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DBS Asian Insights

DBS Group Research • January 2018

China Internet
Where Does Online Ad Spend Go?
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China Internet
Where Does Online Ad Spend Go?

Susanna CHUI
Associate Research Director
susanna_chui@dbs.com

Tsz Wang TAM

Senior Research Director
tszwangtam@dbs.com

Produced by:
Asian Insights Office • DBS Group Research

go.dbs.com/research
@dbsinsights
asianinsights@dbs.com

Goh Chien Yen Editor-in-Chief

Jean Chua Managing Editor
Geraldine Tan Editor
Martin Tacchi Art Director
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04 Executive Summary
06 Introduction
08 Industry Overview
China’s Advertising Market

Internet Companies’ Position in Online

Advertising

27 Appendix:
How advertisers pay for and
evaluate online ads
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Executive Summary

B
ased on traditional measures such as users and time spent, the market believes
advertisers would like to allocate more budget to Tencent. It is because Tencent
has the largest number of monthly active users (MAUs) of 938m (March 2017) and
longest monthly time spent per MAUs of 1,869 minutes, while Alibaba and Baidu
have lower MAUs of 507m and 400m and monthly time spent per MAUs of 224 and 289
minutes, respectively.

We interviewed China’s advertising agencies, advertisers in various industries (i.e. auto,

consumer, financial and property), and Internet companies. Our proprietary research shows
that advertising objectives (namely, ‘Attention’, ‘Interest & Desire’, and ‘Action’) influence
advertisers’ budget allocation more than traditional measures such as users and time spent.

1. ‘Attention’: Attracting potential customers’ Attention,

2. ‘Interest & Desire’: Raising customers’ Interest by demonstrating advantages and benefits,
and convincing consumers that they Desire the product or service,

3. ‘Action’: Final purchasing Action.

Tencent, Baidu, and Alibaba, which have China’s largest social communication, search, and
e-commerce platforms, are well-positioned in online ads for ‘Attention’, ‘Interest & Desire’, and
‘Action’, respectively.

We forecast ad spending for ‘Action’, as a percentage of total online ad budget, to increase

from the current 30% to 50% in 2019F. We base our analysis on interviews with China’s
advertising agencies and industry experts; we expect China’s online ads for ‘Action’ as a
percentage of China’s online ad market to increase from 30% in 2016 to 50% in 2019F. We
expect China’s online ads for ‘Action’ to deliver CAGR of 54% (FY16-19F), versus 30% for the
overall online ads industry.

1. Advertisers’ point of view: online ad budget allocation to ‘Attention’, ‘Interest & Desire’, or
‘Action’? The number of potential customers is the largest in the first stage – ‘Attention’,
and decreases in the second and third stages – ‘Interest & Desire’ and ‘Action’. Online ads
for ‘Attention’ are thus the most effective in chalking up in user numbers and time spent.
However, online ads for ‘Action’ are the most effective in converting users into buyers. It
is because the lag time between customers seeing ads and purchasing is shorter, which
can reduce the chances that customers will be influenced by other ads or other categories,
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products or brands. Despite having the lowest number of potential customers in ‘Action’,
advertisers would like to allocate more budget to online ads for ‘Action’.

2. Internet companies’ point of view: online ad inventories in ‘Attention’, ‘Interest & Desire’,
or ‘Action’? The continuous growth in user numbers and time spent will cause a chain
reaction in the growth in online ad inventories for ‘Attention’, ‘Interest & Desire’ and
‘Action’. However, improving user data analytics, which will increase the click-through rate
and the conversion rate, will amplify the effect of user numbers and time spent most on
online ad inventories for ‘Action’.

Which online ad platforms will be beneficiaries? (1) E-commerce (selling goods online)
platforms, which are able to connect users to point of sales, are the major source of online ad
inventories for ‘Action’ and beneficiaries; (2) Local service online-to-offline (local service O2O,
selling services online) platforms are another huge potential source of online ad inventories for
‘Action’ and beneficiaries.

1. Alibaba operates leading e-commerce platforms including Taobao and Tmall in China, and
it will be a key beneficiary of the shift in ad budget towards ‘Action’. We forecast Alibaba’s
share of China’s online ad market to grow from 30% in 2016 to 35% in 2019.

2. Tencent is well-positioned in online ads for ‘Action’ in local service O2O market. Tencent
is well-positioned to provide online ads for ‘Action’ in the local service O2O market,
leveraging its WeChat MAUs, Tenpay, and various partnership such as Meituan Dianping.
We expect Tencent’s share of China’s online ad market to grow 9% in 2016 to 15% in
2019F.

3. Baidu is positioned to stir users’ ‘Interest and Desire’, but not to stir them into ‘Action’.
Its search business is losing share of China’s online ad market to e-commerce platforms,
We forecast which can more effectively direct customers to take ‘Action’. Its search business and its ads
ad spending will be in an increasingly unfavourable position, due to e-commerce platforms’ product
for ‘Action’, as category expansion or rising adoption of other local service O2O platforms. We expect
a percentage Baidu’s market share of online ads to decline from 22% in 2016 to 18% in 2019F.
of total online
4. Weibo is the second-largest social communication platform in China. Like Tencent,
ad budget, to Weibo’s ads are positioned to attract users’ ‘Attention’. But it is expanding its ecosystem to
increase from the e-commerce through cooperation with Alibaba (which owns 30% of Weibo), to position
current 30% to their ads to convert users to buyers. Weibo will be a beneficiary of the shift in ad budget
50% in 2019F towards ‘Action’ with Alibaba.
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Introduction

O
nline advertising, commission, and value-added service fees are three main
ways of monetisation for Internet companies. There are three main methods
of monetisation for Internet companies, (1) online advertising (i.e. merchants
pay for top placement ads in result lists after users’ keyword search on Alibaba’s
e-commerce platform and Baidu’s search platform), (2) commission (i.e. merchants pay
transaction-based commission on Alibaba’s e-commerce platform), and (3) value-added
service fees (i.e. users pay for Tencent’s online games and digital content).

Diagram 1. Three main ways of monetisation for Internet companies

i.e. merchants pay for top

placement ads in result lists
Online after users’ keyword search on
advertising Alibaba’s e-commerce platform
and Baidu’s search platform

i.e. merchants
pay transaction-
based commission
on Alibaba’s Internet i.e. users pay for
e-commerce companies Tencent’s online games
platform and digital content

Value-added
Commission
service fee

Source: Company, DBS Bank

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Online advertising contributes a significant amount to the revenues of Baidu, Alibaba, and
Tencent. Among the three, online ads are the key monetisation model, accounting for
91.5%, 60.2%, 17.8% of Baidu’s, Alibaba’s, and Tencent’s – collectively known as BAT –
FY16 total revenue, respectively.

