Cs China Internet Overview Jan14

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17 January 2014
Asia Pacific/China
Equity Research
Computer Services & IT Consulting

China Internet Sector

THEME

Live and breathe the Net
Figure 1: China Internet economy expansionfast but still at early stage
0.66%
0.83%
1.08%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2011 2012 2013
Major internet company revenue (RMB Mn) GDP (Tertiary industry, RMB Mn)
Internet revenue as % of Tertiary Industry GDP

Source: CEIC, company data
Next mega trend: service digitisation. Internet has been the most vibrant
sector in the Chinese economy for the past ten years. After revolutionising
media, advertising, entertainment, physical-goods purchase and travel, Internet
is penetrating into more traditional industries, including local services, real
estate, automobiles, financial services and education. Increasing mobile and
4G penetration will likely further accelerate this process.
Internet finance. We see finance representing a new layer of services offered
by Internet companies to users and business partners. Although the near-term
financial impact is limited, improvement in payment infrastructure could enable
more business and consumption activities to move from the offline to online
medium, especially with the refinement of mobile payment processes.
Mobile games and IM. Smartphone mobile games and IM-enabled VAS
and O2O services will be major areas of mobile monetisation development
in 2014. In mobile games, competition among developers and publishers will
intensify, while channels may further consolidate into the hands of several
major traffic owners. On mobile IM, WeChat Payment will play a crucial role
in commercialising various services on the platform.
Stock calls. After the sector-wide rally in 2013, we suggest investors
position selectively in 2014. In the large-cap space, we prefer Baidu, for its
under-appreciated mobile monetisation value, and Tencent for mobile
payment opportunities. In the mid-small cap space, we favour Soufun and
Sungy Mobile for their growth opportunities in their respective areas and
relatively more reasonable valuation.
Research Analysts
Dick Wei
852 2101 7339
dick.wei@credit-suisse.com
Evan Zhou
852 2101 6745
evan.zhou@credit-suisse.com
Contribution by
Daniel Chen
17 January 2014
China Internet Sector 2
Focus charts and tables
Figure 2: Large monetisation potential of China local
service market
Figure 3: China service market size
297,700
4.3Mn
53Mn
Total members of
58.com
Total active local
merchants on 58.com
SMEs in China

45%
60%
0%
10%
20%
30%
40%
50%
60%
70%
0
2
4
6
8
10
2012 2017E
China service market size(US$Tn) % of China GDP

Source: Company data, iResearch Source: iResearch

Figure 4: The landscape of China Internet finance Figure 5: Internet finance exposure of major players
Internet
Finance
Internet-enabled
SME Loan
Internet-enabled
P2P Loan
Crowd
Funding
Online
Financing
Online
Payment
Financial
Product
Distribution

Sub-sectors Baidu Tencent Alibaba
Online
payment
Baipay Tenpay Alipay
Online
financing
P2P Loan NA NA NA
Internet-enabled
SME loan
Baidu
SME
Loan
Licensed Ali Finance
Crowd funding NA NA NA
Financial
product
distribution
8.Baidu.c
om
Stock App;
Co-ops
with fund
companies
Alipay MM
Fund (Yu'E
Bao), Mutual
funds Tmall
stores
Source: Credit Suisse research Source: Company data, Credit Suisse research

Figure 6: Top picks
in USD
Company Rating Current TP Up/downside P/E (x) EPS (% YoY) CS est/street
price 2014E 2015E 2014E 2015E
Baidu O 171 220 29% 24.1 18.7 36% 29% 7.5%
Tencent O 509 619 21% 35.5 28.5 23% 24% -2.9%
SouFun O 89 110 24% 21.3 16.8 25% 27% 1.1%
Sungy Mobile O 21 24 14% 28.0 22.0 66% 27% -2.0%
Source: Thomson Reuters, company data, Credit Suisse estimates

17 January 2014
Live and breathe the Net
Next mega trend: Service digitisation
Internet has been the most vibrant sector in the Chinese economy for the past ten years. After
revolutionising media, advertising, entertainment, physical-goods purchase and travel,
Internet is increasingly penetrating into more traditional industries day by day, including local
services, real estate, automobiles, financial services and education. The size of the Internet
economy is rapidly expanding and taking a more significant role in the entire China GDP.
Increasing mobile and 4G penetration will further accelerate this process.
A new business model, quality of services, superior user experience and the
understanding of user behaviour via big data have empowered Internet companies with
customer loyalty and the capability to adapt to fast changes and compete with companies
operating in a traditional way.
Internet finance: A new layer of service digitisation
We see financial products representing a new layer of services offered by China Internet
companies to users and business partners. Although their near-term financial contribution
should be limited, improvement in the overall payment infrastructure could enable more
business and consumption activities to move from offline to online, especially with the
perfection of mobile payment processes. This should further enhance user stickiness of
Internet companies and vertical leaders.
Major Internet companies are well-positioned in various aspects of Internet finance, with
their sizeable balance sheets, big data repository, and rich accumulation of users and
merchants. Baidu has been actively developing finance products for both business
partners and individuals in recent months. Tencent's focus is more on the consumer side,
and service launches are carefully paced. WeChat Payment application scenarios are
gradually expanding both online and offline. Vertical leaders such as Soufun could
leverage their vertical expertise in offering tailor-made products.
Mobile games and IM
Smartphone mobile games and IM-enabled VAS and O2O services will likely continue to
be major areas of mobile monetisation development in 2014.
Listed client-based game companies are entering the arena with heavy investments, in
mobile games. Competition among developers and publishers will intensify, while
channels may further consolidate into the hands of several major traffic owners.
On mobile IM, we see WeChat continuing its dominance with more offerings in games, e-
commerce and, ultimately, ads. WeChat Payment will play a crucial role in commercialising
various services on the platform. International expansion will continue to be a drag on cost
lines, with competition intensifying in global emerging markets. Vertical IMs focusing on
specific user groups will grow and monetise in their respective user segments.
Stock picks
After the sector-wide rally in 2013, we suggest investors position themselves selectively in
2014. In the large-cap space, we prefer Baidu for its under-appreciated mobile
monetisation value and Tencent for its potential penetration into O2O and mobile payment.
In the mid-small cap space, we favour Soufun and Sungy Mobile for growth opportunities in
their respective areas and relatively more reasonable valuation.
We downgrade Changyou on the back of uncertainties in spending.
Internet is penetrating into
more traditional industries
such as local service, real
estate, automobiles
Internet companies are
ready to compete with
traditional companies
Financial products
representing a new layer of
service digitisation
Major Internet companies
are well-positioned in
various aspects of Internet
finance, with sizeable
balance sheets, data, and
rich accumulation of users
and merchants
More competition in mobile
game industry
We see WeChat continuing
its dominance with more
offerings in games, e-
commerce and, ultimately,
ads
17 January 2014
Sector valuation comparison
Figure 7: China Internet and new media comps table
Close Mkt cap ROE
Company Ticker Ccy price (US$Mn) 2013 2014 2015 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E
China: Online Platform
Tencent 700 HK HKD 508.5 122,109 11.7 14.4 17.9 42.9x 34.9x 28.0x 28.9% 34.5x 25.8x 20.4x 2% 3% 3.6%
Qihoo 360 QIHU US USD 89.1 10,287 1.4 2.2 3.5 63.4x 40.4x 25.2x 30.3% 56.7x 29.7x 17.3x 1% 2% 3.9%
YY YYUS USD 70.4 3,829 1.5 2.2 2.6 47.3x 32.5x 26.9x 30.8% 48.0x 28.0x 18.8x 2% 3% n.a
Renren RENN US USD 3.3 1,231 -0.2 -0.3 -0.3 -15.4x -9.7x -11.6x -13.9% -6.2x -6.5x -7.4x n.a n.a n.a
Average 34.6x 24.5x 17.1x 19.0% 33.2x 19.2x 12.3x 2% 3% 4%
China: Online Ad - Portal
Sina SINA US USD 84.6 5,647 1.2 2.3 2.9 70.2x 36.9x 29.2x 12.9% 114.9x 36.2x 25.9x 1% 3% 3.4%
People.cn 603000 CH CNY 87.0 3,978 1.0 1.4 1.9 85.9x 64.1x 46.6x 15.6% 79.0x 57.2x 40.9x n.a n.a n.a
Sohu SOHU US USD 75.9 2,901 1.2 2.5 4.3 61.3x 30.4x 17.6x 12.5% 8.0x 5.8x 4.2x -11% -2% -1.8%
Phoenix New Media FENGUS USD 11.1 857 0.5 0.6 0.8 21.6x 17.9x 14.2x 17.4% 14.7x 10.5x 7.3x n.a n.a n.a
China Finance Online JRJC US USD 7.2 159 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Average 59.7x 37.3x 26.9x 14.6% 54.1x 27.4x 19.6x -5% 1% 1%
China: Online Ad - Video
Youku YOKU US USD 34.8 5,736 -0.4 0.2 0.6 -82.2x 206.4x 59.6x 1.8% 99.1x 28.8x 17.4x 1% 3% 5.4%
LeTV 300104 CH CNY 51.5 6,804 0.4 0.6 0.7 133.1x 91.5x 69.8x 20.3% 47.9x 39.7x 27.9x n.a n.a n.a
Ku6 KUTV US USD 3.2 149 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Average 25.5x 149.0x 64.7x 11.0% 73.5x 34.3x 22.7x 1% 3% n.a
China: Online Ad - Search
Baidu BIDU US USD 170.5 59,637 5.2 7.1 9.1 32.1x 23.8x 18.4x 28.3% 24.8x 17.9x 13.8x 3% 4% 5.8%
Average 32.1x 23.8x 18.4x 28.3% 24.8x 17.9x 13.8x 3% 4% 6%
China: eCommerce - Physical Goods
VIPShop VIPS US USD 96.4 5,319 1.1 2.1 3.2 90.9x 47.0x 30.5x 33.8% 90.2x 33.1x 19.2x 3% 1% 4.6%
Global Sources GSOL US USD 8.0 270 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Mecox Lane MCOX US USD 3.6 41 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Dangdang DANGUS USD 10.8 885 -0.4 -0.2 0.4 -25.5x -54.7x 26.0x -20.1% -22.8x -108.2x 13.0x -3% -4% 0.8%
Light in the box LITB US USD 10.0 500 0.1 0.3 0.4 137.4x 33.4x 23.9x 13.0% 92.3x 35.6x 25.8x 3% 3% 4.5%
HC International 39292 HK HKD 11.8 1,002 0.3 0.5 0.8 37.0x 23.6x 15.1x n.a n.a n.a n.a n.a n.a n.a
Average 59.9x 12.3x 23.9x 8.9% 53.2x -13.1x 19.4x 1% 0% 3%
China: Travel
Qunar QUNR US USD 29.1 3,327 -0.1 - 0.4 -217.4x 80.5x -5.5% -33.7x -178.5x 72.4x n.a n.a n.a
Ctrip CTRP US USD 40.3 5,235 1.5 1.3 1.9 27.3x 31.0x 20.7x 14.4% 26.1x 28.0x 15.2x 4% 3% 5.4%
eLong LONGUS USD 18.1 624 -0.5 0.1 0.8 -35.4x 157.0x 21.8x n.a n.a n.a n.a n.a n.a n.a
Tempus 300178 CH CNY 30.0 607 0.7 1.0 1.2 42.2x 30.6x 24.6x n.a n.a n.a n.a n.a n.a n.a
Travelsky 0696 HK HKD 8.2 3,094 0.5 0.6 0.6 15.2x 13.7x 12.6x n.a n.a n.a n.a n.a n.a n.a
Average -33.6x 58.1x 32.0x 4.5% n.a -75.3x n.a n.a n.a n.a
China: eCommerce - Services
58.com WUBA US USD 44.5 3,537 0.2 0.6 1.0 197.4x 76.3x 44.0x 420.9% 199.1x 68.4x 36.7x 0% 1% 2.1%
Autohome ATHM US USD 36.3 3,819 0.7 1.0 1.4 50.5x 37.0x 26.2x n.a n.a n.a n.a n.a n.a n.a
Bitauto BITA US USD 35.2 1,527 1.0 1.3 1.8 35.7x 27.3x 19.2x n.a n.a n.a n.a n.a n.a n.a
51jobs JOBS US USD 81.7 2,380 2.6 3.0 3.6 31.1x 27.0x 22.9x 15.2% 23.9x 19.5x 15.9x 1% 1% 1%
Jiayuan DATEUS USD 7.3 228 0.4 0.4 0.5 20.5x 18.0x 14.1x 8.0% n.a n.a n.a n.a n.a n.a
SouFun SFUN US USD 89.4 7,226 3.3 4.2 5.3 26.8x 21.5x 16.9x 45.3% 21.9x 17.3x 14.3x -2% 4% 5.1%
E-House EJ US USD 14.0 1,678 0.6 0.8 1.2 23.9x 16.5x 12.0x 14.5% n.a 8.9x 7.3x n.a n.a n.a
Everyday Network 300295 CH CNY 82.6 729 2.3 3.0 4.0 35.4x 28.0x 20.9x 15.0% n.a n.a n.a n.a n.a n.a
500.com WBAI US USD 41.9 1,341 0.3 0.9 1.4 145.5x 47.6x 29.9x 32.5% n.a n.a n.a n.a n.a n.a
Average 63.0x 33.2x 22.9x 78.8% 81.6x 28.5x 18.6x 0% 2% 3%
China: Online Games
Changyou CYOU US USD 30.9 1,639 4.6 4.2 6.6 6.8x 7.3x 4.7x 18.9% 4.7x 5.3x 3.5x 2% 13% 20.9%
Giant Interactive GA US USD 10.9 2,601 0.9 1.0 1.1 11.6x 10.9x 9.8x 33.6% 9.5x 7.8x 6.7x 9% 9% n.a
NetEase NTES US USD 79.3 10,358 5.6 5.5 6.4 14.0x 14.1x 12.1x 20.2% 10.3x 8.8x 7.4x 6% 7% 8.1%
NetDragon 777 HK HKD 17.5 1,145 1.1 0.8 1.0 16.4x 20.7x 17.4x 8.1% n.a n.a n.a
Perfect World PWRD US USD 20.0 970 1.5 1.9 2.3 13.0x 10.4x 8.6x 12.8% 6.7x 4.6x 3.0x 8% 12% n.a
Shanda Games GAME US USD 4.2 1,144 0.8 0.9 1.0 5.2x 4.6x 4.2x 24.3% 2.9x 2.2x 2.0x 20% 21% 24.2%
The9 NCTYUS USD 2.6 79 -3.3 n.a n.a -0.8x n.a n.a n.a n.a n.a n.a n.a n.a n.a
IGG 8002 HK HKD 9.0 1,575 0.2 0.3 0.4 58.0x 29.0x 23.2x 5.8% 199.0x 34.2x 28.6x n.a n.a n.a
Forgame 0484 HK HKD 61.8 1,004 2.3 4.7 6.2 26.7x 13.1x 9.9x 37.5% 12.6x 7.1x 4.7x n.a n.a n.a
Boyaa 0434 HK HKD 12.7 1,208 0.4 0.5 0.6 35.3x 27.5x 19.7x 17.4% 38.5x 23.1x 15.5x 2% 4% 5.8%
KongZhong KONGUS USD 8.7 247 0.4 0.5 0.8 20.8x 16.2x 11.5x n.a n.a n.a n.a n.a n.a n.a
CMGE CMGEUS USD 32.9 920 0.2 1.3 2.5 143.1x 26.3x 13.1x n.a n.a n.a n.a n.a n.a n.a
Taomee TAOM US USD 6.9 251 0.1 0.2 n.a 50.7x 34.3x n.a 6.6% n.a n.a n.a n.a n.a n.a
China: Mobile Internet
Kingsoft 3888 HK HKD 26.5 4,039 0.7 0.8 1.0 39.4x 31.5x 25.7x 21.4% 33.4x 24.9x 19.6x n.a n.a n.a
Sungy Mobile GOMO US USD 21.1 682 0.4 0.7 0.9 46.5x 28.1x 22.0x 33.3% 47.1x 29.3x 18.6x 2% 3% 4.2%
AutoNavi AMAP US USD 15.2 1,052 0.2 -0.5 0.1 95.7x -33.3x 145.0x -0.5% -41.0x -12.3x -13.9x 0% -3% n.a
NetQin NQ US USD 15.6 716 1.1 1.4 n.a 14.9x 11.1x 9.1x 15.3% 11.2x n.a n.a 5% 10% n.a
Ourpalm 300315 CH CNY 38.0 4,428 0.3 0.6 0.9 120.5x 58.8x 44.7x 18.9% 149.9x 73.1x 38.7x 1% 1% n.a
Sky-mobi MOBI US USD 4.9 144 0.2 0.1 0.3 23.1x 35.7x 16.7x n.a n.a n.a n.a n.a n.a n.a
NavInfo 002405 CH CNY 13.2 1,508 0.2 0.3 0.4 59.9x 44.7x 35.5x 7.2% 42.6x 28.7x 21.0x n.a n.a n.a
China: Internet-related Supplier/Servicer
DX.com (ePro) 8086 HK HKD 0.3 171 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
21Vianet VNET US USD 23.1 1,337 0.3 0.6 1.0 77.5x 41.4x 23.5x 9.9% 20.5x 13.7x 9.9x -4% -2% n.a
ChinaCache CCIH US USD 13.5 342 -0.1 n.a n.a -95.0x n.a n.a n.a n.a n.a n.a n.a n.a n.a
Average -8.8x 41.4x 23.5x 9.9% 20.5x 13.7x 9.9x -4% -2% n.a
China New Media
AirMedia AMCN US USD 2.4 146 -0.1 -0.0 0.0 -18.8x -400.0x 80.0x -1.8% 4.2x 2.4x 1.6x n.a n.a n.a
Clear Media 100 HK HKD 7.1 488 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Tom Online 2383 HK HKD 1.4 698 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Average -18.8x -400.0x 80.0x -1.8% 4.2x 2.4x 1.6x n.a n.a n.a
China Other Media
Beijing Media 1000 HK HKD 4.9 124 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
BlueFocus Communication 300058 CH CNY 59.2 4,546 0.9 1.3 1.8 66.2x 44.5x 33.5x 22.7% 35.3x 24.5x 23.8x 1% 1% 2%
China Digital TV STV US USD 2.2 131 0.3 0.3 n.a 7.4x 6.9x n.a n.a n.a n.a n.a n.a n.a n.a
Beijing Gehua 600037 CH CNY 7.2 1,270 0.3 0.4 0.5 22.4x 19.6x 15.7x 6.9% 5.6x 4.5x 3.4x n.a n.a n.a
Next Media 282 HK HKD 0.9 276 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Oriental Pearl Group 600832 CH CNY 9.0 4,754 0.2 0.3 n.a 38.7x 29.6x n.a n.a n.a n.a n.a n.a n.a n.a
Phoenix Satellite 2008 HK HKD 2.9 1,869 0.2 0.2 0.3 14.5x 13.5x 10.4x 18.3% 7.8x 6.1x 4.8x n.a n.a n.a
QJYMedia Services 2366 HK HKD 0.7 51 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Sino Media 623 HK HKD 5.5 400 0.8 0.9 1.0 6.7x 6.0x 5.4x 24.7% 3.5x 2.5x 1.8x n.a n.a n.a
Television Broadcasts Limited 511 HK HKD 49.5 2,796 3.8 3.9 4.1 13.0x 12.5x 12.0x 20.3% 8.2x 7.9x 7.6x n.a n.a n.a
Charm CHRM US USD 4.2 163 0.2 0.6 0.7 18.7x 6.8x 5.8x 11.1% 6.6x 1.2x 0.7x n.a n.a n.a
BesTV 600637 CH CNY 42.0 7,739 0.6 0.9 1.2 66.6x 48.2x 35.5x 20.6% 36.6x 29.9x 22.4x 0% 1% 2%
Average 28.2x 20.8x 16.9x 17.8% 14.8x 11.0x 9.2x 1% 1% 2%
EPS Consensus PE EV/EBITDA FCFyield (%)

* Priced as of 15 January 2014. Source: Company data, Credit Suisse estimates
17 January 2014
Dick Wei's 2014 top ten predictions
(1) Digitalisation of local services. The post 1980s generation has grown into the age
for services-related spendingreal estate/autos/financial products/restaurants
(extending beyond games, news and physical-goods e-commerce). This group of
users turns to the Internet as the first gateway to explore these services, creating
strong value for Internet companies.
(2) Local services and mobile integration. WeChat and other communication services
are likely to further integrate more local servicestaxi, mobile payments, coupons,
movie tickets, lotteries, etc.
(3) Mobile Investment begins to pay off. With better mobile data infrastructure
development, we expect mobile search, video, and mobile games to see early
monetisation. Flash sales and fashionable products work best via mobile e-commerce.
(4) yet the fight for mobile market share continues in 2014. With smartphone
penetration still low in China, Internet companies are likely to maintain a high level of
spending to gain mobile market share. We expect margins for leading companies
likely to be flattish, despite good revenue growth.
(5) e-commerceanother year of execution focus. Rather than a high-profile price war,
we expect e-commerce to continue to focus on operation improvements, market
places and development in Internet finance.
(6) Internet finance. Virtual banking services, direct financial and insurance products
sales, third-party mobile payments and social finance are some new emerging
opportunities for Internet companies. There is room for more imagination for Internet
companies.
(7) Go Global! Mobile Internet provides a new pivotal technology change that allows
China Internet companies to go overseas. Games and utility apps (browsers,
communication tools and others) are gaining traction overseas, further enhancing
value for China's Internet companies.
(8) Further online travel penetration, especially driven by increasing smartphone
adoption.
(9) Mobile search to see faster adoption, while portal and brand ad pricing could face
challenges.
(10) Expect more financing activities. With higher sector valuation and good share price
performance for recent IPOs, we expect more companies to enter the market for
financing and other strategic alternatives.
17 January 2014
Next mega trend: Service
digitisation
Internet has been the most vibrant sector in the Chinese economy for the past ten years.
After revolutionising media, advertising, entertainment, physical-goods purchase and
travel, Internet is penetrating into more traditional industrieslocal services, real estate,
auto, financial services, education, etc. The size of the Internet economy is rapidly
expanding and taking a more significant role in the entire China GDP.
Figure 8: China Internet economy expansionfast but still at early stage (1.1% of
Tertiary industry GDP)
in Rmb mn, unless otherwise stated
0.66%
0.83%
1.08%
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
-
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
2011 2012 2013
Major internet company revenue (RMB Mn) GDP (Tertiary industry, RMB Mn)
Internet revenue as % of Tertiary Industry GDP

Source: CEIC, company data
Why is Internet able to penetrate into all traditional industries and pose a threat to
incumbents? We think the following intrinsic characteristics set Internet companies apart
from traditional ones:
Business model: Internet companies usually provide products/services for free or at
their cost pricethey monetise with on-going value-added services, rather than from
one-time purchases.
Quality of services: From day one, Internet companies have faced individual users
directly rather than through distributors or agents. They put users who use their
services at a higher priority than customers who pay for them. Their ever-increasing
understanding of their users has empowered them with customer loyalty and the
capability to adapt fast to changes.
Superior user experience: Internet companies design products/services aiming to solve
users' genuine problems and often exceed expectations. Simplification of previous
complex processes quickly prompts user adoption of new behaviour online. Internet
companies also relentlessly improve their products and services with intensive hard work.
We expect this process of penetration to accelerate in the next three years, driven by mobile.
As mobile Internet usage continues to increase, mobile/smart devices will become a
necessary part of daily life, driving up user time spent and demographics expansion.
The service market in China has seen rapid expansion over the past several years driven
by overall Chinese economic growth. According to iResearch, China's services market
was US$3.7 tn in 2012 (45% of total China GDP), and is expected to expand to US$8.5 tn
in 2017 (60% of total China GDP).
Internet is penetrating into
more traditional industries.
Such as local service, real
estate, automobiles etc
Unique business model,
quality of services and
superior user experience set
Internet companies apart
from traditional ones
17 January 2014
Figure 9: Large monetisation potential of China local
service market
Figure 10: China service market size
297,700
4.3Mn
53Mn
Total members of
58.com
Total active local
merchants on 58.com
SMEs in China

45%
60%
0%
10%
20%
30%
40%
50%
60%
70%
0
2
4
6
8
10
2012 2017E
China service market size(US$Tn) % of China GDP

Source: Company data, iResearch Source: iResearch
Figure 11: China/US SME number comparison Figure 12: China/US cities comparison
53
38 39
121
0
20
40
60
80
100
120
140
China US
Number of SMEs(Mn) Number of SMEs per 1,000 people

45
4
82
5
108
25
0
50
100
150
200
250
China US
Population >2Mn Population 1-2Mn Population 0.5-1Mn

Source: Company data, iResearch Source: US Census Bureau, IDC, Credit Suisse research
We see large monetisation potential for China's local services market compared with the
US. The number of SMEs per 1,000 people is only 39 in China, compared with 121 in the
US. Also, the total number of cities with population over 0.5 mn in China is 235, almost 7x
of 34 in the US.
Investment opportunities will emerge from vertical leaders, usually asset-heavy companies
with Internet spirit and thinking. These companies enjoy barriers to entry from offline resource
accumulation and unique understanding in utilising Internet resources in specific verticals.
Figure 13: China Services e-commerce comps
Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield (%)
Company Ticker Ccy price (US$ mn) 2013E 2014E 2015E 2013E 2014E 2015E 2014E 2013E 2014E 2015E 2013E 2014E 2015E
58.com WUBA US USD 44.5 3,537 0.2 0.6 1.0 197.4x 76.3x 44.0x 421% 199.1x 68.4x 36.7x 0% 1% 2.1%
Autohome ATHM US USD 36.3 3,819 0.7 1.0 1.4 50.5x 37.0x 26.2x n.a n.a n.a n.a n.a n.a n.a
51jobs JOBS US USD 81.7 2,380 2.6 3.0 3.6 31.1x 27.0x 22.9x 15.2% 23.9x 19.5x 15.9x 1% 1% 1%
Jiayuan DATE US USD 7.3 228 0.4 0.4 0.5 20.5x 18.0x 14.1x 8.0% n.a n.a n.a n.a n.a n.a
SouFun SFUN US USD 89.4 7,226 3.3 4.2 5.3 26.8x 21.5x 16.9x 45.3% 21.9x 17.3x 14.3x -2% 4% 5.1%
Everyday Network 300295 CH CNY 82.6 729 2.3 3.0 4.0 35.4x 28.0x 20.9x 15.0% n.a n.a n.a n.a n.a n.a
500.com WBAI US USD 41.9 1,341 0.3 0.9 1.4 145.5x 47.6x 29.9x 32.5% n.a n.a n.a n.a n.a n.a
Average 63.0x 33.2x 22.9x 78.8% 81.6x 28.5x 18.6x 0% 2% 3%
* Priced as of 15 January 2014.
Source: Company data, Bloomberg, Credit Suisse estimates
Large monetisation potential
for China's local services
market compared with the
US.
17 January 2014
Real estate
We believe the demographic tailwind will propel increasing online usage in the real estate
segment in the coming years. The usage shift should gradually migrate real estate
marketing, sales and consumer spending dollars from offline to online.
Figure 14: China's Internet population is entering the age group of home ownership
20% 20%
21%
21%
20% 20%
19%
19%
18%
17%
16% 17%
15%
14%
14%
13% 13%
13%
13%
13%
14%
15% 15%
14%
15%
16% 15%
16%
16%
16%
17%
18%
19%
20%
20%
20%
19%
18%
17%
17%
16%
16%
10% 10%
10% 11% 11% 12%
13%
13%
14%
14% 14%
13%
14%
14%
15%
15%
15%
16%
16%
17% 18%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Age 0-9 Age 10-19 Age 20-29 Age 30-39 Age 40-49 Age 50-59 Age 60-69 Age 70-79 Age 80-89 Age 90-99

Source: CEIC, National Bureau of Statistics
China's Internet population mainly consists of people born after 1970, with the majority
born between 1980 and 1995. In the next 5-10 years, the bulk of China's Internet
population (post 1980s and 1990s) will be entering the age group of home ownership
(ages 25-50). People in this age group tend to use more online tools and information to
find the right property to buy or rent, which is positive for SouFun.
Figure 15: China Internet population age migration
35.2%
33.0% 31.8%
29.9%
27.3% 26.0%
26.7%
25.4% 24.0%
23.2%
31.5%
29.8%
28.6%
28.1%
29.8%
30.8%
29.8%
30.2%
30.4%
29.5%
17.6%
20.7%
21.5%
22.8% 23.4% 23.2%
25.7%
25.5%
25.3%
26.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13
Below 10 10 to 19 20 to 29 30 to 39 40 to 49 50 to 59 60 or above

Source: CNNIC
As usage migrates to online, businesses along the real estate value chainincluding
developers, agencies and related service companiesare increasingly adopting online
vertical sites such as SouFun and E-house as effective customer acquisition channels.
Marketing dollars, sales promotion budgets, as well as consumer spending have flowed to
SouFun and E-house's various service platforms in the past several years.
Post the 1980s and 1990s
population to be main driver
of SouFun's growth
17 January 2014
Figure 16: SouFun's position in old value chain Figure 17: SouFun's position in new value chain
D
e
v
e
l
o
p
e
r
s
A
g
e
n
t
s
S
o
u
F
u
n
B
u
y
e
r
s
Provide
services
Direct sales
Delegate
agents to
sell
Ad
Real estate
information
Ad(1)
Sell and provide related services

D
e
v
e
l
o
p
e
r
s
A
g
e
n
t
s
B
u
y
e
r
s
Provide
services
Direct sales
Delegate
agents to
sell
Ad
Real estate
information
Sell and provide related services
Buyers
S
o
u
F
u
n
Buyers
Ad(1)

Source: Credit Suisse research Source: Credit Suisse research
Entering 2014, real estate verticals such as SouFun and E-house also provide personal
finance-related products such as mortgages from financial institutions, as a means to
further penetrate into the whole real estate transaction process.
Figure 18: Real estate online ad market share breakdown
by revenue (3Q13)
Figure 19: Monthly PV of major vertical real estate
websites
SouFun
72%
Sina
eHouse
15%
Sohu
Focus
12%
Others
1%

0
500
1,000
1,500
2,000
2,500
1
Q
1
0

2
Q
1
0

3
Q
1
0

4
Q
1
0

1
Q
1
1

2
Q
1
1

3
Q
1
1

4
Q
1
1

1
Q
1
2

2
Q
1
2

3
Q
1
2

4
Q
1
2

1
Q
1
3

2
Q
1
3

(
m
n
)
SouFun Sohu Focus Sina eHouse

Source: DCCI Source: DCCI
Automobile
Business model transition in online auto verticals has already shown early signs of
progress. Besides traditional portal advertising, vertical leaders Bitauto and Autohome are
deepening their relationship with dealers and OEMs. They offer more integrated marketing
and sales solutions to grab more of the budgets.

