ebook img

Battle of the Internet giants IV: TAM'ing the profit pool PDF

62 Pages·2016·1.36 MB·English
by  
Save to my drive
Quick download
Download
Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.

Preview Battle of the Internet giants IV: TAM'ing the profit pool

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 BUY-RATED NAMES WITH KEY EXPOSURE TO SEVEN PILLARS long term growth and potential (operating) profit pool for China Internet. Tencent* Baidu Alibaba JD.com This is in contrast to 2010-15 when margins slipped on high competition, Games  Online Ad.    there was a need to acquire customers, and an impetus to tackle new E‐commerce   entrants. As such, we believe now is the right time to examine the 2020E Travel   Local Services     industry profit pool verticals we call the ‘Seven Pillars’ – games, online Internet Finance     advertising, e-commerce, travel, local services, internet finance, and cloud. Cloud Computing    *Denotes stock is on our regional Conviction List Four key takeaways Source: Company information, Goldman Sachs Global Investment Research. On TAM: Mobiles have exploded the overall total addressable market (TAM), with our estimates (ex-fins) suggesting a ~US$10tr opportunity by SEVEN PILLARS OF CHINA INTERNET 2020. We believe the market has underappreciated the stickiness of PC 1. Games: China, living in a virtual world gaming and the attraction of mobile games. The next main sector growth 2. Online advertising: Social, online video and search are growth engines drivers should come from financial services and local services going online. 3. E-commerce: 3x increase to US$1.5tn by 2020E 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 5. Local services O2O: Building a second BABA, US$1.4tn TAM (2020E) profitability, as was the case with Ctrip in 2010, Baidu in 2011 and Alibaba 6. Internet Finance: Tapping the underbanked China in 2013, when operating profit margins were at record levels. 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 RELATED RESEARCH businesses, we have started moving towards SOTP valuations to reflect an Tencent Holdings (0700.HK): Weixin: the north star (2); increasing degree of confidence in synergistic growth. Leveraging current multiple drivers intact; reiterate CL-Buy, April 13, 2016 assets and positioning for the next major opportunities (internet finance, China: Technology: Internet: Upcoming MSCI inclusions: What to own; Tencent to CL-Buy, November 30, 2015 O2O) will be key. NetEase Inc. (NTES) Buy: Games leader and new growth On who is best positioned: Those with social network assets appear best seeker; initiate at Buy, November 25, 2015 positioned, due to the growth opportunity, the significant barriers to entry, China: Technology: Internet: Shopping sans frontières: Buy China online retail – BABA/JD/VIPS, November 6, 2015 the substantial upside to ad-loads, and the time spent on the app. China: Technology: Internet: Planes, Trains, and Hotel Rooms; Buy Ctrip, Qunar, October 26, 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 We are positive on Tencent (CL-Buy), Baidu (Buy), and Alibaba (Buy) given marginalization, November 14, 2014 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 Goldman Sachs does