Diagram 2. BAT’s revenue mix in 2016

Source: Company, DBS Bank

That’s why we are interested in studying how BAT’s share of China’s online advertising
market changes. For this report, we interviewed China’s advertising agencies, advertisers in
various industries (i.e. auto, consumer, financial and property), and Internet companies. We
studied (1) the online ad market in China, using advertising functions (namely, ‘Attention’,
‘Interest & Desire’, and ‘Action’), in addition to traditional measures such as users and time
spent; (2) BAT’s positions in these advertising functions, and (3) how advertisers allocate
their ad budget to these advertising functions. We analysed BAT’s market share of online
advertising in the next three years.
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Industry Overview
China’s Advertising Market
Driven by online ads, China’s advertising market will grow at a CAGR of 21% from 2016-
19. iResearch expects China’s advertising market to deliver a CAGR of 21% from 2016-
19F. Online ads will be the key driver, delivering CAGR of 29.6% from 2016-19F, during
which mobile ads will deliver CAGR of 40.4%. The growth of traditional ads such as TV
and radio ads will be flat, and the print ad market will decline 26.1% (2016-19F CAGR).
We expect ad dollars to continue shifting from traditional ads to online ads.
Diagram 3. China’s advertising market

RMB bn 2015 2016 2017F 2018F 2019F 2016-2019

CAGR
Online 218 290 388 502 632 29.6%
PC 119 115 124 132 148 8.6%
Mobile 100 175 265 370 484 40.4%
TV 108 105 103 103 102 -0.9%
Radio 15 15 15 15 15 1.5%
Print 27 17 12 9 7 -26.1%
Total 369 427 518 630 756 21.0%
Source: iResearch, DBS Bank

Traditional advertising refers to ads on mass media, such as TV, radio, newspapers, and magazines.

Online advertising refers to ads on online platforms, such as social communication, videos,
portals, search engines, verticals, and e-commerce platforms:
Diagram 4. China’s online ad market by Internet platforms

RMB bn 2012 2013 2014 2015 2016 2012-2017F

CAGR
Social 3 5 8 15 24 71.8%
Video 7 10 15 23 32 48.1%
Portal 8 10 11 16 21 30.7%
Search 26 34 38 71 79 31.8%
Vertical 10 11 13 15 18 17.6%
18 30 40 59 87 42.9%
Others 6 11 29 20 29 38.0%
Total 77 111 155 218 290 38.0%
Source: iResearch, DBS Bank
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1. Social communication platforms: Social communication platforms such as Tencent’s

WeChat (微信) and Weibo have a high number of monthly active users (MAUs) and
time spent per active user. Advertisers can attract potential customers’ attention
through in-feed ads in between users’ post in WeChat’s Moments or Weibo’s Timeline.

1. Video platforms: On online video platforms such as Tencent’s Tencent Video (騰訊
視頻), Baidu’s iQiyi (愛奇藝), and Alibaba’s Youku Tudou (優酷土豆), advertisers can
attract users’ attention through in-stream video ads, before (pre-roll), during (mid-
roll) or after (post-roll) streaming content.

2. Portal platforms: Portal platforms aggregate information, such as news from diverse
sources, including Sohu (搜狐) and Sina (新浪). Advertisers can attract users’ attention
through display ads and in-feed ads (i.e. advertorial) in between content feeds.

3. Search platforms: Users of Search platforms, such as Baidu’s Baidu Search (百度搜索),
are usually aware of a category, product/ service or brand, and search for its or peers’
details. So, advertisers can bid for top placement ads in result listings after users’
keyword search, to attract traffic to their online web pages.

4. Vertical platforms: Vertical platforms focus on certain industries, such as auto verticals
– Autohome (汽車之家) and Bitauto (易車) – and property verticals – Fang’s SouFun
(搜房) and Leju (樂居) with professionally-generated content. Like search platforms,
users are usually aware of or even interested in a category, product/ service or brand,
and search for its or peers’ details. Advertisers can deepen users’ interest through
display ads and in-feed ads (i.e. advertorial) in between content feeds.

5. E-commerce platforms: On e-commerce platforms such as Alibaba’s, Taobao (淘寶),

and Tmall (天貓), users have strongest purchase intention for a product and search
for different merchants to compare their price performance ratio. Advertisers can bid
for top placement ads in result listings after users’ keyword search, to attract traffic
to their online store to increase the likelihood of purchases.

Diagram 5. Online platforms’ major ad formats

Online platforms Major ad formats

Social communication In-feed ads' between users’ posts in WeChat Moments or Qzone
platforms
Video platforms In-stream video ads, before (pre-roll), during (mid-roll) or after (post-roll) streaming content
Portal platforms Display ads and in-feed ads (i.e. advertorial) between content feeds
Search platforms Top placement ads in result listing after users’ keyword search, to attract traffic to their online web pages
Vertical platforms Display ads and in-feed ads (i.e. advertorial) between content feed
E-commerce platforms Top placement ads in product listing after users’ keyword search, to attract traffic to their online store to
increase changes of purchases
Source: DBS Bank
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Why the shift from traditional advertising and

PC ads to mobile ads?
1. Time spent: Users spend more time with online media. Average time spent with
online media rose 6% (2013-16 CAGR); time spent on mobile media grew 11.3%
(2013-16F CAGR). Average time spent on traditional media, such as TV and radio was
flat, and time spent reading print declined 5.9% (2013-16F CAGR).

2. Better ad-targeting: Internet companies can collect users’ profiles and daily activity
(i.e. interests and purchase behaviour) through universal login across their expanding
ecosystems. They can define users in different categories, and predict users’ behaviour,
for more precise targeting.

3. Ad placement is available anywhere and anytime. In mobile advertising, users see

ads on smartphones anywhere and anytime, click on ads for details of products or
services, and even click to purchase.

4. Ad-evaluation accuracy is high and lag time is short. Advertisers can easily and
quickly determine whether ads are successful, through evaluating ads’ number of
impressions, clicks, or action (i.e. sales).