17 January 2014
Figure 20: China auto marketing market sizing forecast
in Rmb mn, unless otherwise stated
67.9%
47.9%
28.1%
75.8%
55.0%
40.8%
38.8%
26.7%
24.1%
0%
10%
20%
30%
40%
50%
60%
70%
80%
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
China market size of auto advertising (Rmb Mn) YoY

Source: iResearch

Figure 21: China new auto sales volume Figure 22: China used auto sales volume
13.6
18.1
18.5
19.3
0.0
5.0
10.0
15.0
20.0
25.0
2009 2010 2011 2012
China new auto sales volume (in Mn)

3.3
3.9
4.3
4.8
0.0
1.0
2.0
3.0
4.0
5.0
6.0
2009 2010 2011 2012
China used auto sales volume (in Mn)

Source: CAAM Source: CADA
Online classified
According to iResearch, China's online classified market is expected to achieve the total
size of US$434 mn in 2013, accounting for 15% of the total classified market. The online
classified market is also expected to grow at a four-year CAGR of 53.2% to achieve
US$2.39 bn in 2017, accounting for 43.9% of the total classified market, showing a fast
offline to online shift in this market.
We think China's local services market is at the dawn of online budget migration. Local
merchants' awareness in various verticals to do marketing and business online is rising.
Online classified market is
expected to grow at four-
year CAGR of 53.2%
17 January 2014
Figure 23: China online classified market size forecast

Source: iResearch
Mobile app for user: Enhanced efficiency with LBS element
We view mobile to be a key catalyst for online classified websites as the efficiency of some
listing categories can be greatly enhanced when the LBS (location based service) is
included. In the past, if a user wanted to find a rental house in a specific area, he had to
log on to the website on a PC, search for rental information in a specific area and then
write down/print out relevant info and contact the house owner, which used to take a lot of
preparation time beforehand. However, with the new mobile app, users can directly go to
the destination, search for nearby rental house info, choose desirable houses and contact
shop owners through the app, which brings a lot of convenience to users in the house-
hunting process. According to 58.com, the number of PV per unique visitors on its mobile
app is 2x the number for PCs, showing stronger user engagement on mobile.
Figure 24: WUBA mobile app provides various VAS to enhance user experience

Source: Company data, Credit Suisse research

LBS helps to enhance
efficiency of mobile online
classified app
17 January 2014
Internet finance: A new layer of
service digitisation
We see financial products representing a new layer of services offered by China Internet
companies to users and business partners, on top of their existing offerings in tangible-
goods e-commerce, games and advertising. Although their near-term financial contribution
should be limited, improvement in the overall payment infrastructure could enable more
business and consumption activities to move from offline to online, especially with the
perfection of mobile payment processes. This should further enhance user stickiness of
Internet companies and vertical leaders.
Major Internet companies are well-positioned in various aspects of Internet finance, with
their sizeable balance sheets, big data repository and rich accumulation of users and
merchants. Baidu has been actively developing finance products for both business
partners and individuals in recent months. Tencent's focus is more on the consumer side,
and service launches are carefully paced. WeChat Payment application scenarios are
gradually expanding both online and offline. Mobile QQ payment will also likely be
released soon. Vertical leaders such as Soufun could leverage their vertical expertise in
offering tailor-made products. Emerging start-ups should have more opportunities in areas
of P2P loan, vertical search and crowd funding.
Figure 25: Core competitive advantages of leading Internet companies
Companies Core advantage(s)
Baidu Marketing power: No.5 website globally and No.1 in China, according to Alexa. Market share over 70% in China search engine
market. Baidu enjoys the largest traffic base in China on user side.
Advertisers relationship: Over 460,000 advertisers are doing online marketing on Baidu on a quarterly basis. This can serve
as a good customer base for Baidu's to-B financial products in the future.
Tencent WeChat: Most popular mobile IM with 600 mn registered users. Although just launched in August, WeChat Payment fits well into
the usage scenario of impulse buying and social sharing.
SouFun User base: In 3Q13, SouFun has over 30 mn registered members, over 10 mn SouFun card members and over 100,000
SouFun card VIP members who have high demand on house purchases and house loan services.
Alibaba E-commerce and payment data: According to Sina Tech Channel, Taobao and Tmall annual sales volumes surpassed Rmb1
tn in 2012, ~5% of China's retail sales. According to iResearch, Alipay had a market share of about 50% in 3Q13. In November
last year, transactions on Tmall via Alipay surpassed Rmb35 bn. Data repository on Alibaba sites provides a solid data base for
credit analysis for AliFinance.
Jingdong Supplier relationship: Jingdong has management efficiency and higher bargaining power over its suppliers.
Source: Alexa, iResearch, company data
Baidu, Tencent, SouFun, Alibaba and Jingdong put Internet finance in a strategic position.
Baidu has strong marketing power in product distribution. Tencents 'killer move' is
WeChat Payment. SouFun has a large user base that has strong demand in house loan
products. Alibaba, with its SME financial service group, AliFinance, is taking an initiative in
this sector, while Jingdongs focus lies in supply-chain finance.
Figure 26: BAT's (Baidu, Tencent and Alibaba) exposure in Internet finance
Sub-segments Baidu Tencent Alibaba
Payment Baipay Tenpay Alipay
Online financing Internet P2P loan NA NA NA
Internet SME loan Baidu SME Loan Licensed Ali Finance
Crowd funding NA NA NA
Financial product distribution 8.Baidu.com Stock App; Co-ops with fund companies Yu'E Bao, Mutual funds Tmall stores
Source: Company data, Sina News, Credit Suisse research

Leading Internet companies
are well-positioned with their
sizeable balance sheets, big
data repository and rich
accumulation of users and
merchants
Baidu, Tencent, SouFun,
Alibaba and Jingdong have
put Internet finance in a
strategic position
17 January 2014
The scope of Internet finance
We break down Internet finance products and services into the following three major
segments:
Online payment
Online financing, including:
P2P loan
Internet-enabled SME loan
Crowd funding; and
Financial product distribution.
Figure 27: Scope of China Internet finance
Internet
Finance
Internet-enabled
SME Loan
Internet-enabled
P2P Loan
Crowd
Funding
Online
Financing
Online
Payment
Financial
Product
Distribution

Source: Credit Suisse research
(1) Payment
Online payment serves as the foundation for Internet-related finance activities. Besides
paying through online banking, users are increasingly adopting the use of third-party
online payment services as a more convenient way to handle money transactions online.
In China, online payment has been the early enabler of a booming e-commerce market, as
more consumers complete the whole purchase process through online third-party payment
services. Although a fairly large proportion of online shoppers still adopts cash-on-delivery
(CoD) when buying goods online, products such as utilities payment, credit card
repayment and cell-phone charging, and functions, such as express payment ()
to shorten processes, are increasingly migrating payment behaviour day by day.
Payment services: the
foundation of Internet
finance
Online payment: the early
enabler of China's e-
commerce
17 January 2014
Figure 28: Size of China's third-party online payment transactions
(Rmb bn)
175.7%
95.9%
100.1%
118.1%
67.0%
55.2%
49.1%
37.3%
25.8%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
0
2000
4000
6000
8000
10000
12000
14000
16000
2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Third Party Online Payment Transaction Value (RMB B) YoY Gth

Source: iResearch
(2) Online financing
Financing activities outside the banking system have long existed, but Internet makes it
more versatile and accessible for individuals and small business owners. Within online
financing, there are three major areas of interest:
Internet P2P loan: Internet platforms that enable peer-to-peer lending by introducing
credit-worthy borrowers to return-seeking lenders.
Internet SME loan: Internet companies are acting as lenders to issue loans to SMEs
they have business relationships withusually their suppliers, merchants on their
platforms and advertisers. For example, Alibabas small loan company successfully
converts trading data into credit records to support loan issuance.
Crowd funding: Emerging crowd funding websites organise fundraising on projects,
equities, debts, rights and even venture into private market share trading.
(3) Financial product distribution
In the offline world, banks, brokers and insurance companies own the most extensive
distribution networks and dominate the sales of financial products, from mutual funds to
insurance policies. However, their reach may still not be comparable to that of Internet
companies, which enjoy a fast-growing Internet population of 591 mn, as of mid-2013, with
464 mn on mobile, according to CNNIC.
Internet companies and finance vertical websites are beginning to change the financial
product distribution landscape. According to Sina News and Hexun News, Yu'E Bao's
Rmb100 bn-plus fund base and East Money's Rmb9 bn sales of Huoqibao () in 3Q
indicated that low-risk cash management products have gained traction on the Internet.
Fund management companies are rushing to Tmall to open stores and sell their products.
Using transaction data to
evaluate credit
The reach of Internet may
reduce the role of traditional
financial product distribution
networks
Cash management products
are gaining traction on the
Internet
17 January 2014
Figure 29: Key companies in China Internet finance
Segment Sub-segment Companies Activities Global comps
Payment Online payment
and settlement
Alipay, Tenpay, ChinaPnR, 99bill, etc. 250 licences have been issued since 2011 by
PBOC.

Fund distribution 26 licences issued to independent fund
distribution company.

Payment and
settlement for
fund sales
11 licences issued to third-party payment
companies by October 2013.

Third-party e-
commerce
platform for fund
distribution
Alibaba Alibaba received the first licence in October
2013.

Forex payment
for cross-border
e-commerce
17 pilot licences issued by SAFE since
September 2013.

POS and offline
payment
China UnionPay, Lakala, Tencent,
Alibaba, etc.
Square
Online financing P2P loan Lufax, My089.com, Renrendai.com,
Ppdai.com, dianrong.com, Yooli.com,
Renrenmoney.com, etc.
It is estimated by P2P lending watcher
Wangdaizhijia that over 500 websites are doing
the business. CreditEase is also a large player
but only part of its business is online lending
and it discloses very limited information.
Zopa, Prosper,
Lending Club
Crowd funding Angel Crunch, Demo Hour,
Dajiatou.cn, Zhongchou.cn
Kickstarter
Financial product
distribution
Distribution
platform
Tmall.com, Howbuy.com, Fund123.cn,
dashu88.com
Distribute products including mutual funds, trust
products, wealth management products,
insurance, hedge funds and PE/VC products.

Vertical product
search
Baidu.com, Rong360.com,
Haodai.com, 91jinrong.com,
qqw.com.cn
Help users to find the best credit card and loan
products and charge service fee on banks,
mainly smaller banks looking for more
customers.

Personal finance
management tool
Feidee (), Cardniu, Tencent
Portfolio
Personal finance management and budgeting
apps/software trying to connect all bank
accounts of users and become a distributor of
products in future.
MINT
Others Financial social
networks
Xueqiu Xueqiu creates a community for investors to
discuss their investment ideas and socialise.
Seekingalpha.c
om
Credit loan to
gamers
Mo9.com.cn Offers instant loans to game players for virtual
item purchase
Mo9
Source: PBOC, CSRC, www.wangdaizhijia.com, Lufax, My089.com, Renrendai.com, Ppdai.com, dianrong.com, Yooli.com, Renrenmoney.com,
news.cnstock.com, Angel Crunch, Demo Hour, Dajiatou.cn, Zhongchou.cn, Tmall.com, Howbuy.com, Fund123.cn, dashu88.com, Baidu.com,
Rong360.com, Haodai.com, 91jinrong.com, qqw.com.cn, xueqiu.com, mo9.com.cn

17 January 2014
Mobile games and IM
Growth momentum to continue in 2014
Figure 30: China mobile game market size forecast
0.3
0.8
1.7
3.0
4.6
3.8%
8.1%
15.3%
22.0%
27.7%
0%
20%
40%
60%
80%
100%
120%
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
5.0
2011 2012 2013 2014E 2015E
Mobile game market size (US$Bn) As % of China total game market size

Source: IDC, Credit Suisse estimates
Figure 31: China game market size YoY by segment
20%
8% 7% 7%
33%
18%
15% 14%
49%
23% 20%
15%
185%
131%
75%
50%
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2012 2013 2014E 2015E
MMOG ACG Webgame Mobile Game

Source: IDC, Credit Suisse estimates
Mobile game continues to be the fastest-growing sub sector in China's game market:
We expect China's mobile game market size to reach US$3 bn (Rmb19.2 bn) in 2014,
growing at 75% YoYthe fastest among all sub sectors.
Mobile game is the fastest
growing sub-sector in China
game market
17 January 2014
Figure 32: Leading smartphone mobile games in China
Title Chinese title Genre Developer Publisher Gross mthly rev
(Rmb mn)
Timi Run Everyday ACG Tencent Tencent 150
Quan Min Ying Xiong Card Sixjoy Tencent 120
Tiantian Speed ACG Tencent Tencent 100
Space Hunter ACT Punchbox 80
Trump the landlord ACG Tencent Tencent 80
Fishing Joy 2 2 ACG Punchbox Punchbox 75
I'm MT MT Card Locojoy Locojoy 70
The Legend of King ACT Linekong Linekong 50
Timi match everyday ACG Tencent Tencent 40
Return of the Condor Heroes RPG Perfect World Perfect World 30
Million Arthur Card Square Enix Shanda Games 30
Da Zhang Men Card 27
Meng Jiang Hu Card Youzu Youzu 25
QQ Yujian QQ RPG Tencent Tencent/Feiliu 20
Dream One Piece RPG Youai Youai 20
Wu Xia Q Zhuan Q RPG HuoGu CMGE/Kunlun 20
The World OL RPG 18
Wang Xian RPG /Kunlun 17
Plant Vs Zombie ACG Popcap Tencent 16
Mo Ka Huan Xiang Card iFree Vector(in Japan) 15
Sanguo Now Card RedAtoms Tencent 15
Dragon Force RPG Digital Sky Digital Sky 14
Junwang 2 2 RPG Morefun Morefun 13
Ying Xiong Zhan Hun ACT EGLS Kunlun/Glu 12.5
Shen Xian Dao RPG 12
Little Empire RTS Camel Game Camel Game 10.2
Note: ACG= Advanced Casual Game, RPG=Role Playing Game; RTS=Real-time Strategy.
Source: Pocketbus. Gamelook, Donews, CCidnet, Credit Suisse estimates.
Top mobile game revenue benchmark grows ten-fold in 2013: At the end of 2012, the
monthly revenue benchmark for China's mobile games was Rmb10 mn, with only a few
games, such as Fishing Joy 2 and The World OL, having achieved the level. However, at
the end of 2013, there were already 45 games in China with Rmb10 mn+ monthly revenue,
according to Chukong. We view the new top mobile game monthly revenue benchmark to
be Rmb100 mn, and there are already 4-6 games to achieve such a level, according to
our estimates.
We expect the top mobile game revenue benchmark to achieve Rmb200 mn in 2014,
supported by increasing smartphone penetration in China (we expect 196 mn additional
smartphone ownership in 2014), further growing 3G/4G users and maturity of mobile payment.
We expect top mobile game
revenue benchmark to
achieve Rmb200 mn in
2014
17 January 2014
Tencent: Way ahead in the market
Figure 33: China iOS top grossing mobile game rank
Rank Title Chinese title Genre Developer Publisher
1 Tiantian Speed ACG Tencent Tencent
2 Tiantian Runner ACG Tencent Tencent
3 Quan Min Ying Xiong Card Sixjoy Tencent
4 I'm MT MT Card Locojoy Locojoy
5 Da Zhang Men Card
6 Clash of Clan ACG Supercell Supercell
7 Trump the landlord ACG Tencent Tencent
8 Tiantian Westward Journey Card Eyu Kingsoft
9 Romance of the Three Kingdoms Card Crimoon CMGE
10 Timi match everyday ACG Tencent Tencent
Source: 24 December 2013, AppAnnie
Tencent was the absolute leader in China's mobile game market in 2013. Since the
debut of 'Timi match everyday', the first mobile game on WeChat in August 2013, Tencent
has become the absolute leader in the market. So far, Tencent has launched eight games
on WeChat (not counting the flight shooting game pre-installed in WeChat), five of which
were ranked among the Top 10 China iOS Top Grossing Mobile Games in December
2013, according to AppAnnie. We estimate a Rmb600-700 mn monthly run-rate for
WeChat mobile games in 2014, accounting for ~50% of China's mobile game market.
Channel owner as the largest beneficiary
We expect channel owners to continue to be the largest beneficiary in the China
mobile game market in 2014. We already see strong performance from WeChat,
occupying Top 3 position in iOS top grossing rank, supported by its 272 mn MAU in 3Q13.
Also, Tiantian Westward Journey, a mobile card game exclusively published by Kingsoft is
at No.8 of iOS top grossing rank, supported by cross promotion of various Kingsoft apps,
such as Kingsoft battery doctor (MAU over 20 mn on iOS) and Mobile Liebao Browser.
Top 5 distribution channels to account for 80% of total mobile game distribution
volume in 2014. Top channels, such as Baidu, Tencent, Qihoo, Kingsoft and UCWeb,
will have more bargaining power against developers and enjoy considerable revenue
sharing income (currently, top channels take up 30-40% of total mobile game economics).
Competition in top channels may incrementally benefit mobile game developers:
Starting from 2014, we have seen various channels announcing new revenue sharing
policies that are potentially beneficial to developers:
(1) 91 wireless announced that for mobile games with a monthly revenue of <Rmb500k,
developers will get 62% of total revenue. For mobile games with a monthly revenue
of >Rmb500k, developers will get 42% of total revenue.
(2) Alibaba announced that it will launch a mobile game platform that shares 70% of the
revenue with developers.
(3) Xiaomi has announced that it will also share 70% of the revenue with developers for
games that are exclusively published by it.
(4) According to Zhixiang Jin, Tencent will launch a new revenue sharing policy that is
more beneficial to mobile game developers in 2014.
Overall, we expect mobile game developers with a strong portfolio to enjoy a decent
revenue sharing policy in 2014, given their 'scarcity' for mobile game channels.

We estimate Rmb600-700
mn monthly run-rate for
WeChat mobile games in
2014
We expect Top 5 distribution
channels to account for 80%
of total mobile game
distribution volume in 2014.
17 January 2014
Figure 34: China Android mobile app distribution channel breakdown by volume
Baidu
41%
Qihoo
25%
Wandoujia
12%
Tencent
10%
Anzhi
5%
Others
7%

Source: Analysys
MMOG giants to enter mobile game market: Still in
transition process
Witnessing the strong growth of mobile games, we have seen all the MMOG giants, such
as Netease, Changyou, Shanda Games, Perfect World and Giant, entering the market.
However, the performance of MMOG giants in the mobile game market was
lacklustre in 2013. Successful cases in 2013 were (excluding Tencent games): (1) Million
Arthur (Shanda Games), ~Rmb150 mn monthly run-rate in 3Q13; (2) Return of Condor
Heroes (Perfect World), we estimate Rmb10 mn+ monthly run-rate in 4Q13; and (3)
Mobile Wartune (Changyou), we estimate Rmb10 mn+ monthly run-rate in 4Q13.
Looking into 2014, we expect better performance of traditional MMOG companies in
the mobile game market. With top mobile games having shown a desirable income level
(Rmb150 mn run-rate for Tiantian Runner) and life cycle (I am MT and Da Zhang Men
both have an operating history of over one-year and are still top mobile games in China),
we expect traditional MMOG companies to make higher levels of investment in mobile
game R&D, top game licensing and marketing campaigns, which will cultivate more
successful names from them in 2014.

Looking into 2014, we
expect better performance
of traditional MMOG
companies in the mobile
game market.
17 January 2014
Figure 35: Key mobile games pipeline of listed Internet companies in 2014
Game Title Chinese Title Platform Genre Monetization Official
launch date
Operator Developer Dimension
Hell Lord Mobile game ACG Item-based 1H14 Shanda Actoz 2D
Guardian Cross Mobile game ACG Item-based 1H14 Shanda Square Enix 2D
Dragon Nest Labyrinth : Mobile game TBA Item-based 1H14 Shanda Eyedentity 2D
MINI Gear Mobile game ACG Item-based 1H14 Shanda TBA 3D
Chain Chronicle Mobile game ACG Item-based 1H14 Shanda SEGA 2D
Mini WJ Mobile game ACG Item-based 1H14 NetEase NetEase 2D
Hearth Stone Mobile game ACG Item-based 1H14 NetEase Blizzard 2D
The World HD HD Mobile game RPG Item-based 2014 NetEase NetEase 3D
Advancing Dino Mobile game STG Item-based 2014 NetEase NetEase 2D
Happy Island Mobile game Social Item-based 2014 NetEase NetEase TBA
Code MC MC Mobile game MMORPG Item-based 2014 Changyou Changyou 3D
Mobile DDTank Mobile game ACG Item-based 3Q13 Changyou Changyou 2D
Wo Yao Feng Shen Mobile game ACG Item-based 1H14 Changyou GZ Gude 2D
Eastern Blade Mobile game MMORPG Item-based 1Q14 Changyou SmileGate 2D
Mobile game MMORPG Item-based 2Q14 Changyou Changyou 3D
Mobile game MMORPG Item-based 1H14 Changyou Changyou 3D
Mobile game MMORPG Item-based 1H14 Changyou TBA 3D
Shen Gui Huan Xiang Mobile game ACG Item-based 1Q14 Perfect World Perfect World 3D
Y Game Mobile game MMOG Item-based 1Q14 Perfect World Perfect World 3D
Mobile game ACG Item-based 1H14 Tencent Tencent 2D
Tian Tian Ni Zhan Mobile game ACG Item-based 1H14 Tencent Tencent 2D
Moon Wolf Mobile game ACG Item-based 1H14 Tencent Wemade 2D
Tower of Saviors Mobile game ACG Item-based 1Q14 Tencent Mad head 2D
Fruit Ninja Mobile game ACG Item-based 1H14 Tencent Halfbrick 2D
Temple Run 2 2 Mobile game ACG Item-based 1H14 Tencent Imangi 2D
Devil maker Devil maker Mobile game ACG Item-based 1H14 Tencent Palmple 2D
Mobile game ACG Item-based 1H14 Tencent TBA 2D
Mobile game ACG Item-based 1H14 Tencent 2D
Quan Min Dou San Guo Mobile game ACG Item-based 1H14 Feiliu Tencent 2D

17 January 2014
Mobile IM: WeChat dominates
Limited impact from other domestic IM
Figure 36: Domestic IM registered user comparison (4Q13)
10
30
600
0
100
200
300
400
500
600
700
Laiwang YiChat WeChat
Mn

Source: Company data
Both Alibaba and Netease launched instant messaging (IM) apps in 3Q13. Alibaba
launched 'Laiwang', providing some exclusive functions such as 'Snaps sending' (a
Snapchat-like function) and 500-persons group chat. Netease launched 'YiChat', which is
a collaboration product with China Telecom that provides unique functions such as
sending SMS/voice mail for free.
We view limited impact to WeChat from local competitors. (1) IM is a kind of service
that highly relies on people's network. There is a high cost for users to switch to YiChat/
Laiwang, given their extensive network across QQ/Phone directory on WeChat. (2)
Though YiChat and Laiwang can attract some users with their unique functions, we
believe it is easy for Tencent to provide a similar function in its future update. For example,
Tencent recently expanded its group chat upper limit from 40 people to 100 people in its
latest version 5.1 update, targeting a similar function of competitors. According to the
latest comment from Alibaba and Netease, total registered users of Laiwang and
YiChat in 4Q13 are 10 mn and 30 mn, respectively, still quite low compared with 600
mn of WeChat.
We view limited impact to
WeChat from local
competitors.
17 January 2014
WeChat Payment: Expanding user base
Figure 37: WeChat now provides various e-commerce/life service functions

Source: Company data
Evolving into life service platform
After the recent update, WeChat has become a life service platform providing various life
service functions, such as telephone bill top-ups, movie ticket buying and QQ virtual
currency charging. Due to its 'easy to pay' characteristic (five steps to connect with a new
debit card, three steps to finish the whole transaction), we view the life service function as
a power tool for Tencent to expand the user base of WeChat Payment. According to
Huxiu.com, the total number of users of WeChat Payment has surpassed 10 mn in late
November 2013 and is expanding at 100,000 new users per day.
WeChat e-commerce channel: Upgrade to WeChat Mall
Tencent launched the WeChat e-commerce platform () on 11 November 2013
(Double Eleven Festival), providing 15 bestseller products from 51buy every day. The
platform achieved good results since its debut, achieving 80,000 orders on the first day
and 200,000 orders in the first two weeks.
On 12 December 2013 (Double Twelve Festival), WeChat upgraded previous WeChat e-
commerce platforms into 'WeChat Mall': (1) Added daily-deal products at low prices, such
as iPhone5S, Xiaomi smartphones and Moutai wine; (2) expanded into various categories
through vertical channels, such as 3C, food & snacks, home goods and baby products;
and (3) launched a 'flash sales' channel for various apparel brands, such as Nike, Adidas,
Li Ning, Anta and Nautica, at 5090% discounts. According to 51buy, over 10% of its
total orders are from WeChat Mall at 'Double Twelve'.

Due to its 'easy to pay'
characteristic, we view the
life service function as a
power tool for Tencent to
expand the user base of
WeChat Payment.
17 January 2014
Expansion in O2O market
We also notice various new attempts of WeChat in the O2O market: (1) Leading chain
store restaurant 'Haidilao' now enables WeChat Payment in its near-100 stores in China.
(2) Dianping, a leading local life service portal in China, also enables WeChat Payment in
its group buying channel. According to a Dianping executive, its revenue from mobile has
increased by 20% after collaborating with WeChat. (3) Shopin, a discount outlet chain
store in Beijing, enables WeChat Payment in one of its storesas of 24 December 2013,
the daily transaction volume of WeChat Payment in that store had reached Rmb240,000,
accounting for 11% of its total transaction volume.
Figure 38: Screenshot of 'WeChat Mall' Figure 39: Chain Store Restaurant 'Haidilao' enables
customers to pay bills via WeChat Payment

Source: Company data Source: Company data
We are positive of future user expansion of WeChat Payment in 2014. Though
WeChat Payment's 10 mn+ user base is still limited, compared with 100 mn+ of mobile
Alipay, we are positive on its future expansion, given its smooth user experience so far
and strong user network. The upcoming launch of the WeChat financial platform (providing
a Yu'E Bao-like product) will serve as another catalyst.
We notice various new
attempts of WeChat in the
O2O market
17 January 2014
International expansion: Facing challenges
Figure 40: WeChat/Kakao Talk/LINE MAU comparison
0
50
100
150
200
250
300
1Q12 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
Mn
WeChat Kakaotalk LINE

* Estimate LINE/Kakaotalks MAU as 70% of registered users.
Source: Company data, Credit Suisse estimates
'Internationalisation' is one of the main strategies of WeChat. We see decent performance
of WeChat in the international market. According to Martin Lau, President of Tencent,
WeChat already had 100 mn users for its international version in October 2013. According
to AppAnnie data, WeChat stood at No.5 in the SNS category of iOS top downloads in
December 2014.
Due to the strong position of WhatsApp in the developed market, Tencent's main focus is
on penetration in the emerging market. However, it is also facing competition from LINE,
another popular IM with total registered users of 300 mn as at late November 2013. 80%
of LINE's users are from its international version, compared with ~20% of WeChat.
We expect continuous user expansion of WeChat in the international market in 2014,
especially in emerging markets, such as Southeast Asia, South America and Africa. We
believe international expansion of WeChat will continue to be a drag on cost lines for Tencent,
with competition intensifying in global emerging markets. However, we see potential revenue
generation from the international market in 2014, especially game and stamps.

