Insights After Rain Comes Sunshine PDF

China / Hong Kong Industry Focus
China Internet Sector

Refer to important disclosures at the end of this report
DBS Group Research . Equity 8 Feb 2019
After rain comes sunshine in 2019 HSI: 27,942

• Two key segments - mobile games and online ads - to
ANALYST
grow 14% (back-loaded) and 28% y-o-y in 2019 Susanna Chui +852 36684194 susanna_chui@dbs.com
• Focus on: (i) game segment of which approval process Tsz-Wang TAM, CFA +852 36684195 tszwangtam@dbs.com
resumed in Dec 2018, and (ii) new retail which will
gain traction in 2019
• Tencent is a BUY, as PUBG Mobile has substantial Recommendation & valuation
monetisation potential in 2019F, with a monthly
T arget
active user base that already reached 80%+ of
Company Pric e Pric e Rec om 19F 19F
Honour of Kings’
HK $ HK $ PE P/S
• Alibaba is our top pick, as it will be the dominant x x
player in new retail, and “actionable ads” are more Alibaba# 168.49 198.00 BUY 33.1 5.8
resilient to macro headwinds in 2019 (BABA US)
Tencent 346.00 404.00 BUY 29.8 7.3
Bullish on China Internet; market to focus on games and new (700 HK)
retail segments. We are bullish on the China Internet sector for
J D.com 24.85 25.00 HOLD n.a. 0.5
2019, as two key segments - mobile games and online ads - (J D US)
are expected to grow 14% (back-loaded) and 28% y-o-y
Kingsoft 14.90 18.00 BUY 23.1 2.2
respectively in 2019. We expect the market to focus on (i)
(3888 HK)
games of which approval process resumed recently in Dec
NetDragon 14.28 33.00 BUY 22.9 1.1
2018, and (ii) new retail which would start to gain traction in
(777 HK)
2019F.
Mobile games – Rising from the ashes. China’s mobile game Based on 31 Jan 2019 closing
market is expected to grow by 14% y-o-y in 2019F (back- Source: Thomson Reuters, DBS Bank (Hong Kong) Limited (“DBS HK”)
loaded), after approval process resumed in Dec 2018. While
the market is concerned as to when Tencent’s PUBG Mobile
will be approved for monetisation, we expect big games (i.e.
PUBG Mobile) to come after small games have been approved,
after checking with some online game developers. We believe
PUBG Mobile has substantial monetisation potential in 2019F,
with a monthly active user base that is 80%+ of Honour of
Kings’. We reiterate our BUY call on Tencent. We also like
developers with conversion pipeline from PC IPs such as
Kingsoft and NetDragon.
New retail – Powering up e-commerce and advertising. China's
e-commerce market is expected to grow by 21% in 2019F in
terms of GMV, driven by new retail. Our proprietary research
concluded that Alibaba will be the dominant player in new
retail, with online presence (i.e. users) from e-commerce to
new retail, while JD will be a smaller player, with its logistical
advantage over Alibaba diminishing. Besides, our checks with
ad agencies highlight that monetisation via “actionable ads”
will be more resilient to macro headwinds in 2019F. Alibaba
operates the largest e-commerce platforms in China (i.e.
Taobao and Tmall), with an expanding addressable market
from new retail, and will be in a better position to benefit from
the shift in budgets to “actionable ads”. Alibaba is our top
pick, while we maintain our HOLD rating on JD.
ed- JS/ sa-CS / AH

Industry Focus
Introduction 48.0%, and 86.2% of Tencent’s, Alibaba’s, and Baidu’s