and seeks to do business with +852-2978-1677 [email protected] Goldman Sachs (Asia) L.L.C. companies covered in its research reports. As a result, George Meng, CFA +852-2978-0178 [email protected] Goldman Sachs (Asia) L.L.C. investors should be aware that the firm may have a conflict of David Jin, CFA interest that could affect the objectivity of this report. Investors +852-2978-1466 [email protected] Goldman Sachs (Asia) L.L.C. should consider this report as only a single factor in making Fan Liu, CFA their investment decision. For Reg AC certification and other +86(10)6627-3192 [email protected] Beijing Gao Hua Securities Company Limited important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research May 17, 2016 China: Technology: Internet 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 1. Games: China, living in a virtual world 11 2. Online advertising: Social, online video and search are growth engines 19 3. E-commerce: 3x increase to US$1.5tn by 2020E 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 7. Cloud computing: A ~US$20bn opportunity (2020E) 46 Appendix 1: China internet usage 51 Appendix 2: M&A summary 52 Appendix 3: Valuation and risks 56 Appendix 4: TAM table in details 57 Appendix 5: TAM detail in RMB 59 Disclosure Appendix 60 All prices in this report as of May 13, 2016, unless otherwise noted. The authors would like to thank Jason Huang, Elsie Cheng, Shaphan Ng and Kenneth Bang for their valuable contributions to the report. Exhibit 1: China Internet Comps P/E, non-GAAP PE at TP Last Target +/- Mkt Cap Performance diluted EV/Revenue PEG non-GAAP Company Ticker fx Price Price Side Rating (US$mn) 3Mo YTD 2016E 2017E 2016E 2017E 2016E 2016E 2017E China Internet 58.com WUBA $ 5 0.50 6 4.0 27% Neutral 5 ,803 14% -23% NM 27.8x 4.2x 2.9x NM NM 35.2x Alibaba BABA $ 7 7.16 1 00.0 30% Buy 1 96,758 27% -5% 27.0x 21.6x 8.7x 6.8x 1.1x 35.0x 28.1x Autohome ATHM $ 2 4.80 - - Not Rated 2 ,904 4% -29% 16.2x 12.6x 2.6x 2.2x 0.6x - - Baidu BIDU $ 1 59.75 2 20.0 38% Buy 5 6,520 5% -15% 26.6x 17.8x 4.2x 3.5x 0.6x 36.7x 24.5x Changyou CYOU $ 1 7.67 1 6.9 -4% Sell 9 34 9% -29% 9.2x 8.4x 0.7x 0.7x 1.1x 8.8x 8.0x Ctrip CTRP $ 4 3.01 5 5.0 28% Buy 2 1,017 16% -7% 80.8x 30.0x 7.1x 5.3x 0.8x 103.3x 38.4x JD.com JD $ 2 2.64 33.0 46% Buy 3 1,092 -2% -30% NM 50.5x 0.7x 0.5x NM NM 73.7x Jumei JMEI $ 5 .29 9 .5 80% Neutral 7 99 -4% -42% 14.2x 8.8x 0.5x 0.4x 0.3x 25.4x 15.9x NetEase NTES $ 1 53.40 1 82.0 19% Buy 2 0,281 11% -15% 14.0x 14.3x 3.2x 2.5x 1.9x 16.6x 17.0x Qunar QUNR $ 3 5.75 4 5.0 26% Neutral 5 ,272 2% -32% NM 98.5x 6.3x 4.5x NM NM 124.0x Sina SINA $ 4 5.50 4 8.0 5% Neutral 2 ,683 9% -8% 28.1x 21.3x 1.2x 1.0x NM 29.7x 22.5x Sohu SOHU $ 3 9.52 4 1.0 4% Sell 1 ,529 -11% -31% NM 21.5x 0.4x 0.3x NM NM 22.3x SouFun SFUN $ 5 .58 6 .8 22% Neutral 2 ,376 15% -24% NM 16.5x 1.3x 0.9x NM NM 20.1x Tencent 0700.HK HK$ 1 55.10 1 93.0 24% Buy* 1 88,386 16% 2% 28.6x 22.5x 8.6x 7.0x 1.2x 35.6x 28.0x Tuniu TOUR $ 8 .97 1 5.0 67% Neutral 1 ,190 -18% -44% NM NM 0.4x 0.3x NM NM NM VIPShop VIPS $ 1 2.00 1 7.5 46% Buy 7 ,663 10% -21% 18.8x 14.7x 1.0x 0.8x 0.8x 27.4x 21.4x Weibo WB $ 2 3.30 2 2.0 -6% Neutral 5 ,195 93% 19% 43.7x 24.4x 8.0x 5.6x 0.7x 41.3x 23.0x Median (Sum for Mkt cap) 26% 