tencent and sina

August 15, 2013 China: Technology: Internet Equity Research Battle of the internet giants II: Social drives upgrades Social platforms as the center of mobile internet The spate of recent M&A reflects the intensified competition for mobile traffic gateways among the three giants. Traffic patterns indicate that domestic mobile users mainly access content via three channels: apps, browsers, and social platforms, the last of which provides the most compelling user experience with high stickiness, in our view. Social platforms generate referral-based content, which not only delivers timely information to users, but also strengthen their social relationships. Moreover, location-based technology has enabled the creation of new connections, such as via Weixin’s shake-shake function. Social interactions create a vibrant user base that generates recurring traffic, which can now be monetized with the new products. The success of Facebook’s mobile newsfeed suggests mobile advertising will be the next wave of monetization for Weixin. Product upgrades: Weixin 5.0; Sina Weibo “Taobao version” On Aug 5, both Tencent and Sina introduced milestone upgrades to their social platforms. Tencent launched Weixin 5.0, a new version that incorporates enhanced offline-to-online scanning features, payment solution (link to app store), and games. Sina Weibo’s new version dedicated advertising inventory for Taobao merchants. In particular, we view Weixin’s upgrade as a transformational event, as the new features have elevated the app from a pure information exchange tool to a mobile transaction platform. We estimate Tencent will unveil a wide spectrum of entertainment and location-based functionalities, extending Weixin’s scope beyond P2P communications. Monetization roadmap; Tencent to CL-Buy; maintain Buy on Sina We expect Weixin to monetize in three steps, first via value-added services including games and emoticons, followed by advertising, and eventually through mobile e-commerce. We forecast Weixin revenues at Rmb5.3/8.0bn in 2014-15E. At Sina, we expect SME/online merchants’ advertising to remain Weibo’s revenue driver. Alibaba’s commitment to the alliance has translated to improved visibility for Weibo’s customized product launches. We raise Tencent’s 12-m TP to HK$450 from HK$320 (still on 1.0X PEG off 11%/15% higher 2014-15E EPS; blue sky implied value of HK$500 on overseas monetization), maintain Buy and add it to our Conviction List. We retain Buy on Sina with a SOTP-based TP of US$92. TENCENT TP CALCULATION; PEER COMPARISON *See July 22, 2013 report, Yahoo! Inc. (YHOO): Buyback and board update; raising target on Asian investments China: Technology: Internet: Battle of the Internet giants; Ali goes social – May 10, 2013 Tencent Holdings: App Developers Conference highlights the open platform strength – July 4, 2013 Tencent Holdings: Preview Weixin 5.0: Creating the long- tail, location-based inventory – June 10, 2013 Tencent Holdings: Above expectations: Putting concerns to rest – May 16, 2013 Tencent Holdings: The rise of Weixin: China’s social networking leader; Buy – March 8, 2013 YEAR-TO-DATE SHARE PRICE PERFORMANCE Source: Goldman Sachs Global Investment Research Piyush Mubayi +852-2978-1677 piyush.mubayi@gs.com Goldman Sachs (Asia) L.L.C. Goldman Sachs does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification and other important disclosures, see the Disclosure Appendix, or go to www.gs.com/research/hedge.html. Analysts employed by non- US affiliates are not registered/qualified as research analysts with FINRA in the U.S. Fei