revenue respectively. Moreover, we expect the market to focus
We are bullish on the outlook of China’s internet sector in on (i) games of which approval process recently resumed in
2019, as the two key segments for Internet companies - (i) December 2018, and (ii) new retail which is starting to gain
mobile games, and (ii) online advertising - are expected to traction this year.
deliver strong growth of 14.3% and 21.9% y-o-y respectively
in 2019. Note that online games accounted for 49.6% of
Tencent’s revenue, while online advertising formed 17.0%,
Revenue mix - Tencent (2017) Revenue mix - Alibaba (2017)
Others
16%
Others
33%
Content Online Online
subscriptio games adv ertising
n 50% 48%
17%
Online Commission
adv ertising 19%
17%
Revenue mix - Baidu (2017) Revenue mix - JD (2017)
Third-party
marketplace
Others (3P)
14% 8%
Direct sales
(1P)
Online
92%
adv ertising
86%
Source: Company, DBS HK
Page 2
Industry Focus
Mobile games – Rising from the ashes Key trend # 1: Mobile game market growth to pick up in
2Q19, after game approval resumed
We are bullish on the online game segment in 2019, after the
new game approval process resumed in December 2018. The (i) Game approvals suspended in March 2018. Regulators were
growth in China’s mobile game market is expected to undergoing restructuring and were not accepting applications
accelerate from 11.7% in 2018 to 14.3% y-o-y in 2019, for licences for new games since March 2018. The growth in
according to Analysys. But we expect mobile game revenue China’s mobile game market decelerated from 31.7% in 2017
growth to be flattish in 1Q19F, due to high base effect to 11.7% in 2018, given limited new games.
(+46.3% y-o-y growth in 1Q18), before picking up to c.20% in (ii) Approval process resumed in December 2018; Tencent’s,
2Q-4Q19F. NetEase’s, and NetDragon’s games were on the list. Publicity
Based on 2017 data, Tencent and NetEase have 49.2% and Department of the Communist Party of China (中共中央宣傳部
15.1% market share in China’s online game market ) announced on 21 December 2018 that a first batch of
respectively. Note that online games accounted for 49.6%, approvals for games had been completed, implying that the
60.2%, and 43.3% of Tencent’s (700 HK), Kingsoft (3888 HK) game approval process has resumed, ahead of our expectation
and NetDragon’s (777 HK) 2017 revenue. of 1Q19F (after National People's Congress concludes its
meeting). The State Administration of Press, Publication, Radio,
Film, and Television (國家新聞出版廣電總局) announced that
China's mobile game market
80/84/93/95/95 games in first/second/third/fourth/fifth batches
have been approved on 29 December/9 January /22 January
Rmb bn /24 January/29 January. NetDragon’s Eudemons PC-Mobile
200 104.7% 183 120% Connect (魔域互通版) was in the second batch, while Tencent
180
90.7% 160 ’s SunJieMaoHuo (榫接卯和, a function game), ZheShan (折
160 143 100%
扇, a function game), LangManMeiGuiYuan (浪漫玫瑰園, a
140 80% stimulation game) and NetEase’s (NTES US) ZhanChunQiu (戰
120 109
春秋, a massively multiplayer online role-playing games
100 60%
[MMORPG]) were in the fourth and fifth batch of games to be
80 57 31.7% 40% approved.
60
40 11.7% 14.3% (iii) Expect number of game licences to be approved to be less
20%
20 than 2017 level, but not to have much impact on number of
0 0% games releasing of big developers. Investors may be concerned
2015 2016 2017 2018 2019F
that a lower number of game licences will be approval. Based
China's mobile game market (LHS) y-o-y (RHS) on 447 games approved since December 2018, we expect
c.6,000-7,000 games to be approved in 2019, which will be
Source: Analysys, DBS HK similar to number of games in the pipeline awaiting approval,
but less than 2017’s c.9,000 level before the suspension of
game approvals. However, even big developers like Tencent
Market share of China's online game market in 2017 launched c.20-30 new games per annum. We believe there will
not be much impact on number of games releasing of big
developers, especially those which have good track record in
revising games based on regulators’ feedback for approval to
take place.
Others
36%
Tencent
49%
NetEase
15%
Source: iResearch, DBS HK
Page 3
Industry Focus
Game licences approval for monetisation in China Key trend #2: Survival games’ (i.e. PUBG Mobile) monetisation
to be market focus in 2019
No. of Game License PlayerUnknown’s Battlegrounds (PUBG, a PC survival game
10,000 9,368 developed by Bluehole), and Fortnite (a PC survival game
9,000 developed by Tencent’s Epic) were launched in 2017 and 2018
8,000 respectively. Fornite is the world’s top free-to-play game by
7,000 revenue with US$2.1bn in 2018.
6,000 There were a few survival games in the mobile space launched
5,000 in China in 2017-2018, including NetEase’s Knives Out (荒野
3,790
4,000 行動), and Tencent’s PUBG Mobile (絶地求生:刺激戰場, co-
3,000 developed by Bluehole and Tencent's Quantum Studio).
2,064
2,000 NetEase’s Knives Out enjoyed an early-mover advantage in
1,000 219 360 2017. But it was surpassed by Tencent’s PUBG Mobile. The
0 number of monthly active users (MAUs) for Knives Out
2014 2015 2016 2017 2018 dropped from 84m as at February 2018 to 16m as at October
2018. On the other hand, PUBG Mobile’s number of MAUs
Source: SAPPRFT, DBS HK
grew from 78m as at February 2018 to 167m as at October
(iv) Expect approval for big games (i.e. Tencent’s PUBG Mobile) 2018, which is 86% of Honour of Kings’.
to come after small games are approved. Some investors are
concerned that the features of PUBG Mobile is not in line with MAUs of major survival games
regulators’ objectives to be approval for monetisation, because
169
171
167
161
of its 1) Korean IP, 2) non-Chinese culture, and 3) violence. 180
151
However, China is still importing Korean entertainment (i.e. 160
127
dramas), and the same would apply to PUBG Mobile. As for 140 121
109
non-Chinese culture and violence, Tencent has a good track 120