We believe international
expansion of WeChat will
continue to be a drag on
cost lines for Tencent.
However, we see potential
revenue generation from the
international market in 2014,
especially game and
stamps.
17 January 2014
e-commerce: Consolidation and
Mobile
Online shopping at 8.3% of China retail sales
Chinas e-commerce market has enjoyed significant growth in the past five years,
especially in the online retail segment. After the money-burning and land-grabbing phase
in 2011 and 2012, we have seen some consolidation in the past 12 months. Price
competition has quieted down a bit from the peak level. Leading players are expanding
their market share at much healthier growth rates than smaller players.
If we put ourselves into a long-term time frame, Chinas online retail is still at a nascent
stage, compared with the global level and its fair share, in our view. We expect Chinas
online shopping (B2C+C2C) GMV to grow at a CAGR of 37.5% to reach Rmb3,391 bn by
end-2015, representing 11.5% of Chinas total retail sales.
Figure 41: Chinas online shopping market forecastfrom 8.3% to 11.5% of retail sales by end-15
2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Online shopping GMV (Rmb bn) 26.3 56.1 128.2 263.0 461.0 784.7 1,304.0 1,940.4 2,633.1 3,391.4
Online shopping GMV (US$ bn) 3.32 7.44 18.58 38.68 68.81 123.57 206.98 307.99 417.95 538.31
YoY growth (%) 67.6% 113.2% 128.5% 105.2% 75.3% 70.2% 66.2% 48.8% 35.7% 28.8%
C2C GMV 118.1 242.5 397.8 586.1 916.7 1,200.7 1,450.4 1,639.9
C2C GMV (%) 92.1% 92.2% 86.3% 74.7% 70.3% 64.9% 59.2% 54.3%
B2Conline retailers (%) 2.0% 2.0% 5.7% 11.3% 12.7% 15.1% 15.8% 16.7%
B2Cmarketplace (%) 5.9% 5.8% 8.0% 14.0% 17.0% 20.0% 25.0% 29.0%
Online shopping users (mn) 43.1 55.0 80.0 109.0 148.0 187.0 242.0 300.1 354.1 407.2
As a % of Internet Users (%) 31.5% 26.2% 26.8% 28.4% 32.4% 36.4% 42.9% 49.3% 54.7% 59.3%
Online shopping (% retail sales 0.3% 0.6% 1.1% 2.0% 2.9% 4.3% 6.3% 8.3% 10.0% 11.5%
Online shopping (% GDP) 0.1% 0.2% 0.4% 0.8% 1.2% 1.7% 2.5%
B2C GMV 10.1 20.5 63.2 198.5 387.3 681.1 1,074.3 1,549.9
YoY growth (%) 102.6% 207.9% 214.3% 95.1% 75.9% 57.7% 44.3%
B2Conline retailers 2.6 5.3 26.3 88.7 165.6 293.0 416.0 566.4
B2Cmarketplace 7.6 15.3 36.9 109.9 221.7 388.1 658.3 983.5
B2C as % of retail sales 0.1% 0.2% 0.4% 1.1% 1.9% 2.9% 4.1% 5.3%
Drivers
Online shopping users (mn) 43.1 55.0 80.0 109.0 148.0 187.0 242.0 300.1 354.1 407.2
YoY growth (%) 32.6% 27.6% 45.5% 36.3% 35.8% 26.4% 29.4% 24.0% 18.0% 15.0%
Annual per-capita spend (Rmb) 610 1,020 1,602 2,413 3,115 4,196 5,388 6,466 7,436 8,328
YoY growth (%) 26.4% 67.1% 57.1% 50.6% 29.1% 34.7% 28.4% 20.0% 15.0% 12.0%
Source: iResearch, Credit Suisse estimates
Compared to the global level, China has already surpassed Japan as the second largest
B2C e-commerce country in terms of GMV in 2013, according to eMarketer.
We expect Chinas online
shopping (B2C+C2C) GMV
to grow at a CAGR of 37.5%
to reach Rmb3,391 bn by
end-15, representing 11.5%
of Chinas total retail sales.
17 January 2014
Figure 42: B2C e-commerce sales worldwideChina among the fastest-growing countries
in US$ bn
2011 2012 2013E 2014E 2015E 2016E
North America 327.8 373.0 419.5 469.5 523.1 580.2
US 308.6 351.8 395.3 442.0 492.1 545.8
Canada 18.6 21.2 24.3 27.6 31.0 34.4
Asia Pacific 237.9 315.9 388.8 501.7 606.5 707.6
Japan 112.9 127.8 118.6 127.1 135.5 143.1
China 56.7 110.0 181.6 274.6 358.6 439.7
Australia 22.9 25.3 26.8 28.3 29.8 31.2
South Korea 16.3 17.3 18.5 20.2 21.9 23.7
India 8.7 12.1 16.3 20.7 25.7 30.3
Indonesia 0.6 1.0 1.8 2.6 3.6 4.5
Other 19.8 22.3 25.1 28.2 31.5 35.0
Western Europe 218.3 255.6 291.5 326.1 358.3 387.9
UK 76.8 87.3 99.2 111.3 122.7 132.8
Germany 38.1 47.0 53.0 58.0 62.0 66.0
France 29.7 33.3 37.0 40.4 43.6 46.9
Spain 15.6 18.6 21.6 24.5 27.5 30.2
Italy 12.9 16.2 19.8 23.8 27.8 31.3
Other 45.2 53.3 60.9 68.1 74.8 80.8
Central/Eastern Europe 30.9 40.2 48.6 58.0 64.5 68.9
Russia 11.1 14.5 17.5 20.9 23.2 24.8
Other 19.8 25.7 31.0 37.0 41.2 44.1
Latin America 28.3 37.7 46.0 56.0 63.0 69.6
Brazil 13.9 17.0 19.7 23.5 25.5 27.3
Mexico 4.2 6.2 8.0 9.9 11.4 12.9
Argentina 2.6 3.4 3.9 4.8 5.7 6.3
Other 7.7 11.2 14.4 17.8 20.5 23.1
Middle East & Africa 14.4 20.6 27.0 33.8 39.6 45.5
Total worldwide 857.0 1,043.0 1,221.3 1,445.0 1,654.9 1,859.8
Source: eMarketer, June 2013
Within Asia Pacific, China will outgrow other countries in e-commerce size and is expected to
take 23.6% of the worldwide B2C e-commerce market by end-2016, according to eMarketer.
Figure 43: China will outgrow the rest of Asia-Pac in B2C
e-commerce in the coming years
Figure 44: Online shopping as a % of total retailChina
catching up
6.6%
10.6%
14.9%
19.0%
21.7% 23.6%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011 2012 2013E 2014E 2015E 2016E
Japan China Australia South Korea
India Indonesia Other

6.3%
6.4%
6.5%
4.6%
10.2%
9.0%
6.0%
3.5%
2.0%
0% 2% 4% 6% 8% 10% 12%
China
Korea
Japan
U.S.
U.K.
Germany
France
Spain
Russia

Source: eMarketer, June 2013 Source: CEIC, iResearch, eMarketer, Korea Stats, US Census
Bureau, Euromonitor, Credit Suisse estimates, 2012.
17 January 2014
Looking across major countries, after several years of fast growth, China's online retail
penetration level has already surpassed the US and Japan, but is still lower than the UK,
Germany and Korea.
Category expansion through marketplaces
Leading comprehensive B2C retailers made solid progress in their marketplace business
to help enrich their product categories and monetise large traffic. Through retaining users
to buy more goods in non-core categories, leaders are eating into the market share of
smaller and vertical players.
Figure 45: China's leading online retailers GMV size
in Rmb bn
Type Category 2010 2011 2012
Alibaba (B2C+C2C) e-commerce platform Comprehensive 400.0 637.9 1000.7
Tmall (B2C only) B2C marketplace Comprehensive 26.3 92.0 207.2
Jingdong (360buy) Comprehensive B2C retailers Comprehensive 10.2 30.9 66.0
Suning.com Comprehensive B2C retailers Comprehensive 2.0 5.9 18.8
QQ Mall B2C marketplace Comprehensive 2.0 5.3 11.5
Amazon China Comprehensive B2C retailers Comprehensive 3.0 6.0 10.5
Xiaomi.com Branded retailersonline 3C 10.0
Dangdang Comprehensive B2C retailers Comprehensive 1.4 4.1 7.5
Yixun (51buy) Vertical B2C retailers Comprehensive 0.8 2.4 5.8
VIPShop Flash sales Comprehensive 0.3 1.4 5.4
Vancl Branded retailersonline Apparels 1.9 3.5 4.5
Yihaodian Comprehensive B2C retailers Comprehensive 0.8 2.7 4.5
Coo8 Vertical B2C retailers 3C & Appliances 0.5 2.1 3.6
Newegg Vertical B2C retailers 3C & Appliances 1.3 1.5 1.9
Jumei.com Vertical B2C retailers Cosmetics, apparels 0.4 1.8
Redbaby Vertical B2C retailers Mother/Baby 1.5 1.5 1.6
Lefaso Vertical B2C RETAILERS Cosmetics 0.2 1.0 1.5
Gome Online arm of offline retailers 3C & Appliances 0.3 1.0 1.4
Moonbasa Branded retailersonline Apparels 0.2 0.9 1.3
Jiuxian.com Vertical B2C retailers Wines 0.4 1.2
hicdma.com Vertical B2C retailers 3C 0.2 0.5 0.8
V+ B2C marketplace Apparels 0.2 0.3 0.8
Xiu.com Vertical B2C retailers Apparels 0.2 0.5 0.7
Tiantian.com Vertical B2C retailers Cosmetics 0.4 0.7
Lenovo.com Branded retailersonline + offline 3C 0.1 0.3 0.7
Yintai.com Comprehensive B2C retailers Comprehensive 0.2 0.6
M18 Branded retailersonline + offline Apparels 0.7 0.8 0.6
OKBuy Vertical B2C retailers Footwear 0.2 0.6 0.5
mBaobao Branded Retailersonline Bags & Luggage 0.2 0.5 0.5
Womai.com Branded Retailersonline + offline Food 0.2 0.4
Yougou.com Branded Retailersonline + offline Footwear 0.1 0.4
lusen.com Vertical B2C retailers 3C & Appliances 0.2 0.3 0.4
Letao Vertical B2C retailers Footwear 0.1 0.5
New7.com Vertical B2C retailers 3C & Appliances 0.1 0.3
iHush Flash sales Flash Sale 0.2 0.3
Winxuan.com Vertical B2C retailers Books 0.1
Shopin.net Flash sales Discount Goods 0.1
Source: iResearch
That said, we also expect some leaders in certain verticals to extend their leading position,
and successfully expand into new categories in 2013.
Leading comprehensive
B2C retailers made solid
progress in their
marketplace business
17 January 2014
Marketplace to expand SKU variety and lift profitability
Within online shopping, the B2C marketplace particularly gained momentum in 2013 and
stayed on-track to take 29% of China's total online shopping market by 2015E.
Every major player put much emphasis on its market place in 2013. As online retailers
accumulate their customer base, at a certain level, many found it a better way to monetise
this large traffic base by hosting merchant services rather than owning the inventory and
reselling themselves.
Jingdong: Jingdong launched its marketplace in December 2010. In 2012, total GMV
of Jingdong marketplace was ~Rmb12 bn (~20% of JDs total GMV in 2012). Jingdong
started to put more emphasis on marketplace in 2013. In July 2013, Jingdong hosted
the first Jingdong open platform partner conference. According to Richard Liu, CEO of
Jingdong, the development of marketplace will be the key focus for Jingdong from 2013.
In order to attract third-party merchants, Jingdong will open its logistics service to them.
He also hoped that marketplace will account for 50% of total GMV of Jingdong in 2016.
In the future, Jingdong will only operate 10% of total SKU by itself. Currently, Jingdong
has ~30,000 third-party merchants and total SKU of 11 mn.
Dangdang: Dangdang launched its market place service in 2009. As at December
2012, there were more than 3,000 third-party merchants on Dangdangs marketplace.
In 2Q13, GMV of Dangdangs marketplace was Rmb788 mn, +178% YoY, accounting
for ~35% of its total GMV. According to Danqian Yao, senior VP of Dangdang,
Dangdang will focus on collaboration with leading vertical B2C and strictly manage
third-party merchants in order to guarantee overall service quality of Dangdang.
Currently, leading vertical B2C merchants, such as Gome and Moonbasa, have
entered the Dangdang marketplace.
Vipshop: Starting from 2Q13, Vipshop started to migrate some of its non-core, bulky
categories of goods from its self-run B2C to its marketplace, where Vipshop will not be
responsible for the fulfilment of the goods purchased. Categories running on
marketplaces mainly include home goods, home appliances and 3Cs. Contribution to
Vipshop's overall GMV is still very limited.
Yihaodian: Yihaodian launched its marketplace 1Mall.com () in 2010. By
the end of June 2013, there were over 6,000 third party merchants on Yihaodian.
Currently, leading brands such as jiuxian.com (wine vertical B2C), Philips and HP
have entered the Yihaodian marketplace.
The backdrop behind the expansion of marketplaces is that buyer traffic on Alibaba
platform has become more expensive and complexto the extent that both merchants
and users are open to alternative destinations. On the users' side, users sometimes find it
hard to locate the exact items they want and take a large amount of time browsing through
millions of merchants. On the merchants' side, it is becoming more expensive to buy top
ad slots of popular keywords on Alibaba.
We see marketplaces as a lighter business modelmore scalable and margin accretive to
most B2C retailers. Many B2C players have finally realised they can't use their own-
inventory models for all product categories. Marketplaces help expand SKU variety,
enlarge per-order size and improve purchase frequency. These ultimately enhanced user
experience and lifted profitability overall.
Take-off of mobile e-commerce
2014 is poised to become a year of significant ramp-up of mobile e-commerce. Leading
B2C retailers and marketplaces already have 40-50% of traffic coming from mobile, with
close to 20% of GMV generated on mobile devices.
We see marketplaces as a
lighter business model
more scalable and margin
accretive to most B2C
retailers.
17 January 2014
Figure 46: China e-commerce companies' mobile traffic and GMV
Company Alibaba Jingdong Dangdang Vancl Yihaodian Moonbasa Xiu VIPShop 55.com Meituan
Mobile % of traffic 40.0% 22.0%
Mobile % of GMV 7.0% 6.0% 10.0% 20.0% 6.0% 8.0% 10.0% 18.0% 30.0% 25.0%
Source: Sina News, iResearch, company data
The following factors will drive the adoption of mobile e-commerce in 2014: (1) readiness
of mobile payment, (2) proliferation of mobile payment application scenarios, (3) further
smart-device penetration, and (4) 4G roll-out and lowering of data plan prices.
Figure 47: Mobile e-commerce GMV and penetration Figure 48: Mobile e-commerce GMV market share
0.7%
1.1%
1.6%
2.3%
3.0%
4.4%
5.6%
5.7%
7.6%
8.6%
9.5%
0%
2%
4%
6%
8%
10%
12%
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Mobile eCommerce GMV As % of B2C+C2C GMV

Taobao,
76.6%
Jingdong,
6.0%
Tencent,
1.5%
Suning,
0.8%
Amazon.cn,
0.6%
Dangdang,
0.5%
Vancl, 0.4%
Ytao.cn,
0.3%
Others,
13.3%

Source: iResearch Source: iResearch
Besides physical goods e-commerce, mobile fits into the application context of virtual
items and service e-commerce even better. We expect mobile sales of e-coupons, movie
tickets, lottery, virtual gifts, as well as payment of utilities, phone bills and other local
services to be major areas of growth in 2014.

17 January 2014
Online ad
China's online advertising market has grown decently in previous years, and by the end of
2013, we expect the overall market size to have reached Rmb85.5 bn, up 25.6% YoY.
Online advertising accounted for 23% of China's total advertising market in 2013,
compared to the US online advertising market's 22.5% of the overall advertising market.
Figure 49: China Internet advertising industry growth
trend
Figure 50: China online ad market and overall ad market
comparison
0%
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15%
20%
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(
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)
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1
8
E
2
0
1
9
E
2
0
2
0
E
China ad market growth rate China Internet ad market growth rate

Source: iResearch, Credit Suisse estimates Source: iResearch, Credit Suisse estimates
We estimate that China's online ad market will reach Rmb103.9 bn in 2014, up 21.5% YoY
and accounting for 24.4% of the total ad market.
Major drivers in 2014 for online ads are: (1) further diversified advertising formats; (2)
deeper penetration of online advertisers in lower tier cities and SMEs; (3) increasing user
numbers and time spent on the Internet; (4) increasing penetration ratio and user time
spent on mobile video applications; (5) further adoption of ads on mobile; and (6)
continued budget shifting to online ad formats from offline.
Figure 51: China online advertising market forecast
Rmb mn 2006 2007 2008 2009 2010 2011 2012 2013E 2014E 2015E
Brand 2,980 4,871 8,411 8,997 13,518 17,532 19,285 21,600 25,488 29,311
Search 1,412 2,880 5,331 6,991 11,038 18,880 28,028 38,782 48,096 58,022
Video 100 250 570 1,360 2,150 4,250 6,720 9,408 12,701 16,638
Others 1,655 2,771 3,770 4,742 6,513 12,411 14,025 15,708 17,593 19,704
Total online ad market 6,147 10,771 18,082 22,089 33,219 53,073 68,058 85,497 103,877 123,675
Ad market (% of GDP) 0.64% 0.62% 0.60% 0.58% 0.63% 0.71% 0.73% 0.75% 0.79% 0.83%
Online ad ( % of total ad
market)
3.2% 4.9% 10.0% 11.2% 13.4% 17.5% 20.1% 22.9% 24.4% 25.7%
Source: iResearch, Company data, Credit Suisse estimates
We recommend investors focus on growth layers of online ads in 2014: performance-based
ads, new mobile ad formats and, to a less extent, online video in the next few quarters.
Search
The search market will likely enter a new era in 2014Baidu, Qihoo and Sogou will
extend their competition from PC to mobile.
After Baidu takes a clear lead, Qihoo will officially enter the mobile search market with new
product offerings. Sogou will integrate with more of Tencent's mobile assets to expand its
We estimate that China's
online ad market will reach
Rmb103.9 bn in 2014, up
21.5% YoY and accounting
for 24.4% of the total ad
market.
17 January 2014
mobile search distribution, and explore more innovative search formats on WeChat and
Tencent Map.
On PC, Qihoo would extend monetisation efforts on PC to close its traffic-money gap.
Baidu's Zhixin will further sustain its PC revenue momentum by further increasing
monetisation depth. Sogou is likely to benefit from Tencent's traffic base to increase its
organic traffic share. This shall further help its revenue share and profitability in 2014E.
According to our estimates, China's search engine advertising market reached Rmb38.8
bn in 2013, up by 38% YoY and now accounts for 45% of the total online ad market.
Recently, the search engine ad market growth has been slowing down due to large base
effects and PC to mobile transition. We are still positive on the search market in the long
term, as mobile search increases monetisation.
Figure 52: China online search engine market size Figure 53: China online search engine market YoY growth
20%
22%
24%
26%
28%
30%
32%
34%
36%
38%
40%
0
2
4
6
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10
12
1
Q
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3
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0
7
3
Q
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7
1
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8
1
Q
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9
3
Q
0
9
1
Q
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Q
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Q
1
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1
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Q
1
2
3
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1
2
1
Q
1
3
3
Q
1
3
Search Engine Market Size (Rmb Bn)
% of total online ad market

-20%
0%
20%
40%
60%
80%
100%
120%
140%
Online search engine market Online ad market

Baidu still dominates the PC search engine ad market, with a market share of 81.4% in
3Q13. Other domestic search engines, such as Qihoo 360, Tencent Soso and Sogou, are
gaining market share from Google China. According to iResearch, Qihoo's search engine
traffic has accounted for over 15% of total search engine traffic, but its revenue was only
1.6% of the entire market. We expect Qihoo's search engine revenue to ramp up in the
next two years.
Figure 54: Search engine market breakdown by revenue Figure 55: Major search engines ad revenue YoY growth
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Baidu Google China Sohu Sogou
Tencent Soso Qihu Others

0%
50%
100%
150%
200%
250%
300%
1Q112Q113Q114Q111Q122Q123Q124Q121Q132Q133Q13
Baidu Google China Sohu Sogou Tencent Soso

Baidu still dominates the PC
search engine ad market,
with a market share of
81.4% in 3Q13.
17 January 2014
Mobile ads: Potential year of inflection point
As mobile traffic ramped up significantly during 2013 across all Internet sub-segments,
mobile ad spending, especially branded mobile ads, lagged growth of traffic significantly.
Figure 56: Mobile revenue % still lags mobile traffic % by a large amount
%

40%
50%
25%
70%
78%
50%
40%
12%
17%
15%
49%
20%
3%
10%
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Baidu Naver Google Facebook Sina Weibo Youku Dangdang
Mobile Traffic Mobile Revenue
Gap: 50% traffic vs. 18%
revenue on average

In 2014, we expect performance-based mobile ads to continually benefit from intense
competition in mobile traffic. Leading mobile app/game distribution channels will further
consolidate the market and expand their shares. Channels with sizeable volumes and
differentiated user profiles may have the opportunity to realise their value proposition.
More innovation in performance-based ad formats and technology should also help the
growth of the entire value chain.
Figure 57: User time spent split by PC and mobile Figure 58: DAU (daily active user) of Android users
4
.
4
%
4
.
5
%
5
.
6
%
6
.
0
%
6
.
4
%
7
.
3
%
8
.
2
%
8
.
0
%
8
.
5
%
8
.
8
%
86%
88%
90%
92%
94%
96%
98%
100%
A
u
g
-
1
2
S
e
p
-
1
2
O
c
t
-
1
2
N
o
v
-
1
2
D
e
c
-
1
2
J
a
n
-
1
3
F
e
b
-
1
3
M
a
r
-
1
3
A
p
r
-
1
3
M
a
y
-
1
3
PC Mobile

0%
10%
20%
30%
40%
50%
60%
0
50
100
150
200
250
300
2Q12 3Q12 4Q12 1Q13 2Q13 3Q13
DAU of Android users (mn) QoQ growth

Source: iResearch Source: Baidu Wireless report 3Q13
In 2014, we expect
performance-based mobile
ads to continually benefit
from intense competition in
mobile traffic-
17 January 2014
In mobile search, we have witnessed strong search query volume pick-up in recent
months on leading players. More than 30% of Baidu's search traffic comes from mobile,
but only ~10% of revenue comes from it. Wider distribution through apps and mobile webs,
as well as better search result presentation may gradually help monetisation in the next
two years.
New channels may potentially change the landscape of app/game distribution in 2014.
With their customised data plan offerings and diversified services, virtual network
operators (VNO) may potentially become another channel of app/services distribution for
upstream traffic seekers to offer their products.
Figure 59: Mobile advertising market still small
in Rmb bn
0.5
0.9
1.2
2.4
6.4
10.3
16.2
24.6
30.7
0.1 0.2 0.3
0.6
1.3
2.6
5.3
10.2
15.4
0
5
10
15
20
25
30
35
2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E
Mobile Ads (ex-search) Mobile Search

Source: iResearch
We also expect advertiser mindset in mobile branding spend allocation to potentially
change. As mobile is eating into the users' time spent on newspapers and magazines,
budget migration from traditional media and PC to mobile is happening. When brand
advertisers revise their annual budget and spending size in early 2014, mobile allocation is
an important metric to track.
Figure 60: Mobile online video user's penetration of PC
online video users increased consistently
Figure 61: Mobile online video user growth outperformed
mobile Internet users
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
2H10 1H11 2H11 1H12 2H12 1H13
0
20
40
60
80
100
120
140
160
(
m
n
)
Mobile online video users (mn) % of PC online video users

0%
5%
10%
15%
20%
25%
30%
35%
40%
1
H
1
1
2
H
1
1
1
H
1
2
2
H
1
2
1
H
1
3
Mobile online video users Mobile internet users

Source: CNNIC Source: CNNIC
In mobile search, we have
witnessed strong search
query volume pick-up in
recent months on leading
players
17 January 2014
Within mobile brand ads, mobile video is still in the woods, pending a resolution on better
tracking technologies and performance metrics improvement. 4G roll-out may help in the
longer run.
In-app mobile brand ads (banner, offer wall, etc.) may get more traction in 2014. In 2H13,
advertisers experimented on a small scale with the placement of banners on popular
mobile apps, content pages of mobile news app, ad slots in WeChat official accounts and
in-feed slots on Weibo. In 2014, these new mobile display formats are likely to contribute
more to the bottom line of online ad companies. That said, further technology innovation
and ecosystem building are needed to improve conversion and pricing.
Portal/Social
Pure-play PC portal may be subject to more potential budget losses to video and mobile in
2014. Leading portals bundled the sales of traditional portal ads with social/mobile
inventory packages in 2013.
Major social media platforms are proactively developing new ad formats to monetise their
large user base. Sina Weibo now accounts for more than 550 mn registered users;
Tencent micro-blog DAU reached 70 mn in 3Q13; WeChat MAU also reached 272 mn.
Tencent's Guang Dian Tong and Weibo's Fen Si Tong have been gaining advertiser
traction in recent quarters.
On the other hand, we believe there are still challenges for social-based display ads: (1)
advertisers still need to be educated to accept this new advertising format; (2) technology
of the targeted advertising system needs further improvement to accurately target the
desired customer base; (3) there is no authoritative third-party agency to track the impact
of social advertising.
Vertical portals in auto and real estate are moving closer to be involved in transactions,
rather than relying on pure online marketing budgets to generate revenue.
Video: Outperforming growth with competition
heating up
We estimate the online video ad market to reach Rmb12.7 bn in 2014, up 35% YoY. We
expect online video ad to account for 12.2% of the total online ad market, up from 9.9% in
2012.
Figure 62: Online ad segment growth Figure 63: Online ad segment revenue
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2
0
0
6
2
0
0
7
2
0
0
8
2
0
0
9
2
0
1
0
2
0
1
1
2
0
1
2
2
0
1
3
E
2
0
1
4
E
Display (ex-Video) Advertising Other Online Format
Total Internet Ad Video Advertising
Search Advertising

0
20
40
60
80
100
120
2006 2007 2008 2009 2010 2011 2012 2013E 2014E
(
R
m
b

b
n
)
Display (ex-Video) Advertising Video Advertising
Search Advertising Other Online Format

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Mobile video is still in the
woods, pending a resolution
on better tracking
technologies and
performance metrics
improvement. 4G roll-out
may help in the longer run
17 January 2014
We expect video growth to continue to outperform the overall market in 2014 due to: (1)
continued growth in online video users; (2) continued budget shifts from TV to online video;
(3) lower CPM (cost per thousand impressions) in lower tier cities with high spending
efficiency; (4) middle-roll ad has not been widely used, there is still inventory room; and (5)
more mobile Internet ad revenue from tablets and phones.
In our view, key focus of online video sector growth in 2014 would be:
RTB: How much self-run DSP and RTB systems could help online video players to
better monetise their long-tail inventories.
Content competition: Towards end-2013, major online video players are becoming
more aggressive in competing for top content on an exclusive basis. Cost pressure
from traffic competition may emerge again.
In-house production traction: Almost all online video players emphasised on in-
house production in the past two years. In 2013, we saw some successful in-house
dramas/shows from leading players like Youku, Sohu and LeTV, with good VV metrics
and limited investment. However, head drama and top TV shows with much social
traction are still mostly from professional producers. The quality of online video in-
house production still has much scope to improve.
PC sell-through rate in lower-tier cities: Continued penetration into lower-tier city
advertisers and inventory sell-through to drive PC revenue growth.
Figure 64: Online video market share based on ad revenue
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
2011FY 1Q12 2Q13 3Q13
Youku & Tudou Sohu iQiyi+PPS PPTV Tencent video LeTV Others

Source: Analysys, iResearch, Credit Suisse research
On mobile, mobile video ads are still in the woods, pending resolution on better tracking
technologies and performance metrics improvement. 4G roll-out, especially China Mobile's
effort in enabling its massive user base with data plans, may help in the longer run.
Mobile Internet user scale has been ramping up fast since 1H11, and already accounts for
38% of PC online video users. In 2012, the mobile traffic contribution of different online
video websites was quite differentiated. According to iQiyi, mobile traffic already
accounted for 25% of its total traffic, but Tencent's mobile traffic percentage of total traffic
was only 5% in 2012.
Figure 65: Mobile traffic contribution to major online video websites2012
56.com Tencent video iQiyi
Mobile traffic (% of total traffic) 10% 5% 25.0%
Source: Credit Suisse
Key focus of online video
sector growth is pricing:
Whether online video site
will be able to raise its
executed blended ad rate
more than 30-40% YoY.
17 January 2014
Stock recommendation changes
Figure 66: Summary of stock recommendation thesis*
in local currency
Company Ticker Rating TP Up/Downside CS est/street* Key thesis
Baidu BIDU US O 220 29% 7.5% (1) Mobile revenue ramping up in 2014; (2) Internet finance
as a new driver; (3) margin under pressure
Ctrip CTRP US O 58 44% -25.2% (1) Market share expansion as top-priority; (2) Ctrip's
expanded product offerings to capture outbound and leisure
travel; (3) competitive pricing strategy and marketing spend
to drag down margin
SouFun SFUN US O 110 23% 1.1% (1) Structural beneficiary of real estate demand shift from
offline to online; (2) e-commerce and listing as key growth
segments; (3) finance as a new layer of sticky service; (4)
mobile as a new catalyst.
Sohu SOHU US O 95 25% 32.4% (1) Good traction on Sogou; (2) Sohu Video: well-balanced
video platform with strength in both in-house and licence
content; (3) Changyou investment to drag down bottom line.
Tencent 700 HK O 619 21% -2.9% (1) Valuing Tenpay and Weixin Payment at US$25 bn.
(2) BnS and mobile games revenue progression to be
near-term themes; (3) inflection point for social
networks revenue growth: mobile VIP membership.
Changyou CYOU US N 34 10% -15.1% (1) Solid performance in webgame with potential in TLBB
rebound; (2) mediocre mobile game performance, bottom line
under pressure from increasing marketing and licensing
expense of mobile game
Vipshop VIPS US N 80 -17% -2.9% (1) 2014 will be an important year of strategic execution for
Vipshop; (2) investment ramp-up in traffic acquisition and
brand building; (3) focus on quality improvement and more
inventory share
Note: Priced as of 15 January 2014. O = Outperform; N = Neutral.
* FY14E EPS differences between CS estimates and consensus.