Fang +852-2978-1466 fei.fang@gs.com Goldman Sachs (Asia) L.L.C. The Goldman Sachs Group, Inc. Global Investment Research Old value (HK$/share) New value (HK$/share)Chg. (%) Implied total value (US$bn) Weixin HK$ 30 HK$ 160 433% US$ 38bn Legacy business HK$ 290 HK$ 290 0% US$ 69bn Tencent 12-m TP HK$ 320 HK$ 450 41% US$ 108bn Global peers: Alibaba Group * US$ 105bn Amazon US$ 162bn Baidu US$ 33bn Facebook US$ 115bn Google US$ 321bn Yahoo US$ 39bn 137% 99% 65% 49% 44% 41% 39% 27% 25% 17% 0% 20% 40% 60% 80% 100% 120% 140% 160% August 15, 2013 China: Technology: Internet Goldman Sachs Global Investment Research 2 Table of contents Social platforms engage users 3 Tencent Holdings (0700.HK): Reiterate Buy; add to Conviction List 4 Weixin monetization road-map & valuation 6 Sina: Reiterate Buy, target price of US$92 13 Appendix 17 Disclosure Appendix 18 The authors would like to thank Fan Liu for her contribution to this report. All prices in this report are as of the market close of Aug 13, 2013, unless mentioned otherwise. Exhibit 1: Valuation comparables *On Conviction List. Source: Company data, Bloomberg, Goldman Sachs Global Investment Research. Company Bloomberg Price Last Target Share px GS Mkt Cap Fiscal Ticker Crcy Price Price return Rating (US$mn) Year 2013E 2014E 2013E 2014E 2013E 2014E 12-15E 13-16E 2013E China Internet 51job JOBS US USD 67.68 NA NA NC 1,956 Dec 23.3 20.3 19.1 14.3 11% 15% NA NA NA Baidu BIDU US USD 141.53 94.00 -34% Neutral 49,504 Dec 28.9 25.6 23.7 20.0 1% 12% 11% 17% 1.7 Ctrip CTRP US USD 45.12 45.00 0% Neutral 5,839 Dec 30.6 23.6 23.0 16.6 15% 30% 24% 28% 1.1 eLong LONG US USD 18.15 NA NA NC 627 Dec NM 40.3 NM NM NM NM NM NA NA Qihoo QIHU US USD 70.46 NA NA NC 8,651 Dec 85.6 45.5 87.8 39.4 12% 88% NA NA NA Sina SINA US USD 82.90 92.00 11% Buy 5,524 Dec 79.0 39.1 109.1 33.2 577% 102% 183% 71% 1.1 Sohu SOHU US USD 61.32 55.00 -10% Neutral 2,347 Dec 23.9 16.6 5.2 3.5 1% 45% 29% 39% 0.6 SouFun SFUN US USD 41.00 31.50 -23% Neutral 3,313 Dec 15.1 12.8 12.2 10.4 28% 18% 21% 15% 1.0 Tencent 700 HK HKD 370.00 450.00 22% Buy* 88,604 Dec 30.1 22.1 22.3 15.6 29% 36% 29% 31% 1.0 Youku Tudou YOKU US USD 23.20 24.00 3% Neutral 3,848 Dec NM 96.3 NM 106.0 NM NM NM NM NA Average 37.3 30.2 37.8 28.8 76% 47% 49% 36% 1.1 China Online Gaming Changyou CYOU US USD 30.19 29.00 -4% Neutral 1,601 Dec 5.3 5.0 3.0 2.0 4% 6% 6% 7% 0.8 Giant Interactive GA US USD 8.11 NA NA NC 1,943 Dec 8.7 8.1 6.2 5.4 10% 8% NM NA NA NetEase NTES US USD 60.89 NA NA NC 7,957 Dec 11.1 9.8 7.5 6.3 22% 13% NM NA NA Perfect World PWRD US USD 20.21 NA NA NC 859 Dec 12.7 10.9 11.5 9.8 -27% 16% NM NA NA Average 12.4 10.8 9.6 7.9 9% 13% 6% 7% 0.8 China Education China Distance Education DL US USD 10.60 NA NA NC 359 Sep 27.8 22.5 NM NM NA NA NM NA NA New Oriental EDU US USD 23.00 23.50 2% Neutral 3,643 May 19.0 15.5 9.6 9.1 18% 23% 24% 20% 1.0 TAL Education XRS US USD 12.67 16.00 26% Buy 989 Feb 19.6 15.8 10.9 10.7 26% 24% 23% 24% 0.8 Xueda XUE US USD 4.26 3.00 -30% Sell 278 Dec 16.6 13.1 2.9 1.2 230% 27% 72% 23% 0.7 Average 20.6 16.4 7.8 7.0 91% 25% 35% 21% 0.8 Asia Internet Daum 035720 KQ KRW 86,800 82,500 -5% Neutral 1,042 Dec 14.7 12.3 10.2 7.9 5% 19% 13% NA NA NCsoft 036570 KS KRW 183,500 230,000 25% Buy 3,563 Dec 21.6 12.0 16.5 8.9 20% 80% 16% NA NA NHN 035420 KS KRW 293,500 295,000 1% Neutral 12,620 Dec 22.4 18.6 17.7 14.3 16% 20% 20% NA NA Average 16.1 14.8 10.2 8.8 3% 9% 13% NA NA Global Media Astro ASTRO MK MYR 3.03 3.40 12% Buy 4,786 Jan 32.2 29.1 19.2 19.2 6% 10% 19% NA NA BSkyB BSY LN GBp 841.00 1,010.00 20% Buy* 20,676 Jun NM NM 4.6 4.5 5% 11% 11% NA NA SBS