015 (as of GMV%)
Ctrip (standalone)
Qunar
Tuniu
39%
38%
12%
12%
41%
49%
4%
6%
0%
0%
98%
2%
Hotel
#1
#3
N/A
Air-ticketing
#2
#1
N/A
Package tour
Tied #1
Top 5
Tied #1
233
144
11
Hotel
OTA (1P), commission;
Platform (3P), cross-sale
Platform (3P), P4P advertising
N/A
Air-ticketing
Platform, P4P advertising;
OTA (1P), commission
N/A
Package tour
Platform, P4P advertising
Merchant (1P), commission
Value terms
24%
<10%
65%
1.9%
-1.3%
-1.5%
3.5%
-13.0%
-12.5%
Rmb bn
3.4%
GP as of GMV
0.4%
Non-GAAP OP as of GMV
1.4%
Non-GAAP NP as of GMV **
* Qunar started merchant-model hotel booking from 3Q15, where they book GMV as hotel revenues
** Ctrip recorded a one-off gain from Tujia deconsolidation in 2015, which is included in non-GAAP net profit
37
May 17, 2016
5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E)
We first laid out the local services O2O market sizing analysis in Baidu’s 2Q15 earnings
review7 when they announced the plan to invest Rmb20bn in O2O; the O2O market
landscape has changed since then, with one change being the merger between Meituan
and Dianping. Thus we update our thesis of the O2O market in the below section and
highlight the associated investment opportunities.
Baidu
Online
video
8%
O2O
6%
Online
ad
86%
BAT to capitalize on changing user habits, driving local services
We believe online local services in China are likely to be better exploited by the internet
giants, in contrast to other parts of the world. We see the big three (BAT) as well positioned
to capitalize on the changing user habits, which should enable them to:
Meituan Dianping
O2O
100%
Key beneficiaries
 BAT (all rated Buy): Well
positioned to capitalize
on changing user habits.
Online local services
likely to remain
competitive until
penetration rises and
clear winners emerge.

Capture the trend of spending online across multiple partners, bringing domain
expertise. However, the approach varies between Tencent, which partners with the
companies it has invested in (e.g. WUBA, Didi), and Baidu which tends to consolidate
the invested entities that fulfill the services (e.g. Nuomi, Baidu Food Delivery).

Benefit from traffic to payment gateways given millions of these high-frequency O2O
transactions taking place on a daily basis. Baba, Tencent and Baidu each have Alipay,
Weixin Pay/QQ Wallet and Baidu Wallet, respectively, all of which are well positioned
to exploit the secular trend of online payment.

Expand the advertising customer base, as millions of small merchants that are brought
online should over time translate into potential advertising partners.
Overall the O2O vertical could potentially evolve in a manner similar to the e-commerce
industry and defy predictions in exceeding global benchmarks, in our view. From the
industry’s perspective, online demand will effectively enhance asset utilization – in this
case restaurants, cinemas, spas, food deliverymen, etc – thus improving efficiency for the
broader economy due to the relatively inefficient bricks and mortar infrastructure in China,
which is the similar case we saw for e-commerce previously.
We forecast China’s total local services spend (offline + online) will double to
~Rmb9.25tn (US$1.4tn) in 2020E from Rmb6tn in 2015, implying 10% of GDP in 2020E.
Of this Rmb9.25tn, we expect ~57% of the transaction to come from restaurant, food
delivery and hotel bookings. We also expect local services online penetration to rise from
~5% (or Rmb324bn (US$52bn)) in 2015 to ~12% by the decade’s end.
Exhibit 62: Local services to be a Rmb9.25tn market by 2020E, or 10% of GDP
Food delivery/restaurants form the backbone of local services
Total transaction value, in Rmb bn
2013
2015E
2020E
2020E
split %
Restaurants + food delivery
Beauty
Hotels
Wedding
Parenting
Entertainment/Cinema/Leisure
Other/Medical/etc.
2,539
335
179
595
473
560
0
3,092
398
245
705
551
649
351
4,866
630
379
1,088
852
1,003
438
53%
7%
4%
12%
9%
11%
5%
TOTAL
4,681
5,992
9,256
Source: Goldman Sachs Global Investment Research, iResearch.
7
See ‘Baidu: Building BABA for local services; maintain Buy’, July 30, 2015
38
May 17, 2016
The sizable market potential in local services has attracted a large number of players,
including both established leaders and start-ups motivated by entrepreneurial spirit. At the
same time, equity investors and venture capitalists have also seen the potential of this
market and have moved in to support the start-ups. However, we saw a clear distinction in
investor sentiment into O2O private companies, before and after July 2015:
1.
Stage 1, the “O2O mania”, before July 2015: According to Eastmoney.com, there
were 40 projects that gained more than Rmb100mn financing each in 2014, including
Jiuxian.com and Koudai.com. In 2014, Baidu/Alibaba/Tencent invested in 94 start-ups,
of which 14 companies were in local services, making this the leading sector favored
by BAT.
2.
Stage 2: the “O2O cool down”, from 2H2015: Financing for private O2O projects saw
a significant cool down in part due to the correction in China’s A-share market. Without
funding support, many O2O start-ups shut down, which in turn reinforced the
competitiveness for established leaders backed by internet giants.
Key players in the industry include:

Tencent, which can leverage its 200mn users that have bank cards linked to Weixin
Pay/QQ Wallet and its broad investments incl Didi in transport, 58.com in classifieds,
58 Home and eJiaJie to home services, MaoYan and WeiYing in cinema, Guahao.com
and DingXiangYuan in medical services, etc.

Baidu, according to Analysys International, Nuomi (Baidu’s subsidiary) had 20%
market share in China’s GroupBuy market in 3Q15. According to Sina News on January
25, 2016, Baidu Food Delivery had 13% market share in China’s online food delivery
services market in 2015, following E Le Me’s 27%.

Koubei is Alibaba’s foray into the local services segment, and is a JV with Alipay, the
payment company that had 400mn active users as of 2015. Working with Alibaba’s
~300mn mobile MAUs, Koubei targets the fast food segment, restaurants, cafes, food
takeout and deliveries from groceries, supermarkets and convenience stores.
According to Sina news (January 25, 2016), Koubei ranked No.4 in China’s online food
delivery services market in 2015, with 8% market share.
39
May 17, 2016
Heavy subsidies will pass, in our view
Consumers in China are on the lookout for the best deals across platforms. O2O, in its early
stage of growth, is using coupons/subsidies to attract new users and build user habits. This,
in our view, is likely to keep the industry landscape fragmented in the medium term.
However, we note that competition and primary market financing in this area appeared to
turn more rational as previously discussed; as a result, companies are becoming more
tactical with couponing/rebates to cultivate the user habits and improve retention thus we
believe that over time either the customers will prove to be sticky and need less subsidies,
or won't return thus the platforms would stop couponing as a result. Either way, as O2O
platforms’ algorithms are able to predict/track user behavior (especially BAT who have
leading engineering capabilities), the current subsidies on a per unit basis ought to ease, in
our view.
Local services more likely to succeed in China
In principle, business models are able to succeed when both parties are better off. The
broad local services segment has yet to prove to be successful in the US, as a) it is highly
fragmented, b) sales leverage has been low in the past, c) it has been reliant on a large
sales force and/or a call center, and d) customer loyalty has yet to be firmly established.
Nevertheless, we are seeing pockets of success with food delivery, as seen with JUST EAT
(JE.L, CL-Buy, 406.6p as of close on May 13, 2016, covered by Carl Hazeley) which has a
broader footprint across Europe, Canada and Australia. Carl Hazeley points out in his
recent report that although Western Europe online penetration for takeaways and
deliveries is only 7%, penetration exceeds 60% in Denmark, 35% in Canada, 39% in UK
(assume 14% take rate, or commission rate), and 22% in Australia8. His view on JUST EAT
is predicated on the success that chains have had with going online (Domino’s Pizza UK is
already at c.78% based on GSe) and a mid-teens take rate.
Exhibit 63: China lags developed market trends
Online food takeout/pickup (% online, 2015)
90%
80%
78%
70%
60%
60%
50%
39%
40%
35%
30%
22%
22%
20%
15%
10%
<5%
0%
Domino's
UK
Denmark
UK
Canada
Australia
France
Brazil
China
8
See ‘JUST EAT: JUST too cheap? Raising estimates and price target; reiterate CL-Buy’, March 10, 2016.
40
May 17, 2016
We believe prospects for the broader O2O segment in China could surprise the market on
the upside given the broad skepticism which we believe was shown by Baidu’s soft stock
performance post its 2Q15 announcement of O2O investment (it fell more than 30%
between 30 June and 23 September 2015), as well as venture capital investors’ hesitation
to invest into O2O start-ups. This is because BAT, as platforms, have large user bases as
well as established payment relationships with merchants in several instances. These
platforms have a broad reach and a deep understanding of the users as well as their
preferences, a seasoned marketing team, and are data driven in target marketing, which
raises the probability of transacting with the merchants.
Within local services, we are less enthusiastic about the long-term attractiveness of
discount based models, which may bring in more customers in a concentrated period to
merchants. This does generate short-term business, but the long term stickiness is not
warranted. Also, the risk is that full paying regular customers are highly likely to switch to
the discounted product. Last, there is limited value in data when it’s not sticky.
Subsidies offered across the platform to change user behavior have proven to work in the
broader internet space, as we witnessed when app developers were paying for preinstalls,
for example. Baidu’s algorithms detect stickiness, and we have begun to observe, across a
small sample, lower subsidies for optimal utilization of resources across a plethora of local
services.
41
May 17, 2016
6. Internet finance: Tapping the underbanked China consumer; a US$5.4tr
opportunity (2020E)
The role of payment solutions offered by internet companies has been underappreciated
by the market, in our view, due to the low take rates. However, it is the large user base of
these services from Alibaba, Tencent and Baidu who are the customers we expect the
three companies to target as more and more financials services are offered online to an
underbanked China Consumer.
Alipay
Internet
finance
100%
Creation of world-leading online payment platforms
Solutions such as Alipay have been at the core of China’s widespread adoption of ecommerce as they have overcome the trust issues that prevail when transacting online.
These symbiotic relationships between the transactions and payments in China have
resulted in the creation of some of the most successful online payment platforms in the
world.
Tencent
Cloud
9% Others
15%
Online
Internet
ads
finance
17%
4%
Despite a recent crackdown on improper P2P lending, we believe the platform created by
the internet giants has been built using solid technology advances and that it could serve
to meet unfulfilled borrowing demand. In our view this has been done to create the
mechanisms to serve the SMEs and consumer banking, segments of the market that have
been under banked.
Online
games
55%
Key beneficiaries