84
record in revising games based on regulators’ feedback for 100

78
74
67
approval to take place. 80

59
44
60
32
Another concern is when the games (i.e. Tencent’s PUBG

31
24
40
16
15
Mobile) will be approved. We have checked with some online 20
game developers, and they expressed that game approval is 0
based on two rules: (1) first come first serve basis in most
Mar-18
Jun-18
May-18
Apr-18
Sep-18
Jan-18
Jul-18
Oct-18
Aug-18
Feb-18
cases, and (2) small games (i.e. casual games) are placed at the
front of the queue. This is because small games are simpler to
review and modify. We expect approvals for big games (i.e.
PUBG Mobile (Tencent) Knives Out (NetEase)
Tencent’s PUBG Mobile) to come after approvals for small
games are completed.
Source: Questmobile, DBS HK
(v) Mobile game market growth to pick up in 2Q19, now that
game approval process has resumed. With contribution from Once PUBG receives a licence for monetisation, PUBG’s
more new games, the growth in China’s mobile game market monetisation potential will be substantial in FY19F, as (1) PUBG
is expected to accelerate from 11.7% in 2018 to 14.3% y-o-y Mobile’s MAU base stands at 167m as of October 2018, which
in 2019F, according to Analysys. But we expect mobile game is 80%+ of Honour of Kings’ 182m, (2) PUBG Mobile’s
revenue growth to be flattish in 1Q19, due to high base effect overseas version’s monthly gross billings at US$20m is 67% of
(+46.3% in 1Q18), before picking up to c.20% in 2Q-4Q19. Arena of Valor’s (傳說對決, Honour of Kings’ overseas version)
US$30m.
Page 4
Industry Focus
MAUs of PUBG Mobile and Honour of Kings Key trend # 3: Gross billings for Honour of Kings in 2019 to
grow at a similar rate as 2018
mn
185 Tencent’s Honour of Kings (王者榮耀) has been ranked at the
182
top in China on iOS for 27 consecutive months based on
180 monthly gross billings since November 2016. It dominated the
multiplayer online battle arena (MOBA) game genres, thanks to
175 its early-mover advantage and network effect. Honour of
Kings’ iOS gross billings grew 20%+ y-o-y in 2018.
170
167 Note that gross billings of League of Legends (英雄聯盟), the
165 world’s most popular PC MOBA launched in 2009, declined
33.3% y-o-y in 2018 (versus +10.4% y-o-y in 2016 and
160 +16.7% y-o-y in 2017), due to user base cannibalisation from
PUBG and Fortnite. The market have concerns that
155 cannibalisation of user base will occur between Honour of
PUBG: Exciting Battleground Honour of Kings Kings and PUBG Mobile. However, we believe most of the
cannibalisation had already occurred in 2018. Honour of Kings’
MAUs has started to decline by 1-10% y-o-y since May 2018,
according to Questmobile. As PUBG Mobile was launched a
year ago, its number of MAUs as a percentage of Honour of
Monthly gross billings of PUBG Mobile and Arena of
Kings’ grew from 37% as at February 2018 to 86% as at
Valor’s (Honour of Kings’ overseas version)
October 2018. We expect both Honour of Kings’ and PUBG
Mobile’s MAUs to stabilise in 2019F.
US$mn
35 Therefore, we believe PUBG Mobile starting to monetise its
30 large user base in 2019F will not have a material impact on
30
Honour of Kings’ user base and monetisation. We expect
25 Honour of Kings to record similar growth in gross billings in
20 2019F as 2018, on the back of a stable user base, increasing
20 number and average price of champion skins (alternate
appearance for any given Honour of Kings’ character).
15
10
0
PUBG: Exciting Battleground Honour of Kings
Page 5
Industry Focus
MAUs of Honour of Kings
mn %
354.3%
274.4% 247.1%
300 284.1% 206.8% 159.3% 104.4% 107.3%
149.3% 137.8% 110.4% 63.2% 30.4% 7.9% -1.1% -9.8%