Diagram 6. Average time spent per day with media

Minutes 2012 2013 2014 2015 2016 2013-2016

CAGR
Online 127 153 169 178 185 6.5%
PC 61 63 64 62 61 -1.1%
Mobile 66 90 105 116 124 11.3%
TV 162 162 161 160 159 -0.6%
Radio 11 11 11 11 11 0.0%
Print 14 12 11 10 10 -5.9%
Total 441 491 521 537 550 3.9%
Source: eMarketer, DBS Bank

Average time spent with online media rose 6%;

time spent on mobile media grew 11.3%

Diagram 7. Comparison of traditional, PC, and mobile advertising
Traditional advertising
Ad targeting + Advertisers or advertising
agencies can conduct market
research to collect data about
target markets and customers.
- Research results may be biased
by researchers and respondents.
Ad targeting 
Ad placement - Ad placement is limited to
media at homes, schools, offices
or particular areas.
Limited to particular areas
Ad evaluation + Advertisers can know viewership + Advertisers can quickly
of media.
- Advertisers do not know
viewership of their ads and
whether they will be converted
to sales.
- Advertisers can estimate
incremental sales attributed to
ads, but after a long lag time.
Accuracy 
Efficiency 
PC advertising
+ Internet companies can track
users’ browsers by cookies,
which is a code embedded in
web pages to collect users’ daily
activity data.
- But cookies are associated with
browsers, not people. If a family + They can define users in
of four shares a browser on a
computer, the activity associated
with one cookie might be the
result of four different people
surfing the web. Similarly, if
one person uses two different
browsers on the same computer
or another computer, there is no
way to associate his actions on
one browser with the actions on
another browser.
Ad targeting 
- Ad placement is limited to PCs
at homes, schools, offices or
particular areas.
Limited to particular areas
determine whether ads are
successful, through evaluating
ads’ number of impressions,
clicks, or actions (i.e. sales).
Accuracy 
Efficiency 
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Mobile advertising
+ Internet companies can collect
users’ profile and daily activities
(i.e. interests and purchasing
behaviour) through their
universal login across their
mobile apps.
different categories and predict
users’ behaviour for more
precise targeting.
Ad targeting 
+ In mobile advertising, users see
ads on smartphones anywhere
and anytime.
Anywhere and anytime
+ Advertisers can quickly
determine whether ads are
successful, through evaluating
ads’ number of impressions,
clicks, or actions (i.e. sales).
Accuracy 
Efficiency 
Source: DBS Bank
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China’s advertising market versus the United

States’
China’s advertising dollar is far below that of the United States’, with US$60b versus
US$180b in 2016, equivalent to 0.6% and 1.2% of Gross Domestic Product (GDP).

But China’s ad market will deliver faster CAGR of 21% during 2016-19F versus the US’
5.5%, driven by faster online ad growth. China’s online ads will deliver CAGR of 29.6%
(2016-19F), versus the US’ 11.8%. We believe this is likely due to the innovativeness of
China’s Internet industry (i.e. mobile applications cater to almost every aspect of daily life)

Diagram 8. China’s advertising market

USD bn 2015 2016 2017F 2018F 2019F 2016-2019

CAGR
Online 31 41 55 71 89 29.6%
PC 17 16 17 19 21 8.6%
Mobile 14 25 37 52 68 40.4%
TV 15 15 15 15 14 -0.9%
Radio 2 2 2 2 2 1.5%
Print 4 2 2 1 1 -26.1%
Total 52 60 73 89 107 21.0%
Source: iResearch, DBS Bank
Diagram 9. The United States’ advertising market

USD bn 2015 2016 2017F 2018F 2019F 2016-2019

CAGR
Online 60 69 77 87 96 11.8%
PC 28 25 25 25 27 2.2%
Mobile 32 44 53 61 69 16.6%
TV 69 71 72 74 75 2.2%
Radio 14 14 14 14 14 0.2%
Print 28 27 26 26 26 -1.2%
Total 171 180 190 200 211 5.5%
Source: eMarketer, DBS Bank

Internet Companies’ Position in Online

Advertising
China’s online advertising market is dominated by Baidu, Alibaba, and Tencent – collectively
known as BAT – which commanded in 2016 market share of 22.2%, 29.8%, and 9.3%,
respectively. Others, including Sohu, Sina, Autohome, Bitauto, Fang, Leju, and Weibo
account for less than 5% each.
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Diagram 10. Share of online advertising market (2016)

Source: Company, iResearch, DBS Bank

We apply the AIDA model – namely ‘Attention’, ‘Interest & Desire’, and ‘Action’, which
are objectives of ads – to study BAT’s position in China’s online advertising market.

1. First stage: ‘Attention’: Attracting potential customers’ Attention.

2. Second stage: ‘Interest & Desire’: Raising customers’ Interest by demonstrating

advantages and benefits, and convincing consumers that they Desire the product or
service.

3. Third stage: ‘Action’: Final purchasing Action.

Tencent, Baidu, and Alibaba, which have China’s largest social communication, search,
and e-commerce platforms, are well-positioned in online ads for ‘Attention’, ‘Interest &
Desire’, and ‘Action’ (i.e. sales), respectively.
Diagram 11. BAT’s position based on the Attention, Interest & Desire, and Action (AIDA) theory

Advertising AIDA Description Which ad positions are BAT in?

objectives - AIDA
Ads for Attention Attracting the attention of the customer WeChat
to a category, product or brand. (Tencent)

Ads for Interest & Raising customer interest by

Desire demonstrating advantages and benefits. Baidu Search
Convincing consumers that they desire (Baidu)
the product or service and it will satisfy Mobile Taobao
their needs. (Alibaba)
Ads for Action Leading customers to take action (make
purchases).

Source: DBS Bank

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Tencent has China’s largest social communication platform – with the highest monthly
active users (MAUs) and user time spent – which are used for social communication, but
not for making purchases. So, its ads (i.e. in-feed ads in WeChat Moments or Qzone)
are positioned to attract potential customers’ attention to a category, product/ service or
brand (i.e. Mercedes Benz, BMW, Airbnb, McDonalds, and Xiaomi).

Baidu has China’s largest search platform, on which ads are positioned to stir users’ ‘Interest
& Desire’. Having China’s largest search platform, Baidu’s users are usually already aware
of a category, product/service or brand (i.e. medical and healthcare, network services, or
financial services), and search for this category, product/ service or brand’s advantages
and benefits to find out which will satisfy their desire. So, its ads (i.e. top placement ads
in result listings after keyword search to attract traffic to advertisers’ online web pages)
are positioned to stir users’ ‘Interest and Desire’.