BAT (all rated Buy):
Ability to leverage the
large user base and
omnipresent BAT
ecosystem.
Exhibit 64: Consumer leverage much lower than that of
corporate leverage in China
Big growth potential for consumer banking
(as % of GDP)
274
263
249
270
240
Total debts
as % of GDP
Exhibit 65: Smaller bankcard share in China
Internet players have a closed ecosystem to complete
transactions and payment functions in China
Internet shopping payment volume's share by payment
tools in 2013
230
Bankcard
220
210
182
161
149
150
114
101
122
110
109
142
LGFV leverage(loan,
bond, trust)
114 105 97 99 94 95
28
25
31
Govt. Leverage
31 34
24 28 24 26
1
0
6
1
85%
Source: PBOC, Wind, Gao Hua Securities Research.
2017E
2015
2016E
2014
2013
2012
2011
2010
2009
2008
2007
2006
2005
2004
11 12
2003
9
2002
2001
2000
7
76%
41
1999
113
36
13 15 15 16
29
23
29 27 25 24 23
30
32
28
28
26
40 44
22 22 24 25
25 27 30 35
8
14 13 15 15 19 23 23
2 4 6 9 12 12
100
30
0
139
1998
107
107
120 124136
1997
60
103
15%
164
154
155 156 155 154154
135 138
90
Third-party
Corporate leverage
159
180
120
211
197 196
24%
Household leverage
US
China
Source: CEIC, Goldman Sachs Global Investment Research, Gao Hua Securities
Research.
42
May 17, 2016
Exhibit 64 shows that lending by the China’s banks appear to have ignored the consumer,
as the government guarantees 75% L/D ratio cap for loans to SOEs. As a result, the credit
system for smaller borrowers is still underdeveloped, making money ~10% more expensive
for the SME segment.
It is this vast opportunity which technology firms could solve using data mining and
analysis expertise, which leverages transaction and/or social behavioral data, for both
customer acquisition and better credit analysis. As a result, our banks team estimates the
overall loan book could grow to Rmb3.3tn in 2020, representing 1.5% of total social
financing, ex-bonds and equities. We forecast consumer and SME loans/payment-related
business of the internet companies could generate Rmb47bn (US$7bn)/Rmb33bn (US$5bn)
net profits by 2020E.
Two of the most important areas of internet finance are payments and consumer/SME
lending.

Payments: Established payment tools, Tenpay and Alipay, act as high frequency
gateways, provide transaction information, and act as a distribution channel. A
plethora of transactions provide the basis for credit risk management.

Lending: BAT leverage their retail and SME client base, strong datamining capability
via online transactions, and their established transactions driven ecosystem.
Alibaba/Ant Finance and JD both offer SME loans to their merchants and/or suppliers
as well as consumer loans to their clients.
Insurance, an emerging area
An emerging opportunity for the online giants is online insurance. According to the
Insurance Association of China, insurance premiums in 1H15 amounted to Rmb1.75tn, of
which online accounted for 4.7%, or Rmb82bn (2014: Rmb86bn). These digital insurance
products are offered by 96 insurance companies in China.
BAT’s position in financial services

Alibaba: Alipay is the market leader in online payments based on revenues in 2015 and
has strong data mining and risk management capabilities. The company has
successfully developed products and platforms.

Tencent: Gathering retail social information, we think Tencent has the potential to
develop O2O payments and financial service for consumers and SMEs in the longer
run. Its users can apply for un-collateralized loans of up to Rmb200k, at an interest rate
of 0.05% per day. Tencent determines the size of the loan based on customer
creditworthiness, which, in turn, is linked to hundreds of points of user data that the
company gathers across its multiple platforms. While the credit scores have not been
rolled out yet, Tencent uses the unique QQ ID, user behavior and third party data.