9.4% 11.8% -2.2% -9.9% -1.1% 200%
250 -4.0%
223
214 210
202 199 201 193 194
182 184 186 189 191 182 -300%
200 177 181 174 177 180
169
159 161
150
-800%
100
-1300%
50
0 -1800%
Dec-17
Mar-17
Mar-18
May-17
Jun-17
Jun-18
May-18
Apr-17
Sep-18
Sep-17
Apr-18
Nov-17
Jan-18
Jan-17
Jul-17
Jul-18
Feb-17
Feb-18
Aug-18
Aug-17
Oct-18
Oct-17
MAUs (m) (LHS) Growth (RHS)
Key trend # 4: “Conversion of PC games to mobile games” has PC-to-mobile games (conversion of PC games to mobile
proven to be successful but has peaked games in the top 10 mobile games in China by gross
billings
Conversion of PC games to mobile games has proven to be
successful in the past few years. We like game developers with No. of conv ersion game
a conversion pipeline from PC IPs. The mobile games that will
8
be converted from top 30 PC game IPs in 2019F include 7
NetDragon’s (777 HK)’s Eudemons 3D Mobile (魔域 3D 手遊) 7
6 6
and Kingsoft (3888 HK)’s JX3 Mobile (劍俠情緣 2 手遊) and 6
JX3 Mobile (劍俠情緣 3 手遊), which are all published by
5
Tencent.
4
However, most of the top PC game IPs (based on top 30 PC 3
games) are now exhausted. PC-to-mobile games occupied 6 3
positions on average among the top 10 mobile games in China 2
on iOS in 2018, versus 7 in 2017. As the number of PC-to-
1
mobile games pipeline is getting smaller, the visibility for game
titles or game developers to standout will be lower in 2019F. 0
2015 2016 2017 2018
Source: App Annie, DBS HK
Page 6
Industry Focus
Key trend # 5: More game genres in top 10, less RPGs Here are some of the recent hit games: Example 1: NetEase’s
LifeAfter (明日之後, a survival game) ranked as one of the top
Role-playing games (RPGs) dominated the top 10 mobile
10 in China’s mobile games list on iOS for two months from
games in the past few years, as most of the hit mobile game
November 2018. Example 2: Red Tencent’s Alert OL (紅警 OL,
titles converted from PC games were mostly RPGs. Based on
a strategy game) ranked as one of the top 10 in China’s mobile
the experience in global markets, we expect to see a more
games list on iOS for two months from November 2018.
diversified range of game genres in the long term, including (i)
Example 3: Tencent’s QQ Speed (QQ 飛車, a car racing game)
casual games, (ii) strategy games, and (iii) survival games. Note
ranked as one of the top 10 in China’s mobile games list on
that non-RPG occupied 4 positions among the top 10 mobile
iOS for twelve months from January 2018. All in all, we expect
games in China on iOS in December 2018, versus 3 in
a more diversified range of game genres to “randomly” pop
December 2017.
up in the top 10 ranking.
Top 10 China's mobile games by gross billings (December 2018 versus December 2017)
M obile games (Dec 2018) Publishers M obile games (Dec 2017) Publishers
Honour of Kings (王者榮耀) Tencent (騰訊) Honour of Kings (王者榮耀) Tencent (騰訊)
Fantasy Westward J ourney (夢幻西游) NetEase (網易) Fantasy Westward J ourney (夢幻西游) NetEase (網易)
LifeAfter (明日之後) NetEase (網易) MU Miracle (奇蹟：最强者) Longtu Game (龍圖遊戲)
Westward J ourney Online (大話西游) NetEase (網易) Ghost (倩女幽魂) NetEase (網易)
QQ Speed (QQ飛車) Tencent (騰訊) Westward J ourney Online (大話西游) NetEase (網易)
v ersus
Samural Spirits (待魂：朧月傳說) Tencent (騰訊) TLBB (天龍八部) Tencent (騰訊)
Onmyoji (陰陽師) NetEase (網易) King Of Chaos (亂世王者) Tencent (騰訊)
Red Alert OL (紅警OL) Tencent (騰訊) Onmyoji (陰陽師) NetEase (網易)
Naruto OL (火影忍者OL) Tencent (騰訊) Contra: Return (魂斗羅:歸來) Tencent (騰訊)
Ghost (倩女幽魂) NetEase (網易) Archangel Sword H5 (大天使之劍H5) 37games (三七互娯)
Non-RPG mobile games
Top 10 mobile games by gross billings in December 2018 (China versus global)
China M obile games Publishers Global M obile games Publishers