Alibaba has China’s largest e-commerce platform, on which ads are positioned to arouse
users’ ‘Interest & Desire’ to the final purchasing ‘Action’. Having China’s e-commerce
platform, Alibaba’s users have the strongest intention to purchase a product (i.e. computer,
communication & consumer electronics [3C], beauty & personal care, maternal & child,
apparel & shoes, or food & beverage), and search for different merchants to compare
their price-performance ratio. So, its ads (i.e. top placement ads in result listings after
keyword search to attract traffic to advertisers’ online store) are positioned to arouse
users’ ‘Interest and Desire’ to the final purchasing action.

Advertisers’ online ad budget allocation to Attention,

Interest & Desire, and Action
We interviewed China’s ad agencies, advertisers, and Internet companies to understand
the trends in online ad budget allocation and ad inventories in different categories
(‘Attention’, ‘Interest & Desire’, and ‘Action’).

User number and time spent and ad effectiveness are two key factors in online ad budget
allocation. For advertisers, online ads for ‘Attention’ win at chalking up user numbers and
time spent, while online ads for ‘Action’ are effective in converting such users into buyers.

1. Online ads for ‘Attention’ are the most effective in chalking up in user number
and time spent. The number of potential customers is the largest in the first stage
‘Attention’, and decreases in the second and third stages ‘Interest & Desire’ and
‘Action’.

2. Online ads for ‘Action’ are the most effective in converting users into buyers. Online
ads for ‘Attention’ - Desire are effective in attracting customers to see and click on
ads for products/ services’ details. But when customers go to stores, they may see
other ads or other categories, products or brands, which may influence their final
decision to purchase.
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But with online ads for ‘Action’, after customers see and click on ads for products/
User number and services’ details, they can click to purchase. The lag time between customers seeing
time spent and ad ads and purchasing is shorter, which can reduce the chances that customers will be
effectiveness are influenced by other ads or other categories, products or brands.

two key factors in Online ads for ‘Action’ are highly effective in converting users into buyers. Ad revenue
online ad budget per potential customer is the largest in ‘Action’, versus in ‘Attention’ and ‘Interest &
allocation Desire’.

Despite having the lowest number of potential customers in ‘Action’, online ads for
‘Action’ are highly effective in converting users into buyers. So, advertisers would like to
allocate more budget to online ads for ‘Action’.

Diagram 12. Major Internet companies in AIDA and their user number and time spent as well as ad revenue per user

Advertising objectives Which ad positions are BAT in?

- AIDA
WeChat (Tencent)
Ads for
Attention (i) MAUs: 938m
Monthly time spent per MAU
(minutes):
1,869
(ii) Ad revenue per MAU: RMB29

Ads for Baidu Search (Baidu)

Interest & (i) MAUs: 400m
Desire
Monthly time spent per MAU Mobile Taobao (Alibaba)
(minutes): (i) MAUs: 507m
289 Monthly time spent per MAU
(ii) Ad revenue per MAU: (minutes):
RMB161 224
Ads for
Attention (ii) Ad revenue per MAU:
RMB171

Source: DBS Bank

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Diagram 13. Lag time between customers seeing online ads and purchasing

Advertising objectives Online ads for Attention - Online ads for Action
- AIDA Interest & Desire

Ads for Customers see ads on Customers see ads on

Attention Internet platforms. Internet platforms.

Customers click on ads Customers click on ads Shorter lag time

to know more about a to know more about a between users
category’s, a product’s or category’s, a product’s or seeing ads and
a brand’s advantages and a brand’s advantages and purchasing
Ads for can reduce the
benefits. benefits.
Interest & chances that
Desire customers will
Customers are convinced Customers are convinced
be influenced
that they desire the product that they desire the product
by other ads or
or service and it will satisfy or service and it will satisfy
other categories,
their needs. their needs.
products or
brands.

Ads for On the way to stores,

Action customers may see
other ads or other
Customers go to store categories, products Customers click to
to purchase. or brands, which may purchase
influence their final
purchasing decisions.

Source: DBS Bank

Internet companies’ online ad inventories in Attention,

Interest & Desire, and Action
What are online ad inventories? Online ad inventories for ‘Attention’, ‘Interest & Desire’,
and ‘Action’ are impressions (i.e. users see ads), clicks (i.e. users click on ads), and actions
(i.e. sales), respectively.

• Online ad inventories for ‘Attention’: Impressions (depending on users and time spent)

• Online ad inventories for ‘Interest & Desire’: Clicks= Impressions x click-through

rate (% of impressions converting to clicks, depending on user data analytics)

• Online ad inventories for ‘Action’: Action = Impressions x click-through rate x

conversion rate (% of clicks converted into actions, depending on user data analytics)
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User number and time spent as well as user data analytics are two key factors in online ad
inventories. As a common factor, user number and time spent will cause a chain reaction
in the growth in online ad inventories for ‘Attention’ (depending on user and time spent),
‘Interest & Desire’ (depending on user and time spent x user data analytics), and ‘Action’
(depending on user and time spent x user data analytics x 2).

However, improving user data analytics, which will increase the click-through rate and
the conversion rate, will amplify the effect of user number and time spent most on online
ad inventories for ‘Action’ (depending on user and time spent x user data analytics x 2).’

Diagram 14. Online ad inventories and their independent variables

Advertising Ad inventories Independent variables

objectives - AIDA
‘(1) User number and user time spent 

Chain reaction on number of impressions ,
Ads for Attention Impression number  clicks  and actions (i.e. sales) 

Ad inventories for Attention ,
x Click-through-rate Interest & Desire , and Action 
(% of impressions + (2) Internet companies’ user data analytics
converting to clicks)  capability 

Ads for Interest & Click through rate 
Click number 
Desire 
Amplifier effect on number of clicks 

x Conversion rate
Ad inventories for Interest & Desire 
(% of clicks converting
to actions)  ‘+ (2) Internet companies’ user data analytics
capability 

Conversion rate 
Ads for Action Action number  
Amplifier effect on number of actions (i.e.
sales) 

Ad inventories for Action 
Source: DBS Bank

1. User number and time spent will cause a chain reaction in the growth in online ad
inventories for ‘Attention’, ‘Interest & Desire’, and ‘Action’. China’s top 10 apps’
MAUs and monthly user time spent per monthly active users (MAU) as at Mar 2017
increased 37% and 13% y-o-y on average, respectively. We believe the number of
user and time spent will continue to grow, and thus will cause a chain reaction in the
growth in online ad inventories for ‘Attention’, ‘Interest & Desire’, and ‘Action’.
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2. User data analytics capability will have the largest multiplier effect on growth in
online ad inventories for ‘Action’. Another key factor of online ad inventories is user
data analytics capability, which will improve the click-through rate (% of impressions
converting to clicks) and the conversion rate (% of clicks converting to actions).