Baidu: While Baidu is relatively weaker in e-commerce transaction/payment functions,
its strong search capability could build platforms. An aggressive stance on O2O/local
services has resulted in Baidu Wallet’s user numbers exceed 200mn. According to
recent press articles, Baidu has also applied for both an internet banking license for
Baixin Bank (SCMP, November 19, 2015), a venture with Citic Bank (Sina news, April 21,
2015), and an insurance license with Allianz (SCMP, November 26, 2015).
43
May 17, 2016
Exhibit 66: Detailed long-term projects of banks, internet giants’ credit products and payments
Predominantly BAT + JD
RMB, bn
TSF excl bonds and equity
yoy growth
Bank P/L
Bank earnings assets est.
NIM
Non-NII income as % of revenue
CIR
Credit cost
Profit
ROAE
ROAA
Internet credit products
P2P
yoy growth
as % of TSF excl bonds, equities
Internet giants (mainly BAT, JD)
yoy growth
as % of TSF excl bonds, equities
Margin
Cost-income ratio
Credit cost
Profit
yoy growth
Capital needed
as % of bank profit
ROE
Payment
Bankcard transaction payment
yoy growth
Unionpay's POS revenue
Unionpay's profits
Third-party payment
As % of total bank card volume
Internet giants
Relative to bankcard payment
yoy growth
Payment fees and idle funds' interest income
Take rate
Cost-income ratio
Internet giants' payment NPAT
yoy growth
Relative to Unionpay profits
2012
81,673
2013
96,313
17.9%
2014E
110,612
14.9%
2015E
125,461
13.4%
2016E
142,303
11.9%
2017E
159,272
11.9%
2018E
178,264
11.9%
2019E
199,520
11.9%
2020E
223,311
11.9%
100,500 113,348
2.75%
2.68%
19.83%
21.2%
39.4%
38.8%
0.61%
0.64%
1,239
1,418
19%
1.35%
130,265
2.59%
22.2%
38.8%
0.65%
1,565
19%
1.31%
147,752
2.50%
23.2%
38.8%
0.73%
1,692
18%
1.24%
165,370
2.41%
23.2%
38.8%
0.78%
1,789
17%
1.17%
185,089
2.36%
23.2%
38.8%
0.83%
1,911
16%
1.11%
207,160
2.31%
23.2%
38.8%
0.88%
2,036
16%
1.06%
231,862
2.26%
23.2%
38.8%
0.93%
2,164
15%
1.01%
259,510
2.21%
23.2%
38.8%
0.98%
2,294
14%
0.95%
83
210%
0.1%
23
230%
0.0%
11%
46%
0.8%
1
237%
2
0.0%
23%
233
180%
0.2%
73
210%
0.1%
11%
46%
0.9%
2
211%
7
0.1%
35%
465
100%
0.4%
211
190%
0.1%
11%
46%
1.5%
4
118%
21
0.2%
26%
698
50%
0.6%
550
161%
0.3%
10%
44%
2.0%
8
111%
55
0.4%
20%
816
17%
0.6%
1,215
121%
0.7%
10%
42%
2.5%
14
77%
121
0.7%
16%
954
17%
0.6%
2,199
81%
1.1%
9%
40%
2.5%
28
104%
220
1.3%
16%
1,116
17%
0.7%
3,321
51%
1.5%
9%
38%
2.5%
47
68%
332
2.0%
17%
495,331
17%
109
45
23,300
32%
4.7%
6,967
1.4%
40%
14
0.20%
29.5%
8
39%
16.9%
569,631
15%
125
51
31,200
32%
5.5%
9,641
1.7%
38%
19
0.19%
29.0%
10
37%
20.2%
646,531
14%
142
58
41,300
32%
6.4%
13,175
2.0%
37%
25
0.19%
28.5%
14
35%
24.1%
730,580
13%
161
66
52,600
26%
7.2%
17,568
2.4%
33%
33
0.19%
28.0%
19
32%
28.1%
818,250
12%
180
74
64,172
22%
7.8%
22,396
2.7%
27%
41
0.19%
27.5%
23
26%
31.7%
908,257
11%
200
82
74,440
16%
8.2%
27,096
3.0%
21%
49
0.18%
27.2%
28
20%
34.2%
1,008,165
11%
222
91
86,350
16%
8.6%
32,727
3.2%
21%
59
0.18%
26.9%
33
19%
36.7%
6
2
27
368%
0.0%
7
255%
0.0%
11%
46%
0.8%
0
0.0%
346,212
423,360
22%
76
93
31
38
12,900
17,200
33%
3.7%
4.1%
4,971
1.2%
10
0.20%
30.0%
5
14.2%
Source: Company data, PBOC, CBRC, Gao Hua Securities Research, Goldman Sachs Global Investment Research.
44
May 17, 2016
Exhibit 67: We expect online and mobile payment to grow substantially with higher bank cards penetration
Bankcard penetration and online/mobile payment trends
Unit
Bankcard system
Bank card Transaction Amount
Bank card Consumption Volume
-Transfer
-Cash Deposits and Withdraw
yoy
2008
2009
2010
2011
2012
2013
2014
2015E
2016E
2017E
127,157
3,947
57,508
65,701
32%
165,991
6,861
87,455
71,676
74%
246,763
10,430
140,487
95,846
52%
323,825
15,212
195,912
112,702
46%
346,212
20,826
206,312
119,075
37%
423,360
31,830
254,120
137,410
53%
449,900
42,380
262,460
145,050
33%
517,385
52,975
299,204
165,206
25%
587,232
63,570
341,093
182,569
20%
663,572
73,741
385,435
204,396
16%
Mn
1.85
56%
2.41
31%
3.33
38%
4.83
45%
7.12
47%
10.63
49%
15.94
50%
18
15%
20
10%
21
6%
Mn
1.2
59%
11.3%
1.6
33%
13.7%
2.2
39%
17.6%
3.2
46%
23.4%
4.8
52%
32.8%
7.6
58%
46.9%
12.0
58%
67.9%
14.2
18%
73.8%
15.8
11%
75.9%
16.9
7%
75.9%
128
129%
263
105%
461
75%
RMB bn
785
70%
12
RMB bn
773
1,303
66%
69
490%
1,234
60%
0.20
1,983
52%
274
297%
1,709
38%
22%
2,817
42%
930
239%
1,888
10%
3,957
40%
1,809
95%
2,149
14%
5,164
30%
2,835
57%
2,329
8%
6,043
17%
3,729
32%
2,314
-1%
39%
44%
47%
48%
50%
53%
55%
10.8%
RMB bn
RMB bn
RMB bn
RMB bn
POS machine
-No. of POS
yoy
Merchant penetration
-No. of merchants accepting bankcard payment
yoy
-As % of total merchants
Online payment system
Internet retail shopping
%
RMB bn
yoy
- Mobile shopping
yoy
- PC shopping
yoy
Penetration ratio by various consumption channels
Bank card consumption as % of retail
sales(excl. property/auto/wholesale)
%
Mobile shopping as % of retail sales
%
0.1%
0.3%
1.2%
3.5%
6.3%
9.0%
PC shopping as % of retail sales
%
4.2%
5.9%
7.2%
7.2%
7.4%
7.4%
6.7%
2011
8.4
6.0
2.2
0.1
0.2
2012
12.9
8.9
3.7
0.2
0.2
2013
17.2
10.3
5.4
1.2
0.3
2014
23.3
12.5
7.4
2.9
0.4
2015E
31.2
15.0
10.4
5.2
0.6
2016E
41.3
18.0
14.2
8.5
0.7
2017E
52.6
21.4
18.5
11.9
0.8
Rmb bn, transaction volume
Third party players
Bankcard merchant acquirer
PC payment
Mobile payment
Others
24%
2008
RMB tn
RMB tn
RMB tn
RMB tn
RMB tn
32%
2009
3.00
2.40
0.51
0.04
0.06
35%
2010
5.1
3.9
1.0
0.1
0.1
Source: Analysys, PBOC, Goldman Sachs Global Investment Research, Gao Hua Securities Research.
Exhibit 68: Contrasting the strength and weaknesses of banks vs. Baidu, Alibaba and Tencent (Dec 2015)
Traditional banks vs. BAT
Alibaba
Tencent
Baidu
Payment users
Banks
Alipay 400mn registered users
Tenpay/Weipay 300mn+
Baidu Wallet 53mn
Other users
407mn active annual shoppers
ecommerce, payments, video, etc. Sticky,
transaction oriented user base, proven datamining skills
WeChat >600m, Qzone SP M AU 573mn
Gaming, social, messaging, payments.
Sticky user base, dominant time spent,
proven data-mining skills
Search, video, O2O. Behavioral data base, data
mining capability
Strong online B2B, B2C,C2C
Some online e-commerce via JD, C2C, O2O Online exposure the smallest of BAT
Traffic based
Economic transactions
Payments
Data source/utilization
Financial product sale
Strong B2B, offline B2C, C2C,
large tickets, investments
Strength: Security, convenience
Dominant online, offline transition
for big ticket, offline. Weak
successful
online
Some efforts in O2O, NFC
Change in O2O strategy in 2015
643mn mobile search active users
Strong C2C small ticket, convenience,
significant users linked to bank cards. Weak Convenient online payment, but a late entrant
B2B
O2O push may accelerate follow ing M&A
Accelerated O2O spend in 2015
Large data sets (ID, financial,
transacitons, B2B). Little on
customer behavior
M ulti-dimensional data (ID, behavior) across Large data sets (ID, financial, transacitons,
consumer and SM E
B2B). Little on customer behavior
Large data sets (ID, financial, transacitons, B2B).
Little on customer behavior
Very limited data mining
Strong data mining, targeted marketing and Wechat/QQ captures behavior, retail
risk managment
presence grow ing, w ell positioned in O2O
Search engine w ith proven data mining skills, but
ID/transaction information missing - ex travel and
recently O2O
Deposits, WM P, 3rd parthy
WM P, credit cards, consumer
loans, SME/corp. loans
SM E loans, WMP (3rd party), w ith M yBank
to launch more products. Ant Financial ow ns
30% of M yBank. Zhong An Online Property,
a venture w ith Ping An and Tencent,
announced a year ago.
Financials a key search vertical w ith potentially
WM P (3rd party), some SME/consumer
high CPC. Applied: Internet bank license for Baixin
loans. Ow n 30% of Webank. Zhong An
Bank, in cooperation w ith Citic Bank. Formed: Bai
Online Property, a venture w ith Ping An and
An, a digital insurance venture w ith Allianz and
Tencent, announced a year ago.
Hillhouse.
45
May 17, 2016
China is the world’s second largest market for IT hardware spending, but is only #7 for
software. While we estimate cloud computing in China lags the US by four years, we are
confident that spending on cloud will be the fastest growth area within the China Internet
sector.
Alibaba
Cloud
2%
Online
ad
37%
Others
38%
China’s cloud spending growing at a fast pace as it catches up
Commis
sion &
others
23%
Cloud services are an efficient and economical computing solution that can be scaled up
for a quick time to market, and potentially a way to deliver more innovative solutions.
Cloud computing is the on-demand delivery of IT resources and applications via the
internet, usually on a ‘pay as you go’ pricing model. Applications range from the simple
sharing of a photograph to business critical solutions. Cloud services allow businesses to
scale as they gain access to IT resources in a flexible manner, and at a cost point
determined by usage, and pricing which gains from the sharing of the common
infrastructure.
Tencent
Others
27%
Cloud
1%
Online
ads
17%
Online
games
55%
Key beneficiaries
 Alibaba (Buy): One of
the largest cloud service
providers in China and
is expanding its Aliyun
cloud service abroad.
Cloud computing is the fastest growing segment of IT spending globally, growing at 15%
CAGR from 2015 to 2020E vs. 1% CAGR in total services IT spending and 2.5% per annum
in total IT spending (including hardware). The growth in spending on cloud services is due
to industries shifting to cloud based services from legacy IT services. Within cloud services,
we expect application and infrastructure based cloud services growth rates will be quicker
than the overall growth in cloud spending, consistent with recent trends.
We forecast cloud spending growth to be quickest in China, where we expect 17% CAGR in
US$ terms over the next five years (Exhibit 69). China growth rates are higher, off a low
base, with switching supported by a major government support for the segment, as well as
the lack of legacy systems that tend to slow down the move to cloud in the rest of the
world.
 Tencent (CL-Buy): One
of the largest cloud
service providers in
China and plans to
operate its Weiyun
cloud storage service in
the US.
Exhibit 69: Public cloud user spend (in US$ mn)
China has the fastest growing cloud spending
In US$ mn
US
China
Japan
France
Germany
UK
Global
2013
69,901
5,325
6,204
3,536
5,387
13,204
131,271
2014
83,000
7,039
6,846
4,102
6,247
15,038
153,911
2015
98,954
8,778
7,388
4,240
6,534
15,914
175,055
2016E
116,442
10,733
8,355
4,869
7,445
17,854
203,891
2017E
136,910
13,468
9,469
5,593
8,482
20,061
239,260
2018E
159,691
14,984
11,174
6,436
9,710
22,595
277,510
2019E
182,755
16,969
13,024
7,345
11,093
25,314
317,956
2020E
204,685
19,005
14,977
8,300
12,646
28,225
359,291
15-18E
CAGR
17%
20%
15%
15%
14%
12%
17%
15-20E
CAGR
16%
17%
15%
14%
14%
12%
15%
Source: Gartner, Goldman Sachs Global Investment Research.
46
May 17, 2016
Cloud computing is a focus area of the government in China (i.e. in the 2016-20 Five Year
Plan) and is one of 11 priority technology sectors for the government. The cloud
opportunity in China is still nascent, and accounted for only 9% of the US public cloud
market in 2015. The driver of growth in cloud services is enterprise demand, and the sharp
growth in 4G smartphone take up. By 2019, cloud apps will account for 90% of mobile data
traffic, vs. 81% in 2014, according to Gartner.
Exhibit 70: China’s public cloud spending as % of GDP is
among the lowest globally, at 0.08% in 2015E
Exhibit 71: China’s public cloud spending as % of total IT
spending is among the lowest globally, at 2.5% in 2015E
China public cloud spending as % GDP
China public cloud spending as % of IT spending
US
China
Japan
France
Germany
UK
US
China
Japan
France
Germany
United Kingdom
14.00%
0.90%
0.80%
12.00%
0.70%
10.00%
0.60%
0.50%
8.00%
0.40%
6.00%
0.30%
4.00%
0.20%
2.00%
0.10%
0.00%
0.00%
2013
2014
2015E
2016E
2017E
2018E
Source: Gartner.
2013
2014
2015E
2016E
2017E
2018E
Source: Gartner.
Cloud delivery models
There are three different types of cloud services/delivery models, depending on whether
the service provisioning includes infrastructure, platforms and software (see Exhibit 72):