17 January 2014

Asia Pacific / China
Consumer Internet

Baidu Inc
(BIDU.OQ / BIDU US)
INCREASE TARGET PRICE
The dawn of mobile monetisation
Mobile revenue ramping up in 2014. We expect the mobile and PC
monetisation gap to gradually narrow for Baidu in 2014. We expect it to see
strong momentum in mobile search revenue in 2014, supported by: (1) more
mobile-optimised sites, (2) Baidu's strong control over mobile entry points
(mobile search DAU of 130 mn, mobile search app installation base of 330
mn+) and (3) higher acceptance mobile search and cost per call models by
advertisers. We also expect Baidu's mobile app stores (90 mn+ daily
distribution in December 2013, according to Baidu, 40.6% market share
according to Analysys 3Q13 data) to ride the wave of the fast-growing mobile
game market in 2014.
Internet finance as a new driver. We expect that in the short to medium
term, potential revenue could mainly come from two sources in Internet
finance: (1) to B: based on the latest annual advertiser base of ~600,000,
Baidu can issue loans or offer credit lines to these SMEs with marketing
spend data supporting credit rating and analysis; (2) to C: Baidu would serve
as a distribution platform and help distribute financial products, such as
funds, trusts and WM products. We see potential revenue opportunities
(interest income) for Baidu's finance-related offerings reaching an annual
run-rate of ~Rmb3 bn in a blue-sky scenario.
Margin under pressure. With investment into the future, we believe margins
won't see expansion in 2014, with (1) increasing TAC level due to higher
revenue contribution of contextual ad and potential competition for union
members; (2) increasing S&M level due to marketing activities for mobile apps
and entry points, (3) large-scale content spending of iQiyi.
Maintain OUTPERFORM, increase target price to US$220. Our target price
implies 31.1x FY14E and 24.1x FY15E earnings, implying a PEG of 1x on the
back of 20-25% long-term earnings growth. We believe it's still a good entry
point for investors, given potential upside in mobile and verticals expansion.
Share price performance
60
110
160
80
130
180
Price (LHS) Rebased Rel (RHS)

The price relative chart measures performance against the
MSCI CHINA F IDX which closed at 6221.46 on 15/01/14
On 15/01/14 the spot exchange rate was US$1./US$1

Performance over 1M 3M 12M
Absolute (%) 1.3 2.8 55.1
Relative (%) -2.5 -3.2 29.6
Financial and valuation metrics
Year 12/12A 12/13E 12/14E 12/15E
Revenue (Rmb mn) 22,306.0 31,906.9 43,346.7 55,333.0
EBITDA (Rmb mn) 12,410.6 13,599.3 18,776.8 24,408.6
EBIT (Rmb mn) 11,051.3 11,809.3 16,158.2 20,826.5
Net profit (Rmb mn) 10,668.3 11,295.9 15,579.9 20,260.9
EPS (CS adj.) (Rmb) 30.50 32.06 43.26 55.96
Change from previous EPS (%) n.a. -0.7 2.2 2.2
Consensus EPS (Rmb) n.a. 30.4 39.8 53.3
EPS growth (%) 57.0 5.1 34.9 29.3
P/E (x) 33.8 32.1 23.8 18.4
Dividend yield (%) 0.0 0.0 0.0 0.0
EV/EBITDA (x) 27.2 23.9 16.4 11.7
P/B (x) 13.8 9.4 6.7 4.9
ROE (%) 51.6 35.0 33.3 30.8
Net debt/equity (%) Net cash Net cash Net cash Net cash
Source: Company data, Thomson Reuters, Credit Suisse estimates.
Rating OUTPERFORM*
Price (15 Jan 14, US$) 170.50
Target price (US$) (from 200.00) 220.00
Upside/downside (%) 29.0
Mkt cap (US$ mn) 59,637 (US$59,637 mn)
Enterprise value (Rmb mn) 325,311
Number of shares (mn) 349.77
Free float (%) 94.4
52-week price range 181.883.6
ADTO - 6M (US$ mn) 146.6

*Stock ratings are relative to the coverage universe in each
analyst's or each team's respective sector.
Target price is for 12 months.

Research Analysts
Dick Wei
852 2101 7339

17 January 2014
Baidu Inc BIDU.OQ / BIDU US
Price (15 Jan 14): US$170.50, Rating: OUTPERFORM, Target Price: US$220.00, Analyst: Dick Wei
Target price scenario
Scenario TP %Up/Dwn Assumptions
Upside 250.00 46.63
50% CAGR for # of active online mktg
customers from 13-15E
Central case 220.00 29.03
Downside 190.00 11.44

Key earnings drivers 12/12A 12/13E 12/14E 12/15E
Average active online
mktg customers in quarter
367,250 453,240 494,639 570,126

Income statement (Rmb mn) 12/12A 12/13E 12/14E 12/15E
Sales revenue 22,306 31,907 43,347 55,333
Cost of goods sold 6,438 11,178 15,865 20,408
SG&A 2,447 4,727 5,977 7,313
Other operating exp./(inc.) 1,010 2,403 2,727 3,204
EBITDA 12,411 13,599 18,777 24,409
Depreciation & amortisation 1,359 1,790 2,619 3,582
EBIT 11,051 11,809 16,158 20,827
Net interest expense/(inc.) (759) (919) (1,598) (2,363)
Non-operating inc./(exp.) 155.5 58.0
Associates/JV
Recurring PBT 11,965 12,787 17,756 23,189
Exceptionals/extraordinaries
Taxes 1,574 2,076 2,835 3,693
Profit after tax 10,391 10,711 14,921 19,496
Other after tax income
Minority interests (64.8) (104.5) (126.0) (126.0)
Preferred dividends
Reported net profit 10,456 10,815 15,047 19,622
Analyst adjustments 212.3 480.5 532.6 639.1
Net profit (Credit Suisse) 10,668 11,296 15,580 20,261
Cash flow (Rmb mn) 12/12A 12/13E 12/14E 12/15E
EBIT 11,051 11,809 16,158 20,827
Net interest 914 977 1,598 2,363
Tax paid (1,574) (2,076) (2,835) (3,693)
Working capital 3,347 1,726 2,351 2,710
Other cash & non-cash items 1,572 2,271 3,151 4,221
Operating cash flow 15,310 14,707 20,424 26,427
Capex (2,508) (2,612) (3,766) (4,895)
Free cash flow to the firm 12,803 12,095 16,658 21,532
Disposals of fixed assets
Acquisitions
Divestments
Associate investments
Other investment/(outflows) (2,354) (4,683) (2) (2)
Investing cash flow (4,862) (7,295) (3,767) (4,897)
Equity raised 243 1,288 947 1,152
Dividends paid
Net borrowings 7,483 8,824
Other financing cash flow 42.6 126.7 126.0 126.0
Financing cash flow 7,769 10,238 1,073 1,278
Total cash flow 18,217 17,649 17,730 22,808
Adjustments
Net change in cash 18,217 17,649 17,730 22,808
Balance sheet (Rmb mn) 12/12A 12/13E 12/14E 12/15E
Cash & cash equivalents 32,880 50,529 68,259 91,067
Current receivables 1,253 1,455 1,879 2,353
Inventories
Other current assets 541 1,084 1,399 1,753
Current assets 34,674 53,069 71,537 95,173
Property, plant & equip. 3,958 4,782 5,931 7,246
Investments 803 2,134 2,134 2,134
Intangibles
Other non-current assets 6,233 9,584 9,584 9,584
Total assets 45,669 69,569 89,186 114,137
Accounts payable 3,807 6,913 8,899 11,200
Short-term debt
Current provisions
Other current liabilities 4,430 3,794 4,898 6,136
Current liabilities 8,237 10,707 13,797 17,336
Long-term debt 9,337 15,284 15,284 15,284
Non-current provisions
Other non-current liab. 881 3,757 3,757 3,757
Total liabilities 18,454 29,748 32,838 36,377
Shareholders' equity 26,055 38,562 55,089 76,502
Minority interests
Total liabilities & equity 45,669 69,569 89,186 114,137
Per share data 12/12A 12/13E 12/14E 12/15E
Shares (wtd avg.) (mn) 349.8 352.3 360.1 362.1
EPS (Credit Suisse)
(Rmb)
30.5 32.1 43.3 56.0
DPS (Rmb)
BVPS (Rmb) 74 109 153 211
Operating CFPS (Rmb) 43.8 41.7 56.7 73.0
Key ratios and valuation 12/12A 12/13E 12/14E 12/15E
Growth(%)
Sales revenue 53.8 43.0 35.9 27.7
EBIT 45.9 6.9 36.8 28.9
Net profit 57.1 5.9 37.9 30.0
EPS 57.0 5.1 34.9 29.3
Margins (%)
EBITDA 55.6 42.6 43.3 44.1
EBIT 49.5 37.0 37.3 37.6
Pre-tax profit 53.6 40.1 41.0 41.9
Net profit 47.8 35.4 35.9 36.6
Valuation metrics (x)
P/E 33.8 32.1 23.8 18.4
P/B 13.8 9.4 6.7 4.9
Dividend yield (%)
P/CF 23.6 24.7 18.2 14.1
EV/sales 15.1 10.2 7.1 5.1
EV/EBITDA 27.2 23.9 16.4 11.7
EV/EBIT 30.5 27.5 19.0 13.7
ROE analysis (%)
ROE 51.6 35.0 33.3 30.8
ROIC 351 240 342 655
Asset turnover (x) 0.49 0.46 0.49 0.48
Interest burden (x) 1.08 1.08 1.10 1.11
Tax burden (x) 0.87 0.84 0.84 0.84
Financial leverage (x) 1.68 1.75 1.58 1.47
Credit ratios
Net debt/equity (%) (86.5) (88.5) (94.0) (97.5)
Net debt/EBITDA (x) (1.90) (2.59) (2.82) (3.10)
Interest cover (x) (14.6) (12.8) (10.1) (8.8)

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12MF P/E multiple

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12MF P/B multiple

Source: IBES
17 January 2014
Rating and estimates
We maintain our OUTPERFORM rating on Baidu and increase our target price to
US$220 (from US$200).
We arrive at our target price on the back of a combination of three methodologies:
(1) P/E
We use P/E multiple as a valuation reference for Baidu. Our target price of US$220 implies
31.1x FY14E and 24.1x FY15E diluted adjusted EPS. The company had cash, cash
equivalents and short-term investments of US$20.2 per diluted ADS as at the end of 3Q13.
(2) PEG
We use PEG ratio as another valuation methodology. Using PEG ratio is appropriate for
high-growth companies such as Baidu, in our view. We use 1.0x PEG as the valuation
reference point, as leading China companies with strong market shares are trading at this
forward PEG ratioit is the average of companies such as Sina and Tencent. We expect
longer-term growth for Baidu to be around 20-25%.
(3) DCF valuation
We also use DCF valuation to set our target price. Assuming long-term revenue growth of
22%, long-term OPM of 37%, a WACC of 12% and no terminal growth, our base case
DCF valuation yields a target price of US$220 by end-2014.
Share price drivers/risks
Baidus positive share price drivers are: (1) solid revenue contribution from mobile
search, (2) higher usage traction on mobile search traffic, (3) positive online active
customers and revenue per online marketing customer growth, and (4) better margin trend
due to operating leverage.
Risks to our target price include:
(1) Intensifying search market competition: Qihoo and Sogou might compete for traffic
share in a more aggressive way by giving higher share to affiliate partners and promoting
their PC desktop client-based software.
(2) Performance-based ad budgets migrating to other platforms such as e-
commerce and SNS: New performance-based ad offerings from Taobao/Tmall and
leading social networks such as Tencent GDT may compete with Baidu's search on
advertiser budgets.
(3) A prolonged loss-making period for the online video business: The iQiyi video
business may take several years to be profitable. If that happens, it may further drag down
Baidu's margin going forward.
(4) Low visibility on mobile monetisation: Although mobile search is ramping up well in
recent months, it still takes time for advertisers to migrate their budget from PC search to
mobile search. The speed of mobile search ramp-up is still hard to gauge at this stage.

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Figure 67: Baidu income statement

2012 2013E 2014E 2015E
(RMB in M, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Total Revenue 4,263.7 5,456.2 6,250.7 6,335.3 5,968.5 7,560.8 8,891.7 9,485.9 8,990.4 10,401.3 11,710.4 12,244.6 22,306.0 31,906.9 43,346.7 55,333.0
Online marketing services 4,260.5 5,451.6 6,246.0 6,287.5 5,952.9 7,539.1 8,848.0 9,387.8 8,887.4 10,293.2 11,596.8 12,125.3 22,245.6 31,727.8 42,902.7 54,793.2
Other services 3.2 4.7 4.7 47.8 15.6 21.7 43.7 98.1 103.0 108.2 113.6 119.3 60.4 179.1 444.1 539.8
COGS -1,249.7 -1,505.7 -1,694.1 -1,988.9 -2,094.9 -2,633.1 -3,072.6 -3,377.0 -3,363.0 -3,811.5 -4,264.4 -4,426.5 -6,438.4 -11,177.5 -15,865.5 -20,407.6
Gross Profit 3,014.0 3,950.6 4,556.6 4,346.4 3,873.7 4,927.7 5,819.0 6,109.0 5,627.4 6,589.8 7,446.0 7,818.1 15,867.6 20,729.4 27,481.3 34,925.4
Operating Expense -922.6 -1,135.7 -1,259.7 -1,498.3 -1,663.2 -2,023.9 -2,481.3 -2,751.8 -2,515.6 -2,733.5 -3,002.2 -3,071.8 -4,816.3 -8,920.1 -11,323.1 -14,098.9
SG&A expenses -464.6 -569.8 -624.5 -788.0 -818.6 -1,055.9 -1,335.2 -1,517.7 -1,348.6 -1,456.2 -1,580.9 -1,591.8 -2,446.8 -4,727.5 -5,977.4 -7,313.2
R&D expenses -422.8 -512.0 -578.5 -643.8 -733.7 -884.7 -1,002.9 -1,090.9 -1,033.9 -1,144.1 -1,288.1 -1,346.9 -2,157.1 -3,712.2 -4,813.1 -6,146.6
Share-based comps expenses -35.2 -53.9 -56.7 -66.6 -110.9 -83.3 -143.1 -143.1 -133.1 -133.1 -133.1 -133.1 -212.3 -480.5 -532.6 -639.1
EBIT 2,091.5 2,814.9 3,296.9 2,848.1 2,210.5 2,903.9 3,337.7 3,357.2 3,111.8 3,856.3 4,443.8 4,746.2 11,051.3 11,809.3 16,158.2 20,826.5
Adj. EBIT (ex-share-based exp.) 2,126.6 2,868.8 3,353.6 2,914.7 2,321.4 2,987.1 3,480.9 3,500.3 3,245.0 3,989.5 4,576.9 4,879.4 11,263.6 12,289.8 16,690.7 21,465.6
EBITDA 2,420.3 3,188.0 3,718.5 3,296.2 2,721.2 3,404.9 3,943.3 4,010.5 3,818.4 4,617.1 5,258.6 5,615.2 12,622.9 14,079.8 19,309.3 25,047.7
Net Interest Income 156.9 177.8 204.3 219.5 184.7 226.6 230.4 277.6 343.6 369.6 416.1 468.4 758.6 919.3 1,597.8 2,362.6
Net Other Income -49.4 -8.9 -42.0 255.8 0.6 21.0 36.4 0.0 0.0 0.0 0.0 0.0 155.5 58.0 0.0 0.0
Pre Tax Profit 2,199.0 2,983.8 3,459.2 3,323.4 2,395.8 3,151.5 3,604.5 3,634.8 3,455.5 4,225.9 4,859.9 5,214.7 11,965.4 12,786.6 17,756.0 23,189.1
Tax (Expense) / Credit -331.2 -235.4 -467.7 -539.9 -388.9 -513.2 -588.1 -585.6 -556.2 -675.7 -773.9 -828.9 -1,574.2 -2,075.7 -2,834.7 -3,693.4
Minority interest -15.2 -21.4 -16.2 -12.0 -35.9 -5.6 -31.5 -31.5 -31.5 -31.5 -31.5 -31.5 -64.8 -104.5 -126.0 -126.0
Net Profit 1,883.0 2,769.9 3,007.7 2,795.5 2,042.8 2,643.9 3,048.0 3,080.7 2,930.8 3,581.8 4,117.5 4,417.3 10,456.0 10,815.4 15,047.3 19,621.8
Adj. Net Profit (ex-share-based exp.) 1,918.1 2,823.7 3,064.4 2,862.0 2,153.8 2,727.2 3,191.1 3,223.9 3,063.9 3,714.9 4,250.6 4,550.4 10,668.3 11,295.9 15,579.9 20,260.9
Diluted EPS (RMB) 5.38 7.92 8.60 7.99 5.84 7.56 8.70 8.58 8.16 9.95 11.43 12.24 29.89 30.70 41.79 54.19
Adj. Diluted EPS (RMB, ex-share-based exp.)5.48 8.07 8.76 8.18 6.16 7.79 9.11 8.98 8.53 10.32 11.80 12.61 30.50 32.06 43.26 55.96
Margins (%)
Gross Margin 70.7 72.4 72.9 68.6 64.9 65.2 65.4 64.4 62.6 63.4 63.6 63.8 71.1 65.0 63.4 63.1
Adj. Operating Margin (ex-share-based exp.) 49.9 52.6 53.7 46.0 38.9 39.5 39.1 36.9 36.1 38.4 39.1 39.8 50.5 38.5 38.5 38.8
EBITDA Margin 56.8 58.4 59.5 52.0 45.6 45.0 44.3 42.3 42.5 44.4 44.9 45.9 56.6 44.1 44.5 45.3
Net Margin 44.2 50.8 48.1 44.1 34.2 35.0 34.3 32.5 32.6 34.4 35.2 36.1 46.9 33.9 34.7 35.5
Adj. Net Margin (ex-share-based exp.) 45.0 51.8 49.0 45.2 36.1 36.1 35.9 34.0 34.1 35.7 36.3 37.2 47.8 35.4 35.9 36.6
Sequential Growth (%)
Revenue -4.7 28.0 14.6 1.4 -5.8 26.7 17.6 6.7 -5.2 15.7 12.6 4.6 53.8 43.0 35.9 27.7
Gross Profit -6.9 31.1 15.3 -4.6 -10.9 27.2 18.1 5.0 -7.9 17.1 13.0 5.0 49.5 30.6 32.6 27.1
EBIT -9.0 34.6 17.1 -13.6 -22.4 31.4 14.9 0.6 -7.3 23.9 15.2 6.8 45.9 6.9 36.8 28.9
Net Profit -8.3 47.1 8.6 -7.1 -26.9 29.4 15.3 1.1 -4.9 22.2 15.0 7.3 57.5 3.4 39.1 30.4
Adj. Net Profit -8.7 47.2 8.5 -6.6 -24.7 26.6 17.0 1.0 -5.0 21.2 14.4 7.1 57.1 5.9 37.9 30.0
Diluted EPS -8.3 47.1 8.6 -7.1 -26.9 29.4 15.1 -1.3 -5.0 22.0 14.8 7.1 57.4 2.7 36.1 29.7
Adj. Diluted EPS -8.7 47.2 8.5 -6.6 -24.8 26.6 16.9 -1.4 -5.1 21.1 14.3 6.9 57.0 5.1 34.9 29.3
2014E 2012 2013E

17 January 2014

Consumer Internet

Changyou.com Ltd
(CYOU.OQ / CYOU US)
DOWNGRADE RATING
Near-term margin pressure, awaiting catalysts
Solid performance in webgame with potential in TLBB rebound. We are
positive on 7Road's webgame performance, supported by continuous
momentum of Wartune in overseas and domestic markets (latest Wartune 2
update grossed Rmb10 mn on its debut day, according to Gamelook) and new
webgame pipeline (Deifu's Crown by DDTank developer team and Sword
Shadow by Wartune developer team). We also expect New TLBB's
performance to be back on track in the coming quarters, our tracking shows
that the total game server has reached 676 in Dec 2013, 25 additional servers
from the 3Q13 level.
Mediocre mobile game performance, bottom line under pressure from
increasing marketing and licensing expense of mobile game. We view the
current performance of the Changyou mobile game as below expectation.
(Mobile Wartune/TLBB ranking at No.21/100+ of iOS top grossing rank on 5
January 2014, according to AppAnnie). Changyou also announced setting up
a Rmb1 bn fund on mobile game licensing, and plans to launch 8-12 mobile
games in 2014. While we will keep tracking Changyou's transition into a multi-
platform game company, we are concerned about bottom line performance in
the coming quarter due to increasing spending.
Catalysts. (1) New mobile game launch success, (2) the smooth transition of
New TLBB in 4Q13, (3) continued momentum in webgame international
performance and pipeline, and (4) a recurring dividend plan. Risks: (1)
operating margin pressure due to high R&D and marketing, and (2) lacklustre
performance of new game titles.
Downgrade to NEUTRAL with TP of US$34: We revise down FY14E EPS by
14% to reflect on-going marketing and R&D spend in the coming quarters. Our
target price is based on P/E of 6.2x/3.9x FY14E/15E EPS. We suggest investors
wait for catalysts in mobile games as signs of normalisation of investments.

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Absolute (%) 3.4 -17.7 -3.3
Relative (%) 6.4 -15.1 2.6
Year 12/12A 12/13E 12/14E 12/15E
Revenue (US$ mn) 623.4 737.8 864.0 1,008.2
EBITDA (US$ mn) 371.2 319.8 284.1 436.8
EBIT (US$ mn) 348.1 295.6 260.6 412.0
Net profit (US$ mn) 286.1 244.2 226.4 354.6
EPS (CS adj.) (US$) 5.36 4.57 4.23 6.63
Change from previous EPS (%) n.a. -0.1 -13.7 -10.7
Consensus EPS (US$) n.a. 4.65 5.06 5.89
EPS growth (%) 24.3 -14.7 -7.3 56.6
P/E (x) 5.8 6.8 7.3 4.7
Dividend yield (%) 12.2 0.0 0.0 0.0
EV/EBITDA (x) 4.1 3.8 3.6 1.5
P/B (x) 2.7 1.7 1.4 1.1
ROE (%) 51.0 30.9 20.9 25.8
Rating (from Outperform) NEUTRAL*
Price (15 Jan 14, US$) 30.92
Mkt cap (US$ mn) 1,639 (US$1,639 mn)
Enterprise value (US$ mn) 1,231
Free float (%) 19.1
ADTO - 6M (US$ mn) 2.4


Research Analysts
Evan Zhou
852 2101 6745

17 January 2014
Changyou.com Ltd CYOU.OQ / CYOU US
Price (15 Jan 14): US$30.92, Rating: OUTPERFORM, Target Price: US$34.00, Analyst: Evan Zhou
Upside 48.00 55.24
SOTP fair value under conservative
multiple
Central Case 34.00 9.96
Online games to grow at 15% CAGR from
12-15E
Downside 25.00 (19.15)
Online games to grow at 10% CAGR from
12-15E

Online game revenue
(USD Mn)
574.7 669.5 775.4 909.3

Income statement (US$ mn) 12/12A 12/13E 12/14E 12/15E
Sales revenue 623 738 864 1,008
Cost of goods sold 104.2 127.0 174.2 199.1
SG&A 95.6 196.6 275.8 234.4
Other operating exp./(inc.) 52.5 94.4 129.9 137.8
EBITDA 371.2 319.8 284.1 436.8
Depreciation & amortisation 23.1 24.1 23.5 24.9
EBIT 348.1 295.6 260.6 412.0
Net interest expense/(inc.) (13.1) (10.8) (12.5) (16.5)
Non-operating inc./(exp.) (0.2) 2.2
Associates/JV
Recurring PBT 361.0 308.7 273.1 428.5
Taxes 67.4 48.0 48.0 75.2
Profit after tax 293.6 260.7 225.1 353.3
Minority interests 11.2 17.8
Preferred dividends
Reported net profit 282.4 242.9 225.1 353.3
Net profit (Credit Suisse) 286.1 244.2 226.4 354.6
Cash flow (US$ mn) 12/12A 12/13E 12/14E 12/15E
EBIT 348.1 295.6 260.6 412.0
Net interest 12.9 13.0 12.5 16.5
Tax paid (67.4) (48.0) (48.0) (75.2)
Working capital (150.8) (56.6) (16.5) (15.9)
Other cash & non-cash items 26.7 25.4 24.8 26.2
Operating cash flow 169.5 229.5 233.5 363.6
Capex (18.9) (191.9) (18.0) (18.0)
Free cash flow to the firm 150.6 37.6 215.5 345.6
Acquisitions
Divestments
Other investment/(outflows) (149.1) 210.2 (0.9) (1.0)
Investing cash flow (168.0) 18.3 (18.9) (19.0)
Equity raised 10.2 (137.4) (1.3) (1.3)
Dividends paid (200.9)
Net borrowings 239.0 47.0
Other financing cash flow (13.6) 238.3
Financing cash flow 34.7 147.9 (1.3) (1.3)
Total cash flow 36.2 395.8 213.3 343.3
Adjustments
Net change in cash 36.2 395.8 213.3 343.3
Balance sheet (US$ mn) 12/12A 12/13E 12/14E 12/15E
Cash & cash equivalents 367 762 976 1,319
Current receivables 23.4 34.1 40.6 46.5
Inventories
Other current assets 197.4 259.7 308.8 353.6
Current assets 587 1,056 1,325 1,719
Property, plant & equip. 64.8 233.3 228.7 222.9
Investments
Intangibles
Other non-current assets 462.3 251.3 251.3 251.3
Total assets 1,115 1,541 1,805 2,193
Accounts payable 6.7 8.9 10.1
Short-term debt 113.0 354.0 354.0 354.0
Current provisions
Other current liabilities 185.0 194.8 231.6 265.2
Current liabilities 298.0 555.4 594.5 629.3
Long-term debt 126.4
Other non-current liab. 20.5 14.7 14.7 14.7
Total liabilities 444.8 570.1 609.2 644.0
Shareholders' equity 608 971 1,196 1,549
Minority interests 61.8
Shares (wtd avg.) (mn) 53.4 53.5 53.5 53.5
EPS (Credit Suisse)
(US$)
5.36 4.57 4.23 6.63
DPS (US$) 3.76
BVPS (US$) 11.4 18.2 22.4 29.0
Operating CFPS (US$) 3.17 4.29 4.37 6.80
Growth(%)
Sales revenue 35.9 18.3 17.1 16.7
EBIT 35.6 (15.1) (11.8) 58.1
Net profit 24.5 (14.6) (7.3) 56.6
EPS 24.3 (14.7) (7.3) 56.6
Margins (%)
EBITDA 59.5 43.3 32.9 43.3
EBIT 55.8 40.1 30.2 40.9
Pre-tax profit 57.9 41.8 31.6 42.5
Net profit 45.9 33.1 26.2 35.2
P/E 5.77 6.77 7.30 4.66
P/B 2.72 1.70 1.38 1.07
Dividend yield (%) 12.2
P/CF 9.7 7.2 7.1 4.5
EV/sales 2.43 1.67 1.18 0.67
EV/EBITDA 4.07 3.84 3.58 1.54
EV/EBIT 4.34 4.16 3.90 1.64
ROE analysis (%)
ROE 51.0 30.9 20.9 25.8
ROIC 72.2 45.2 37.8 58.6
Asset turnover (x) 0.56 0.48 0.48 0.46
Tax burden (x) 0.81 0.84 0.82 0.82
Credit ratios
Net debt/equity (%) (19.0) (42.1) (52.0) (62.3)
Net debt/EBITDA (x) (0.34) (1.28) (2.19) (2.21)
Interest cover (x) (26.6) (27.3) (20.9) (24.9)

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17 January 2014
We downgrade Changyou to NEUTRAL with a target price of US$34 (from US$37)
We arrive at our target price based on the following three valuation methodologies.
(1) P/E
Our main valuation methodology is P/E. On a price/earnings basis, our target price of US$34
implies ex-cash P/Es of 6.2x/3.9x 2014E/15E earnings per ADS. Currently, peers are trading
at 2015E forward P/E of 4.2x23.2x. We conservatively resort to the low end of the peer
valuation range to acknowledge Changyou's low visibility in its pipelines. That said, we do
see the chances of multiple re-rating if Changyou's portfolio performance improves.
Figure 68: China online game companies comps
Close Mkt cap EPS P/E ROE EV/EBITDA FCF yield(%)
Changyou CYOU US USD 30.9 1,639 4.6 4.2 6.6 6.8x 7.3x 4.7x 18.9% 3.8x 3.6x 1.5x 2% 13% 20.9%
Giant Interactive GA US USD 10.9 2,601 0.9 1.0 1.1 11.6x 10.9x 9.8x 33.6% 9.5x 7.8x 6.7x 9% 9% n.a
NetEase NTES US USD 79.3 10,358 5.6 5.5 6.4 14.0x 14.1x 12.1x 20.2% 10.3x 8.8x 7.4x 6% 7% 8.1%
NetDragon 777 HK HKD 17.5 1,145 1.1 0.8 1.0 16.4x 20.7x 17.4x 8.1% n.a n.a n.a
Perfect World PWRD US USD 20.0 970 1.5 1.9 2.3 13.0x 10.4x 8.6x 12.8% 6.7x 4.6x 3.0x 8% 12% n.a
Shanda Games GAME US USD 4.2 1,144 0.8 0.9 1.0 5.2x 4.6x 4.2x 24.3% 2.9x 2.2x 2.0x 20% 21% 24.2%
The9 NCTY US USD 2.6 79 -3.3 n.a n.a -0.8x n.a n.a n.a n.a n.a n.a n.a n.a n.a
IGG 8002 HK HKD 9.0 1,575 0.2 0.3 0.4 58.0x 29.0x 23.2x 5.8% 199.0x 34.2x 28.6x n.a n.a n.a
Forgame 0484 HK HKD 61.8 1,004 2.3 4.7 6.2 26.7x 13.1x 9.9x 37.5% 12.6x 7.1x 4.7x n.a n.a n.a
Boyaa 0434 HK HKD 12.7 1,208 0.4 0.5 0.6 35.3x 27.5x 19.7x 17.4% 38.5x 23.1x 15.5x 2% 4% 5.8%
KongZhong KONG US USD 8.7 247 0.4 0.5 0.8 20.8x 16.2x 11.5x n.a n.a n.a n.a n.a n.a n.a
CMGE CMGE US USD 32.9 920 0.2 1.3 2.5 143.1x 26.3x 13.1x n.a n.a n.a n.a n.a n.a n.a
Taomee TAOM US USD 6.9 251 0.1 0.2 n.a 50.7x 34.3x n.a 6.6% n.a n.a n.a n.a n.a n.a
* Priced as of 15 January 2014. Source: Company data, Credit Suisse estimates
(2) Discounted cash flow (DCF)
We see DCF also providing a reference point to gauge Changyou's valuation. Assuming
longer-term revenue growth of 5%, longer-term OPM of 45%, WACC of 12% and 0%
terminal growth, our base-case DCF valuation yields a target price of US$80 by end-2014.
Online gaming companies usually trade below their fair DCF valuation, as the market
tends to place a discount on the volatility to their cash flows, which are subject to the hit-
and-miss nature of game performance.
Share price drivers/catalysts
We see Changyou's positive catalysts and share price drivers as being: (1) new mobile
game launch success; (2) the smooth transition of New TLBB in 3Q13; (3) continued
momentum webgame international performance and pipeline; and (4) the potential
recurring dividend plan.
Downside risks may emerge from:
(1) a weaker-than-expected performance of New TLBB in 2H13, when the company
focuses on user migration, operation optimisation and the call-back of previous gamers in
the first quarter of operation, rather than starting serious monetisation immediately;
(2) an erosion in operating margin due to the high R&D and marketing costs of new games,
especially on mobile;
(3) a lacklustre performance of new game titles, especially webgames and mobile games;
visibility to pipelines is still low at this stage; and
(4) sustained high ARPU of MMOG may hurt the lifecycle of its existing portfolio.