Internet companies are expanding ecosystems from social communication, search,

e-commerce (selling goods online) to local service online-to-offline (local service O2O,
selling services online) etc, to encompass customers’ entire buying behaviour – from
‘Attention’, ‘Interest & Desire’, to ‘Action’. By collecting and analysing more users’
daily activities, they can strengthen user data analytics.

I. For example, Tencent has China’s largest and most-used social communication
platform, WeChat (微信), which is positioned to collect users’ daily online
activities. It has expanded to mobile video, local service O2O, and mobile payment
through Tencent Video (騰訊視頻, China’s largest mobile-video platform),
Meituan Dianping (美團點評, China’s largest local service O2O platform),
Meituan Deliveries (美團外賣, China’s largest online food-delivery platform), and
Tenpay (財富通, China’s second-largest third-party mobile payment platform), to
collect more data on users’ interests and purchasing behaviour.

II. Baidu has China’s largest search platform, Baidu Search (百度搜尋), on which
users search for things they are interested in; it is positioned to collect users’
browsing activity and, hence, interests. It has expanded into local service
O2O through Baidu Nuomi (百度糯米, China’s third-largest local service O2O
platform), to collect more data on users’ purchasing behaviour.

III. Alibaba has China’s largest e-commerce platform - Taobao (淘寶) and Tmall (
天貓), on which users search for and purchase what they desire; the sites are
positioned to collect data on users’ purchasing behaviour. It has expanded into
mobile communication, video, and search through Weibo (微博, China’s third-
largest social communication platform), Youku Tudou (優酷土豆, China’s third-
largest mobile video platform), and UCWeb (China’s second-largest mobile search
platform), to collect more data on users’ interests. Alibaba has also expanded to
local service O2O, through Koubei (口碑, China’s second-largest local service
O2O platform), Ele.me (餓了麼, China’s second-largest online-delivery platform)
and Baidu Deliveries (百度外賣, China’s third-largest online-delivery platform), to
further strengthen collection of data on users’ purchasing behaviour.

So, Internet companies are collecting and analysing more data on users’ daily activities
through their social communication, information surfing, meals, shopping, entertainment,
etc, for more precise targeting, which can increase online ads’ click-through rates and
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conversion rates. Leveraging improvement in both click-through rates and conversion

rates can yield a larger multiplier effect on the growth in online ad inventories for ‘Action’
than ‘Attention’ and ‘Interest & Desire’.
Diagram 15. MAUs and user time spent of China’s top 10 apps (March 2017)

MAU y-o-y Monthly y-o-y (%) Total y-o-y (%)

(m) (%) time spent monthly
per MAU time spent
(minutes) (k minutes)
1 WeChat (Tencent) 938 23.0% 1,869 11.1% 1,753 36.7%
2 Mobile QQ (Tencent) 678 3.0% 752 31.7% 510 35.7%
3 Mobile Taobao (Alibaba) 507 23.7% 224 14.3% 113 73.1%
4 Tencent Video (Tencent) 435 48.0% 294 17.0% 128 76.2%
5 iQiyi Video (Baidu) 434 76.2% 265 0.0% 115 41.4%
6 Baidu Search App (Baidu) 400 42.1% 289 3.8% 116 47.5%
7 Weibo (Alibaba) 357 31.6% 297 36.7% 106 80.0%
8 Alipay (Alibaba) 353 29.8% 42 27.8% 15 65.9%
9 Youku (Alibaba) 314 65.1% 222 -13.4% 70 42.9%
10 QQ Browser (Tencent) 312 27.6% 329 1.1% 103 29.0%
Average 37.0% 13.0% 52.8%
Source: QuestMobile, DBS Bank

3. Besides e-commerce platforms, local-service O2O platforms will provide more online
ad inventories for ‘Action’. E-commerce platforms provide most of the online ad
inventories for ‘Action’, converting ads into real transactions. We expect online ads
for ‘Action’ not only to enhance the sales of goods online (e-commerce), but also that
of services (local service online-to-offline [local service O2O]). We expect increasing
penetration of local service O2O gross merchandise value (GMV), with increasing
online ad inventories for ‘Action’.

China’s market for services is nearly as big as its market for goods. China’s consumption of
services (i.e. transport and communication, education, culture & entertainment, medical
& health care) accounted for 80.5% of goods consumption (i.e. food & beverage, apparel
& shoes, and necessities) in 2016.

However, China’s local service O2O (selling service online) GMV only accounted for 7%
of China’s e-commerce (selling goods online) GMV in 2016. We expect local service O2O
GMV to catch up with e-commerce GMV, triggered by,

I. Better user experience: Users can book/ queue, order, pay, and maybe enjoy
discounts by simply scanning a QR code.

II. Improved merchants’ efficiencies: Merchants can reduce manpower to improve

operating efficiencies and accumulate user data.
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III. Mobile payment’s increasing adoption by offline merchants: Alipay’s (支付寶,

China’s largest mobile third-party payment platform) and Tenpay’s (財付通, China’s
second-largest mobile third-party payment platform) increasingly adopted by brick-
and-mortar merchants.

Diagram 16. China’s e-commerce and local service online-to-offline (O2O) market

RMB bn 2015 2016 2017F 2018F 2019F

China's e-commerce
3,800 4,700 5,600 6,500 7,300
GMV
y-o-y 35.7% 23.7% 19.1% 16.1% 12.3%
China's local service
online-to-offline 255 327 398 484 591
(O2O) GMV
y-o-y 41.3% 28.2% 21.8% 21.6% 21.9%
% of China's
6.7% 7.0% 7.1% 7.5% 8.1%
e-commerce market
Source: iResearch, DBS Bank

Diagram 17. Consumption breakdown in China

Source: National Bureau of Statistics of China, DBS Bank

China’s online ads for ‘Action’ as a percentage of China’s

online ad market
To conclude, (1) advertisers would like to allocate more budget to online ads for ‘Action’, as
the latter has competitive advantage in generating sale actions. (2) For Internet companies,
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we expect improving user data analytics to improve click-through and conversion rates,
and in turn, online ad inventories for ‘Action’. And besides e-commerce platforms, local
service O2O platforms will provide more online ad inventories for ‘Action’.