5 50,401 9% -23% 26.6x 21.4x 2.6x 2.2x 0.8x 32.3x 23.0x 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: Technology: Internet 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 Total Internet Users(mn) 70% 900 Mobile Internet Users(mn) 60% Internet users penetration %(RHS) 800 700 50% 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. Goldman Sachs Global Investment Research 3 Exhibit 4: The China internet opportunity in a global context M G oldm ay 17 an , 2 Sach CPohpuilantiaon 016 s G 1,376mn lo Internetpenetration 13% ba 50% Japan l In GDP Population 37% 50% ve $10,847bn 127mn stme e$C7o2m1mb+nTr a-vNel+oA.d1s size I9n1te%rnetpenetration 45% nt R G$D4P,121bn e s eComm+Travel+Adssize ea Europe $116bn -No.4 rc h Population 822mn Internetpenetration India Korea US 74% G$1DP6,947bn P1o,2pu5la2timonn P4o9pmulantion P3o2p1ulmatinon 5% e$C3o8m3mb+nTr a-vNel+oA.d3ssize I3n0te%rnetpenetration I9n2te%rnetpenetration I8n7te%rnetpenetration 34% GDP GDP GDP $2,060bn $1,357bn $17,943bn 26% eComm+Travel+Adssize eComm+Travel+Adssize eComm+Travel+Adssize $36bn -No.6 $48bn -No.5 $559bn -No.2 9% 70% Internet Penetration 7% 10% 1% 10% eCommerce 45% 47% 39% 66% Travel 31% 32% 14% 28% 26% Advertising 13% 8% Note: Data as of 2015. Source: eMarketer, Phocuswright, InternetWorldStats, Goldman Sachs Global Investment Research. C h ina : T e c h n o lo g y : In te rn 4 et May 17, 2016 China: Technology: Internet China Internet in Numbers CHINA INTERNET USER CHINA INTERNET USER DEMOGRAPHICS 75% users between 10-39 years old 620mn mobile internet users = 2x US pop. 72% from urban cities China has 620mn mobile internet users, 90% of the 688mn 54% of internet users total internet users. Internet penetration has surpassed Age: 10‐39 are male, 67% are of 50%, and we expect it to grow to 60% with 847mn internet secondary/high school 75% users in 2020E. educational level. ONLINE ADVERTISING E-COMMERCE ADS Online ad spend as % of total ad spend: Online penetration to reach 22% in 2020E China: 45% vs. US: 33% from 13% in 2015. TAM: Rmb552bn in 2020E, 21% CAGR in 2015-20E. We Category penetration (2014): forecast search ad spend is currently ~33% of the market Books & Magazines: 40% Phones: 19% and social ad spend to grow fastest at 31% CAGR (2015- Apparel: 31% Digital: 17% 20E). Cosmetics: 22% Home appliance: 10% GAMES TRAVEL China surpassed the US as the world's 2014 OTA penetration in China: 28% 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. 1. People booking trips online in China: 260mn  4th most eSport player population to grow at 23% CAGR (2015- populated country: Indonesia. 2018E). 2. Trips booked on mobile platforms 34% as of online. LOCAL SERVICES/O2O CLOUD COMPUTING China cloud market to grow at 18% CAGR to Online penetration to reach 12% in 2020E Rmb127bn by 2020E 70% of movie tickets booked online in 2015, up from IaaS, PaaS and SaaS in China expected to grow at 45%/25% in 2014/2013. 51% of the bookings on mobile. 20%/23%/22% CAGR till 2020E. We expect AliCloud to The top 3 (Maoyan, Weipiao, Gewara) ~55% market share. capture 28% market share in 2020E vs. 3% in 2015. INTERNET FINANCE TENCENT (0700.HK) T BA $ AliPay: 400mn+ real-name registered users 55.2% Weixin users open the app >10 TenPay: 300mn users with bankcards linked times/day and time spent is 2x Facebook. MAU (end-2015): 549mn AliPay and TenPay combined is 67.5% of China's total third Average Weixin user age: 26 party online payment transaction volumes. 