IaaS: Infrastructure as a Service – as customers move to a common infrastructure,
IaaS provides access to computing hardware, networking features, computers (virtual
or on dedicated hardware), and data storage space. IaaS provides customers with the
highest level of flexibility, gives management control over IT resources and is most
similar to existing IT departments as well as what developers are familiar with.
–
IaaS was a US$16bn market globally in 2015, expected to grow at 28% pa to
US$56.3bn by 2020, according to Gartner.
–
In China, the market in 2015 was US$103mn, and is expected to grow to
US$257mn by 2020, according to Gartner.
PaaS: Platform as a Service - is designed for agility and provides the total
infrastructure required, i.e., both the hardware and the operating system,
encompassing resource procurement, capacity planning, and software maintenance.
This leaves the customer to focus on the application.
–
PaaS was a US$3.8bn market globally in 2015, expected to grow at 16% pa to
US$8.1bn by 2020, according to Gartner.
–
In China, this segment was US$188mn in 2015, with growth to US$538mn
expected by 2020, according to Gartner.
47
May 17, 2016

SaaS: Software as a Service – capitalizes on the move from on-premises licensesbased world to a cloud based offering, where user-end applications are managed and
run by the service provider. This in effect is the simplest form of a web-based
application. Globally, ERP (enterprise resource planning) and CRM (customer
relationship management) dominate the cloud solution offerings.
–
SaaS is set to remain as the largest public IT cloud category with revenue
projected to grow at 17% pa from US$31.3bn in 2015 to US$69bn in 2018 globally,
according to Gartner.
–
In China, SaaS revenue is forecast to grow to US$881mn in 2020, from US$321mn
in 2015, according to Gartner.
Exhibit 72: Cloud services segmentation demonstration
On Premises
Infrastructure as a
Service
Platform as a
Service
Software as a
Service
Applications
Applications
Applications
Applications
Data
Data
Data
Data
Runtime
Runtime
Runtime
Runtime
Middleware
Middleware
Middleware
Middleware
O/S
O/S
O/S
O/S
Virtualization
Virtualization
Virtualization
Virtualization
Servers
Servers
Servers
Servers
Storage
Storage
Storage
Storage
Networking
Networking
Networking
Networking
Managed by Cloud Vendor
Managed by User
Source: Microsoft Azure.
48
May 17, 2016
Exhibit 73: China, US, and Global cloud revenue breakdown
In US$mn
China
BPaaS
PaaS
SaaS
Cloud Mgmt, Security
IaaS
Cloud Advt
2013
91
95
180
100
73
4,786
2014
95
140
241
140
85
6,337
2015
104
188
321
191
103
7,872
2016
114
246
413
255
125
9,581
2017
128
316
526
329
153
12,015
2018
143
396
657
412
188
13,188
2019
161
480
787
512
230
14,800
2020E
180
538
881
573
257
16,576
15-20E
12%
23%
22%
25%
20%
16%
US
BPaaS
PaaS
SaaS
IaaS
Cloud Advt
2013
17,874
1,091
13,025
1,418
4,723
31,770
2014
19,811
1,456
16,036
1,852
6,630
37,214
2015
22,137
1,799
19,387
2,379
9,754
43,499
2016
24,707
2,166
23,159
2,970
14,117
49,324
2017
27,278
2,545
27,258
3,578
19,360
56,892
2018
30,277
2,925
31,740
4,238
25,425
65,087
2019
33,441
3,337
35,818
4,842
31,858
73,459
2020E
37,454
3,737
40,116
5,423
35,681
82,274
15-20E
11%
16%
16%
18%
30%
14%
World
BPaaS
PaaS
SaaS
IaaS
Cloud Advt
2013
35,245
2,492
22,102
3,210
9,228
58,994
2014
38,180
3,293
27,172
4,152
12,276
68,838
2015
39,196
3,824
31,385
5,011
16,191
79,449
2016
42,596
4,629
37,750
6,248
22,410
90,257
2017
46,486
5,468
45,077
7,565
30,147
104,516
2018
50,955
6,345
53,326
8,983
39,381
118,520
2019
55,749
7,206
61,117
10,453
49,866
133,566
2020E
62,997
8,142
69,062
11,812
56,348
150,929
15-20E
10%
16%
17%
19%
28%
14%
Note: 2013-2019 data is from Gartner, 2020 is GSe.
Source: Gartner, Goldman Sachs Global Investment Research.
The China cloud market currently generates revenues of US$9bn, which we expect to grow
to US$19bn by 2020E. We believe this is an opportunity for the Chinese companies to
exploit as non-Chinese companies, according to the ITA, may be required to hand over
proprietary source code, while by 2020 the government plans to remove foreign vendors of
both hardware and software from SOEs. Nevertheless, this doesn’t rule out partnerships,
such as the announced Microsoft’s partnership and 21Vianet, HP with Beijing UnionRead
Information Technology, and IBM with 21Vianet.

Alibaba’s Aliyun (AliCloud) service is the market leader in the fastest growing segment
of the internet, servicing 1.4mn cloud customers directly and 0.45mn indirectly. China
Mobile, China Unicom, China Telecom, Baidu, Tencent, and ZTE are among the other
large, well-resourced, and technically-savvy Chinese companies offering (or preparing
to offer) some sort of cloud service. Alibaba has signed cloud agreements ranging
from developing cloud storage solutions to helping provinces gather and crunch data
to optimize its traffic lights. These agreements cover more than a dozen Chinese
provinces and cities including Hainan, Guangdong, Tianjin and Shanghai. It also works
with China Meteorological Administration, China Central Government Procurement
Centre, and the State Railway Service Centre.

Aliyun in April 2015 announced a deal with state oil and gas giant China Petroleum &
Chemical Corporation, known as Sinopec, to create a cloud system to track its
production and emissions (Source: Reuters, April 17, 2015). The company also has an
agreement with the City of Dalian to build a cloud computing center and provide online
government services.

Tencent is the 2nd-largest cloud computing company in China, behind the early mover,
Alibaba. Tencent continues to be aggressive in investing in data center and bandwidth,
and the company’s need to own fiber capacity to cater to new game peak download
demand has led the company to own fiber capacity.
49
May 17, 2016

21Vianet (VNET, Not Covered) has partnerships with Microsoft and IBM for public
and private cloud services respectively. 21Vianet helps Microsoft expand its
commercial public cloud services in China until 2018. This includes Microsoft office
applications, business email, file sharing and HD video conference. Vianet also works
with IBM’s private cloud infrastructure service and brings high-value managed private
and hybrid cloud services to China. IBM will provide the physical point of distribution
(POD) and service, while 21Vianet hosts the POD facility at their Beijing data centers.
Private cloud services are offered to multi-national corporations and include database
management services, firewall services, server load balancing, data backup recovery
services, server management and virtual private networks (VPN). According to Vianet’s
2015 20F, the company has 85 data centers and 113k servers.