We base our analysis on (i) interviews with China’s advertising agencies, advertisers in
various industries (i.e. auto, consumer, financial and property), and Internet companies,
(ii) forecasts of China’s e-commerce (selling goods online) and local service O2O (selling
service online) GMV, and (iii) assumption of China’s online ads for ‘Action’ as a percentage
of China’s e-commerce and local service O2O GMV increasing to 4% in 2019F, driven by
improving user data analytics. We expect China’s online ads for ‘Action’ as a percentage
of China’s online ad market to increase from 30% in 2016 to 50% in 2019F. We expect
China’s online ads for ‘Action’ to deliver CAGR of 53.7% (FY16-19F), versus 29.6% for
the overall online ads industry.

Diagram 18. China’s online ads for ‘Action’

Rmb bn 2016 2017F 2018F 2019F Assumption

China's online ads for Action on e-commerce platforms
China's e-commerce GMV
China's e-commerce GMV 4,700 5,600 6,500 7,300 industry growth, according
to iResearch
x China's online ads for Action on e-commerce We expect it to increase
platforms as a percentage of China's e-commerce 2% 3% 3% 4% from 2% in 2016 to 4% in
GMV 2019F
= (1) China's online ads for Action on e-commerce
87 144 213 292
platforms
y-o-y 65.8% 48.7% 37.0%
Local service O2O
China's local service O2O
China's local service O2O GMV 327 398 484 591 GMV industry growth,
according to iResearch
x China's online ads for Action on local service O2O We expect it to increase
platforms as a percentage of China's local service 0% 1% 3% 4% from 0% in 2016 to 4% in
O2O GMV 2019F
= (2) China's online ads for Action on local service
0 5 13 24
O2O platforms
y-o-y 143.2% 82.9%
Total
China's online ads for Action 87 149 226 316 (1) + (2)
y-o-y 71.9% 52.1% 39.6%
/ China's online ads 290 388 502 632 According to iResearch
= China's online ads for Action as a percentage of 30% 38% 45% 50%
China's online ad market
Source: DBS Bank
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Which online ad platforms will be beneficiaries?

We believe the following Internet companies will be beneficiaries, riding on the increasing
proportion of online ads for ‘Action’ in China’s online ad market.

1. Leading e-commerce platforms, or Internet companies cooperating with leading

e-commerce platforms. Now e-commerce (selling goods online) platforms, which are
able to connect users to point of sales, are the major source of online ad inventories
for ‘Action’ and beneficiaries.

Diagram 19. Share of players in China’s e-commerce GMV 2016

Source: iResearch, DBS Bank

2. Leading local service O2O platforms or Internet companies cooperating with leading
local service O2O platforms. Local service online-to-offline (local service O2O, selling
services online) platforms, which are able to connect users to point of sales, are
another huge potential source of online ad inventories for ‘Action’ and beneficiaries.

Diagram 20. Share of players in China’s Diagram 21. Share of players in China’s
local service O2O GMV market (2016) food delivery GMV (2016)

Sources: Trustdata, DBS Bank

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3. Among the above Internet companies, those which can improve data analytics.
Companies that can improve data analytics for better online ads’ click-through rates
and conversion rates – to increase online ad inventories for ‘Action’ – will gain an
even higher market share of China’s online ad market.

What will be BAT’s estimated market share of online

advertising in the next three years?
Diagram 22. China’s online advertising market share

1. Alibaba’s market share of online ads will continue to rise from 30% in 2016 to 35%
in 2019F. E-commerce (selling goods online) platforms’ ads can effectively direct
customers to take action (i.e. sales). Currently, online ad inventories for ‘Action’ come
mostly from e-commerce platforms, and Alibaba is well positioned with its leading
e-commerce platform. With its e-commerce platform’s improving user data analytics
to increase ad inventories and the potential of its local service O2O platform, we
expect Alibaba’s market share of online ads to continue to rise from 29.8% in 2016
to 35% in 2019F.

I . Improving user data analytics capability to increase its ad inventories and

advertisers’ ad budget. Alibaba has China’s largest e-commerce platform -
Taobao (淘寶) and Tmall (天貓), and it is expanding its ecosystem to include
mobile communication, video, and search through investment in Weibo (微博,
China’s second-largest social communication platform), Youku Tudou (優酷土豆,
China’s third-largest mobile video platform), and UCWeb (China’s second-largest
mobile search platform). The company can collect and analyse more data from
users’ purchasing behaviour on Taobao and Tmall, as well as their interests from
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their browsing behaviour on Weibo, Youku Tudou, and UCWeb, for more precise
targeting. This can increase click-through rates and conversion rates, resulting in
an increase in Alibaba’s online ad inventories for ‘Action’ and advertisers’ return on
investment (ROI, i.e. eCPC and eCPA).

II. Expanding beyond goods to services, to capture the potential in online ads for
‘Action’ on local service O2O platform. It is expanding beyond goods to services,
through Koubei (口碑, China’s second-largest local service O2O platform) and
investment in Ele.me (餓了麼, China’s second-largest online food delivery platform),
with 40.9% and 35.4% market share in 2016, respectively. In August 2017, Ele.
me acquired Baidu’s Baidu Deliveries (百度外賣, China’s third-largest online food-
delivery platform). Ele.me and Baidu Deliveries have a combined market share
of 55.2% in 2016. We see great potential in Koubei and Ele.me’s online ads for
‘Action’. Examples are top placement ads in result listings after users’ keyword
search and nearby search to attract traffic to merchants’ stores to take action (i.e.
sales), just like ads on e-commerce platforms.

2. Baidu’s market share of online ads will continue to decline from 22% in 2016 to 18%
in 2019F. Baidu is positioned to stir users’ ‘Interest and Desire’, but not to stir them into
‘Action’. Its search business is losing share of China’s online ad market to e-commerce
platforms, which can more effectively direct customers to take action (i.e. sales). Its search
business and its ads will be in an increasingly unfavourable position, due to e-commerce
platforms’ product category expansion or increasing adoption of other local service O2O
platforms. We expect Baidu’s market share of online ads to decline from 22.2% in 2016
to 17.7% in 2019F.