Media 101060 KS KRW 5,080.00 8,000.00 57% Buy 636 Dec 10.4 9.7 8.3 7.7 125% 8% 42% NA NA CJ E&M 130960 KS KRW 40,050.00 35,000.00 -13% Neutral 1,361 Dec 25.3 22.1 22.3 19.3 160% 14% 50% NA NA Naspers NPN SJ ZAr 841.95 890.00 6% Buy 35,117 Mar 30.1 25.7 65.3 57.0 10% 17% 18% NA NA Sun TV SUNTV IN INR 424.70 430.00 1% Neutral 2,735 Mar 19.4 16.1 11.0 11.2 7% 20% 17% NA NA Television Broadcasts 511 HK HKD 54.25 58.00 7% Neutral 3,064 Dec 13.1 12.3 9.2 8.4 5% 7% 6% NA NA Zee Entertainment Z IN INR 248.60 262.00 5% Neutral 3,899 Mar 24.1 21.2 13.5 17.2 26% 14% 19% NA NA Average 20.4 18.5 25.6 17.2 43% 13% 22% NA NA Global Internet Amazon AMZN US USD 293.97 355.00 21% Buy 134,310 Dec NM 110.2 189.6 57.2 NM 525% NM NA NA Bankrate RATE US USD 17.20 10.00 -42% Sell 1,743 Dec NM 73.3 30.4 24.7 -82% 334% 2% 18% 18.1 Demand Media DMD US USD 6.53 6.00 -8% Sell 586 Dec NM NM NM 4,115.9 NM NM NM 11% NM eBay EBAY US USD 54.12 63.00 16% Buy* 70,060 Dec 24.6 21.2 19.1 15.5 10% 16% 15% 16% 1.6 Expedia EXPE US USD 49.38 62.00 26% Neutral 6,673 Dec 27.1 18.9 18.6 10.7 -16% 43% 12% 17% 1.6 Facebook FB US USD 37.02 46.00 24% Buy 90,153 Dec 74.5 51.4 26.3 19.2 67% 45% NA NA NA Groupon GRPN US USD 10.35 13.00 26% Buy 6,888 Dec NM NM 23.0 16.4 NM NM NM 35% NA Google GOOG US USD 881.25 950.00 8% Neutral 293,650 Dec 22.5 21.3 15.6 12.5 15% 5% 11% NA NA InterActiveCorp IACI US USD 50.18 39.00 -22% Sell 4,436 Dec 18.4 19.1 10.5 10.4 59% -4% 20% 8% 2.2 LinkedIn LNKD US USD 241.82 275.00 14% Buy 26,688 Dec NM NM NM 130.3 40% 251% 123% 49% 18.4 Mail.ru MAIL LI USD 33.80 40.80 21% Buy 7,068 Dec 22.2 19.0 NM NM 17% 17% 19% NA NA Netflix NFLX US USD 259.19 280.00 8% Neutral 15,272 Dec 133.4 52.5 72.9 27.9 558% 154% 197% 70% 1.9 Pandora P US USD 20.85 18.00 -14% Neutral 3,645 Jan NM NM NM NM NM NM NM NM NA Priceline PCLN US USD 953.61 1,200.00 26% Buy 49,111 Dec 26.7 20.9 20.2 15.0 29% 28% 27% 17% 1.6 TripAdvisor TRIP US USD 80.96 70.00 -14% Neutral 11,607 Dec 54.6 41.6 36.8 27.8 8% 31% 20% 12% 4.6 WebMD Health WBMD US USD 33.24 27.00 -19% Sell 1,662 Dec NM NM 33.7 34.9 NM 1% NM 17% NA Yahoo YHOO US USD 28.34 35.00 24% Buy* 28,916 Dec 19.9 16.8 32.7 29.3 -57% 18% NM 4% 5.5 Yelp YELP US USD 51.29 45.00 -12% Neutral 3,345 Dec NM NM NM 221.0 NM NM NM 89% NA Zillow Z US USD 93.30 79.00 -15% Neutral 3,222 Dec NM NM NM NM NM NM NM 75% NA Zynga ZNGA US USD 2.91 3.00 3% Neutral 2,310 Dec NM NM NM NM NM NM NM 34% NA Average 42.0 45.0 56.2 207.6 42% 76% 55% 29% 5.7 P / E (X) EV / EBIT (X) EPS Growth YoY EPS CAGR PEG August 15, 2013 China: Technology: Internet Goldman Sachs Global Investment Research 3 Social platforms engage users Weixin at the center of China mobile internet Channels used to access mobile internet are undergoing rapid changes. Traditionally, desktop computers provide a superior web experience, as the large screens lead to easy navigation and comfortable reading. Since the rise of multi-touch technology in 2007, users’ preference has rapidly shifted to portable and wireless devices. This change has happened on a global basis, and has been in an accelerating mode, as telecom and handset infrastructures become affordable. HTML5’s invention was another milestone for the industry. The mark-up language enabled the playing of multimedia content on simple webpages, offering users a dynamic mobile internet experience. China’s internet population mainly consumes web content on the following platforms: a. App-based. Users download apps that serve their desired functions, and launch these on Android and iOS operating systems. The gatekeepers for the channel are mobile app stores, such