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Figure 69: Changyouincome statement

2012 2013E 2014E 2015E
(US$ in Mn , year-end Dec) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Total Revenue 136.8 147.3 165.8 173.5 177.6 182.4 183.1 194.8 197.4 208.2 226.8 231.6 623.4 737.8 864.0 1,008.2
Games 127.4 137.2 151.1 158.9 167.4 168.3 161.5 172.3 180.8 187.2 201.7 205.8 574.7 669.5 775.4 909.3
Online Ad 8.2 9.1 12.8 12.5 6.6 10.1 16.4 17.2 11.2 15.7 19.6 20.2 42.5 50.4 66.7 75.4
IVAS 0.0 0.0 1.4 1.4 1.1 1.2 1.3 1.2 1.4 1.4 0.0 5.1 5.2 6.1
Others 1.1 1.1 1.9 2.1 2.1 2.6 4.0 4.1 4.1 4.2 4.2 4.2 6.3 12.8 16.7 17.4
COGS -21.3 -23.5 -30.9 -28.5 -30.0 -31.0 -30.1 -35.9 -40.0 -42.2 -45.5 -46.6 -104.2 -127.0 -174.2 -199.1
Gross Profit 115.5 123.8 134.9 145.0 147.6 151.4 153.0 158.8 157.4 166.1 181.3 185.0 519.2 610.8 689.8 809.1
Operating Expense -35.6 -42.0 -42.5 -51.0 -45.9 -58.1 -71.5 -139.6 -108.9 -112.2 -100.1 -108.0 -171.1 -315.1 -429.2 -397.1
SG&A expenses -17.7 -24.8 -23.9 -29.1 -25.7 -31.6 -41.0 -98.4 -75.0 -71.2 -61.2 -68.3 -95.6 -196.6 -275.8 -234.4
R&D expenses -16.6 -16.2 -17.7 -21.3 -20.0 -26.2 -30.2 -40.9 -33.6 -40.6 -38.6 -39.4 -71.9 -117.3 -152.1 -161.4
EBIT (GAAP) 79.9 81.8 92.4 94.0 101.6 93.3 81.5 19.3 48.5 53.9 81.2 77.0 348.1 295.6 260.6 412.0
Adj. EBIT (ex-SBC.) 81.1 82.8 93.2 94.6 101.8 93.6 81.8 19.6 48.9 54.2 81.5 77.3 351.8 296.9 262.0 413.3
EBITDA 86.5 88.4 99.1 100.8 108.2 100.6 87.0 25.2 54.6 60.1 87.5 83.3 374.8 321.0 285.4 438.2
Net Interest Income 2.4 3.9 4.2 2.6 2.0 2.4 4.5 1.9 2.9 3.0 3.2 3.4 13.1 10.8 12.5 16.5
Net Other Income 0.3 0.6 -1.8 0.7 1.3 0.5 0.4 0.0 0.0 0.0 0.0 0.0 -0.2 2.2 0.0 0.0
Pre Tax Profit 82.6 86.2 94.8 97.4 104.9 96.2 86.4 21.1 51.4 56.9 84.4 80.4 361.0 308.7 273.1 428.5
Tax (Expense) / Credit -16.3 -16.1 -17.4 -17.7 -16.6 -13.9 -13.6 -3.9 -9.3 -9.7 -14.4 -14.5 -67.4 -48.0 -48.0 -75.2
Net Profit 65.3 69.1 72.9 75.2 77.6 75.2 72.8 17.3 42.1 47.2 70.0 65.9 282.4 242.9 225.1 353.3
Adj. Net Profit (ex-SBC) 66.5 70.0 73.7 75.8 77.9 75.6 73.2 17.6 42.4 47.5 70.3 66.2 286.1 244.2 226.4 354.6
Diluted EPS 1.22 1.29 1.37 1.41 1.45 1.41 1.36 0.32 0.79 0.88 1.31 1.23 5.29 4.54 4.21 6.61
Adj. Diluted EPS (US$, ex-SBC) 1.25 1.31 1.38 1.42 1.46 1.41 1.37 0.33 0.79 0.89 1.31 1.24 5.36 4.57 4.23 6.63
Margins (%)
Gross Margin 84.4 84.1 81.4 83.6 83.1 83.0 83.6 81.6 79.8 79.7 80.0 79.9 83.3 82.8 79.8 80.2
Adj. Operating Margin (ex-SBC) 59.3 56.2 56.2 54.5 57.3 51.3 44.7 10.1 24.8 26.0 36.0 33.4 56.4 40.2 30.3 41.0
EBITDA Margin 63.3 60.0 59.8 58.1 61.0 55.2 47.5 13.0 27.7 28.8 38.6 36.0 60.1 43.5 33.0 43.5
Net Margin 47.7 46.9 44.0 43.3 43.7 41.2 39.8 8.9 21.3 22.7 30.9 28.4 45.3 32.9 26.1 35.0
Adj. Net Margin (ex-SBC) 48.6 47.5 44.5 43.7 43.9 41.4 40.0 9.0 21.5 22.8 31.0 28.6 45.9 33.1 26.2 35.2
Revenue -0.6 7.7 12.5 4.7 2.3 2.7 0.4 6.4 1.4 5.5 8.9 2.1 35.9 18.3 17.1 16.7
Gross Profit -1.1 7.3 8.9 7.5 1.7 2.6 1.0 3.8 -0.9 5.5 9.2 2.0 31.7 17.6 12.9 17.3
EBIT 9.5 2.4 13.0 1.7 8.1 -8.2 -12.6 -76.4 152.0 11.1 50.6 -5.2 35.6 -15.1 -11.8 58.1
Net Profit 1.4 5.8 5.6 3.1 3.3 -3.2 -3.1 -76.3 143.6 12.1 48.3 -5.9 26.0 -14.0 -7.3 56.9
Adj. Net Profit 1.1 5.3 5.3 2.8 2.7 -3.0 -3.2 -75.9 140.9 12.0 48.0 -5.9 24.5 -14.6 -7.3 56.6
Diluted EPS 1.4 5.8 5.5 3.0 3.2 -3.2 -2.9 -76.3 143.6 12.1 48.3 -5.9 25.7 -14.1 -7.4 56.9
Adj. Diluted EPS 1.0 5.3 5.2 2.7 2.7 -3.0 -2.9 -76.0 140.9 12.0 48.0 -5.9 24.3 -14.7 -7.3 56.6
2014E 2012 2013

17 January 2014

Consumer Internet

Ctrip.com International
(CTRP.OQ / CTRP US)
DECREASING TARGET PRICE
Investing in the future
Market share expansion as top-priority. We believe the companys strategy
of building franchise value through higher near-term marketing spending is the
correct strategy. In 2014, we expect Ctrip to increase investment in branding,
promotion and new products. In particular, we want to highlight that China's
travel market is at the phase of rapid offline to online transition. We estimate
online travel penetration in China is only 11% vs 39% in the US. With a better
mobile booking environment compared to PC, Ctrip can help accelerate its
travel market move from offline to online.
Ctrip's expanded product offerings to capture outbound and leisure
travel. Ctrip has expanded its range of product offerings that cater to the
needs of price-sensitive leisure travellers, as well as its core business
travellers. A wider range of services, such as open-platform, group-buy & pre-
paid hotels, and tickets for attractions, enhance user stickiness and drive
higher growth.
Competitive pricing strategy and marketing spend to drag down margin:
We expect such strategy to create more uncertainty on Ctrip's margin profile in
2014. We revise down Ctrip's adj. operating margin in 2014/15E from
28.9%/31.0% to 17.9%/22.2%. However, looking beyond the short-term
investment, we are positive on its effect on Ctrip's revenue growth and market
share expansion in the long run.
Maintain OUTPERFORM, cut target price to US$58. Given the fast growing
travel market in China, we maintain our OUTPERFORM rating. With near-term
investment, we revise down FY14E/15E EPS by 30%/23% to reflect the
influence of competitive pricing strategy and marketing spend. Our target price
implies 45.1x 2014E and 30.2x 2015E diluted adjusted P/E. Key risks include
slower-than-expected leisure travel market, intense competition environment
and weak monetisation prospects for mobile service.

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Absolute (%) -15.8 -32.3 65.7
Relative (%) -12.9 -29.7 71.7
Year 12/12A 12/13E 12/14E 12/15E
Revenue (Rmb mn) 4,158.8 5,343.2 7,159.6 9,502.6
EBITDA (Rmb mn) 753.6 999.1 932.0 1,719.1
EBIT (Rmb mn) 654.6 856.2 743.1 1,470.2
Net profit (Rmb mn) 1,087.9 1,285.5 1,367.4 2,085.1
EPS (CS adj.) (Rmb) 7.68 8.92 7.88 11.76
Change from previous EPS (%) n.a. 0.0 -29.7 -23.0
EPS growth (%) -17.7 16.3 -11.7 49.3
P/E (x) 31.8 27.3 31.0 20.7
Dividend yield (%) 0.0 0.0 0.0 0.0
EV/EBITDA (x) 34.6 19.7 19.8 9.3
P/B (x) 5.3 4.4 4.5 3.7
ROE (%) 16.1 17.7 15.6 19.7
Rating OUTPERFORM* [V]
Price (15 Jan 14, US$) 40.34
Mkt cap (US$ mn) 5,235 (US$5,235 mn)
Free float (%) 97.0
ADTO - 6M (US$ mn) 40.1

[V] = Stock considered volatile (see Disclosure Appendix).

Research Analysts
Dick Wei
852 2101 7339

17 January 2014
Ctrip.com International CTRP.OQ / CTRP US
Price (15 Jan 14): US$40.34, Rating: OUTPERFORM [V], Target Price: US$58.00, Analyst: Dick Wei
Upside 75.00 85.74
50% CAGR for # of hotel room reservation
from 13-15E
from 13-15E
Downside 30.00 (25.70)
from 13-15E

Hotel room reservation
volume (000)
27,877 38,963 52,439 68,575

Sales revenue 4,159 5,343 7,160 9,503
SG&A 1,255 1,591 2,533 2,959
Other operating exp./(inc.) 1,112 1,419 1,922 2,459
EBITDA 754 999 932 1,719
EBIT 655 856 743 1,470
Non-operating inc./(exp.) 130.3 120.5 107.4 142.5
Associates/JV
Recurring PBT 951 1,125 1,099 1,898
Taxes 294.5 286.3 267.8 456.5
Profit after tax 656 839 831 1,442
Minority interests (18.9) (85.0) 11.0 19.0
Preferred dividends
Reported net profit 675 924 820 1,423
EBIT 655 856 743 1,470
Net interest 296.1 269.0 356.0 428.3
Tax paid (294.5) (286.3) (267.8) (456.5)
Working capital 692.3 381.8 325.0 805.1
Capex (525.7) (481.0) (714.5) (786.2)
Acquisitions
Divestments
Other investment/(outflows) (236.9) (242.0) (13.2) (13.8)
Investing cash flow (762.6) (723.0) (727.8) (800.0)
Equity raised (1,694) 223 95 115
Dividends paid
Net borrowings 1,126 4,870
Other financing cash flow 53.1 55.5 (11.0) (19.0)
Financing cash flow (514) 5,149 84 96
Total cash flow 602 6,236 1,237 2,435
Adjustments (7.5) 85.9
Net change in cash 595 6,322 1,237 2,435
Current receivables 984 1,531 2,418 3,166
Inventories
Other current assets 1,061 1,117 1,471 1,926
Current assets 7,643 14,592 17,069 20,708
Investments 1,437 1,528 1,528 1,528
Intangibles
Total assets 11,670 19,199 22,215 26,404
Short-term debt
Current provisions
Long-term debt
Other non-current liab. 1,175 6,045 6,045 6,045
Minority interests 95.2 204.8 204.8 204.8
Shares (wtd avg.) (mn) 141.7 144.1 173.6 177.3
EPS (Credit Suisse)
(Rmb)
7.7 8.9 7.9 11.8
DPS (Rmb)
BVPS (Rmb) 45.8 55.9 54.8 65.9
Key ratios and
valuation
12/12A 12/13E 12/14E 12/15E
Growth(%)
Sales revenue 18.9 28.5 34.0 32.7
EBIT (38.6) 30.8 (13.2) 97.8
Net profit (20.6) 18.2 6.4 52.5
EPS (17.7) 16.3 (11.7) 49.3
Margins (%)
EBITDA 18.1 18.7 13.0 18.1
EBIT 15.7 16.0 10.4 15.5
Pre-tax profit 22.9 21.1 15.4 20.0
Net profit 26.2 24.1 19.1 21.9
P/E 31.8 27.3 31.0 20.7
P/B 5.33 4.36 4.45 3.70
Dividend yield (%)
P/CF 18.4 19.4 22.5 13.8
EV/sales 6.26 3.69 2.58 1.69
EV/EBITDA 34.6 19.7 19.8 9.3
EV/EBIT 39.8 23.0 24.9 10.9
ROE analysis (%)
ROE 16.1 17.7 15.6 19.7
ROIC 28.9 (47.3) (15.7) (31.0)
Asset turnover (x) 0.36 0.28 0.32 0.36
Tax burden (x) 0.69 0.75 0.76 0.76
Credit ratios
Net debt/equity (%) (85) (145) (136) (131)
Net debt/EBITDA (x) (7.4) (12.0) (14.1) (9.1)
Interest cover (x) (3.95) (5.77) (2.99) (5.15)

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2009 2010 2011 2012 2013 2014
12MF P/E multiple

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2009 2010 2011 2012 2013 2014
12MF P/B multiple

Source: IBES
17 January 2014
We maintain our OUTPERFORM rating on Ctrip and cut target price to US$58 (from
US$76).
(1) P/E
We use P/E multiple as a valuation reference for Ctrip. Our target price of US$58 implies
45.1x FY14E and 30.2x FY15E diluted adjusted EPS. The company has cash and cash
equivalents, restricted cash and short-term investment of US$7.1 per diluted ADS at the
end of 3Q13.
(2) DCF valuation
We also use DCF valuation to set our target price. Assuming longer-term revenue growth
of 25%, long-term OPM of 26%, a WACC of 12% and no terminal growth, our base case
DCF valuation yields a target price of US$58 by end-2014.
Ctrip's positive share price drivers are: (1) Increased international ticketing and package
tour revenue;,(2) strong growth in leisure travel market, and (3) leading position in PC-to-
mobile transition.
Risks to our target price include: (1) on-going soft macro-economic environment; (2)
slower-than-expected leisure travel market; (3) intense competition environment; (4)
weaker-than-expected mobile Internet monetisation capability.

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Figure 70: Ctripincome statement

2012 2013E 2014E 2015E
(RMB in M, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 1QE 2QE 3QE 4QE
Total gross revenue 964 1,031 1,247 1,167 1,228 1,320 1,640 1,481 1,601 1,788 2,254 1,949 4,409.2 5,670.3 7,592.4 10,077.0
Hotel reservation 367 410 457 468 451 511 611 594 592 691 860 779 1,702.5 2,166.4 2,920.6 3,854.1
Air-ticketing 360 404 478 447 457 522 604 553 563 687 787 691 1,690.3 2,135.9 2,728.0 3,448.8
Packaged tour 166 134 224 166 235 187 320 220 329 266 451 310 689.7 962.2 1,355.8 1,891.6
Corporate travel 39 49 54 58 51 66 72 73 69 90 97 98 199.8 261.4 353.9 474.5
Others 31 33 34 29 35 34 34 41 49 54 59 71 127.0 144.5 234.1 407.9
Total net revenue 911 974 1,173 1,101 1,161 1,245 1,541 1,397 1,510 1,686 2,126 1,838 4,158.8 5,343.2 7,159.6 9,502.6
COGS -226.0 -241.2 -286.0 -284.7 -304.2 -309.1 -379.1 -340.8 -375.9 -413.0 -527.2 -455.9 -1,037.8 -1,333.2 -1,772.0 -2,366.2
Gross Profit 684.9 732.5 887.0 816.7 856.3 935.7 1,161.9 1,056.0 1,133.8 1,272.7 1,598.6 1,382.4 3,121.0 4,010.0 5,387.6 7,136.5
Operating Expense -508.3 -564.4 -696.9 -696.7 -696.3 -739.8 -862.3 -855.3 -979.4 -1,121.2 -1,376.4 -1,167.5 -2,466.4 -3,153.8 -4,644.5 -5,666.3
SG&A expenses -241.2 -280.5 -378.9 -354.8 -352.1 -353.8 -452.6 -433.0 -513.3 -617.0 -778.1 -625.0 -1,255.4 -1,591.4 -2,533.4 -2,958.8
R&D expenses -166.4 -175.1 -209.6 -228.2 -232.7 -274.8 -300.8 -307.3 -332.1 -370.9 -467.7 -404.4 -779.3 -1,115.7 -1,575.1 -2,064.3
EBIT 176.6 168.0 190.1 119.9 160.0 195.9 299.5 200.7 154.5 151.5 222.2 215.0 654.6 856.2 743.1 1,470.2
Adj. EBIT (ex-share-based exp.) 277.2 276.9 298.6 233.6 271.6 307.1 408.4 315.7 288.4 284.9 352.9 353.0 1,086.3 1,302.8 1,279.1 2,113.4
EBITDA 302.0 301.6 323.3 258.4 303.2 342.9 445.5 354.1 330.2 330.3 401.9 405.6 1,185.3 1,445.7 1,468.0 2,362.3
Net Other Income 9.4 56.4 6.1 58.4 7.7 24.1 67.8 21.0 22.6 25.3 31.9 27.6 130.3 120.5 107.4 142.5
Pre Tax Profit 231.8 256.3 250.3 212.3 190.3 263.1 420.0 251.9 236.8 236.8 316.3 309.2 950.7 1,125.2 1,099.1 1,898.5
Minority interest/equity income from affiliates2.1 -20.1 2.9 34.0 24.6 17.7 45.2 -2.5 -2.4 -2.4 -3.2 -3.1 18.9 85.0 -11.0 -19.0
Net Profit Attributable to shareholders 169.1 119.7 193.8 192.6 153.5 210.4 373.0 187.0 176.6 177.4 236.3 230.1 675.1 923.9 820.4 1,422.9
Adj. Net Profit (ex-share-based exp.) 269.7 228.5 302.3 306.3 265.1 321.5 481.9 302.0 310.5 310.8 367.0 368.1 1,087.9 1,285.5 1,367.4 2,085.1
Diluted EPS (RMB) 1.11 0.81 1.41 1.35 1.07 1.44 2.41 1.10 1.03 1.03 1.37 1.33 4.69 6.01 4.76 8.10
Adj. Diluted EPS (RMB, ex-share-based exp.) 1.77 1.56 2.20 2.14 1.84 2.20 3.11 1.78 1.82 1.81 2.13 2.12 7.68 8.92 7.88 11.76
Margins (%)
Gross Margin 75.2 75.2 75.6 74.1 73.8 75.2 75.4 75.6 75.1 75.5 75.2 75.2 75.0 75.0 75.2 75.1
Adj. Operating Margin (ex-share-based exp.) 30.4 28.4 25.5 21.2 23.4 24.7 26.5 22.6 19.1 16.9 16.6 19.2 26.1 24.4 17.9 22.2
EBITDA Margin 33.2 31.0 27.6 23.5 26.1 27.5 28.9 25.4 21.9 19.6 18.9 22.1 28.5 27.1 20.5 24.9
Net Margin 18.6 12.3 16.5 17.5 13.2 16.9 24.2 13.4 11.7 10.5 11.1 12.5 16.2 17.3 11.5 15.0
Revenue -1.6 6.9 20.5 -6.1 5.4 7.3 23.8 -9.4 8.1 11.7 26.1 -13.5 18.9 28.5 34.0 32.7
Gross Profit -2.3 7.0 21.1 -7.9 4.9 9.3 24.2 -9.1 7.4 12.2 25.6 -13.5 15.9 28.5 34.4 32.5
EBIT -23.4 -4.8 13.1 -36.9 33.5 22.5 52.9 -33.0 -23.0 -1.9 46.7 -3.3 -38.6 30.8 -13.2 97.8
Net Profit -33.1 -29.2 62.0 -0.7 -20.3 37.1 77.3 -49.9 -5.6 0.4 33.3 -2.7 -37.3 36.9 -11.2 73.4
Adj. Net Profit -22.3 -15.3 32.3 1.3 -13.5 21.3 49.9 -37.3 2.8 0.1 18.1 0.3 -20.6 18.2 6.4 52.5
Diluted EPS -33.1 -26.6 73.4 -4.6 -21.0 35.0 67.4 -54.3 -6.0 -0.1 32.6 -3.1 -33.7 28.2 -20.8 70.0
Adj. Diluted EPS -22.3 -12.2 41.7 -2.8 -14.2 19.5 41.5 -42.9 2.3 -0.4 17.5 -0.2 -17.7 16.3 -11.7 49.3
2014E 2012 2013E

17 January 2014

Consumer Internet

Sohu.com
(SOHU.OQ / SOHU US)

Solid growth in search and video, dragged by
game spending
Good traction on Sogou. After merging with Tencent Soso, new Sogou's
share in search market is 13.1% (CNZZ, December 2013), Sogou
management expects Sogou to reach US$100 mn quarterly revenue in 2014.
We expect strong growth of Sogou's mobile search business in 2014,
supported by strong market position of QQ/Sogou browser and cross
promotion of other Tencent/Sohu apps. Currently, mobile search accounts
for ~15% of the search revenue of new Sogou.
Sohu Video: well-balanced video platform with strength in both in-house
and licence content. Supported by strong video view of Voice of China S2,
we view Sohu Video as a top-tier video site in China on both PC and mobile in
2013. We are positive on Sohu Video's strategy in both licensed content (focus
on exclusive overseas variety show) and in-house content (double investment
level of 2013) in 2014 and expect its momentum to continue. We also expect
penetration of 4G and regulation of pirate content as extra catalysts.
Changyou investment to drag down bottom line. While we are positive
on Changyou's webgame business and expect TLBB to rebound in coming
quarters, we view the current performance of Changyou's mobile games to
be mediocre and cautious on bottom line pressure due to large-scale
investment plan in marketing and licensing of mobile game. (Changyou
announced setting up Rmb1 bn fund on mobile game licensing in 2014).
Maintain OUTPERFORM PT of US$95. Our TP implies 38.1x 2014E, and
22.0x 2015E diluted adjusted P/E. Our target price is based on the midpoint of
our sum of the-parts valuation of US$87.5-US$102.8. Key risks: (1) slowdown
in PC-based ad, (2) intense online video competition, (3) soft macro
environment, and (4) worse-than-expected game business performance.

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Absolute (%) 12.8 -11.8 55.5
Relative (%) 15.8 -9.3 61.4
Year 12/12A 12/13E 12/14E 12/15E
Revenue (US$ mn) 1,067.2 1,399.2 1,714.3 2,041.8
EBITDA (US$ mn) 274.2 252.3 345.6 481.6
EBIT (US$ mn) 223.3 189.2 263.1 385.5
Net profit (US$ mn) 97.8 47.9 97.1 167.4
EPS (CS adj.) (US$) 2.54 1.24 2.49 4.32
Change from previous EPS (%) n.a. -2.9 -23.5 -12.5
Consensus EPS (US$) n.a. -0.87 1.79 3.01
EPS growth (%) -48.8 -51.2 101.4 73.3
P/E (x) 29.9 61.3 30.4 17.6
Dividend yield (%) 0.0 0.0 0.0 0.0
EV/EBITDA (x) 7.3 10.0 7.7 5.9
P/B (x) 2.7 4.4 3.8 3.1
ROE (%) 9.3 5.5 13.5 19.4
Price (15 Jan 14, US$) 75.87
Target price (US$) 95.00
Mkt cap (US$ mn) 2,901 (US$2,901 mn)
Free float (%) 78.0
ADTO - 6M (US$ mn) 26.1


Research Analysts
Dick Wei
852 2101 7339
Evan Zhou
852 2101 6745

17 January 2014
Sohu.com SOHU.OQ / SOHU US
Upside 110.00 44.98
20% 2 year CAGR for net sales from 13-
15E
15E
Downside 75.00 (1.15)
15E


Sales revenue 1,067 1,399 1,714 2,042
SG&A 295.8 471.0 534.3 593.7
EBITDA 274.2 252.3 345.6 481.6
EBIT 223.3 189.2 263.1 385.5
Non-operating inc./(exp.) 5.4 5.6
Associates/JV
Recurring PBT 253.4 216.4 274.8 394.5
Taxes 76.2 59.7 72.3 102.6
Profit after tax 177.2 156.7 202.6 291.9
Preferred dividends
Reported net profit 78.1 (43.4) 82.2 151.0
EBIT 223.3 189.2 263.1 385.5
Net interest 30.1 27.2 11.8 8.9
Tax paid (76.2) (59.7) (72.3) (102.6)
Working capital 101.0 (71.1) 28.0 27.9
Capex (74.3) (474.5) (373.5) (485.5)
Free cash flow to the firm 268.7 (317.0) (46.1) (53.8)
Acquisitions
Divestments
Other investment/(outflows) (158.1) 333.4
Equity raised (20.8) (532.3) 12.1 12.9
Dividends paid
Other financing cash flow (90.0) (115.5) (121.2) (141.4)
Financing cash flow 123.5 (539.2) (109.1) (128.5)
Total cash flow 234.1 (522.8) (155.2) (182.3)
Adjustments
Net change in cash 234.1 (522.8) (155.2) (182.3)
Cash & cash equivalents 1,005 733 577 395
Inventories
Current assets 1,232 1,054 963 848
Property, plant & equip. 179 590 881 1,271
Investments
Intangibles
Total assets 2,076 1,977 2,176 2,450
Accounts payable 124.9 53.9 64.8 74.5
Short-term debt 113.0 354.0 354.0 354.0
Current provisions
Current liabilities 552 817 908 1,003
Long-term debt
Total liabilities 699 831 923 1,018
Shareholders' equity 1,084 664 771 951
Shares (wtd avg.) (mn) 38.5 38.7 39.0 38.8
EPS (Credit Suisse)
(US$)
2.54 1.24 2.49 4.32
DPS (US$)
BVPS (US$) 28.1 17.1 19.8 24.5
Growth(%)
Sales revenue 25.2 31.1 22.5 19.1
EBIT (12.2) (15.3) 39.0 46.6
Net profit (49) (51) 103 72
EPS (49) (51) 101 73
Margins (%)
EBITDA 25.7 18.0 20.2 23.6
EBIT 20.9 13.5 15.3 18.9
Pre-tax profit 23.7 15.5 16.0 19.3
Net profit 9.2 3.4 5.7 8.2
P/E 29.9 61.3 30.4 17.6
P/B 2.70 4.43 3.83 3.09
Dividend yield (%)
P/CF 8.5 18.7 9.0 6.8
EV/sales 1.88 1.80 1.56 1.40
EV/EBITDA 7.3 10.0 7.7 5.9
EV/EBIT 9.0 13.3 10.2 7.4
ROE analysis (%)
ROE 9.3 5.5 13.5 19.4
ROIC 30.9 21.9 21.6 23.6
Asset turnover (x) 0.51 0.71 0.79 0.83
Tax burden (x) 0.70 0.72 0.74 0.74
Credit ratios
Net debt/equity (%) (64.7) (33.1) (17.8) (2.9)
Net debt/EBITDA (x) (3.25) (1.50) (0.65) (0.09)
Interest cover (x) (9.1) (8.7) (22.4) (43.1)

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12MF P/E multiple

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2009 2010 2011 2012 2013 2014
12MF P/B multiple

Source: IBES
17 January 2014
We maintain our OUTPERFORM rating on Sohu with a target price of US$95
Our target price is based on the midpoint of our sum-of-the-parts valuation of US$87.5-
US$102.8.
In our SOTP valuation, we assume portal valuation of US$353 mn, Sohu video of US$300
mn, Sohu's portion of online games of US$873 bn, Sohu's portion (40%) of Sogou at US$1
bn, and Sohu's claim of cash of US$1,065 mn.
At the midpoint of our SOTP valuation, Sohu portal is valued at US$353 mn. We expect
the companys increasing investments to drive the long-term value of the company to lead
to lower valuation in the near term. Given Sohus brand name and content investment, we
believe its portal could see a higher valuation.
Sohu Video is valued at US$300 mn, similar to iQiyis recent valuation of ~US$300 mn
and PPTV valuation of US$568 mn. We forecast the midpoint for portal + online video
business to be valued at around US$653 mn, which is undervalued compared to peers.
Figure 71: SOTP of Sohu
2014 net profit Multiple (x) Multiple (x)
Branded ads 20.2 15 302.5 20 403.3
Sohu Video -100.0 nm 300.0 nm 300.0
WVAS 9.2 8 73.8 10 92.3
Games (66% of holdings) 158.7 4 634.6 7 1,110.6
Others 4.7 5 23.7 5 23.7
Sogou (40% holdings) 0.0 nm 1,000.0 nm 1,000.0
Sohu.com net cash and others 739.6 739.6
Claim on Changyou cash (66%) 325.9 325.9
Total equity value 3,400.2 3,995.4
Value per diluted share 87.5 102.8
Average value per dil share US$95
Share price drivers
We expect key share price drivers in next six months to be: (1) good results from online
video ad revenue; (2) tangible progress of Tencent-Sogou cooperation and (3) mobile
game upside surprise from Changyou.
Key risks include: (1) slowdown in PC-based ad revenue growth, as more user time-
spend are moved to mobile; (2) macro-economic environment remains soft, hurting overall
brand advertiser budget; (3) intense online video industry competition to lower company's
margin further; and (4) stalled online game business.