Although Chinese companies may currently lack some of the larger U.S. firms’ key
advantages (e.g., scale, technical skill, innovative services), we believe these gaps will
close to varying degrees over the next several years.
Exhibit 74: Major domestic cloud vendors in China
Company
Traditional IDC operators
21Vianet
Capital Online Data Services
Sinnet
Specialised Cloud providers
Ucloud
QingCloud
Big 3 ISPs
China Mobile Cloud
China Unicom WoCloud
China Telecom eCloud
Internet companies
AliYun
Tencent Qcloud
Baidu
KSYun
Sina Cloud
Traditional hardware company
Huawei Cloud
Offerings
Clients
IaaS
IaaS+PaaS
IaaS
Tencent, KingSoft, Jiayuan.com, YouKu, Vancl
VIPShop, 1HaoDian, Jumei, Mogujie, LongTu Game, The 9, Cannon, iQiyi
Gome, Jumei, Vancel, DangDang, HomeLink, Nestle, Huaxia Bank, McDonald's
IaaS+PaaS
IaaS+PaaS
Tarena, KuaiQian, Lilith
TAL Education, 91Finance, YongYou, 36Kr
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
MMAE, GuoKing Bingo
Ericsson, Mei Ah Entertainment, CSSWEB
NBS, China Merchant Bank, Baidu, Sohu, LeTV, Gree
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
IaaS+PaaS+SaaS
Tmall, Mybank, PPTV, Vanke, Philips
WeBank, GF Securities, TaiKang Life, Jumei, 58.com, Ctrip
Air China, GF Securities, iQiyi, Nuomi, CSDN
XiaoMi, BitAuto, Skyworth, CCTV, CRCC, YongYou
Renmin University, PerfectWorld, YOU+
IaaS+PaaS+SaaS
CPIC, QianHaiP2P, YouGuo.com
Source: Analysys, Company data
The international cloud opportunity for Chinese cloud providers
In 2014, Tencent revealed plans to operate its Weiyun cloud storage service in the US,
while in July 2015 Alibaba began expanding its Aliyun cloud service abroad, investing
US$1bn in the project and announcing plans to build data centers in the US, Europe, the
Middle East, Singapore and Japan. Other companies such as Ucloud and QingCloud’s have
announced similar plans, further reinforcing China’s intent to create a larger overseas
cloud computing presence.
50
May 17, 2016
Appendix 1: China internet usage
Exhibit 75: Daily life for a ‘typical’ China internet user
07:30
08:00
08:30
11:00
TAXI
Didi
Order
Meituan
ele.me
Nuomi
12:00
Lunch
+
Lunch
delivered
$ Alipay/Tenpay
Taxi hailing
24:00
Online music streamin.
QQ music
Netease cloud music
Kugou/Kuwo/Xiami
Drama
MAU(mn) yoy%
108
90%
106
69%
96 184%
Tencent
Youku
iQiyi
E‐comm
JD
# of Games among Top 10 in 2016
Tencent: ~6
Netease: ~2
Classified
Local svc. Same day Delivery
Taobao: 1.809
Tmall: 1,141
JD: 457:
16:00
58.com
964k paying merchants in 4Q15
Restaurant
reservation
Grp buy
Local svc. Booked tickets
& hotels
50%
+
Buy discount
coupon
Ant issue in kitchen
Clan activities
58.com
Fantasy Westwood Journey
21:00
Source: Company data, 163.com, Iimedia, Analysys.cn, Goldman Sachs Global Investment Research.
Booked 2hrs to‐door cleaning services on Saturday
20:00
Dinner
@ home, JD delivery arrived
19:00
Add
comment on Dianping
New discount coupon awarded
18:00
51
22:00
Ctrip
14:00
2015 GMV (Rmb bn)
Gaming:
Place
Order
On Taobao
Wechat: 697mn
Weibo: 236mn
Meituan
Dianping
Discussion on weekend travel
Wechat
Group
Weibo
Merchant
ads
4Q15 MAU
‐ ele.me 34.1% ‐ Meituan 32.8% ‐ Baidu 18.7%
Mobile Games Youku, iQiyi,
Tencent video
13:00
SNS
2015.12 GMV: Rmb7.1bn
Kugou
QQ Music
Kuwo
2015
Food O2O
Alipay
Settle ~75% of BABA’s GMV
Tenpay
+7x yoy in MAU in 4Q15
4Q15 user base: 440mn
App Popularity Ranking:
1.
2.
3.
Online video
23:00
Didi
1.43bn trips
490mn driving hrs
12.8bn km 2015
Mobile payment
Wechat
Moments
May 17, 2016
Appendix 2: M&A summary
Exhibit 76: China internet M&A in 2015: Five largest deals
Date
Companies involved
Details
Price change
14-Feb-15 Taxi hailing app
Didi & Kuadi Merger
Two largest taxi-booking apps in China, Alibaba-invested Kuaidi
Dache and Tencent-invested Didi Dache, announced their merger in
Feb 2015. Two companies together are valued at about US$6 billion
post-deal, according to Sina news.
N/A, both are private cos
17-Apr-15 Classified
58.com & Ganji.com
58.com (WUBA) to acquire a strategic stake, 43.2% on a fully diluted
WUBA: US$67.57 (16 Apr 2015 close) to
basis, in Ganji.com, a leading online local services marketplace
US$ 70.50 (17 Apr 2015 close), 4.3%
platform in China. Please refer to published comment: WUBA to
increase
acquire 43.2% of Ganji.com, April 17, 2015
8-Oct-15
Sector
Group-Buy/O2O
Meituan & Dianping
16-Oct-15 Online video
Alibaba & Youku
26-Oct-15 Online travel
Ctrip & Qunar
Two biggest online-to-offline (O2O) service providers in China,
Meituan (backed by Alibaba) and Dianping (backed by Tencent)
announced a merger to thrive together in a highly competitive
market. The merged company could be valued at $15 billion or more,
according to Sina news.
BABA submitted a non-binding proposal to the board of directors of
Youku Tudou (YOKU) to acquire all outstanding shares of YOKU for
US$26.60 per ADS in cash. Please refer to published comment:
BABA announced non-binding privatization proposal to YOKU,
October 17, 2015
N/A, both are private cos
YOKU: US$ 20.43 ( 15 Oct 2015 close) to
US$24.91 (16 Oct 2015 close), 21.9%
increase
Baidu exchanged 48% of Qunar’s ordinary shares with Ctrip for
CTRP: US$74.34 (23 Oct 2015 close) to
newly-issued Ctrip shares with 25% voting interest post deal. Please
US$90.78 (26 Oct 2015 close), 22.1%
refer to published report: Buy Ctrip: Consolidating online travel,
increase
raising TP to US$130, November 4, 2015
Notes: Price change is closing price on day prior to announcement to closing price on day of announcement.
Source: Bloomberg, Company data.
Exhibit 77: Baidu: Investments over the past 11 years
Date
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
2015/6
2014/12
2014/12
2014/11
2014/10
2014/10
2014/9
2014/9
2014/7
2014/5
2014/4
2014/4
2014/1
2014/1
2013/7
2013/5
2011/7
2004/8
Names
Nature of business
Rounds
Stellar International Cineplex
Pixellot
Uber
oTMS
Indoor Atlas
Peixe Urbano
Zhi Ke Wang
Shanghai High-Flying
Chuan Ke
Line Kong
Cheetah
Hu Jiang
Nuomi
Le Cai
91 Wireless
iQiyi + PPS
Qunar
Hao123
Cinema
Video recording technology
Taxi-hailling
Logistic system
Indoor navigation
eCommerce
Education
Hardware technology
Education
Mobile game
Mobile internet
Education
Group buy
Lottery
Mobile app store
Online video
Online travel
Search engine
Strategic invesment
Seed angel
E round
A round
A round
Acquisition
A round
A round
Acquisition
D round
Pre-IPO
C round
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
% Stake
2%
100%
100%
100%
100%
91%
51%
100%
Note: A, C, E refer to funding round that Baidu acquired stock in.
Source: Company data
52
May 17, 2016
Exhibit 78: Alibaba: M&A history since April 2013
Rounds
% Stake
Valuation
US$ mn
Date
Company Name
Nature of business
1
2016/4
E Le Me
Food Takeout Delivery services
28%
4,513
Investment, US$ mn
1,250
2
2016/4
Lazada
Online shopping
67%