as Qihoo and 91 Wireless, which provides download services and handle payment. b. Browser-based. Users access web content within mobile browsers. The gatekeepers are the search services and directory websites. Similar to desktop, Baidu is at the center of distributing mobile browser traffic to content publishers. c. Social-based. Users interact with families and friends in virtual communities. Each user receives and generates referral-based content at the same time. We believe Weixin is the dominant player, similar to Facebook. Among the three, we believe the social platforms provide the most engaging user experience. Weixin stands out as a service that offers timely information, solidifies relationship among individuals, and creates new connections through location-based technologies (e.g. shake-shake feature that finds new friends). These social interactions create a sticky user base with active engagement, serving as Weixin’s sustainable barrier to entry. Exhibit 2: Weixin ranks as the most actively used Asia-based app (2Q13) Source: GlobalWebIndex. 11% 17% 22% 22% 23% 27% 30% 35% 44% 54% 0% 10% 20% 30% 40% 50% 60% Instragram Whatsapp Facebook Messenger Skype Twitter Wexin/WeChat Google+ YouTube Facebook Google Maps % of global smartphone users who have used the app in the past month August 15, 2013 China: Technology: Internet Goldman Sachs Global Investment Research 4 Tencent Holdings (0700.HK): Reiterate Buy; add to Conviction List Source of opportunity On August 5, Tencent launched Weixin version 5.0. We believe the new version has differentiated itself from other popular messaging services overseas. In this upgrade, Weixin showed that its vision stretches far beyond peer-to-peer communication. Tencent is building a broad spectrum of entertainment and location-based functionalities. Catalysts Weixin version 5.0 has enabled the purchases of virtual items through the Apple app store. We view the development as an important milestone, as the feature has transformed Weixin from a pure information exchange service into a mobile transaction platform. 1) Games. The upgrade offered two mobile games, both of which have accomplished significant user traction. Tian Tian Ai Xiao Chu, a puzzle game that resembles NHN’s most popular game Line pop, has become one of China’s top-ranked free applications in the iOS App Store in just five hours post its launch. The game operates a free-mium model that allows users to download for free, and purchase virtual items via the app store. The other title, Flight Battle, was also widely discussed in Weixin’s newsfeed (Moments) and local forums. 2) Scanning. With QR code’s initial success, Tencent has expanded the scanner to general barcodes and translation services. Users can identify an offline product with the scanner, and load the pricing info from third- party retailers (e.g., Amazon Joyo, YiHaoDian). In addition, the new scanner is a breakthrough in location-based technology. Users can capture the offline streetviews via Weixin, and load the relevant local commerce information from Soso map's data. Users can also identify bar codes and do translation via the Weixin scanner. 3) Emoticons. Weixin users can purchase animated stickers for the equivalent of HK$8 per set, and use them in the conversations. We have seen active usage of these emoticons, and we expect the popularity to rise as has been the case in Japan and Korea. 