86.2% of users are between 18-36 years old 90%+ smartphones installed Weixin in China ALIBABA (BABA) A BAIDU (BIDU) B B T AT No.1 search engine in China. 1,049k SME customers. 407mn active buyers, avg. spend Rmb7,249 per annum Mobiles 60% of 1Q16 rev. Achieved GMV RMB3tn milestone in FY2016. Single's Day 150% Paid Clicks 2015 attracted 115mn buyers, transacted GMV Rmb91bn 100% Cost per click 50% through AliPay; Rural Taobao penetrated over 12,000 of Search rev. 0% China's 600,000 villages. 200720082009201020112012201320142015 -50% Notes: Data as of 2015, unless stated. Sources: Company data, iResearch, eMarketer, CNNIC, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 5 May 17, 2016 China: Technology: Internet 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, e- commerce, 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 M&Ain public space, moving Strong firms go public/ to market structure stability Survival of the gain share -Online travel, "Richest" --EP-2cPo lmenmdeinrcge, ,etc. --OOnnlliinnee gviadmeoin, ge,t c. M&Ain private space -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 Newbusiness ideas, e.g. Developmentphase 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. Goldman Sachs Global Investment Research 6 May 17, 2016 China: Technology: Internet 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 Latest update David Jin, on March 23, 2016 RMB bn 2014 2015 2016E 2017E 2018E 2019E 2020E Cagr 15-20 Companies with exposure GDP 63,689 67,940 69,428 74,161 79,040 85,067 91,383 6.1% TAM assessment, by category 1. RETAIL 26,239 30,093 33,403 36,744 40,051 43,455 46,931 9% E-Commerce 2,790 3,877 5,079 6,400 7,744 8,983 10,151 21% Alibaba, JD, VIPS, Jumei, Netease 2. ADSPEND 396 467 553 629 699 770 842 13% Alibaba, Baidu, Tencent Online Adspend 154 210 276 345 411 480 552 21% 3. TRAVEL (OTA TGT.) 1,308 1,444 1,590 1,744 1,908 2,089 2,270 9% OTAs 366 527 634 758 901 1,056 1,231 18% Ctrip, Qunar, Alitrip, Tuniu 4. LOCAL SERVICES (O2O) 5,329 5,992 6,641 7,280 7,936 8,571 9,256 9% Online 237 324 438 575 730 900 1,111 28% Meituan, Baidu Nuomi, Koubei 5. ONLINE GAMES 110 144 183 221 251 266 277 14% Tencent, Netease, Changyou Mobile 28 56 91 125 152 164 172 25% PC+browser 83 87 92 96 99 102 105 4% 6. IT SPENDING 3,049 3,593 4,107 4,577 4,995 5,361 5,675 10% Cloud computing 44 56 72 90 100 114 127 18% Alibaba, Baidu, Tencent Online, ex-finance 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21% 7. FINANCE 6,990 9,713 13,385 18,118 23,611 29,295 36,047 30% Alibaba, Baidu, Tencent, JD a.Total bankcard transaction 495,331 569,631 646,531 730,580 818,250 908,257 1,008,165 12% % online penetration 1.4% 1.7% 2.0% 2.4% 2.7% 3.0% 3.2% 2pp Change in pp, '15-'20E b.TSF excl. bond and equity 110,612 125,461 142,303 159,272 178,264 199,520 223,311 12% % of total bank loans 0.0% 0.1% 0.1% 0.3% 0.7% 1.1% 1.5% 1pp Change in pp, '15-'20E Total Addressable Mkt. (ex finance) 36,432 41,733 46,477 51,195 55,839 60,511 65,252 9% % of GDP 57.2% 61.4% 