1,500
1,000
3
2016/2
YiGuo
Fresh fruit eCommerce
4
2016/2
SM Entertainment
K-POP agent
Investment
5
2016/2
Magic Leap
Cinematic reality device
C Round
C Round
4%
752
30
18%
4,500
794
266
6
2015/12
South China Morning Post
News agency
100%
266
7
2015/12
BONA
Movie producer
Go private
10%
860
86
8
2015/11
Youku Tudou
Online video
Go private
100%
4,500
4,500
680
9
2015/11
Tutor Group
Online education platform
C round
10
2015/10
CMC Holdings
Entertainment
Co-founder
11
2015/10
58 Home
LBS O2O
A round
12
2015/9
One97(PayTM)
Payment system in India
40%
1,700
13
2015/8
Snapdeal
eCommerce in India
10%
5,000
500
14
2015/8
Suning
eCommerce
20%
22,823
4,565
15
2015/7
MEI.com
Luxury goods flash sale eCommerce
16
2015/6
First Financial
Media
37%
527
194
17
2015/6
Micromax
Smartphone (India)
25%
2,800
700
18
2015/6
Han Hai Yuan
China's equivalent of FireEye (FEYE)
19
2015/5
Zulily
Baby maternity eCommerce in US
9%
6,022
20
2015/3
Enlight Media
Entertainment
9%
4,399
387
21
2015/3
Snapchat
Social app
2%
13,333
200
22
2015/2
Meizu
Smartphone
29%
2,034
590
23
2014/12
Tedou
Innovative camera
Hundred millions of $
Cyber security
100%
Hundred millions of $
24
2014/12
hk515.com
Doctor booking
25
2014/11
KTPlay
Social gaming platform
26
2014/11
V-Key
Mobile security sofware marker
27
2014/11
MOMO
Dating app
28
2014/11
Huayi Brother
Entertainment
29
2014/10
Liu Liu
Pet dating
A round
Millions of $
30
2014/10
TimeHut
Note recording
A round
Millions of $
31
2014/9
Shiji Information Tech
Hotel technology
32
2014/9
Peel
TV remote app
D round
50
33
2014/9
Moman Camera
Camera app
A round
10
34
2014/8
bale.cn
Online video -original content
C round
35
2014/8
iTown
WiFi marketing system
36
2014/7
hk515.com
Online medical appointment
B round
37
2014/7
Kabam
Game developer
E round
38
2014/6
UCWeb
Web browser
39
2014/6
Evergrande Football Club
Soccer club
40
2014/6
Super class timetable
Class timetable tool
41
2014/5
Ka Xing Tian Xia
Road transport supply chain
42
2014/5
Youku Tudou
Online video
43
2014/5
OneTouch
eCommerce custom services
44
2014/5
Mei Tuan
O2O
C round
560
Millions of $
B round
21%
242
8%
15%
50
NA
3,022
453
Millions of $
Millions of $
10%
1,200
120
100%
1,775
1,775
50%
NA
Millions of $
17%
6,606
1,090
100%
335
335
45
2014/5
Singapore Post
Postage
10%
2,497
250
46
2014/5
China Smart Logistics
Logistics
48%
560
269
47
2014/5
cfly.com
Online travel
48
2014/4
Autonavi
Navigation system
100%
1,292
1,292
49
2014/4
Weibo
Social network
30%
3,728
1,118
50
2014/4
Alihealth
Internet healthcare
53%
753
399
51
2014/4
Wasu Media
Media
20%
5,242
1,048
100%
532
532
52
2014/4
Vmovier
Media
53
2014/4
Lyft
Taxi-hailling
54
2014/4
Hengsheng Electronics
Computer software
55
2014/3
ByeCity
Online travel
D round
B round
56
2014/3
Haier Electronics + Goodaymart House appliances
2%
6,153
123
57
2014/3
Cai Niao
Logistic system
48%
722
347
58
2014/3
ShopRunner
eCommerce
39%
59
2014/3
TangoMe
Mobile messaging
20%
60
2014/3
Intime Retail
Commercial property manager
33%
2,116
688
61
2014/3
Alibaba Picture
Entertainment
50%
1,615
62
2014/2
INMAN
Apparel
63
2014/2
Tutor Group
Online education platform
64
2014/1
FirstDibs
Luxury eCommerce
65
2013/10
Tian Hong Fund
Mutual fund manager
Online travel
66
2013/6
Qyer
67
2013/4
Didi Kuaidi
Taxi-hailling
68
2013/4
XiaMi
Online music
69
2013/4
Umeng
App development platform
799
Millions of $
B round
15
51%
~10%
95%
Note: A-E refer to the funding round that Alibaba acquired stock in.
Source: Company data, Sina News, Yahoo News,
53
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
Date
2015/8
2015/8
2015/7
2015/4
2015/3
2015/2
2015/2
2015/2
2015/2
2015/2
2015/1
2015/1
2015/1
2015/1
2015/1
2014/12
2014/12
2014/12
2014/12
2014/12
2014/11
2014/11
2014/11
2014/11
2014/11
2014/11
2014/11
2014/11
2014/11
2014/11
2014/9
2014/9
2014/9
2014/9
2014/9
2014/9
2014/8
2014/7
2014/7
2014/7
2014/6
2014/6
2014/5
2014/5
2014/5
2014/4
2014/3
2014/3
2014/3
2014/3
Names
Kik Interactive
Ren Ren Car
ly.com
Dian Ping Mei Tuan
Cyanogen
Beautiful flowers
e home clean
Miniclip SA
M4JAM
Robot Entertainment
Cheng Mi Wang
Nanjing Zero Line
Easy Exam / easy to think should learn
BitAuto
E Le Me
WiWide
Kamcord
Aiming
Playdots
Bread Travel
Everyone Express Network
Huayi Brothers
4:33 Creative Lab
heirloom
Blink quick look
Registered Network / Micro Medical
China LotSynergy (CLS)
Pocket Shopping
Tile
58.com
Ding Xiang Yuan
e home clean
Wo Qu Lv Xing
Red Dot live / Red Dot Tech.
AltspaceVR
PATIGames
Kua Kao Education
Rongchang e wash bag
Scaled Inference
Excellent A / micro school tomorrow
PICOOC Bin engraved Prius / Latin
TapZen
Optimus Prime / play games network
Same / RunStudio buns Tech.
Navinfo
Weebly
JD.com
Trading treasure
Locke / E-House China
Fu Tu Securities
Nature of business
Rounds
Messaging
D round
Used car C2C eCommeC round
Online travel service provider
Group buy
F round -Pre IPO
Tech.
C round
eCommerce
Seed, Angel
House cleanning
B round
Online games website A round
Free lancing
A round
Video game
A round
City guid
A round
Take away platform
B round
A round
Car verticle
Strategic Inv.
Take away platform
E round
WIFI services provider C round
Mobile game developer B round
Mobile game developer C round
Mobile game developer A round
Online travel
C round
Logistics
A round
Entertainment
Strategic Inv.
Mobile game developer A round
SNS
Seeds Angel
SNS
A round
Doctor booking
C round
Appointment booking IPO+beyond
eCommerce
C round
Tech. hardware
A round
Classified
IPO market + beyond
Online healthcare
C round
House cleanning
A round
Online travel
B round
Live broadcast
A round
Tech. hardware
Seeds Angel
Game developer
Strategic Inv.
Education
B round
LBS
Seeds Angel
Tech. hardware
Seeds Angel
A round
Health care
B round
Game developer
A round
Game
B round
A round
Inv.
Corporate services
C round
eCommerce
F round -PreIPO
F round -PreIPO
IPO market and beyond
Stock broker
A round
51
52
53
54
55
56
57
58
59
60
61
62
63
64
65
66
67
68
69
70
71
72
73
74
75
76
77
78
79
80
81
82
83
84
85
86
87
88
89
90
91
92
93
94
95
96
97
98
99
100
Date
2014/3
2014/3
2014/2
2014/2
2014/1
2014/1
2014/1
2014/1
2014/1
2013/12
2013/11
2013/11
2013/9
2013/6
2013/6
2013/4
2013/3
2013/2
2013/1
2013/1
2013/1
2013/1
2013/1
2012/8
2012/7
2012/7
2012/6
2012/5
2012/3
2012/3
2012/2
2012/11
2012/11
2012/11
2012/11
2011/11
2011/11
2011/10
2012/9
2012/1
2012/1
2012/1
2011/6
2011/6
2011/6
2011/6
2011/4
2011/1
2011/1
2010/8
Names
Whisper
CJ Games
Brush Masters / mushroom cloud
The same way network
Didi Kuaidi
Everyone loan
Star Year of the Internet / national hero / art dynamic entertainment
China South City
Section Ling Hang Core Spatial Info. Tech.
Good buy fund network / good fortune to buy
Rose only special love Florist
iDreamSky
e home clean
Snapchat
Kinsoft
Thailand Sage Software Togic / Taijie video
Maple browser ChromePlus