4) Public accounts. Together with Weixin 5.0, Tencent launched the Fengling system, a back-end service that helps Weixin enterprise users program their public accounts. Key features include setting automatic response, generate Weixin-based webpages. Valuation We raise our earnings forecasts to reflect Weixin’s better monetization potential. In our base case, we model a US$38bn valuation for Weixin, or HK$160/share, where we assume Weixin’s domestic user base will monetize as effectively as Kakao Talk and NHN’s LINE, adjusting for the relative consumption levels. Our bull-case values Weixin at US$50bn, or HK$210/share, where we assume financial contribution from a successful overseas expansion. We raise our 12-m TP to HK$450 from HK$320 (still on 1.0X PEG off 11%/15% higher 2014-15E EPS). We fine tune our 2013E EPS. Key risks Performance of desktop games; regulatory risks with Weixin. Growth Returns * Multiple Volatility Volatility Multiple Returns * Growth Investment Profile Low High Percentile 20th 40th 60th 80th 100th * Returns = Return on Capital For a complete description of the investment profile measures please refer to the disclosure section of this document. Tencent Holdings (0700.HK) Asia Pacific Media and Entertainment Peer Group Average Key data Current Price (HK$) 370.00 12 month price target (HK$) 450.00 Market cap (HK$ mn / US$ mn) 689,417.3 / 88,894.6 Foreign ownership (%) -- 12/12 12/13E 12/14E 12/15E EPS (HK$) 9.55 11.87 16.28 20.76 EPS growth (%) 31.4 21.6 36.1 27.5 EPS (diluted) (Rmb) 6.83 8.47 11.84 15.22 EPS (basic pre-ex) (Rmb) 7.82 9.61 13.17 16.79 P/E (X) 24.0 30.9 22.7 17.8 P/B (X) 8.4 9.6 7.0 5.2 EV/EBITDA (X) 16.4 21.0 14.6 10.7 Dividend yield (%) 0.5 0.4 0.6 0.8 ROE (%) 36.5 32.2 32.9 31.2 CROCI (%) 157.3 170.7 201.0 237.6 50 52 54 56 58 60 62 64 66 220 240 260 280 300 320 340 360 380 Aug-12 Nov-12 Feb-13 May-13 Price performance chart Tencent Holdings (L) MSCI China (R) Share price performance (%) 3 month 6 month 12 month Absolute 37.1 36.1 60.6 Rel. to MSCI China 41.5 45.9 47.7 Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 8/14/2013 close. August 15, 2013 China: Technology: Internet Goldman Sachs Global Investment Research 5 Tencent Holdings: Summary financials Profit model (Rmb mn) 12/12 12/13E 12/14E 12/15E Balance sheet (Rmb mn) 12/12 12/13E 12/14E 12/15E Total revenue 43,893.7 59,422.9 80,779.0 103,213.9 Cash & equivalents 29,709.3 45,323.7 70,979.4 102,879.6 Cost of goods sold (18,207.4) (26,846.9) (35,963.5) (45,872.2) Accounts receivable 2,354.0 2,729.7 3,388.4 3,891.9 SG&A (5,677.9) (8,368.3) (11,327.0) (14,542.3) Inventory 0.0 0.0 0.0 0.0 R&D (4,176.0) (5,160.2) (6,330.1) (7,693.3) Other current assets 3,877.8 5,249.7 7,136.4 9,118.5 Other operating profit/(expense) (283.9) 432.6 (110.0) (152.1) Total current assets 36,509.1 54,041.6 82,464.3 117,138.1 EBITDA 19,665.5 25,262.9 34,181.2 43,515.6 Net PP&E 7,402.8 9,245.1 11,611.7 14,396.8 Depreciation & amortization (2,612.7) (3,662.7) (4,611.2) (5,617.5) Net intangibles 4,719.1 4,829.0 4,938.9 5,048.8 EBIT 17,052.8 21,600.2 29,570.0 37,898.1 Total investments 5,632.6 5,632.6 5,632.6 5,632.6 Interest income 835.7 1,284.4 1,616.5 2,039.0 Other long-term assets 20,992.2 20,719.9 20,495.5 20,226.3 Interest expense 0.0 0.0 0.0 0.0 Total assets 75,255.8 94,468.1 125,142.9 162,442.5 Income/(loss) from uncons. subs. (80.9) 235.7 224.4 269.2 Others 0.0 0.0 0.0 0.0 Accounts payable 10,513.2 14,238.6 19,352.4 24,725.5 Pretax profits 15,051.0 19,836.6 27,218.6 35,336.9 Short-term debt 1,077.1 0.0 0.0 0.0 Income tax (2,266.2) (3,989.3) (4,953.8) (6,431.3) Other current liabilities 9,074.7 10,147.0 13,921.9 17,742.5 Minorities (53.0) (38.9) (15.1) (15.1) Total current liabilities 20,665.0 24,385.6 33,274.3 42,468.0 Long-term debt 7,516.8