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Figure 72: Sohuincome statement

2012 2013E 2014E 2015E
(US$ in M, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Revenue 226.6 255.7 285.4 299.5 306.2 337.5 367.2 388.3 378.2 417.9 453.6 464.6 1,067.2 1,399.2 1,714.3 2,041.8
Advertising 82.6 98.1 113.2 120.8 116.3 146.4 177.1 187.2 168.0 200.8 221.2 227.5 414.6 627.0 817.5 1,000.3
Brand advertising 61.0 69.3 77.9 82.1 80.2 100.2 124.8 123.4 106.8 128.5 140.3 143.3 290.2 428.6 518.8 623.2
Paid search 21.6 28.8 35.3 38.7 36.1 46.2 52.3 63.8 61.3 72.3 81.0 84.2 124.4 198.3 298.7 377.1
Mobile related 13.4 15.6 14.3 12.6 13.8 15.3 14.5 14.5 14.8 15.2 15.6 16.0 55.9 58.1 61.5 68.1
Online games 127.4 137.2 151.1 158.9 167.4 168.3 161.5 172.3 180.8 187.2 201.7 205.8 574.7 669.5 775.4 909.3
Others (from Changyou and video resale) 3.2 4.9 6.8 7.2 8.7 7.6 14.1 14.3 14.6 14.8 15.1 15.3 22.1 44.6 59.8 64.1
COGS -79.3 -99.9 -96.5 -93.3 -103.9 -114.1 -125.8 -141.2 -142.8 -154.8 -167.4 -170.0 -369.0 -485.0 -634.9 -739.1
Gross Profit 147.4 155.8 188.9 206.2 202.2 223.5 241.4 247.1 235.5 263.1 286.2 294.6 698.2 914.2 1,079.4 1,302.6
Sales & Mktg. expenses -40.2 -50.5 -58.5 -70.3 -62.3 -76.5 -95.9 -145.6 -119.5 -102.4 -97.5 -104.5 -219.5 -380.2 -423.9 -463.3
G&A expenses -14.7 -14.1 -17.1 -16.5 -18.4 -20.3 -22.0 -21.4 -22.7 -23.0 -24.9 -25.6 -62.4 -82.0 -96.2 -114.6
R&D expenses -37.4 -41.8 -45.7 -51.2 -51.5 -63.0 -69.6 -69.9 -66.2 -69.0 -72.6 -74.3 -176.1 -254.0 -282.1 -323.4
Other expenses 0.0 -2.9 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 -2.9 0.0 0.0 0.0
Share-based compensation -2.9 -3.4 -3.8 -3.8 -1.1 -1.2 -3.2 -3.3 -3.4 -3.5 -3.6 -3.7 -14.0 -8.8 -14.2 -15.8
EBIT 52.0 43.1 63.7 64.4 69.0 62.6 50.6 7.0 23.6 65.3 87.6 86.6 223.3 189.2 263.1 385.5
Adjusted EBIT (excl share base comps) 55.0 46.6 67.6 68.2 70.1 63.8 53.8 10.3 27.0 68.8 91.2 90.3 237.3 198.0 277.3 401.3
EBITDA 65.3 62.5 80.1 80.3 83.6 78.6 70.2 28.7 45.6 88.9 112.9 112.3 288.1 261.1 359.8 497.4
Net Other Income 1.6 1.8 -0.1 2.1 2.5 1.5 1.5 0.0 0.0 0.0 0.0 0.0 5.4 5.6 0.0 0.0
Pre Tax Profit 59.5 52.2 70.2 71.4 76.3 67.6 58.4 14.1 26.9 68.3 90.4 89.3 253.4 216.4 274.8 394.5
Tax Expense/(Credit) 18.7 18.5 18.7 20.3 20.0 16.3 18.9 4.5 7.6 17.9 23.5 23.2 76.2 59.7 72.3 102.6
Minority Interest Expense/(Income) 17.7 21.0 25.6 25.7 33.7 31.6 22.9 27.3 27.7 29.2 31.8 32.5 90.0 115.5 121.2 141.4
GAAP Net Profit (after MI) 20.2 10.8 24.0 23.1 21.1 19.6 -66.6 -17.5 -8.1 21.3 35.2 33.7 78.1 -43.4 82.2 151.0
Non-GAAP Net Profit Basic (after MI, excl. 123R) 23.7 16.4 29.5 28.2 22.0 21.6 18.3 -14.0 -4.5 25.0 39.0 37.6 97.8 47.9 97.1 167.4
GAPP EPS Diluted (US$) 0.53 0.28 0.63 0.60 0.55 0.51 -1.73 -0.45 -0.21 0.55 0.91 0.87 2.03 -1.12 2.12 3.91
Non-GAAP EPS Diluted (US$ excl 123R option expense) 0.61 0.42 0.77 0.73 0.57 0.56 0.47 -0.36 -0.12 0.64 1.00 0.97 2.54 1.24 2.49 4.32
Margins (%)
Gross Margin 65.0 60.9 66.2 68.8 66.1 66.2 65.7 63.6 62.3 63.0 63.1 63.4 65.4 65.3 63.0 63.8
Operating Margin (excl 123R option expense) 24.3 18.2 23.7 22.8 22.9 18.9 14.7 2.7 7.1 16.5 20.1 19.4 22.2 14.2 16.2 19.7
EBITDAMargin 28.8 24.4 28.1 26.8 27.3 23.3 19.1 7.4 12.1 21.3 24.9 24.2 27.0 18.7 21.0 24.4
GAAP Net Margin 8.9 4.2 8.4 7.7 6.9 5.8 -18.1 -4.5 -2.1 5.1 7.8 7.3 7.3 -3.1 4.8 7.4
Non-GAAP Net Margin (excl 123R option expense) 10.4 6.4 10.3 9.4 7.2 6.4 5.0 -3.6 -1.2 6.0 8.6 8.1 9.2 3.4 5.7 8.2
Revenue -7.9 12.9 11.6 4.9 2.2 10.2 8.8 5.8 -2.6 10.5 8.5 2.4 25.2 31.1 22.5 19.1
Gross Profit -16.2 5.7 21.2 9.2 -1.9 10.5 8.0 2.4 -4.7 11.8 8.8 3.0 13.1 30.9 18.1 20.7
Adj. EBIT (ex- share base comps) 3.5 -15.3 45.1 0.9 2.8 -9.0 -15.6 -80.9 162.4 154.7 32.5 -1.0 -13.1 -16.5 40.0 44.7
EBITDA -25.4 -4.3 28.3 0.2 4.1 -6.0 -10.8 -59.2 59.1 95.1 27.0 -0.5 -12.3 -9.4 37.8 38.2
Diluted EPS -19.6 -46.7 123.3 -4.1 -8.7 -7.1 n.m. n.m. n.m. n.m. 65.3 -4.2 -48.3 n.m. n.m. 84.7
Diluted EPS (excl 123R option expense) -55.1 -30.6 80.5 -4.5 -22.1 -2.0 -15.5 n.m. n.m. n.m. 56.1 -3.5 -48.8 -51.2 101.4 73.3
2014E 2012 2013E

17 January 2014

Consumer Internet

SouFun
(SFUN.N / SFUN US)
E-commerce growth remains strong in 2014
Structural beneficiary of real estate demand shift from offline to online.
We expect a demographic tailwind to propel increasing online usage in the
real estate segment in the coming years. The usage shift should gradually
migrate real estate marketing, sales and consumer spending dollars from
offline to online. Even if the real estate market slows in 2014, our analysis
shows that increasing e-commerce penetration will drive e-commerce
segment growth of 44% in 2014.
E-commerce and listing as key growth segments. We see SouFun's e-
commerce and listing segments as its key growth areas in the next 2-3 years,
benefiting from increasing awareness of customers and merchants using the
online medium as an important real estate transaction channel, as well as a
healthy pick-up in China's secondary real estate market volume.
Finance as a new layer of sticky service. SouFun recently launched its
financial services platform 'SouFun Financial Services Channel' to provide
third-party financial products, such as mortgage, home insurance and
consumer loans to members. We expect Soufun to see good conversion rate
of its existing e-commerce service users to financial services users. SouFun
could use its balance sheet for its own financial products in the future.
Mobile as a new catalyst. Mobile brand ad has already contributed a
revenue of Rmb14 mn, <5% of marketing revenue in 3Q13. We expect
mobile to account for >10% of marketing service revenue in 2014. Risks
include: (1) increased marketing spend; (2) slower-than-expected
membership and listing segment growth; and (3) a slowdown in the overall
real estate market in China.
Maintain OUTPERFORM. Increase TP to US$110 (from US$87). Our main
valuation methodology is forward P/E. Our target price of US$110 implies
26.5x FY14E and 20.9x FY15E diluted adjusted EPS. The company has a
strong cash position of US$294 mn (US$3.5 per diluted share) in 3Q13.
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The price relative chart measures performance against the S&P
500 INDEX which closed at 1848.38 on 15/01/14

Absolute (%) 18.0 56.2 224.6
Relative (%) 21.0 58.8 230.5
Year 12/12A 12/13E 12/14E 12/15E
Revenue (US$ mn) 430.3 622.6 811.5 987.7
EBITDA (US$ mn) 208.0 341.1 430.5 520.6
EBIT (US$ mn) 199.1 327.2 412.5 500.4
Net profit (US$ mn) 154.3 281.2 363.5 466.5
EPS (CS adj.) (US$) 1.90 3.33 4.15 5.28
Change from previous EPS (%) n.a. 0.0 0.0 0.0
EPS growth (%) 43.5 75.7 24.6 27.1
P/E (x) 47.1 26.8 21.5 16.9
Dividend yield (%) 0.0 0.0 0.0 0.0
EV/EBITDA (x) 35.9 21.7 16.4 12.7
P/B (x) 38.9 18.2 9.7 6.1
ROE (%) 110.7 93.5 59.7 44.4
Net debt/equity (%) 124.4 41.7 Net cash Net cash
Price (15 Jan 14, US$) 89.36
Target price (US$) (from 87.00) 110.00 mn
Mkt cap (US$ mn) 7,226 (US$ 7,226)
Free float (%) 30.0


Research Analysts
Dick Wei
852 2101 7339
Evan Zhou
852 2101 6745

17 January 2014
SouFun SFUN.N / SFUN US
Upside 130.00 45.48
50% CAGR for Membership revenue
growth from 13-15E
growth from 13-15E
Downside 90.00 0.72
growth from 13-15E

eCommerce revenue(USD
Mn)
102.2 179.6 258.8 352.7

Sales revenue 430.3 622.6 811.5 987.7
SG&A 150.3 179.0 239.9 290.0
Other operating exp./(inc.) (8.9) (12.7) (9.7) (10.2)
EBITDA 208.0 341.1 430.5 520.6
EBIT 199.1 327.2 412.5 500.4
Non-operating inc./(exp.) 1.4 6.6 9.6 9.6
Associates/JV
Recurring PBT 207.7 347.2 457.7 588.1
Taxes 55.9 72.9 102.5 131.6
Profit after tax 151.8 274.3 355.2 456.5
Minority interests (0.01) 0.07 0.00 0.00
Preferred dividends
Reported net profit 151.8 274.2 355.2 456.5
EBIT 199.1 327.2 412.5 500.4
Net interest 8.6 20.0 45.2 87.7
Tax paid (55.9) (72.9) (102.5) (131.6)
Working capital 13.8 (265.1) (38.5) (48.6)
Capex (18.1) (156.1) (30.4) (36.5)
Free cash flow to the firm 200.8 (126.1) 312.6 401.6
Acquisitions
Divestments
Other investment/(outflows) (111.2) 217.4
Investing cash flow (129.3) 61.3 (30.4) (36.5)
Equity raised 17.3 221.0 379.5 486.0
Dividends paid (131.0)
Other financing cash flow (107.1) (274.3) (355.2) (456.5)
Financing cash flow (122.6) 68.4 24.3 29.5
Total cash flow (33.0) 159.8 336.9 431.1
Adjustments 0.75
Net change in cash (32.2) 159.8 336.9 431.1
Cash & cash equivalents 118 278 615 1,046
Inventories
Current assets 195 732 1,186 1,716
Investments 511.5 292.5 292.5 292.5
Intangibles
Total assets 801 1,263 1,729 2,276
Accounts payable
Short-term debt 270.7 270.7 270.7 270.7
Current provisions
Current liabilities 468.0 579.9 658.7 709.2
Long-term debt 80.8 180.8 180.8 180.8
Total liabilities 613.7 847.3 926.1 976.6
Shareholders' equity 187 415 803 1,299
Total liabilities & equity 801 1,263 1,729 2,276
Shares (wtd avg.) (mn) 81.4 84.4 87.6 88.4
EPS (Credit Suisse)
(US$)
1.90 3.33 4.15 5.28
DPS (US$)
BVPS (US$) 2.3 4.9 9.2 14.7
Growth(%)
Sales revenue 25.1 44.7 30.3 21.7
EBIT 41.8 64.3 26.1 21.3
Net profit 41.8 82.2 29.3 28.3
EPS 43.5 75.7 24.6 27.1
Margins (%)
EBITDA 48.3 54.8 53.1 52.7
EBIT 46.3 52.5 50.8 50.7
Pre-tax profit 48.3 55.8 56.4 59.5
Net profit 35.9 45.2 44.8 47.2
P/E 47.1 26.8 21.5 16.9
P/B 38.9 18.2 9.7 6.1
Dividend yield (%)
P/CF 33 251 23 18
EV/sales 17.3 11.9 8.7 6.7
EV/EBITDA 35.9 21.7 16.4 12.7
EV/EBIT 37.5 22.6 17.1 13.3
ROE analysis (%)
ROE 111 94 60 44
ROIC 47.1 51.2 52.1 57.8
Asset turnover (x) 0.54 0.49 0.47 0.43
Tax burden (x) 0.73 0.79 0.78 0.78
Credit ratios
Net debt/equity (%) 124 42 (20) (46)
Net debt/EBITDA (x) 1.12 0.51 (0.38) (1.14)
Interest cover (x) (27.5) (24.3) (11.6) (6.4)

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17 January 2014
E-commerce: Momentum continues in 2014
Figure 73: SouFun e-commerce business analysis (penetration by tiers of cities)assuming primary real estate market
growth of 10%*
1Q13 2Q13 3Q13 4Q13E 1Q14E 2Q14E 3Q14E 4Q14E
Tier 1 cities new residential value(Rmb mn) 125,331 138,582 146,152 160,960 131,597 145,511 153,460 169,008
YoY 5% 5% 5% 5%
Soufun EC penetration 13.0% 20.0% 20.0% 21.0% 22.0% 22.0% 24.0% 24.0%
Soufun EC take rate 0.57% 0.57% 0.57% 0.57% 0.57% 0.57% 0.57% 0.57%
Tier 1 cities SouFun EC revenue 93 158 167 193 165 182 210 231
Quarter YoY 78% 16% 26% 20%
Whole year YoY 29%
YoY 5% 5% 5% 5%
Quarter YoY 75% 23% 40% 45%
Whole year YoY 42%
YoY 5% 5% 5% 5%
Quarter YoY 170% 170% 110% 69%
Whole year YoY 112%
Total EC revenue(Rmb mn) 161 276 302 358 302 364 429 486
Quarterly YoY 87% 32% 42% 36%
Whole year YoY 44%
* Tiers of cities are ranked by total new house sales in Nov-2013; Tier 1 cities: Beijing & Shanghai; Tier 2 cities: Top 3-10 cities; Tier 3 cities: Top
11-30 cities.
Source: NBS, Credit Suisse estimates
In our analysis of SouFun's e-commerce business, we estimate 2014 new residential
value to grow 5% YoY, and expect SouFun's e-commerce penetration rate to increase
from 20%/6%/2.5% in Tier 1/2/3 cities in 3Q13 to 24%/9%/5% in 4Q14. The result shows
that e-commerce revenue in 2014 will likely increase to 44% YoY on the 2013 level.
Provided that our estimates on penetration rate are conservative, we expect momentum of
SouFun's e-commerce business to continue in 2014.

17 January 2014
We maintain OUTPERFORM rating on SouFun and increase our target price to
US$110 (from US$89.36)
(1) Main valuation methodology is P/E-based valuation
Our main valuation methodology is forward P/E. Our target price of US$110 implies 26.5x
FY14E and 20.9x FY15E diluted adjusted EPS. Currently China online portal and vertical
comps are trading at 31.3x FY14E and 21.7x FY15E. Our target price is in line with sector
average P/E.
Figure 74: China online portal and verticals comps
Close Mkt cap EPS P/E (x) ROE EV/EBITDA (x) FCF yield (%)
Sina SINA US USD 84.6 5,647 1.2 2.3 2.9 70.2x 36.9x 29.2x 12.9% 114.9x 36.2x 25.9x 1% 3% 3.4%
Jiayuan DATE US USD 7.3 228 0.4 0.4 0.5 20.5x 18.0x 14.1x n.a n.a n.a n.a n.a n.a n.a
51job JOBS US USD 81.7 2,380 2.6 3.0 3.6 31.1x 27.0x 22.9x n.a n.a n.a n.a n.a n.a n.a
Sohu SOHU US USD 75.9 2,901 1.2 2.5 4.3 61.3x 30.4x 17.6x 12.5% 8.0x 5.8x 4.2x -11% -2% -1.8%
Phoenix New Media FENG US USD 11.1 857 0.5 0.6 0.8 21.6x 17.9x 14.2x 17.4% 14.7x 10.5x 7.3x n.a n.a n.a
China Finance Online JRJC US USD 7.2 159 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
58.com WUBA US USD 44.5 3,537 0.2 0.6 1.0 197.4x 76.3x 44.0x 421% 199.1x 68.4x 36.7x 0% 1% 2.1%
Average 57.7x 31.3x 21.7x 14.4% 45.9x 15.3x 11.2x -5% 1% 1%
* Priced as of 15 January 2014.
Source: Company data, the BLOOMBERG PROFESSIONAL service, Credit Suisse estimates
(2) DCF
Assuming longer-term revenue growth of 20%, long-term OPM of 43.6%, WACC of 12%
and 0% terminal growth, our DCF valuation yields a target price of US$87 by end-2014.
We use DCF as a valuation reference.
We see that SouFun's positive share price drivers and catalysts are from: (1)
acceleration of growth in membership card and listing segments; (2) overall growth in
China's real estate (primary and secondary markets); and (3) launch of new products,
especially on mobile monetisation.
Downside risks may emerge from: (1) increased marketing spend on user/merchant
acquisition from traffic growth slowdown and competition threat. (2) slower-than-expected
membership and listing segment growth. (3) a slowdown in the overall real estate market
in China.

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Figure 75: SouFunincome statement

2012 2013E 2014E 2015E
(US$ in M, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Total Revenue 58.5 97.0 127.2 147.5 91.0 144.1 185.0 202.3 131.4 183.8 239.2 257.2 430.3 622.6 811.5 987.7
Marketing services 34.3 55.7 79.7 80.2 35.8 58.9 86.5 88.5 39.4 65.0 95.3 96.6 249.9 269.7 296.2 320.9
E-commerce services 12.0 24.4 25.6 40.1 26.4 45.0 49.7 58.6 40.4 61.7 72.3 84.3 102.2 179.6 258.8 352.7
Listing services 10.9 15.5 20.3 26.1 26.8 38.4 46.3 53.2 49.5 54.5 68.7 73.2 72.9 164.8 246.0 300.9
Other value-added services 1.3 1.4 1.6 1.1 2.0 1.8 2.6 2.0 2.1 2.5 2.9 3.0 5.4 8.4 10.5 13.2
COGS -16.5 -18.2 -20.8 -25.3 -20.0 -26.1 -28.5 -40.5 -27.6 -34.0 -37.8 -51.4 -80.9 -115.2 -150.8 -187.4
Gross Profit 42.0 78.8 106.4 122.2 71.0 118.0 156.5 161.9 103.8 149.8 201.4 205.7 349.4 507.4 660.7 800.3
Selling expenses -14.5 -17.1 -20.6 -27.8 -18.7 -23.0 -25.4 -26.3 -27.6 -27.6 -32.3 -46.3 -80.1 -93.4 -133.7 -165.9
General and administrative expenses -13.3 -14.7 -19.5 -22.8 -15.1 -19.4 -20.7 -30.4 -21.0 -23.9 -23.9 -37.3 -70.3 -85.6 -106.1 -124.1
Other income 0.0 0.0 0.0 0.0 0.0 -0.2 -0.3 0.0 0.0 0.0 0.0 0.0 0.0 -0.4 0.0 0.0
SBC -1.3 -1.2 0.0 0.0 -1.8 -1.8 -1.7 -1.7 -2.1 -2.1 -2.1 -2.1 -2.5 -6.9 -8.3 -10.0
EBIT 14.2 47.0 66.3 71.6 37.2 75.8 110.6 103.5 53.1 96.2 143.2 120.1 199.1 327.2 412.5 500.4
Adj. EBIT (ex-share-based exp.) 15.5 48.2 66.3 71.6 39.0 77.6 112.3 105.2 55.2 98.3 145.2 122.2 199.1 327.6 412.5 500.4
EBITDA 15.8 48.6 67.9 73.2 38.8 79.8 114.8 107.7 57.4 100.6 147.7 124.8 210.5 348.1 438.8 530.6
Net Other Income 0.4 0.5 0.2 0.2 0.5 1.3 2.4 2.4 2.4 2.4 2.4 2.4 1.4 6.6 9.6 9.6
Pre Tax Profit 16.4 50.0 69.2 72.1 40.1 80.2 116.9 110.0 59.1 110.4 154.9 133.2 207.7 347.2 457.7 588.1
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.0 0.0
Net Profit 14.5 32.3 49.2 55.8 28.4 55.4 102.7 87.7 45.7 85.6 120.4 103.5 151.8 274.2 355.2 456.5
Adj. Net Profit (ex-share-based exp.) 15.8 33.5 49.2 55.8 30.2 57.1 104.5 89.4 47.8 87.8 122.5 105.5 154.3 281.2 363.5 466.5
Diluted EPS (US$) 0.18 0.40 0.61 0.68 0.34 0.67 1.22 1.01 0.52 0.98 1.37 1.18 1.87 3.25 4.06 5.16
Adj. Diluted EPS (US$, ex-share-based exp.) 0.19 0.41 0.61 0.68 0.36 0.69 1.24 1.03 0.55 1.00 1.40 1.20 1.90 3.33 4.15 5.28
Margins (%)
Gross Margin 71.8 81.2 83.6 82.8 78.0 81.9 84.6 80.0 79.0 81.5 84.2 80.0 81.2 81.5 81.4 81.0
Adj. Operating Margin (ex-share-based exp.)26.5 49.7 52.1 48.5 42.8 53.8 60.7 52.0 42.0 53.5 60.7 47.5 46.3 52.6 50.8 50.7
EBITDA Margin 27.0 50.1 53.3 49.6 42.6 55.4 62.0 53.2 43.7 54.8 61.7 48.5 48.9 55.9 54.1 53.7
Net Margin 24.8 33.3 38.6 37.8 31.2 38.4 55.5 43.3 34.8 46.6 50.3 40.2 35.3 44.0 43.8 46.2
Revenue -48.6 65.8 31.2 15.9 -38.3 58.3 28.4 9.3 -35.1 39.9 30.2 7.5 25.1 44.7 30.3 21.7
Gross Profit -56.7 87.7 35.1 14.8 -41.9 66.2 32.6 3.4 -35.9 44.3 34.5 2.1 26.0 45.2 30.2 21.1
EBIT -69.7 230.7 41.0 8.0 -48.0 103.7 46.0 -6.4 -48.7 81.3 48.8 -16.1 41.8 64.3 26.1 21.3
Net Profit -51.7 122.5 52.0 13.4 -49.1 94.9 85.6 -14.6 -47.9 87.6 40.6 -14.1 49.4 80.6 29.5 28.5
Adj. Net Profit -50.6 112.3 46.6 13.4 -45.9 89.3 82.8 -14.4 -46.6 83.7 39.5 -13.8 41.8 82.2 29.3 28.3
Diluted EPS -51.7 121.6 53.7 10.8 -49.6 95.3 83.1 -17.2 -48.1 87.0 40.2 -14.3 51.2 74.1 24.8 27.3
Adj. Diluted EPS -50.6 111.5 48.2 10.8 -46.5 89.8 80.4 -17.0 -46.7 83.1 39.1 -14.1 43.5 75.7 24.6 27.1
2014E 2012 2013E

17 January 2014

Consumer Internet

Tencent Holdings
(0700.HK / 700 HK)
UPGRADE RATING
WeChat Payment: The next growth frontier
WeChat Payment to revolutionise mobile payment in China. We see
clearer signs that WeChat Payment will emerge as one of the leading mobile
wallets in China. Tencent drives WeChat Payment adoption via mobile game,
taxi apps rebates, financial services, and other offline applications. We
expect Tencent to tap into the Rmb18 tn electronic payment market in China
with revenue opportunities of Rmb22.8 bn by 2015. We expect mobile
payment and financial products distribution to create value of US$25.7 bn.
Potential earnings upside in 2014. We believe Tencent could see margin
upside with mobile games revenue starting to kick in. Basic math is that
mobile games will bring in an additional US$600 mn of profit. On the other
side, key 2014 incremental spending items are US$100 mn on video content
and US$ 100-200 mn additional spending on WeChat marketingleading to
potentially higher OPM. In addition, BnS has seen good traction few months
after launch; this could offset the potential weakness of CF in 2014.
Furthermore, Mobile VIP Membership and other mobile social products should
start to contribute more meaningful revenue.
Risks include: (1) marketing spend on WeChat international expansion and
mobile products promotion, (2) higher-than-expected content spend on video; (3)
slowdown of key legacy client-based game titles and (4) worse-than-expected
user acceptance on Weixin Payment and mobile subscription packages.
Upgrade to OUTPERFORM with TP of HK$619 Why upgrade now? Our
relative Neutral call on Tencent (versus OP on Baidu) was based on the thesis
that Tencent was not likely to see earnings upside in 2H13, given high
spending and initial Weixin games potential already being reflected in street
estimates. While this turned out to be right, going forward we expect the market
to put more focus on WeChat O2O, payment and Internet finance services. We
value Tencent's current reporting segments at US$121.6 bn (HK$512 per
share, or 29x 2015 P/E), and add in Tenpay and WeChat Payment's
valuation of ~US$25.7 bn (HK$107 per share). Our target price of HK$619
implies 43.2x FY14E and 34.7x FY15E diluted adjusted P/E.