I. Its search business and its ads will be in an unfavourable position, with e-commerce
platforms’ product category expansion or other local service O2O platforms’
increasing penetration. Medical and healthcare, network services, and financial
services have been Baidu’s core search categories, which are usually not offered on
e-commerce platforms. Otherwise, users might search for these topics directly on
e-commerce platforms. Therefore, the expansion of e-commerce platforms’ product
categories or the increasing penetration of other local service O2O platforms will
diminish Baidu’s user traffic and make its online advertising less attractive.

II. Lagging local service O2O market and thus losing the potential business in online
ads for ‘Action’ on local service O2O platform. It has expanded its ecosystem to
include local service O2O, through Baidu Nuomi (百度糯米, China’s third-largest
local service O2O platform) and Baidu Deliveries (百度外賣, China’s third-largest
online food delivery platform), with 11.8% and 19.8% market share in 2016,
respectively. These have a smaller share than Tencent‘s Meituan Dianping (美團點
評) and Meituan Deliveries (美團外賣), and Alibaba’s Koubei (口碑) and Ele.me (
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餓了麼). Baidu has thus shifted its focus from market share gain to profitability,
and its local service O2O investment peaked in 2016. In August 2017, it sold Baidu
Deliveries to Ele.me. As Baidu’s search platform advertisers are mostly the leftovers
from e-commerce and local service O2O platforms, reining in local service O2O
investment will boost profitability but will make its online advertising less attractive
in the long term.

3. Tencent’s market share of online ads to grow from 9% in 2016 to 15% in 2019F. Tencent
has the highest monthly active users (MAUs) and time spent per active user who use its
platforms to communicate, not to shop. Therefore, its ads are positioned to attract users’
‘Attention’. But it is expanding its ecosystem to include e-commerce and local service
O2O through cooperation with leading third-party platforms or investment, so that their
ads can convert users to buyers, thus increasingly monetising users and user time spent.
We expect Tencent’s market share of online ads to grow from 9.3% in 2016 to 15% in
2019F.

I. Investing in and partnering with JD on e-commerce, to catch up in online ads for

‘Action’. It is expanding its ecosystem to include e-commerce, through investment in
JD (JD.US, China’s second-largest e-commerce platform). Tencent now owns 18.1%
of JD’s. It formed a strategic partnership to co-operate on e-commerce with JD in
2014. JD’s merchants can place online ads on Tencent’s WeChat or Qzone to attract
traffic to their online stores to take action (i.e. sales). Tencent’s data on daily user
behaviour and JD’s data on purchasing behaviour can improve targeting, which can
increase click-through rates and conversion rates. This can result in an increase in
Tencent’s online ad inventories for ‘Action’ and advertisers’ return on investment
(ROI, i.e. eCPC and eCPA).

II. Expanding to local service O2O, to capture the potential in online ads for ‘Action’ on
local service O2O platform. It is expanding to local service O2O, through investment
in Meituan Dianping (美團點評, China’s largest local service O2O platform) and
Meituan Deliveries (美團外賣, China’s largest online food-delivery platform), with
44.3% and 36% market share in 2016, respectively. We believe the latter is supported
by its rapidly growing market share of third-party mobile payment (from 23% in
1Q16 to 37% in 4Q16), which is widely adopted by its users and merchants, and
involves lower installation costs in using Meituan Dianping and Meituan Deliveries.
We see great potential for cooperation between Tencent, Meituan Dianping, and
Meituan Deliveries on online ads for ‘Action’, like Tencent and JD.

We expect Tencent’s market share of online ads to

grow from 9.3% in 2016 to 15% in 2019F
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Diagram 23. China’s third-party mobile payment market share

Source: Analysys, DBS Bank

Another Tencent’s local service O2O platform is its WeChat’s Mini Programs, on which
users can access a variety of services (i.e. catering and food delivery) by scanning QR codes
or through a keyword search. WeChat is now piloting the top placement ads after users’
keyword search and nearby search which can direct users to advertisers’ Mini Programs
and even to their stores to take actions (i.e. sales). We believe Mini Programs can connect
WeChat’s users to merchants, paving the way for online ads for ‘Action’.
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Appendix:
How advertisers pay for and
evaluate online ads
Ad pricing methods: Advertisers can pay by every thousand impressions, clicks, and
actions, which are cost per thousand impressions (CPM), cost per click (CPC), and cost
per action (CPA), respectively.

Advertisers like to pay for impressions (i.e. users see ads) and clicks (i.e. users click on
ads), which tells them about customers’ attention and interest in advertisers’ categories,
product/ services, or brands. But more important to advertisers is whether customers’
impressions and clicks are converted into actions (i.e. sales). Therefore, advertisers prefer
paying in this order: CPA> CPC> CPM.

Meanwhile, CPA is applicable mostly for e-commerce platforms, which are close to actions
(i.e. sales). Internet companies also prefer getting paid for CPM, because of invisible click-
through rate and conversion rate into CPC and CPA. That is why now online ads are
mostly priced in CPM and CPC now.

Ad evaluation: In online ads, advertisers can quickly determine ad effectiveness, through

evaluating the number of impressions, clicks, and actions (i.e. sales). They can calculate
ads’ return on investment (ROI), by dividing total ad budget by every thousand impressions,
clicks and actions, which are effective cost per thousand impressions (eCPM), effective
cost per click (eCPC), and effective cost per action (eCPA), respectively.

The key performance indicators (KPIs) are impressions and clicks, as they mean that
customers are aware of and interested in advertisers’ categories, product/ services, or
brands. But more important to advertisers is whether customers’ impressions and clicks are
converted into actions (i.e. sales). So, they prefer evaluating ads’ ROI in eCPA>eCPC>eCPM,
metrics which have more a direct relation to sales.
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CPM, CPC, and CPA versus eCPM, eCPC, and eCPA

Ad inventories Description Cost basis Description Return on Description

investment
(ROI) basis
Ad impressions Users see ads Cost per Ad price Effective cost Total ad budget
thousand per 1,000 per thousand / total number
impression impressions impressions of 1,000
(CPM) (eCPM) impressions
x Click through % of / 1,000/ Click through rate
rate impressions
converting to
clicks
= Ad clicks Users click on Cost per click Ad price per = Effective cost Total ad budget
ads to obtain (CPC) click per click / total number
additional (eCPC) of clicks
content
x Conversion % of clicks / Conversion rate
rate converting to
actions
= Ad actions Users click on Cost per action Ad price is per = Effective cost Total ad budget
ads to initiate (CPA) action per action / total number
an action i.e. (eCPA) of actions
sales
Source: DBS Bank

Demonstration of how advertisers evaluate online ads’ return on investment (ROI)

Advertisers prefer Internet companies whose ads are lower in eCPA. This is not necessarily a result of lower cost per thousand
impression (CPM) or cost per click (CPC), but a higher click-through rate (percentage of impressions converting to clicks) or
conversion rate (percentage of clicks converting to actions), supported by better user data analytics, which is demonstrated below.