JiaThis screening
Church-play
Jinghe think of moving BlingStorm
365 Calendar Network / ask Japan Science and Tech.
Shadowcraft Network Prayaya/Shadowcraft desktop
Security Manager /Security Management Best Tech.
Brush Elf /Bottle Tech.
Soma Tech.
Philharmonic Tour game
Le Frog Tech.
The same way network / with the way Tourism
Le brush / Shift Card Tech.
Brush Masters /Mushroom Cloud
Hot Cool Rekoo
Year-know
Beautiful says
Quack video / octave Internet Tech.
Cheetah secure browser /Cheetah Mobile
HangZhou ShunWang
Workec
Kaixin001
Everyme
Valley was the game
Cubic Network
Trading treasure
Kela
Mamacn.com
Innovation Works
Okbuy.com
YouXiGu
In Lung Ching
MyTT Live / Pollex Network
Comsenz
Nature of business
SNS
Game developer
Taxi-hailing app
Finance
Game developer
Rounds
C round
Strategic In
B round
C round
May 17, 2016
Exhibit 79: Tencent: Over 100 investments in the past five years
A round
B round
Strategic In
Purchase
B round
B round
C round
Seeds Ange
B round
Software
A round
Purchase
B round
Seeds Ange
A round
B round
Purchase
Purchase
Purchase
A round
A round
A round
B round
A round
A round
B round
D round
A round
Mobile app developer B round
Internet entertainment platform
CRM
White collar social network
Social address book
A round
B round
Purchase
Online jewelry retailer
Online maternity services portal
Kai-Fu Lee's early stage Inv. co.
Online shoe retailer
SEVEN developer
A round
Purchase
Community platform dev. (Discusz)
Note: A-F refer to the funding round that Tencent acquired stock in.
54
In US$ mn
Amazon
Facebook
Google
BAIDU
ALIBABA
TENCENT
JD.COM
Revenue, 2015
EBITDA, 2015
Net Income 2015
$107,007
$10,805
$596
$17,927
$11,216
$3,689
$60,646
$29,626
$13,560
$10,562
$2,876
$5,577
$14,242
$7,414
$6,447
$16,539
$7,294
$5,211
$28,846
-$117
-$135
Ecommerce
Social
Search, video
Search, video
Ecommerce
Social, gaming
Google Play
MobileAsst.
Core traffic drivers
1
App store
2
Autos
3
Browser
4
Classified/local svc O2O
5
Cloud computing
6
Ecommerce
7
Games
8
Hardware
9
Appstore
Chrome
Amazon
Google Express
Oculus Story
Studio
Kindle, Fire,
Echo
Oculus VR
11 Internet finance
12 Literature
13 Logistics
QQ
58.com (25%), ele.me,
Meituan
Baidu Cloud
Ali Cloud
Wei Cloud
MiCloud
Baidu Mall
Tmall, Taobao,
Juhuasuan
JD.com (18%)
MiMall
Kaola
Across PC, mobile
MIUI Appstore
PC, Mobile
Amazon
Payments
Baidu Wallet (Baixin Bank, Citic
JV pending approval),
Bai An (Digital insurance-Baidu,
Allianz, Hillhouse)
Audible
Baidu Reading
Amazon
Lottery
Mobile OS
Fire OS
Graph Search
Google
Security
Dingding
QQ IM
Ant Fin. (37% profit
share), MYBANK
(~12%)
WeBank (30%),
WePay, TenPay, Citic
Cap. (23%), Webank
(30%)
Weixin Lottery
Autonavi
Navinfo (11%)
FB, IG
Google +
Transport apps
Travel
Prime Video
UGC
Youtube
25 Media
etao
MiWallet
Lede
360 Lottery
360 Security
OS
OS
Sogou
Qihoo
360 Safeguard
Didikuadi (na)
Ctrip (~25%)
Alitrip
eLong (15%)
iQiYi/PPS
YOKU, Alipic
Shoprunner, Zulily,
Aliexpress
South China Morning
Post
QQ Video
MIUI App Sore
Yixin
Gaming
Tuniu
Game: Riot Games, CJ
Tencent News
55
Source: Company data, Goldman Sachs Global Investment Research
JD Finance
YiChat
QQ Doctor
Weixin, Qzone
Baidu News App
MiLiao
TOS+
Weibo (30%)
24 International, major
JD Pharma
JD
Didikuadi (na)
Uber (inv.)
Coolpad
Leju (16%)
Baidu Security
Social
360 Mob. Asst.
Webgame
China Reading (66%)
Cainiao, Haier Log,
Sing Post (10%)
Taobao Lottery
YunOS
Baidu.com
Mi range
Ali Health
Baidu Property
Search
Video/content
Baidu Map
Android
Real Estate
360 Broswer
Meizu (~18%)
Baidu Doctor
Google Maps
360 Mob. Asst.
UC Web
DingXiangYuan,
GuaHao.com
Gaming, security
BITA (25%)
Koubei, Meituan,
ele.me, Intime
Whatsapp,
Messenger
Maps
MIUI App Sore
Baidu
Nexus
QIHOO
$3,596
$1,284
$1,170
Nuomi
91-W, B-gamecenter
Healthcare
10 IM
14
15
16
17
18
19
20
21
22
23
Google Cloud
Platform
AWS
BITA (~6.75%, 3.3% dir)
NETEASE
Ecommerce Smartphone, OS Gaming
Yingyongbao
Ali Autos
XIAOMI
May 17, 2016
Exhibit 80: Chinese internet companies have much deeper vertical exploitation than global peers
May 17, 2016
Appendix 3: Valuation and risks
Exhibit 81: China Internet – Summary valuation methodology and key risks
Company name Ticker
TP method
Key risks
Alibaba
BABA
SOTP
Slower GMV growth, lower monetization, competition.
Baidu
BIDU
SOTP
Search growth slowing, higher O2O spend.
Tencent
0700.HK
28x CY17 PE
Slower-than-expected economy pressuring advertising revenues, more intense competition from Alibaba
Group/NetEase etc.
58.com
WUBA
35x CY17 PE
(+/-): Faster/slower-than-expected cost saving and revenue synergies, higher/ lower-than-expected contribution
from Tencent partnership and new businesses.
Changyou.com
CYOU
8x CY17 PE
Mobile games stronger-than-expected, better-than-expected marketing spending.
Ctrip.com Int'l
CTRP
SOTP
Lower-than-expected air ticket/hotel volume growth/margins, fiercer-than-expected competition.
JD.com
JD
DCF
Slower-than-expected GMV and revenue growth due to weak macro.
Jumei
JMEI
16x CY17 PE
(+): Lowering of Passenger Parcel tax for cosmetics. (-) Tougher-than-expected competition.
NetEase
NTES
17x CY17 PE
Weaker performance of legacy games, lower margin.
Qunar.com
QUNR
DCF
(+/-): Improved/deteriorated business relationship with airlines/collaboration execution, and better/worse-thanexpected cost control.
SINA Corp.
SINA
SOTP, 50% disc.
(+/-): Stronger/softer-than-expected Weibo/Portal performance, higher/lower-than-expected margins, further
collaboration with Alibaba (upside).
Sohu.com
SOHU
SOTP
Stronger macro economy recovery and less intensive competition in online video.
SouFun Holdings SFUN
20x CY17 PE
(+) Better-than-expected China property market, faster-than-expected market share gain. (-) Fiercer
competition, unsuccessful business transition.
Tuniu
TOUR
DCF
(+/-): Better-/worse-than-expected revenue growth, margins, competition.
Vipshop
VIPS
22x CY17 PE
Faster-than-expected revenue slowdown on lower user growth, margin compression.
Weibo
WB
23x CY17 PE
Better/worse-than-expected SME revenue growth/video-related costs.
Source: Goldman Sachs Global Research Investment.
56
May 17, 2016
Appendix 4: TAM table in details
Exhibit 82: China Internet: TAM analysis into the ‘Seven Pillars’
The online opportunity (ex-finance) is potentially >Rmb13tn
RMB bn
2014
2015
2016E
2017E
2018E
2019E
2020E
Cagr 15-20
GDP
63,689
67,940
69,428
74,161
79,040
85,067
91,383
6.1%
TAM assessment, by category
1. RETAIL
E-Commerce
BABA (China retail)
JD
VIPS
Others
26,239
2,790
11%
2,274
260
37
219
30,093
3,877
13%
2,951
447
64
417
33,403
5,079
15%
3,555
665
84
776
36,744
6,400
17%
4,166
904
106
1,224
40,051
7,744
19%
4,819
1,173
124
1,628
43,455
8,983
21%
5,495
1,460
139
1,890
46,931
10,151
22%
6,149
1,739
151
2,112
9%
21%
9pp
16%
31%
19%
38%
396
154
39%
467
210
45%
553
276
50%
629
345
55%
699
411
59%
770
480