0
100
200
300
400
0
200
400
600
Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13

On 16/01/14 the spot exchange rate was HK$7.75/US$1

Absolute (%) 10.0 19.2 91.8
Relative (%) 13.0 21.8 97.7
Year 12/12A 12/13E 12/14E 12/15E
Revenue (Rmb mn) 43,893.7 60,082.3 78,680.4 100,674.3
EBITDA (Rmb mn) 17,539.9 20,933.0 27,836.3 35,192.0
EBIT (Rmb mn) 14,927.6 17,548.4 23,244.3 29,489.3
Net profit (Rmb mn) 14,286.4 17,364.0 21,744.6 27,224.4
EPS (CS adj.) (Rmb) 7.67 9.24 11.27 14.04
Change from previous EPS (%) n.a. 0.0 0.9 -1.2
EPS growth (%) 30.5 20.4 22.0 24.5
P/E (x) 52.1 43.3 35.5 28.5
Dividend yield (%) 0.25 0.21 0.26 0.32
EV/EBITDA (x) 41.5 34.6 25.3 19.3
P/B (x) 18.0 13.4 10.2 7.7
ROE (%) 41.0 35.7 33.0 30.9
Rating (from Neutral) OUTPERFORM*
Price (16 Jan 14, HK$) 512.50
Target price (HK$) (from 440.00) 619.00
Mkt cap (HK$ mn) 954,332 (US$123,071 mn)
Number of shares (mn) 1,862.11
Free float (%) 50.8
ADTO - 6M (US$ mn) 207.2


Research Analysts
Dick Wei
852 2101 7339

17 January 2014
Tencent Holdings 0700.HK / 700 HK
Price (16 Jan 14): HK$512.50, Rating:: NEUTRAL, Target Price: HK$619.00, Analyst: Dick Wei
Upside 700.00 36.59 40% CAGR for gross profit from 13-15E
Central Case 619.00 20.78 28.9% CAGR for gross profit from 13-15E
Downside 540.00 5.37 15% CAGR for gross profit from 13-15E

Number of Premium QQ
susbscription (Mn)
29.6 30.2 36.7 44.6

Sales revenue 43,894 60,082 78,680 100,674
SG&A 10,759 15,250 19,336 24,506
Other operating exp./(inc.) (2,612) (3,385) (4,592) (5,703)
EBITDA 17,540 20,933 27,836 35,192
Depreciation & amortisation 2,612 3,385 4,592 5,703
EBIT 14,928 17,548 23,244 29,489
Net interest expense/(inc.) (204) (1,669) (1,318) (1,597)
Non-operating inc./(exp.)
Associates/JV
Recurring PBT 15,132 19,217 24,563 31,086
Taxes 2,266 3,951 5,239 6,609
Profit after tax 12,866 15,266 19,324 24,477
Minority interests 133.9 (175.9) (112.7) (112.7)
Preferred dividends
Reported net profit 12,732 15,442 19,436 24,589
Analyst adjustments 1,555 1,922 2,308 2,635
EBIT 14,928 17,548 23,244 29,489
Net interest 204 1,669 1,318 1,597
Tax paid (2,266) (3,951) (5,239) (6,609)
Working capital 6,259 687 3,296 3,787
Other cash & non-cash items 3,503 4,601 6,225 7,662
Capex (3,772) (4,988) (7,021) (8,566)
Acquisitions
Divestments
Other investment/(outflows) (16,286) (10,973) (801) (801)
Investing cash flow (20,058) (15,961) (7,822) (9,367)
Equity raised 384.7 711.8 543.5 591.5
Dividends paid (1,828) (1,544) (1,944) (2,459)
Net borrowings (1,033) 4,524
Other financing cash flow 768.0 (700.4) 112.7 112.7
Financing cash flow (1,709) 2,991 (1,287) (1,755)
Total cash flow 861 7,585 19,734 24,804
Adjustments
Net change in cash 861 7,585 19,734 24,804
Current receivables 2,354 2,855 3,759 4,764
Inventories 568 970 1,466 2,175
Other current assets 6,398 8,914 11,669 14,747
Current assets 36,509 47,513 71,402 100,998
Investments 12,978 20,261 20,261 20,261
Intangibles
Total assets 75,256 98,835 125,956 159,215
Short-term debt 1,077 2,564 2,564 2,564
Current provisions
Long-term debt 9,622 12,659 12,659 12,659
Other non-current liab. 3,671 3,947 3,947 3,947
Minority interests
Shares (wtd avg.) (mn) 1,862 1,880 1,929 1,939
EPS (Credit Suisse)
(Rmb)
7.7 9.2 11.3 14.0
DPS (Rmb) 1.00 0.84 1.03 1.29
BVPS (Rmb) 22.2 29.8 39.2 51.7
Growth(%)
Sales revenue 54.0 36.9 31.0 28.0
EBIT 31.4 17.6 32.5 26.9
Net profit 30.6 21.5 25.2 25.2
EPS 30.5 20.4 22.0 24.5
Margins (%)
EBITDA 40.0 34.8 35.4 35.0
EBIT 34.0 29.2 29.5 29.3
Pre-tax profit 34.5 32.0 31.2 30.9
Net profit 32.5 28.9 27.6 27.0
P/E 52.1 43.3 35.5 28.5
P/B 18.0 13.4 10.2 7.7
Dividend yield (%) 0.25 0.21 0.26 0.32
P/CF 32.9 36.6 26.7 21.6
EV/sales 16.6 12.1 9.0 6.8
EV/EBITDA 41.5 34.6 25.3 19.3
EV/EBIT 48.8 41.3 30.4 23.1
ROE analysis (%)
ROE 41.0 35.7 33.0 30.9
ROIC 65.6 45.5 50.3 64.0
Asset turnover (x) 0.58 0.61 0.62 0.63
Tax burden (x) 0.85 0.79 0.79 0.79
Credit ratios
Net debt/equity (%) (39.9) (34.9) (51.9) (63.9)
Net debt/EBITDA (x) (0.94) (0.93) (1.41) (1.82)
Interest cover (x) (73.1) (10.5) (17.6) (18.5)

0
5
10
15
20
25
30
35
40
45
2009 2010 2011 2012 2013 2014
12MF P/E multiple

0
2
4
6
8
10
12
14
16
18
2009 2010 2011 2012 2013 2014
12MF P/B multiple

Source: IBES
17 January 2014
Valuing Tenpay and Weixin Payment at US$25.7 bn
Back in November 2011, we were the first team on the street to highlight the Weixin
opportunity as a potential killer app in the era of mobile Internet. Now, Weixin has become
the major pillar for Tencent to cruise through the mobile space in China. On the back of
the recent research we did on the topic of Internet finance, we see the application of
Weixin Payment as similarly ground-breaking in the O2O segment, to enable more
business scenarios and close the loop of payment and delivery.
Valuing Tenpay and Weixin Payment at US$25.7 bn
Although not a separate reporting segment of Tencent, Tenpay has been serving as a key
payment infrastructure of Tencent's business and solid #2 player in the third-party online
payment market. We see Tenpay's value to be substantially enhanced with the growth of
Weixin Payment, which enables various online and offline business scenarios and closes
the loop of payment and service delivery. We value Tenpay and Weixin Payment at
US$25.7 bn, considering its addressable market size, business model and margin profile.
Figure 76: Valuing Tenpay and Weixin Payment at US$25.7 bn
in Rmb bn, unless otherwise stated
Monetisation areas Forecast
base
2013E 2015E Cashless
(%)
15E
addressable
market size
Non-
Tencent
mkt shr
Tencent
mkt shr
Tencent
grossing
Economics Tencent
revenue
Payment infrastructure Consumer
spending
24,292.9 28,369.1 60.0% 17,021.5 75.0% 25.0% 4,255.4 0.50% 21.3
Financial product
distribution
Fund AUM 4,152.6 4,578.2 100.0% 4,578.2 90.0% 10.0% 457.8 0.25% 1.1
Total Tenpay revenue 22.4
Assuming net margin 35%
Total Tenpay net income 7.8
P/E multiple 20x
Total Tenpay valuation
(Rmb bn)
156.9
(US$ bn)
25.7
Source: PBOC, National Bureau of Statistics ,company data, Credit Suisse estimates
We think Tenpay benefits with the growth of Weixin Payment. The major monetisation
opportunity mainly lies in two areas:
Payment infrastructure.
Financial product distribution.
In payment infrastructure, we use total China consumer spending size as a starting point.
According to MasterCard, non-cash payment now consists of 55% of total consumption in
China, compared to 80% in the US and 89% in the UK.
17 January 2014
Figure 77: Non-cash payments share of the total value of consumer payments
93%
92%
90%
89%
86%
80%
76%
70%
69%
62%
57%
55%
54%
43%
32%
31%
0% 20% 40% 60% 80% 100%
Belgium
France
Canada
U.K.
Australia
U.S.
Germany
Korea
Singapore
Japan
Brazil
China
Spain
Taiwan
India
Russia

Source: MasterCard Advisors Cashless Journey, Oct-2013.
According to PBOC, National Bureau of Statistics and iResearch, by 2012, Bankcard
consumption value in China reached ~Rmb9,100 bn, ~44% of China's total retail sales.
Figure 78: Bankcard consumption value as % of total China retail sales at 44% in 2012
17.0%
21.3%
22.6%
30.1%
35.0%
38.6%
43.9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
0
5,000
10,000
15,000
20,000
25,000
2006 2007 2008 2009 2010 2011 2012
Retail Sales (Rmb Bn) Bankcard Consumption Value Penetration

* Bankcard consumption value excluded wholesale, real estates and auto sales.
Source: PBOC, National Bureau of Statistics, iResearch
We assume in 2015E non-cash payment consists of 60% of total consumption in China.
This will give us a 2015E addressable market size of Rmb17,021 bn.
Figure 79: Tencent's addressable market size from payment infrastructure
Monetisation area Forecast base
scenarios
2013E 2015E Cashless transaction
penetration (%)
15E addressable
cashless payment
market size
Payment infrastructure Retail sales 23,785.7 30,372.0 60.0% 18,223.2
Consumer spending 24,292.9 28,369.1 60.0% 17,021.5
Disposable income 36,420.4 43,668.9 60.0% 26,201.4
Source: PBOC, National Bureau of Statistics, company data, Credit Suisse estimates

17 January 2014
We then use Tenpay's current market share of 20% in third-party online payment as a
reference in the future market share dynamics in cashless payment in China, although we
think Tenpay could potentially grab as much as 40-50% of the total market with the help of
Weixin Payment in more offline payment applications. In our assumptions, we assume
Tencent takes 25% of the total cashless payment addressable market.
Figure 80: Third-party online payment (Rmb bn) Figure 81: Market share of third-party online payment

Alipay, 48.8%
Tenpay, 18.7%
ChinaPnR, 5.9%
China UnionPay
Online, 11.7%
99Bill, 6.7%
ePayment, 2.9%
Yeepay, 3.4%
Others, 1.9%

Source: iResearch Source: iResearch, 3Q13
Then we apply 50 bp economics of processing fee that Tenpay would earn through
facilitating these payment transactions.
This gives us a ~Rmb21.3 bn revenue opportunity from payment infrastructure.
Figure 82: Tencent's revenue opportunity from payment infrastructure
Monetisation area Forecast Base 2015E
addressable
market size
Non-Tencent
mkt shr
Tencent mkt
shr
Tencent
grossing
Economics
(payment fee)
Tencent
revenue
spending
17,021.5 75.0% 25.0% 4,255.4 50bps 21.3
In financial product distribution, we start with the total China fund AUM of approx.
Rmb4.5 tn in 2015E. We conservatively estimate Tenpay would win 10% of the fund
distribution market, with 25 bp of economics as distribution fee. With the recent
introduction of Weixin Wealth Manager (), and Alipay's Yu'E Bao being the biggest
money market fund with AUM of over Rmb250 bn (source: Donews.com), we think 10%
share of the total market is a fair and conservative estimate.
Figure 83: Development of mutual funds and money funds in China
Mutual funds Money market funds
Time Number AUM (Rmb bn) Number AUM (Rmb bn)
2013.11 1505 2916.987 85 633.174
2013.10
1466 2813.335 84 575.448
2013.09
1450 2805.344 78 489.008
2013.08
1411 2774.241 75 509.896
2013.07
1369 2654.904 74 409.631
2013.06
1345 2518.054 73 303.869
2013.05
1317 3003.720 73 564.054
2013.04
1282 2828.664 71 561.567
2013.03
1257 2795.376 70 512.729
2013.02
1215 2890.438 65 536.137
2013.01
1193 2785.474 63 571.728
2012.12
1173 2866.1 61 571.728
Source: Asset Management Association of China (AMAC)
17 January 2014
This should give Tencent an around Rmb1.1 bn revenue opportunity in terms of financial
product distribution.
Figure 84: Tencent's revenue opportunity from financial product distribution
Monetisation area Forecast
base
(%)
Alipay
(%)
Tencent
(%)
Alipay
amount
Tencent
amount
Fee
charged
Tencent
revenue
Financial product
distribution
Fund AUM 4,152.6 4,578.2 100.0% 50.0% 10.0% 2,289.1 457.8 0.25% 1.1
Source: PBOC, National Bureau of Statistics, company data, Asset Management Associate of China.
In terms of margin and trading multiple, we look at Visa and MasterCard, who enjoy 38-
42% net margin and ~25x forward P/E. Considering Tenpay's early development stage,
we apply some discount and use 35% net margin and 20x P/E in valuing Tenpay. This will
in the end give us a Tenpay and Weixin Payment valuation of US$25.7 bn.
Figure 85: Valuing Tenpay and Weixin Payment at US$25.7Bn
Monetisation areas Forecast
base
(%)
2015E
addressable
market size
Non-
Tencent
mkt shr
Tencent
mkt shr
Tencent
Grossing
Economics Tencent
revenue
Spending
24,292.9 28,369.1 60.0% 17,021.5 75.0% 25.0% 4,255.4 0.50% 21.3
Financial product
Distribution
Fund AUM 4,152.6 4,578.2 100.0% 4,578.2 90.0% 10.0% 457.8 0.25% 1.1
Total Tenpay revenue 22.4
Assuming net margin 35%
Total Tenpay net income 7.8
P/E multiple 20x
(Rmb bn)
156.9
(US$ bn)
25.7
Source: PBOC, National Bureau of Statistics ,Company data, Credit Suisse estimates
On top of this US$25.7 bn, we see further upside from potentially more market share grab
and future international expansion as free option embedded in the business.
Additionally, we only considered a traditional, volume-driven, distribution channel business
model for Tenpay and Weixin Payment, which only charges channel/distribution fee at
around 25-50 bp. We haven't factored in its synergistic benefits to Tencent's other
business lines (games, e-commerce, social networks).
17 January 2014
WeChat Payment: Grabbing land
WeChat financial product platform: Another Yu'e Bao?
On 16 January 2014, Tencent launched a financial product platform () on WeChat.
Tencent currently cooperates with China AMC on this product and provides an annualised
return rate of 6.4% at debut day, similar to other money market funds. Tencent guarantees
no procedure fee on this product and will provide full insurance supported by PICC.
We expect a decent scale of Tencent's financial product platform given the total user base
of WeChat (over 600 mn registered user according to Donews). We also expect the
platform to attract more users to activate WeChat Payment function.
Figure 86: Paying process of WeChat financial product platform
WeChat financial product
platform is under My
bank card function
Enter total deposit
amount and 6 digit
password
Check latest revenue
gain and annualized
return rate
Successfully deposit
RMB1000 into financial
product platform

WeChat taxi booking platform: Positive initial performance
On 4 January 2014, Tencent launched a taxi booking platform on WeChat, supported by
taxi booking service provider Didi (), which is also an investee of Tencent.
WeChat users can use this platform to order a taxi and also pay the taxi fee through
WeChat Payment. In order to promote WeChat Payment, Didi awards users/drivers who
use WeChat Payment Rmb10 for each transaction. Didi announced some operating matrix
after one week of operation and the result is satisfactory: on the debut day, the total
number of orders reached 20,000, of which over 6,000 were paid via WeChat Payment.
The latest daily number of orders has reached 38,000 and over 200,000 drivers now
accept WeChat Payment as the paying method.
17 January 2014
Figure 87: Paying process of WeChat taxi booking platform
WeChat taxi booking platform is
under My bank card function
Enter destination and
tip amount (optional)
If a driver respond, will show
distance between you and him
Can choose to pay via cash or
WeChat payment

Expanding third party cooperation
Besides what has been mentioned above, we also see WeChat expanding cooperation
with various online/offline partners: As for online partners, online life service providers
such as Dianping.com (dining), Qunar (travel), 7days Inn (hotel) all support WeChat
Payment now. As for offline partners, chain restaurant Haidilao () now supports
WeChat Payment in its near 100 branches in China. Users can easily scan the QR code
that the restaurant provides and pay the bill in a few steps. WeChat has also tied up with a
convenience chain store 7-11 on offline payment in Guangzhou.
Figure 88: Paying process of chain restaurant via WeChat Payment
Restaurant show QR code of specific bill
Use WeChat Scan function to scan QR
code
Enter 6 digit of password and payment
process is finished


17 January 2014
Blade & Soul: Among most popular MMOGs in China
Figure 89: China top MMOG server count comparison* Figure 90: China top MMOG PCU comparison
666
390
351
210
196
164
116
0
100
200
300
400
500
600
700
TLBB FWJ WoW BNS MIR II JW3 DNF

3
2.71
1.5
1.26
1 1
0.8
0.6
0
0.5
1
1.5
2
2.5
3
3.5
DNF FWJ BNS WJ2 WoW TLBB YLZT DZS
Mn

*As of 10 January 2014.
Since its debut in early December 2013, Tencent's blockbuster MMOG Blade & Soul
(BNS) has attracted a considerable amount of users. Based on our latest check in January
2014, the total server count of BNS had reached 210, which is already among the most
popular games in China. In January 2014, Tencent also announced that PCU of BNS has
already achieved 1.5 mn, which we believe will also qualify BNS as among the Top 5 most
popular MMOGs in China currently.
Based on our checks on Baidu Postbar, we find that gamers are positive on Blade &
Soul's graphic quality and character personalisation system (average time spent on
character personalisation per user is over six hours, according to Tencent). We view the
future momentum of BNS to be highly correlated to the quality of new expansion packs.
(According to Sina Game Channel, BNS's market share in Korean net caf dropped after
the official launch due to lack of new content.)
17 January 2014
WeChat as new promotion platform for Blade & Soul
Figure 91:Snapshot of BNS WeChat official account

Source: Company data, Credit Suisse
BNS has also launched an official account on WeChat, which provides various
functions as follows: (1) a user forum that enables gamers to communicate with each
other; (2) game guides and Q&A for new users; (3) account security system: bound game
account with WeChat account to provide higher security level; (4) virtual in-game item
store: provide various in-game items for sale, also special promotion activity for WeChat
users.
We expect a positive effect for both WeChat and BNS: Tencent provides a special
discounted price of BNS's virtual items on WeChat, which will attract gamers to activate
the WeChat Payment function. Meanwhile, we expect higher virtual item sales of BNS,
supported by the much easier process of WeChat Payment compared to traditional
purchase activity of Q coin.

17 January 2014
We upgrade Tencent to OUTPERFORM with a target price of HK$619 (from HK$440)
We arrive at our target price considering the following two valuation methodologies:
(1) P/E
Our main valuation methodology is forward P/E. Our target price of HK$619 implies 43.2x
FY14E and 34.7x FY15E diluted adjusted P/E.
Our target price implies Tencents market capitalisation of slightly above US$147 bn. We
see this as being reasonable compared to other global Internet companiesgiven
Tencents global opportunities and high-margin social products.
(2) Discounted cash flow (DCF)
We see DCF also provides a reference point to gauge Tencent's valuation. Assuming
longer-term revenue growth of 25%, long-term OPM of 27.0%, WACC of 12% and 0%
terminal growth, our DCF valuation yields a target price of HK$619 by end-14.
(3) Sum-of-the-parts (SOTP)
Intrinsically, we think Tencent's businesses are built upon common, core communication
and social network service foundationsQQ in PC era and Weixin/WeChat in mobile era.
Therefore, we don't think a separate valuation on Weixin makes logical sense, as no one
will look at a separate valuation for QQ nowadays.
On the other hand, valuing Tencent by using SOTP of different business segments (rather
than product portfolios) serves as a good valuation check, in our view, especially when it
comes to factoring new, emerging business lines into the overall valuation.
Figure 92: Tencent SOTP
Business lines Revenue Earnings Multiple Value (Rmb mn) Value Value/share
(Rmb mn) (Rmb mn) Low High Low High Mid-point (US$ bn) (Rmb)
Community VAS 22,349.6 8,939.8 25 30 223,496.2 268,195.5 245,845.8 40.3 132.0
Games 48,331.9 18,849.5 20 25 376,989.2 471,236.5 424,112.8 69.5 227.7
Online ad 7,249.7 1,087.5 20 25 21,749.2 27,186.5 24,467.8 4.0 13.1
e-commerce 22,044.5 -1,322.7 0.4 0.8 8,817.8 17,635.6 13,226.7 2.2 7.1
Tenpay & WeChat Payment -2,440.0 156,900.0 156,900.0 156,900.0 25.7 84.2
Net cash and investments 34,400.4 34,400.4 34,400.4 5.6 18.5
Total value 822,352.8 975,554.4 898,953.6 147.4 482.7
Price per diluted share (Rmb) 441.6 523.8 482.7
Price per diluted share (HK$) 566.1 671.6 618.9
In the SOTP of Tencent, we value Tencent's current business lines (games, social
networks, ads, e-commerce) at US$121.6 bn (HK$512 per share), and add in Tenpay and
Weixin Payment's valuation of ~US$25.7 bn (HK$107 per share).
We see that Tencent's positive share price drivers and catalysts are from: (1) faster-
than-expected growth of mobile game revenue; (2) stronger-than expected growth in the
'Social Networks' segment; (3) faster-than-expected growth in overseas expansion and
O2O revenue generation.
The key risks to our forecast are slower-than-expected Super VIP subscription rate and
online games revenue growth. Risks to our target price include: (1) slower WeChat user
growth leading to lower long-term growth expectation and (2) lower-than-expected user
acceptance in mobile subscription packages.

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Figure 93: Tencentincome statement
2012 2013E 2014E 2015E
(RMB in M, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Net Revenue 9,648 10,527 11,566 12,153 13,548 14,385 15,535 16,615 17,534 18,932 20,337 21,877 43,894 60,082 78,680 100,674
Internet VAS 8,295 8,716 9,317 9,390 10,666 10,752 11,635 12,247 13,021 13,963 14,874 15,649 35,718 45,300 57,507 70,682
Social Networks 2,755 2,924 3,113 3,128 3,194 3,158 3,211 3,343 3,624 4,157 4,539 4,869 11,919 12,907 17,188 22,350
Games 5,541 5,792 6,204 6,262 7,472 7,594 8,424 8,904 9,397 9,806 10,335 10,780 23,799 32,394 40,319 48,332
Online Advertising 540 880 1,015 947 850 1,297 1,390 1,266 1,172 1,369 1,585 1,604 3,382 4,803 5,730 7,250
eCommerce 753 858 1,134 1,684 1,913 2,199 2,359 2,949 3,185 3,440 3,715 4,458 4,428 9,421 14,798 22,044
Others 59 74 99 132 119 136 150 154 157 160 163 166 365 558 645 699
Cost of Revenue -3,836 -4,311 -4,787 -5,273 -5,954 -6,590 -7,036 -7,703 -8,208 -8,632 -9,175 -10,085 -18,207 -27,284 -36,101 -46,679
Gross Profit 5,812 6,216 6,778 6,880 7,594 7,794 8,499 8,912 9,326 10,300 11,161 11,792 25,686 32,799 42,580 53,996
Operating Expenses -2,223 -2,472 -2,845 -3,219 -3,159 -3,635 -4,087 -4,370 -4,471 -4,733 -4,881 -5,251 -10,759 -15,250 -19,336 -24,506
Sales & Mktg. expenses -469 -610 -820 -1,095 -962 -1,234 -1,466 -1,545 -1,578 -1,609 -1,525 -1,641 -2,993 -5,208 -6,353 -7,780
G&A expenses -1,754 -1,862 -2,025 -2,124 -2,196 -2,401 -2,621 -2,825 -2,893 -3,124 -3,356 -3,610 -7,765 -10,043 -12,982 -16,726
Share-based compensation -204 -222 -190 -275 -278 -258 -340 -340 -408 -408 -408 -408 -890 -1,217 -1,633 -1,960
Reported EBIT 3,588 3,744 3,933 3,662 4,435 4,159 4,412 4,542 4,855 5,567 6,281 6,541 14,928 17,548 23,244 29,489
Adj. EBIT (ex share-based expense, other losses/gains) 3,792 3,966 4,123 3,937 4,714 4,417 4,752 4,882 5,263 5,976 6,689 6,950 15,818 18,765 24,877 31,449
EBITDA 4,458 4,553 4,781 4,638 5,436 5,226 5,596 5,892 6,325 7,082 7,853 8,209 18,430 22,150 29,469 37,152
Net Interest Income & Net other (losses) / gains 33 78 92 1 545 420 381 322 266 303 349 400 204 1,669 1,318 1,597
Other income / cost 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Tax (Expense)/Credit -651 -708 -756 -151 -1,029 -926 -955 -1,041 -1,106 -1,256 -1,408 -1,470 -2,266 -3,951 -5,239 -6,609
Minority Interest -21 -14 -50 -48 93 27 28 28 28 28 28 28 -134 176 113 113
Net Profit 2,950 3,100 3,219 3,464 4,044 3,680 3,867 3,851 4,043 4,643 5,250 5,499 12,732 15,442 19,436 24,589
Adj. Net Profit (ex share-based expense, Amort and one-time gains) 3,281 3,386 3,551 4,068 4,476 4,152 4,376 4,360 4,621 5,220 5,827 6,077 14,286 17,364 21,745 27,224
Pre Tax EPS (RMB) 1.99 2.09 2.20 2.00 2.71 2.50 2.61 2.58 2.72 3.11 3.51 3.66 8.28 10.41 13.00 16.35
Diluted EPS (RMB) 1.59 1.67 1.73 1.86 2.17 1.98 2.07 2.00 2.10 2.41 2.72 2.85 6.84 8.21 10.08 12.68
Adj. Diluted EPS (RMB, ex share-based expense, Amort and one-time gains) 1.77 1.82 1.91 2.18 2.40 2.23 2.34 2.27 2.40 2.71 3.02 3.14 7.67 9.24 11.27 14.04
Margins (%)
Gross Margin 60.2 59.0 58.6 56.6 56.1 54.2 54.7 53.6 53.2 54.4 54.9 53.9 58.5 54.6 54.1 53.6
Ex-eCommerce GM 65.1 64.1 64.5 64.3 64.1 62.9 63.5 64.0 63.7 65.2 65.8 66.2 64.5 63.6 65.3 66.6
Reported Op. Margin 37.2 35.6 34.0 30.1 32.7 28.9 28.4 27.3 27.7 29.4 30.9 29.9 34.0 29.2 29.5 29.3
Adj. Op. Margin 39.3 37.7 35.6 32.4 34.8 30.7 30.6 29.4 30.0 31.6 32.9 31.8 36.0 31.2 31.6 31.2
Ex-eCommerce Adj. OPM 42.4 40.8 39.1 36.2 39.4 35.2 35.0 34.5 35.3 37.2 38.9 38.4 39.5 35.9 37.6 37.9
EBITDAMargin 46.2 43.2 41.3 38.2 40.1 36.3 36.0 35.5 36.1 37.4 38.6 37.5 42.0 36.9 37.5 36.9
Net Margin 30.6 29.4 27.8 28.5 29.8 25.6 24.9 23.2 23.1 24.5 25.8 25.1 29.0 25.7 24.7 24.4
Adj. Net Margin 34.0 32.2 30.7 33.5 33.0 28.9 28.2 26.2 26.4 27.6 28.7 27.8 32.5 28.9 27.6 27.0
Ex-eCommerce Adj. Net Margin 36.7 34.8 33.6 37.5 37.3 33.0 32.2 30.7 30.9 32.4 33.7 33.3 35.6 33.2 32.6 32.5
Net Revenue 21.8 9.1 9.9 5.1 11.5 6.2 8.0 7.0 5.5 8.0 7.4 7.6 54.0 36.9 31.0 28.0
Gross Profit 12.2 7.0 9.1 1.5 10.4 2.6 9.0 4.9 4.6 10.4 8.4 5.6 38.3 27.7 29.8 26.8
Adj. EBIT 22.3 4.6 4.0 -4.5 19.7 -6.3 7.6 2.7 7.8 13.5 11.9 3.9 30.8 18.6 32.6 26.4
Pre Tax Profit 17.3 5.5 5.3 -9.0 36.0 -8.0 4.7 1.5 5.3 14.6 12.9 4.7 23.1 27.0 27.8 26.6
Net Profit 16.3 5.1 3.8 7.6 16.8 -9.0 5.1 -0.4 5.0 14.8 13.1 4.7 24.8 21.3 25.9 26.5
Adj. Net Profit 13.2 3.2 4.9 14.5 10.0 -7.2 5.4 -0.3 6.0 13.0 11.6 4.3 30.6 21.5 25.2 25.2
Diluted EPS 15.8 4.9 3.7 7.4 16.7 -8.8 4.8 -3.2 4.8 14.7 12.9 4.6 24.6 20.2 22.7 25.8
Adj. Diluted EPS 12.7 3.1 4.8 14.4 10.0 -7.0 5.1 -3.2 5.8 12.8 11.5 4.1 30.5 20.4 22.0 24.5
2014E 2013E 2012

17 January 2014

Consumer Internet

Vipshop Holdings Limited
(VIPS.N / VIPS US)
Stepping up investment for further growth
2014 will be an important year of strategic execution for Vipshop. Capacity
expansion in fulfillment and investment in more traffic are key areas to watch for
the company's growth in the next three years. We also expect marketplace
growth to help sustain, and mildly improve, gross margin in the next two years.
Demand side: investment ramp-up in traffic acquisition & brand building.
We expect Vipshop to increase marketing spend to further expand its user
base. The company recently launched promotions on new URL (vip.com) and
large-scale branding campaigns both online and offline. This should lay the
foundation for Vipshop's long-term growth as the go-to place in discount retail.
But it will also create short-term headwinds in marketing expense. Investors
should not expect more leverage coming from marketing cost line in 2014.
Supply side: focus on quality improvement and more inventory share.
Vipshop's priority on the supplier side lies in improving overall quality to offer
more higher-tier brands and quality goods. While the number of suppliers may
not increase significantly, per supplier inventory depth should still grow nicely
in 2014. Per our recent checks with some of Vipshop's suppliers, some
smaller-scale brands intend to increase their resource allocation to VIPS, as a
more efficient and low-cost channel to handle excess inventories.
What could make us turn more positive? (1) Re-accelerating growth in
active customers; (2) improvement in purchase frequency and order size; (3)
gross margin upside from product mix or marketplaces. More cautious? (1)
Slower-than-expected user base growth; (2) increasing S&M spend or
customer acquisition cost; (3) decreasing repeat rate/retention in user base.
Maintain NEUTRAL, increase target price to US$80, based on 25x FY15E
P/E, on the back of 73% EPS CAGR from 2013E-15E. PT implies 38.9x
FY14E diluted adjusted EPS. We remain cautious on rich valuation and lack
of further share price catalysts in the next several months.
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The price relative chart measures performance against the S&P
500 INDEX which closed at 1848.38 on 15/01/14

Absolute (%) 24.8 26.0 389.0
Relative (%) 27.8 28.6 395.0
Year 12/12A 12/13E 12/14E 12/15E
Revenue (US$ mn) 692.1 1,644.5 2,731.7 3,726.5
EBITDA (US$ mn) -9.5 56.7 154.2 265.6
EBIT (US$ mn) -11.9 52.1 137.4 223.5
Net profit (US$ mn) -1.9 60.9 121.8 190.8
EPS (CS adj.) (US$) -0.04 1.06 2.05 3.16
Change from previous EPS (%) n.a. -0.7 2.8 6.4
EPS growth (%) n.m. n.m. 93.5 53.9
P/E (x) n.m. 90.9 47.0 30.5
Dividend yield (%) 0.0 0.0 0.0 0.0
EV/EBITDA (x) -538.9 85.3 30.8 16.9
P/B (x) 59.1 22.6 15.1 9.9
ROE (%) -3.7 38.1 40.7 41.8
Rating NEUTRAL* [V]
Price (15 Jan 14, US$) 96.44
Upside/downside (%) -17.0
Mkt cap (US$ mn) 5,319 (US$5,319 mn)
Free float (%) 29.0


Research Analysts
Evan Zhou
852 2101 6745
Dick Wei
852 2101 7339

17 January 2014
Vipshop Holdings Limited VIPS.N / VIPS US
Price (15 Jan 14): US$96.44, Rating: NEUTRAL [V], Target Price: US$80.00, Analyst: Evan Zhou
Upside 105.00 8.88
50% CAGR for # of active customers from
13-15E
Central Case 80.00 (17.05)
13-15E
Downside 55.00 (42.97)
13-15E