66.9% 69.0% 70.6% 71.1% 71.4% Online (ex finance) 3,701 5,138 6,682 8,389 10,137 11,799 13,449 21% % of TAM online 10% 12% 14% 16% 18% 19% 21% 8pp Change in pp, '15-'20E % of TAM online (ex ecomm) 9% 11% 12% 14% 15% 17% 18% 7pp Change in pp, '15-'20E Source: Company data, iResearch, eMarketer, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 7 May 17, 2016 China: Technology: Internet Exhibit 7: China internet profit pool estimates Online adspend, online games and e-commerce are the top 3 profit pool contributors by 2020E 2015 2020E Profit pool (Rmb bn) OP/TAM OP Split OP/TAM OP Split Exposure/Comment 1. RETAIL E-Commerce 0.3% 1 3 17% 0.8% 79 20% Alibaba, JD, VIPS, Jumei, Netease 2. ADSPEND Online Adspend 43.1% 59 80% 46.2% 169 43% Baidu, Tencent, Alibaba 3. TRAVEL (OTA TGT.) OTAs -0.4% ( 2) -3% 1.0% 12 3% 5% take rate, 20% margin, incl. outbound 4. LOCAL SERVICES (O2O) Online -9.4% (30) -41% 0.6% 7 2% 6% take rate, 10% margin 5. ONLINE GAMES 32.2% 4 6 63% 38.4% 106 27% Tencent, Netease, Changyou Mobile 1 1 15% 43 11% PC+browser 3 5 47% 63 6% 6. Cloud computing -20.0% (11) -15% 15.0% 19 5% Alibaba, Baidu, Tencent Total, ex finance 1.4% 7 4 86% 2.9% 393 83% 7. FINANCE 0.1% 1 2 14% 0.2% 80 17% Alibaba, Baidu, Tencent, JD a.Online payment 0.1% 1 0 12% 0.1% 33 7% 0.18% take rate, 57% margin b.SME lending 2.3% 2 2% 1.4% 47 10% 9% interest rate, 36% margin (incl. 2.5% credit cost) TOTAL 8 6 473 2015 2020E OPM (%) OP Split OPM (%) OP Split Alibaba 607.5% 4 2 58% 748.4% 1 41 36% Baidu 19.7% 1 3 18% 32.8% 5 5 14% Tencent 40.6% 4 2 57% 42.1% 1 12 29% BAT Total 55.2% 9 7 132% 68.0% 308 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 120% Online penetration: 2020E Cloud Online 100% gaming computing 80% Online advertising 60% Online travel 40% Local E-commerce services 20% 0% Online market size Internet CAGR: '15-'20E finance -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. Goldman Sachs Global Investment Research 8 May 17, 2016 China: Technology: Internet 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 Online Adspend OTA O2O Alibaba, 9% VIPS, 2% Other, 11% Baidu, JD, 12% Other, 30% Alibaba, 27% Ctrip, 26% Other, 23% 11% Alibaba, 76% Sina, 2% Baidu, 28% Other, 73% Tuniu, 1% DiaMnpeiintuga, n5 7% Sohu, 3% Netease, 1% Tencent, 9% Online games Cloud Alibaba, 3% Internet Finance Tencent, 2% Other, 40% Tencent, 45% Others, 33% Alipay, 48% Other, 95% Tencent, 20% Netease, 13% Changyou, 3% Source: iResearch, Analysys, Company data. Goldman Sachs Global Investment Research 9 May 17, 2016 China: Technology: Internet The Seven Pillars of China Internet The Seven Pillars of China Internet 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. Source: iResearch, eMarketer, NBS, CNNIC, Analysys, Wind, Sina news, Goldman Sachs Global Investment Research. Goldman Sachs Global Investment Research 10

Description:
Alibaba, Baidu, and Tencent could be major beneficiaries . The TAM numbers for e-commerce, travel, O2O, cloud, and internet finance relate to the provided investment banking services within the previous twelve months.
See more

The list of books you might like

Most books are stored in the elastic cloud where traffic is expensive. For this reason, we have a limit on daily download.