62%
842
552
66%
13%
21%
21pp
53
41
32
3
14
11
46
43
3
40
36
4
8
5
3
2
71
52
47
5
22
13
59
54
5
56
49
7
18
9
10
2
92
67
63
10
31
13
71
64
7
77
66
10
29
13
17
3
114
80
81
13
43
13
82
74
8
97
83
14
44
18
26
3
136
91
97
16
55
15
97
88
10
115
96
18
58
24
34
4
158
104
116
20
69
13
113
102
11
130
108
22
73
30
43
4
182
117
134
24
85
10
131
118
13
143
118
25
87
36
52
5
21%
18%
24%
36%
31%
-6%
17%
17%
20%
21%
19%
30%
36%
32%
40%
18%
3. TRAVEL (OTA TGT.)
OTAs
Ctrip (incl. Qunar)
Tuniu
1,308
366
28%
235
5
1,444
527
37%
377
11
1,590
634
40%
491
18
1,744
758
43%
651
28
1,908
901
47%
827
42
2,089
1,056
51%
1,013
57
2,270
1,231
54%
1,204
73
9%
18%
18pp
26%
47%
4. LOCAL SERVICES (O2O)
Online
Baidu - O2O
Meituan (incl. Dianping)
5,329
237
4%
7
68
5,992
324
5%
36
185
6,641
438
8%
75
241
7,280
575
10%
131
311
7,936
730
12%
196
387
8,571
900
12%
255
468
9,256
1,111
12%
293
566
9%
28%
7pp
52%
25%
110
28
83
49
11
38
10
1
9
4
16
32
51
12
32
16
41%
46%
144
56
87
64
21
43
18
8
10
4
27
30
57
30
30
27
38%
49%
183
91
92
77
30
47
25
16
9
3
45
33
59
46
33
45
33%
51%
221
125
96
90
38
52
28
20
9
3
68
32
63
58
32
68
30%
54%
251
152
99
100
45
55
33
23
9
3
84
32
67
68
32
84
30%
56%
266
164
102
111
51
59
36
26
9
3
86
30
72
78
30
86
31%
58%
277
172
105
120
57
63
39
29
10
3
87
29
76
86
29
87
33%
60%
14%
25%
4%
13%
22%
8%
16%
28%
0%
-6%
27%
-1%
6%
24%
3,049
44
1
3,593
56
2
1
4,107
72
5
3
4,577
90
9
5
4,995
100
14
8
5,361
114
23
14
5,675
127
35
23
10%
18%
80%
89%
2. ADSPEND
Online Adspend
Among:
Search adspend
Brand adspend
Video adspend
Classified adspend
Social adspend
Others
BAIDU
- Core search
- Video
Alibaba
- China retail
- Video
Tencent
- Brand
- P4P
Netease - advertising
5. ONLINE GAMES
Mobile
PC+browser
Tencent
- Mobile
- PC
Netease
- Mobile
- PC
Changyou
Other - mobile
Other - PC
PC - coverage total
Mobile - coverage total
PC- non-covered
Mobile-non-covered
Tencent - mobile (% total)
Tencent - PC (% total)
6. IT SPENDING
Cloud computing
Ali Cloud
Tencent
Online, ex-finance
3,701
5,138
6,682
8,389
10,137
11,799
13,449
21%
7. FINANCE
a. Total bankcard transaction
Online transaction
6,990
495,331
1.4%
6,967
9,713
569,631
1.7%
9,641
13,385
646,531
2.0%
13,175
18,118
730,580
2.4%
17,568
23,611
818,250
2.7%
22,396
29,295
908,257
3.0%
27,096
36,047
1,008,165
3.2%
32,727
30%
12%
2pp
28%
b. TSF excl. bond and equity
% of total bank loans
Online bank loans
110,612
0.0%
23
125,461
0.1%
73
142,303
0.1%
211
159,272
0.3%
550
178,264
0.7%
1,215
199,520
1.1%
2,199
223,311
1.5%
3,321
12%
1pp
115%
36,432
57.2%
3,701
10%
9%
41,733
61.4%
5,138
12%
11%
46,477
66.9%
6,682
14%
12%
51,195
69.0%
8,389
16%
14%
55,839
70.6%
10,137
18%
15%
60,511
71.1%
11,799
19%
17%
65,252
71.4%
13,449
21%
18%
21%
8pp
7pp
Total Addressable Mkt. (ex finance)
% of GDP
Online (ex finance)
% of TAM online
% of TAM online (ex ecomm)
Companies with exposure
Baidu, Qihoo, Sogou, Google China
Alibaba, Sina, Sohu, NetEase, Alibaba, Tencent
Youku, iQiyi, Tencent, Sohu, LeTV
58.com, Autohome, SouFun
Tencent, Weibo
Ctrip, Qunar, Alitrip, Tuniu
Meituan, Baidu Nuomi, Koubei
On a consolidated basis
9%
Source: Company data, iResearch, eMarketer, Wind, Goldman Sachs Global Investment Research.
57
May 17, 2016
Exhibit 83: China internet profit pool estimates
Online adspend, online games and e-commerce are the top 3 profit pool contributors by 2020E
2015
Profit pool (Rmb bn)
1.
2.
3.
4.
RETAIL
E-Commerce
BABA (China Retail Commission)
JD
VIPS
Others
ADSPEND
Online Adspend
BAIDU
- Core search
- Video
Alibaba
- China retail
- Video
Tencent
- Brand
- P4P
Netease - advertising
TRAVEL (OTA TGT.)
OTAs
Ctrip
Tuniu
Others
LOCAL SERVICES (O2O)
Online
Baidu - O2O
Koubei (2015 annualized)
Meituan
5.
ONLINE GAMES
Mobile
PC+browser
Tencent
- Mobile
- PC
Netease
- Mobile
- PC
Changyou
Other - mobile
Other - PC
PC - coverage total
Mobile - coverage total
PC- non-covered
Mobile-non-covered
6.
Cloud computing
Ali Cloud
Tencent
Total, ex finance
7.
FINANCE
a. Online payment
b. SME lending
OP
Split
OP/TAM
OP
Split
Exposure/Comment
0.3%
0.5%
-1.0%
4.1%
0.3%
13
13
(4)
3
1
17%
16%
-5%
3%
1%
0.8%
0.7%
1.3%
4.4%
0.3%
79
43
23
7
6
20%
54%
29%
8%
8%
Sustainable dominance in marketplace
Long-term market share gainer
Leader in flash sales model
Other emerging categories/companies
43.1%
42.5%
50.5%
-45.0%
41.8%
50.0%
-19.8%
50.0%
50.0%
50.0%
35.0%
59
25
27
(2)
23
25
(1)
9
4
5
1
80%
29%
32%
-3%
27%
29%
-2%
11%
5%
6%
1%
46.2%
46.6%
50.0%
15.0%
43.9%
50.0%
15.0%
50.0%
50.0%
50.0%
35.0%
169
61
59
2
63
59
4
44
18
26
2
43%
36%
35%
1%
37%
35%
2%
26%
11%
15%
1%
Baidu, Tencent, Alibaba
-0.4%
0.3%
-13.0%
(2)
1
(1)
-3%
1%
-2%
1.0%
0.9%
-0.8%
0.9%
12
11
-1
2
3%
86%
-5%
19%
-9.4%
(30)
-41%
0.6%
7
2%
NM
(12)
(8)
(17)
-13%
-9%
-20%
1.5%
3
1%
32.2%
46
11
35
30
9
21
8
2
6
2
1
5
29
11
5
1
63%
15%
47%
35%
10%
25%
10%
2%
7%
2%
1%
6%
34%
12%
6%
1%
38.4%
106
43
63
70
26
44
15
8
7
1
9
11
52
34
11
9
27%
11%
6%
15%
5%
9%
3%
2%
1%
0%
2%
2%
11%
7%
2%
2%
-20.0%
-40.0%
-40.0%
(11)
(0)
(0)
-15%
0%
0%
15.0%
20.0%
20.0%
19
7
5
5%
1%
1%
74
86%
2.9%
393
83%
1.4%
No.1 in China's search market
iQiyi
YouKu
Tencent video and Tencent news
Weixin and Qzone
Portal, news, mailbox, etc.
5% take rate, 20% margin, incl. outbound
No.1 OTA in China
Niche player focusing on packages
6% take rate, 10% margin
0.1%
12
14%
0.2%
80
17%
0.1%
2.3%
10
2
12%
2%
0.1%
1.4%
33
47
7%
10%
0.18% take rate, 57% margin
9% interest rate, 36% margin (incl. 2.5% credit cost)
TOTAL
Alibaba
Baidu
Tencent
BAT Total
2020E
OP/TAM
86
OPM (%)
607.5%
19.7%
40.6%
55.2%
2015
OP
42
13
42
97
473
Split
58%
18%
57%
132%
OPM (%)
748.4%
32.8%
42.1%
68.0%
2020E
OP
141
55
112
308
Split
36%
14%
29%
78%
58
May 17, 2016
Appendix 5: TAM detail in RMB
Exhibit 84: Seven Pillars of China Internet
TAM = Total Addressable Market. The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the whole industry size. Top 2 players is by
market share. CAGR is for 2015-2020E (in RMB).
59
May 17, 2016
Disclosure Appendix
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Disclosures
Coverage group(s) of stocks by primary analyst(s)
Piyush Mubayi: Asia Pacific Media, Asia Pacific Telecoms. George Meng, CFA: Asia Pacific Media. David Jin, CFA: Asia Pacific Media. Fan Liu, CFA:
Asia Pacific Media.
Asia Pacific Media: 58.com Inc., Alibaba Group Holding, Astro Malaysia Holdings, Autohome Inc., Baidu.com Inc., Changyou.com, China Distance
Education Ltd., Ctrip.com International, Info Edge India Ltd., JD.com Inc., Jumei International Holding, Just Dial Ltd., Kakao Corp., Makemytrip Ltd.,
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Investment Banking Relationships
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15%
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Battle of the Internet giants IV: TAM`ing the profit pool

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