Active customers (000s) 1,704 3,845 6,220 8,202

Sales revenue 692 1,645 2,732 3,727
Cost of goods sold 538 1,250 2,052 2,794
SG&A 49.9 110.9 174.7 223.9
EBITDA (9.5) 56.7 154.2 265.6
EBIT (11.9) 52.1 137.4 223.5
Non-operating inc./(exp.) (0.2) 1.4 1.2 1.2
Associates/JV
Recurring PBT (8.8) 65.5 149.4 240.4
Taxes 0.7 16.6 40.6 63.6
Profit after tax (9.5) 48.9 108.8 176.8
Minority interests
Preferred dividends
Reported net profit (9.5) 48.9 108.8 176.8
Net profit (Credit Suisse) (1.9) 60.9 121.8 190.8
EBIT (11.9) 52.1 137.4 223.5
Net interest 3.2 13.4 12.0 16.9
Tax paid (0.7) (16.6) (40.6) (63.6)
Working capital 107.6 134.8 47.3 154.9
Capex (10.3) (17.1) (112.0) (120.0)
Free cash flow to the firm 97.9 183.2 73.9 267.9
Acquisitions
Divestments
Other investment/(outflows) 0.000 0.010
Equity raised 66.2 94.0 1.3 1.3
Dividends paid
Net borrowings (12.7)
Other financing cash flow
Financing cash flow 53.5 94.0 1.3 1.3
Total cash flow 151.4 277.2 75.2 269.2
Adjustments
Net change in cash 151.4 277.2 75.2 269.2
Cash & cash equivalents 210.6 487.8 563.0 832.1
Inventories 144.0 301.9 475.7 553.1
Current assets 382 869 1,154 1,534
Investments
Intangibles
Other non-current assets 0.010
Total assets 399 899 1,279 1,737
Accounts payable 193.5 421.7 570.8 735.4
Short-term debt
Current provisions
Current liabilities 316 661 918 1,184
Long-term debt
Other non-current liab.
Total liabilities 316 661 918 1,184
Shareholders' equity 82.6 237.5 360.6 552.7
Minority interests
Total liabilities & equity 399 899 1,279 1,737
Shares (wtd avg.) (mn) 44.9 57.4 59.3 60.4
EPS (Credit Suisse)
(US$)
(0.04) 1.06 2.05 3.16
DPS (US$)
BVPS (US$) 1.6 4.3 6.4 9.7
Growth(%)
Sales revenue 205 138 66 36
EBIT 89 536 164 63
Net profit 94 3,348 100 57
EPS 97 2,640 94 54
Margins (%)
EBITDA (1.37) 3.45 5.65 7.13
EBIT (1.73) 3.17 5.03 6.00
Pre-tax profit (1.27) 3.98 5.47 6.45
Net profit (0.27) 3.70 4.46 5.12
P/E (2,308) 91 47 31
P/B 59.1 22.6 15.1 9.9
Dividend yield (%)
P/CF 40.0 27.6 30.8 15.0
EV/sales 7.38 2.94 1.74 1.20
EV/EBITDA (539) 85 31 17
EV/EBIT (428) 93 35 20
ROE analysis (%)
ROE (3.7) 38.1 40.7 41.8
ROIC 16.5 (20.6) (44.2) (68.2)
Asset turnover (x) 1.73 1.83 2.14 2.15
Tax burden (x) 1.08 0.75 0.73 0.74
Credit ratios
Net debt/equity (%) (255) (205) (156) (151)
Net debt/EBITDA (x) 22.2 (8.6) (3.7) (3.1)
Interest cover (x) 3.6 (4.4) (12.7) (14.2)

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12MF P/E multiple

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12MF P/B multiple

Source: IBES
17 January 2014
We maintain our NEUTRAL rating on Vipshop and increase our target price to
US$80 (from US$75)
We arrive at our target price for Vishop mainly considering the following three valuation
methodologies.
(1) P/E
We use P/E ratio as the main valuation methodology for Vipshop. We use 25x FY15E P/E,
on the back of 73% EPS CAGR over FY13-15E. Our target price implies 38.9x FY14E
diluted adjusted EPS. On PEG basis, our target price implies 0.5x PEG over 54% of adj.
EPS growth in 2015E. We see 25x as close to where most high-growth Chinese retailers
are trading at, and 0.5x PEG reflects a fair discount to its current high-growth stage. We
do not think a higher multiple would be justified for a low-margin retail business over the
long term.
The company has a cash and cash equivalent of US$6.6 per diluted ADS.
Figure 94: Chinas e-commerce companies comps
Close Mkt cap EPS P/E (x) ROE (%) EV/EBITDA (x) FCF yield(%)
VIPShop VIPS US USD 96.4 5,319 1.1 2.1 3.2 91x 47x 31x 40.7% 85.3x 30.8x 16.9x 3% 1% 4.6%
Global Sources GSOL US USD 8.0 270 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Mecox Lane MCOX US USD 3.6 41 n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a n.a
Dangdang DANG US USD 10.8 885 -0.4 -0.2 0.4 -26x -55x 26x -20.1% -23x -108x 13.0x -3% -4% 0.8%
Light in the box LITB US USD 10.0 500 0.1 0.3 0.4 137x 33x 24x 13.0% 92.3x 35.6x 25.8x 3% 3% 4.5%
HC International 39292 HK HKD 11.8 1,002 0.3 0.5 0.8 37x 24x 15x n.a n.a n.a n.a n.a n.a n.a
Average 60x 12x 24x 8.9% 53.2x -13x 19.4x 1% 0% 3%
*Closing price of 15 Jan 2014; Source: Company data, Credit Suisse estimates
(2) Normalised net margin
If we use normalised P/E as another valuation reference, and assume Vipshop can
achieve a normalised net margin of 5%, this implies 2014/2015 EPS of US$2.3/US$3.1. At
our target price of US$80, this implies 34.7x 2014E / 25.9x 2015E normalised P/E.
(3) DCF valuation
We use DCF valuation as a reference to check our assumptions. Assuming longer-term
revenue growth of 15%, long-term OPM of 6.5%, WACC of 12% and 3% terminal growth,
our base-case DCF valuation yields a target price of US$81.5 by end-FY14.
We suggest investors track the following operating and financial metrics to gauge the trend
of Vipshop's performance.
Overall traffic growth and user stickiness.
Scale per event, number of events per brand partner.
Customer repeat rate and retention rate.
Sell-through rate.
Per-order fulfilment expense.
Customer acquisition cost.

17 January 2014
Vipshops positive share price drivers are: (1) active customer base growth and growth
trajectory, (2) Improvement in sell-through rate, scale per event and number of events per
brand partner, and (3) improvement in per-order fulfillment expense and customer
acquisition cost.
Negative drivers include: (1) active customer growth slowdown, (2) increasing competition
from new flash sales entrants on suppliers and customers, and (3) further inventory
improvement from suppliers.

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Figure 95: Vipshopincome statement

2012 2013E 2014E 2015E
(USD in Mn, year-end December) 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4QE 1QE 2QE 3QE 4QE
Total Revenue 101.3 135.3 155.9 299.6 310.7 351.3 383.7 598.8 588.1 626.9 648.6 868.2 692.1 1,644.5 2,731.7 3,726.5
COGS -79.8 -105.7 -121.2 -230.9 -237.9 -268.7 -290.7 -452.7 -442.8 -471.4 -486.5 -651.1 -537.6 -1,250.0 -2,051.8 -2,794.3
Gross Profit 21.4 29.6 34.8 68.7 72.8 82.6 93.0 146.1 145.3 155.5 162.2 217.0 154.5 394.5 679.9 932.2
Fulfillment -16.8 -20.5 -21.6 -37.3 -37.6 -42.6 -43.9 -65.9 -66.5 -70.2 -72.6 -95.5 -96.2 -190.0 -304.8 -410.2
Marketing -5.8 -6.6 -7.3 -12.4 -13.0 -15.0 -17.3 -26.3 -25.9 -27.0 -27.9 -35.6 -32.1 -71.7 -116.3 -148.8
Technology and content -2.3 -2.4 -3.0 -7.6 -7.7 -8.0 -8.7 -12.0 -12.3 -13.8 -14.9 -17.4 -15.3 -36.3 -58.4 -72.5
General & administrative expenses -3.9 -4.3 -4.6 -5.0 -7.0 -8.9 -10.1 -13.2 -12.9 -13.8 -14.3 -17.4 -17.8 -39.2 -58.4 -75.2
Government grants 0.8 0.4 0.5 0.8 1.3 1.4 2.1 2.1 2.1 2.1 2.1 2.1 2.6 6.9 8.4 12.0
EBIT -8.7 -5.4 -3.3 5.4 5.5 6.7 12.0 27.8 26.7 29.8 31.0 49.8 -11.9 52.1 137.4 223.5
Adj. EBIT (ex-share-based exp.) -6.6 -3.8 -1.2 7.2 8.7 9.5 15.1 30.8 29.7 32.8 34.5 53.3 -4.3 64.1 150.4 237.5
Adj. EBITDA -6.0 -3.2 -0.5 7.9 9.6 10.6 16.3 32.2 31.6 36.2 39.5 59.8 -1.9 68.7 167.2 279.6
Net Other Income 0.1 -0.7 0.4 0.0 -0.2 1.0 0.3 0.3 0.3 0.3 0.3 0.3 -0.2 1.4 1.2 1.2
Pre Tax Profit -8.6 -5.8 -1.5 7.1 7.7 11.4 16.1 30.3 30.1 32.4 33.8 53.1 -8.8 65.5 149.4 240.4
Tax (Expense) / Credit 0.0 0.0 0.0 -0.7 -1.9 -2.4 -4.1 -8.3 -8.3 -8.8 -9.3 -14.1 -0.7 -16.6 -40.6 -63.6
Minority interest 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Net Profit -8.6 -5.8 -1.5 6.3 5.8 9.0 12.0 22.0 21.8 23.5 24.5 38.9 -9.5 48.9 108.8 176.8
Adj. Net Profit (ex-share-based exp.) -6.5 -4.2 0.6 8.1 9.0 11.8 15.1 25.0 24.8 26.5 28.0 42.4 -1.9 60.9 121.8 190.8
Diluted EPS (US$) -0.33 -0.11 -0.03 0.12 0.11 0.16 0.21 0.38 0.37 0.40 0.41 0.65 -0.21 0.85 1.83 2.93
Adj. Diluted EPS (US$, ex-share-based exp.) -0.25 -0.08 0.01 0.16 0.17 0.20 0.26 0.43 0.42 0.45 0.47 0.71 -0.04 1.06 2.05 3.16
Margins (%)
Gross Margin 21.2 21.8 22.3 22.9 23.4 23.5 24.2 24.4 24.7 24.8 25.0 25.0 22.3 24.0 24.9 25.0
Adj. Operating Margin (ex-share-based exp.)-6.5 -2.8 -0.7 2.4 2.8 2.7 3.9 5.1 5.1 5.2 5.3 6.1 -0.6 3.9 5.5 6.4
Adj. EBITDA Margin -5.9 -2.4 -0.3 2.6 3.1 3.0 4.3 5.4 5.4 5.8 6.1 6.9 -0.3 4.2 6.1 7.5
Net Margin -8.5 -4.3 -0.9 2.1 1.9 2.6 3.1 3.7 3.7 3.8 3.8 4.5 -1.4 3.0 4.0 4.7
Adj. Net Margin (ex-share-based exp.) -6.4 -3.1 0.4 2.7 2.9 3.4 3.9 4.2 4.2 4.2 4.3 4.9 -0.3 3.7 4.5 5.1
Revenue -3.7 33.6 15.3 92.1 3.7 13.1 9.2 56.1 -1.8 6.6 3.5 33.8 204.7 137.6 66.1 36.4
Gross Profit 2.1 37.9 17.6 97.7 5.8 13.6 12.5 57.2 -0.6 7.0 4.3 33.8 256.4 155.4 72.4 37.1
EBIT -86.3 -37.2 -40.3 -266.8 1.0 23.2 78.4 131.2 -4.0 11.5 4.1 60.6 -88.8 -536.2 163.7 62.7
Net Profit n.m. n.m. n.m. n.m. -8.0 54.6 33.1 82.7 -0.8 8.0 4.1 58.9 n.m. n.m. 122.6 62.6
Adj. Net Profit n.m. n.m. n.m. 1,171.3 10.9 31.0 27.6 65.5 -0.7 7.0 5.5 51.6 n.m. n.m. 99.9 56.7
Diluted EPS n.m. n.m. n.m. n.m. -11.5 45.4 32.2 82.7 -1.7 7.6 3.8 58.5 n.m. n.m. 115.4 59.7
Adj. Diluted EPS n.m. n.m. n.m. 1,124.2 6.7 23.2 26.6 65.5 -1.6 6.7 5.2 51.1 n.m. n.m. 93.5 53.9
2014E 2012 2013E

17 January 2014
Companies Mentioned (Price as of 15-Jan-2014)
500.Com (WBAI.N, $41.89)
51job Inc. (JOBS.OQ, $81.69)
58.com Inc. (WUBA.N, $44.52)
Amazon com Inc. (AMZN.OQ, $395.87)
Autohome (ATHM.N, $36.32)
Baidu Inc (BIDU.OQ, $170.5, OUTPERFORM, TP $220.0)
Bitauto Holdgs (BITA.N, $35.18)
Boyaa Interactive International Limited (0434.HK, HK$12.7)
CMGE (CMGE.OQ, $32.92)
Changyou.com Ltd (CYOU.OQ, $30.92, NEUTRAL, TP $34.0)
Ctrip.com International (CTRP.OQ, $40.34, OUTPERFORM[V], TP $58.0)
E-House China Holdings Ltd (EJ.N, $13.99)
E-commerce China Dangdang Inc. (DANG.N, $10.75)
Everyday Network (300295.SZ, Rmb82.6)
GOME Electrical Appliances Holding Limited (0493.HK, HK$1.38)
Giant Interactive Group, Inc. (GA.N, $10.86)
Google, Inc. (GOOG.OQ, $1148.62)
IGG (8002.HK, HK$8.99)
Jiayuan (DATE.OQ, $7.3)
Kingsoft (3888.HK, HK$26.5)
KongZhong (KONG.OQ, $8.73)
Lenovo Group Ltd (0992.HK, HK$9.96)
LightInTheBox Holding Co., Ltd (LITB.N, $9.95)
Naver Corp (035420.KS, W693,000)
NetDragon (0777.HK, HK$17.46)
NetEase.com (NTES.OQ, $79.33)
Perfect World Co Ltd (PWRD.OQ, $20.04)
Phoenix (FENG.N, $11.13)
Shanda Games Limited (GAME.OQ, $4.23)
Sina Corporation (SINA.OQ, $84.6)
Sohu.com (SOHU.OQ, $75.87, OUTPERFORM[V], TP $95.0)
SouFun (SFUN.N, $89.36, OUTPERFORM[V], TP $110.0)
Sungy Mobile Limited (GOMO.OQ, $21.09)
THE9 Ltd (NCTY.OQ, $2.58)
Taomee Holdings Ltd (TAOM.N, $6.85)
Tencent Holdings (0700.HK, HK$512.5, OUTPERFORM, TP HK$619.0)
Vipshop Holdings Limited (VIPS.N, $96.44, NEUTRAL[V], TP $80.0)

For other companies mentioned, please refer to Figure 7 on page 4.

Disclosure Appendix
Important Global Disclosures
Dick Wei and Evan Zhou, each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this
report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was,
is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
17 January 2014
3-Year Price and Rating History for Baidu Inc (BIDU.OQ)

BIDU.OQ Closing Price Target Price
Date (US$) (US$) Rating
01-Feb-11 118.73 85.20 U
16-Mar-11 120.56 99.00
29-Apr-11 148.52 106.60
25-Jul-11 156.54 117.70
27-Jul-11 161.24 122.00
26-Aug-11 139.70 135.50 N
06-Oct-11 120.89 133.00
24-Oct-11 132.02 130.00
28-Oct-11 144.62 135.60
13-Dec-11 122.22 130.00
13-Feb-12 140.00 134.50
17-Feb-12 136.90 138.00
29-Feb-12 136.70 133.50
28-Mar-12 148.09 138.00
20-Apr-12 144.91 141.70
26-Apr-12 133.21 127.50
13-Jun-12 116.72 122.00
12-Jul-12 108.21 118.50
06-Aug-12 128.94 123.00
30-Aug-12 112.01 118.00
05-Oct-12 114.20 83.00 U
30-Oct-12 113.84 82.00
31-Dec-12 100.29 80.00
31-Jan-13 108.30 81.50
05-Feb-13 96.37 80.00
24-Jun-13 89.89 NR
25-Sep-13 150.64 180.00 O *
30-Oct-13 164.90 200.00
* Asterisk signifies initiation or assumption of coverage.

UND ERPERFORM
NEUT RAL
NOT RAT ED
OUT PERFORM

3-Year Price and Rating History for Changyou.com Ltd (CYOU.OQ)

CYOU.OQ Closing Price Target Price
01-Feb-11 39.72 41.40 O
26-Apr-11 45.54 49.10
15-Jul-11 45.59 56.80
02-Aug-11 47.23 59.00
04-Oct-11 24.28 46.00
31-Oct-11 26.33 38.10
01-Dec-11 26.62 40.80
07-Feb-12 26.22 38.30
30-Apr-12 24.22 39.50
06-Aug-12 23.00 30.00
16-Oct-12 25.14 R
24-Jun-13 27.66 NR
25-Sep-13 32.68 *
26-Sep-13 36.05 43.00 O
26-Sep-13 36.05 *
29-Oct-13 28.93 37.00 O

OUT PERFORM
REST RI CT ED
NOT RAT ED

17 January 2014
3-Year Price and Rating History for Ctrip.com International (CTRP.OQ)

CTRP.OQ Closing Price Target Price
26-Sep-13 56.68 60.00 O *
06-Nov-13 53.13 76.00

OUT PERFORM

3-Year Price and Rating History for Sohu.com (SOHU.OQ)

SOHU.OQ Closing Price Target Price
02-Feb-11 84.88 77.50 N
16-Mar-11 81.38 91.50
26-Apr-11 100.93 101.60
02-Aug-11 80.55 109.60 O
04-Oct-11 50.07 86.70
01-Nov-11 59.17 81.80
07-Feb-12 51.58 70.50
30-Apr-12 51.57 65.00
13-Jun-12 43.96 64.20
07-Aug-12 40.18 50.00
16-Oct-12 39.28 R
24-Jun-13 58.90 NR
25-Sep-13 73.88 98.00 O *
29-Oct-13 67.89 95.00

NEUT RAL
OUT PERFORM
REST RI CT ED
NOT RAT ED

3-Year Price and Rating History for SouFun (SFUN.N)

SFUN.N Closing Price Target Price
15-Nov-13 67.05 87.00 O *
03-Dec-13 76.54 R
05-Dec-13 72.67 87.00 O

OUT PERFORM
REST RI CT ED

17 January 2014
3-Year Price and Rating History for Tencent Holdings (0700.HK)

0700.HK Closing Price Target Price
Date (HK$) (HK$) Rating
11-Feb-11 197.30 227.00 O
16-Mar-11 216.80 246.00
17-Mar-11 193.20 242.10
11-May-11 209.80 252.00
12-May-11 218.60 255.80
18-May-11 218.40 263.60
08-Aug-11 192.30 259.00
11-Aug-11 181.60 250.00
07-Nov-11 174.40 240.00
10-Nov-11 159.40 230.00
16-Jan-12 170.10 220.00
01-Mar-12 199.30 234.00
15-Mar-12 208.80 240.00
24-Apr-12 238.80 270.00
14-May-12 225.20 276.00
16-May-12 219.60 280.00
13-Jun-12 227.00 274.00
13-Aug-12 228.40 275.00
16-Aug-12 244.60 282.00
20-Sep-12 251.80 294.00
09-Oct-12 259.60 300.00
06-Nov-12 275.80 312.00
15-Nov-12 249.20 295.00
13-Dec-12 252.80 292.00
31-Jan-13 271.40 301.00
24-Jun-13 278.60 NR
26-Sep-13 409.00 440.00 N *

OUT PERFORM
NOT RAT ED
NEUT RAL

3-Year Price and Rating History for Vipshop Holdings Limited (VIPS.N)

VIPS.N Closing Price Target Price
26-Sep-13 57.97 60.00 N *
13-Nov-13 86.99 75.00

NEUT RAL

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's
total revenues, a portion of which are generated by Credit Suisse's investment banking activities
As of December 10, 2012 Analysts stock rating are defined as follows:
Outperform (O) : The stocks total return is expected to outperform the relevant benchmark*over the next 12 months.
Neutral (N) : The stocks total return is expected to be in line with the relevant benchmark* over the next 12 months.
Underperform (U) : The stocks total return is expected to underperform the relevant benchmark* over the next 12 months.
*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stocks total return relative to the analyst's coverage universe which
consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and
Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stocks total
return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the
most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American a nd non-Japan Asia stocks, ratings
17 January 2014
are based on a stocks total return relative to the average total return of the relevant country or regional benchmark; Australia, New Zealand are, and prior to 2nd
October 2012 U.S. and Canadian ratings were based on (1) a stocks absolute total return potential to its current share price and (2) the relative attractiveness of a
stocks total return potential within an analysts coverage universe. For Australian and New Zealand stocks, 12-month rolling yield is incorporated in the absolute total
return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and
7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were
based on a stocks total return relative to the average total return of the relevant country or regional benchmark.
Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications,
including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other
circumstances.
Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24
months or the analyst expects significant volatility going forward.
Analysts sector weightings are distinct from analysts stock ratings and are based on the analysts expectations for the fundamentals and/or
valuation of the sector* relative to the groups historic fundamentals and/or valuation:
Overweight : The analysts expectation for the sectors fundamentals and/or valuation is favourable over the next 12 months.
Market Weight : The analysts expectation for the sectors fundamentals and/or valuation is neutral over the next 12 months.
Underweight : The analysts expectation for the sectors fundamentals and/or valuation is cautious over the next 12 months.
*An analysts coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.
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Global Ratings Distribution
Rating Versus universe (%) Of which banking clients (%)
Outperform/Buy* 42% (53% banking clients)
Neutral/Hold* 40% (49% banking clients)
Underperform/Sell* 15% (43% banking clients)
Restricted 2%
*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely
correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to
definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.
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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot
be used, by any taxpayer for the purposes of avoiding any penalties.
Price Target: (12 months) for Ctrip.com International (CTRP.OQ)
Method: Our DCF-based PT for Ctrip is US$58 (ten-year DCF assumption, based on a WACC of 12% and terminal growth rate of 0%). We assume
Ctrip to see 22% long-term revenue growth rate from 2017 to 2023. Our PT of US$58 implies 45.1x FY14E and 30.2x FY15E diluted
adjusted P/E.
Risk: Risks to our price target of US$58 for Ctrip include: (1) ongoing soft macro-economic environment, (2) slower-than-expected leisure travel
market; (3) a more intense competitive environment; (4) weaker-than-expected mobile Internet monetisation capability.
Price Target: (12 months) for Vipshop Holdings Limited (VIPS.N)
Method: We use P/E ratio as the main valuation methodology for Vipshop. 25x FY15E P/E, on the back of 73% EPS CAGR from 2013E-15E. Our
target price of US$80 implies 75.4x FY13E, and 38.9x FY14E diluted adjusted EPS. On the PEG basis, PT implies 0.47x PEG over 54%
of adj. EPS growth in 15E. The company has a cash and cash equivalent of US$8.24 per diluted ADS.
Risk: The risks that may impede achievement of our US$80.0 target price for Vipshop are: (1) active customer growth slowdown, (2) increasing
competition from new flash sales entrants on suppliers and customers, and (3) further inventory improvement from suppliers.
17 January 2014
Price Target: (12 months) for Tencent Holdings (0700.HK)
Method: Our DCF-based valuation for Tencent Holdings is HK$619 (ten-year DCF assumption, based on a WACC of 12% and terminal growth rate
of 0%). We assume that Tencent will see a 25% long-term revenue growth rate from 2016-23. With Tencent's long-term potential in
overseas expansion, e-commerce and other O2O opportunities, we see a 25% growth rate being sustainable.
Risk: We see key risks to our forecasts for Tencent Holdings as being slower-than-expected Super VIP subscription rate and online games
revenue growth. Risks to our price target of HK$619 include: (1) slower WeChat user growth leading to lower long-term growth
expectations; and (2) less-than-expected user acceptance in mobile subscription packages.
Price Target: (12 months) for Sohu.com (SOHU.OQ)
Method: We arrive at our TP of US$95 based on sum-of-the-part of Sohu's different business segments. Our PT of US$95 implies 38.1x 2014E,
and 22.0x 2015E diluted adjusted P/E. Our price target is based on the midpoint of our sum-of-the-parts valuation of US$87.5-US$102.8.
In our SOTP valuation, we assume portal valuation of US$351 mn, Sohu video of US$300 mn, Sohu's portion of online games of US$873
bn, Sohu's portion (40%) of Sogou at US$1 bn, and Sohu's claim of cash of US$1,065 mn.
Risk: Key risks to our target price of US$95 for Sohu include: (1) slowdown in PC-based ad revenue growth, as more user time spends are
moved to mobile; (2) macro-economic environment remaining soft, thereby hurting overall brand advertiser budget; (3) intense online
video industry competition which could lower the companys margins further; and (4) higher spending on online game business.
Price Target: (12 months) for SouFun (SFUN.N)
Method: Our main valuation methodology for SouFun is forward P/E. Our target price of US$110 implies 26.5x FY14E and 20.9x FY15E diluted
adjusted EPS. The company has a strong cash position of US$294 mn (US$3.5 per diluted share) in 3Q13.
Risk: Key risks to our target price of US$110 for SouFun are: (1) increased marketing spend on user/merchant acquisition from traffic growth
slowdown and competition threat; (2) slower-than-expected membership and listing segment growth; and (3) a slowdown in the overall
real estate market in China.
Price Target: (12 months) for Changyou.com Ltd (CYOU.OQ)
Method: Our price target of US$34 for Changyou.com is based on ex-cash P/E of 6x/3.9x 2014E/15E earnings per ADS. Company has net cash
and cash equivalent position (including restricted cash) of US$9.1 per ADS. Currently peers are trading at 2014E forward P/E of 4x-22x.
Risk: The risks that may impede achievement of our US$34 target price for Changyou.com are: (1) weaker-than-expected performance of New
TLBB; (2) erosion of operating margin due to high R&D and marketing cost on new games; and (3) lacklustre performance of new game
titles, especially webgames and mobile games.
Price Target: (12 months) for Baidu Inc (BIDU.OQ)
Method: Our target price of US$220 for Baidu Inc implies 31.1x FY14E, and 24.1x FY15E dil. adj. EPS (earnings per share). Assuming longer-term
revenue growth of 20%, LT OPM (operating profit margin) of 35.6%, WACC (weighted average cost of capital) of 12% and 0% terminal
growth, our DCF (discounted cash flow) valuation yields a target price of US$220.
Risk: The risks that may impede achievement of our US$220 target price for Baidu Inc include: (1) intensifying search market competition, (2)
performance ad budget transferred to other platforms, such as e-commerce marketplace and SS, (3) prolonged loss-making period of
online video business, and (4) low visibility of mobile monetisation.
Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the
target price method and risk sections.
See the Companies Mentioned section for full company names
The subject company (0700.HK, SOHU.OQ, SFUN.N, CYOU.OQ, WUBA.N, EJ.N, AMZN.OQ, 0992.HK, GOOG.OQ, 035420.KS, GA.N, SINA.OQ,
DANG.N, LITB.N, GOMO.OQ) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit
Suisse.
Credit Suisse provided investment banking services to the subject company (0700.HK, SOHU.OQ, SFUN.N, CYOU.OQ, WUBA.N, EJ.N, AMZN.OQ,
0992.HK, GOOG.OQ, LITB.N, GOMO.OQ) within the past 12 months.
Credit Suisse provided non-investment banking services to the subject company (0700.HK, 0992.HK) within the past 12 months
Credit Suisse has managed or co-managed a public offering of securities for the subject company (SFUN.N, WUBA.N, EJ.N, LITB.N, GOMO.OQ)
within the past 12 months.
Credit Suisse has received investment banking related compensation from the subject company (0700.HK, SOHU.OQ, SFUN.N, CYOU.OQ,
WUBA.N, EJ.N, AMZN.OQ, 0992.HK, GOOG.OQ, LITB.N, GOMO.OQ) within the past 12 months
17 January 2014
Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (0700.HK, SOHU.OQ,
SFUN.N, CYOU.OQ, BIDU.OQ, WUBA.N, EJ.N, PWRD.OQ, AMZN.OQ, 0493.HK, 0992.HK, GOOG.OQ, 035420.KS, GA.N, NTES.OQ, GAME.OQ,
SINA.OQ, DANG.N, LITB.N, GOMO.OQ) within the next 3 months.
Credit Suisse has received compensation for products and services other than investment banking services from the subject company (0700.HK,
0992.HK) within the past 12 months
As of the date of this report, Credit Suisse makes a market in the following subject companies (CTRP.OQ, VIPS.N, SOHU.OQ, SFUN.N, CYOU.OQ,
BIDU.OQ, WUBA.N, JOBS.OQ, EJ.N, PWRD.OQ, AMZN.OQ, GOOG.OQ, GA.N, NTES.OQ, GAME.OQ, SINA.OQ, DANG.N, LITB.N, GOMO.OQ).
As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (EJ.N).
Credit Suisse has a material conflict of interest with the subject company (EJ.N) . Credit Suisse is an exclusive financial advisor to the Special
Committee of Independent Directors of China Real Estate Information Corporation's board of directors relating to the proposed going private
transaction by E-House (China) Holdings Limited
Credit Suisse has a material conflict of interest with the subject company (SINA.OQ) . Credit Suisse is acting as financial advisor to E-House's
wholly-owned subsidiary - CRIC Holdings Limited in its merger with SINA Corporation's online real estate business.
Important Regional Disclosures
Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.
The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (CTRP.OQ, VIPS.N,
0700.HK, SOHU.OQ, SFUN.N, CYOU.OQ, BIDU.OQ, WUBA.N, JOBS.OQ, EJ.N, PWRD.OQ, AMZN.OQ, 0493.HK, 0992.HK, GOOG.OQ,
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WUBA.N, EJ.N, 0992.HK, GOOG.OQ, LITB.N, GOMO.OQ) within the past 3 years.
As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.
Principal is not guaranteed in the case of equities because equity prices are variable.
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NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a
research analyst account.
Credit Suisse (Hong Kong) Limited ........................................................................................................................................ Dick Wei ; Evan Zhou
For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-
suisse.com/disclosures or call +1 (877) 291-2683.
17 January 2014
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DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST

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