Demonstration 1:
Cost Impression x Click x Conversion Price Total eCPM eCPC eCPA
basis through cost
rate
= Clicks rate = Actions (RMB) (RMB) (RMB) (RMB) (RMB)
RMB10,000 ad budget (2) (4) (1) (3) (5)
CPM 1,000,000 1.00% 10,000 20.0% 2,000 10.0 10,000 10.0 1.0 5.0
CPC 1,000,000 1.00% 10,000 20.0% 2,000 1.0 10,000 10.0 1.0 5.0
CPA 1,000,000 1.00% 10,000 20.0% 2,000 5.0 10,000 10.0 1.0 5.0
CPM 1,000,000 1.00% 10,000 10.0% 1,000 10.0 10,000 10.0 1.0 10.0
CPC 1,000,000 1.00% 10,000 10.0% 1,000 1.0 10,000 10.0 1.0 10.0
CPA 1,000,000 1.00% 10,000 10.0% 1,000 10.0 10,000 10.0 1.0 10.0
CPM 1,000,000 0.50% 5,000 10.0% 500 10.0 10,000 10.0 2.0 20.0
CPC 1,000,000 0.50% 5,000 10.0% 500 2.0 10,000 10.0 2.0 20.0
CPA 1,000,000 0.50% 5,000 10.0% 500 20.0 10,000 10.0 2.0 20.0
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Given the same (1) eCPM, a higher click-through rate (% of impressions converting to clicks) and conversion rate (% of
clicks converting to actions) can result in lower eCPC and eCPA, respectively. In our example of a RMB10,000 ad budget ,
if (2) the click-through rate increases from 0.5% to 1%, (3) eCPC will decrease from RMB2 to RMB1, holding other things
constant. If (4) the conversion rate increases from 10% to 20%, (5) eCPA will decrease from RMB20 to RMB10.

Demonstration 2:

Cost Impression x Click x Conversion Price Total eCPM eCPC eCPA

basis through cost
rate
= Clicks rate = Actions (RMB) (RMB) (RMB) (RMB) (RMB)
RMB10,000 ad budget
CPM 1,000,000 10.0 10,000 10.0 2.0 10.0
CPC 1,000,000 0.50% 5,000 2.0 10,000 10.0 2.0 10.0
CPA 1,000,000 0.50% 5,000 20.0% 1,000 10.0 10,000 10.0 2.0 10.0
CPM 1,000,000 10.0 10,000 10.0 1.0 10.0
CPC 1,000,000 1.00% 10,000 1.0 10,000 10.0 1.0 10.0
CPA 1,000,000 1.00% 10,000 10.0% 1,000 10.0 10,000 10.0 1.0 10.0
CPM 1,000,000 500 10.0 10,000 10.0 2.0 20.0
CPC 1,000,000 0.50% 5,000 500 2.0 10,000 10.0 2.0 20.0
CPA 1,000,000 0.50% 5,000 10.0% 500 20.0 10,000 10.0 2.0 20.0

RMB20,000 ad budget (4) (5) (1) (2) (3)

CPM 1,000,000 20.0 20,000 20.0 1.0 5.0
CPC 1,000,000 2.00% 20,000 1.0 20,000 20.0 1.0 5.0
CPA 1,000,000 2.00% 20,000 20.0% 4,000 5.0 20,000 20.0 1.0 5.0
CPM 1,000,000 8,000 20.0 20,000 20.0 0.5 2.5
CPC 1,000,000 4.00% 40,000 8,000 0.5 20,000 20.0 0.5 2.5
CPA 1,000,000 4.00% 40,000 20.0% 8,000 2.5 20,000 20.0 0.5 2.5
CPM 1,000,000 20.0 20,000 20.0 1.0 2.5
CPC 1,000,000 2.00% 20,000 1.0 20,000 20.0 1.0 2.5
CPA 1,000,000 2.00% 20,000 40.0% 8,000 2.5 20,000 20.0 1.0 2.5

A lower CPM does not mean a lower eCPC and eCPA. For example, our example of a RMB20,000 ad budget has a higher
(1) CPM and eCPM (RMB20), but lower (2) eCPC and (3) eCPA versus our illustration of a RMB10,000 ad budget , because
of a higher (4) click-through rate and (5) conversion rate.
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Disclaimers and Important Notices

The information herein is published by DBS Bank Ltd

(the “Company”). It is based on information obtained
from sources believed to be reliable, but the Company
does not make any representation or warranty, express
or implied, as to its accuracy, completeness, timeliness
or correctness for any particular purpose. Opinions
expressed are subject to change without notice. Any
recommendation contained herein does not have
regard to the specific investment objectives, financial
situation and the particular needs of any specific
addressee.

The information herein is published for the information

of addressees only and is not to be taken in substitution
for the exercise of judgement by addressees, who
should obtain separate legal or financial advice. The
Company, or any of its related companies or any
individuals connected with the group accepts no
liability for any direct, special, indirect, consequential,
incidental damages or any other loss or damages of
any kind arising from any use of the information herein
(including any error, omission or misstatement herein,
negligent or otherwise) or further communication
thereof, even if the Company or any other person has
been advised of the possibility thereof.

The information herein is not to be construed as an offer

or a solicitation of an offer to buy or sell any securities,
futures, options or other financial instruments or
to provide any investment advice or services. The
Company and its associates, their directors, officers
and/or employees may have positions or other interests
in, and may effect transactions in securities mentioned
herein and may also perform or seek to perform
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The information herein is not intended for distribution

to, or use by, any person or entity in any jurisdiction
or country where such distribution or use would be
contrary to law or regulation.
 Living, Breathing Asia

www.dbs.com