Honour of Kings (王者榮耀) Tencent (騰訊) Honour of Kings (王者榮耀) Tencent (騰訊)
Fantasy Westward J ourney (夢幻西游) NetEase (網易) Fantasy Westward J ourney (夢幻西游) NetEase (網易)
LifeAfter (明日之後) NetEase (網易) Fortnite Epic Games
Westward J ourney Online (大話西游) NetEase (網易) Fate/Grand Order Sony
QQ Speed (QQ飛車) Tencent (騰訊) LifeAfter (明日之後) NetEase (網易)
v ersus
Samural Spirits (待魂：朧月傳說) Tencent (騰訊) Candy Crush Saga Activision Blizzard, Tencent (騰訊)
Onmyoji (陰陽師) NetEase (網易) Monster Strike Mixi
Red Alert OL (紅警OL) Tencent (騰訊) Westward J ourney Online (大話西游) NetEase (網易)
Naruto OL (火影忍者OL) Tencent (騰訊) Clash of Clans Supercell
Ghost (倩女幽魂) NetEase (網易) Onmyoji (陰陽師) NetEase (網易)
Non-RPG mobile games
Conclusion casual games (i.e. QQ Speed), strategy games (i.e. Alert OL),
and survival games (i.e. PUBG Mobile),
We reiterate our BUY call on Tencent (700 HK), as PUBG
Mobile has substantial monetisation potential in 2019F, and However, the visibility or the predictability of successful game
will not have a material impact on Honour of Kings’ gross titles and game developers is much lower, with fewer mobile
billings. Moreover, we are excited on more new game genres games now being converted from top PC IPs. We like game
(instead of being dominated by RPGs) in the top 10. We like developers which still have a conversion pipeline from PC IPs
Tencent’s ability to broaden its game portfolio across genres - such as Kingsoft (3888 HK) and NetDragon (777 HK).
Page 7
Industry Focus
Market share of China's e-commerce market in 2017

E-commerce – Expanding addressable market from
new retail
China's e-commerce market is expected to grow by 21.3% in

2019F in terms of gross merchandise value (GMV), according
to iResearch. Despite decelerating retail sales growth (10.2% y-
o-y in 2017 to 9.0% in 2018) amid macro headwinds, the e-
commerce market growth will be attributed to increasing
online penetration from 18.5% of China’s retail sales in 2018
to 20.3% in 2019F, driven by product category expansion via
new retail initiatives in 2019F, after demonstrating that this
model can improve online sales and operating efficiency in
2018.
Currently, Alibaba (BABA US), JD (JD US), and Pingduoduo’s
(PDD US) are the China’s largest, second largest, and third
largest e-commerce platforms, with 74.9%, 16.4% and 2.3%
market share in terms of GMV in 2017 respectively. E- Source: iResearch, DBS HK
commerce platforms mainly monetise through online ads, and
commission fees (please refer to our next segment on online Key trend #1: Alibaba’s GMV growth outperforming JD’s
advertising for details).
Penetration rates for computer, communication & consumer
electronics (3C) products and apparels are high at 29-36%
China's e-commerce market
based on 2017 data, in which JD and Alibaba have strong
presence respectively. The competition between JDs and
Rmb bn Alibaba in these two segments has been fierce (i.e. Alibaba’s
10,000 35.7% 9,100 40% exclusive cooperation policy).
29.8% 7,500 35% JD had been gaining market share in terms of GMV at the rate
8,000
30% of 2-3ppts per year over 2015-2017, driven by electronics and
23.7% 23.0%
6,100 21.3% 25% home appliance category and expansion into general
6,000
4,700 20% merchandise categories (apparel & shoes, beauty & personal
3,800
4,000 20.3% 15% care). However, we note that Alibaba’s GMV growth has been
18.5%
16.4% starting to outperform JD’s in 2018. Alibaba has stopped
14.2% 10%
2,000 12.6%
5% reporting quarterly GMV since 2QFY3/17, but annual GMV and
0 0% Double 11 (Singles’ Day) Shopping Festival GMV continue to be
2015 2016 2017 2018 2019F reported. JD’s GMV grew by 25.7% y-o-y during Double 11
China's e-commerce market (LHS) Shopping Festival in 2018, below Alibaba’s 26.9% and
y-o-y (RHS) Pingduoduo’s 300%+ (which is growing its online presence,
Online penetration rate (RHS)
especially in lower tier cities with low online penetration rates).
Source: iResearch, DBS HK
In 2017, JD’s growth during Double 11 Shopping Festival was
50.0%+ y-o-y, far above Alibaba’s 39.4% y-o-y.
We expect Alibaba’s GMV growth to outperform JD’s in
2019F, amid intensifying competition in the apparel category.
Page 8
Industry Focus
Key trend #2: Alibaba is leading in new retail initiative Conclusion

Homewares and home furnishings, food and drink, consumer We prefer Alibaba (BABA US) to JD (JD US), as Alibaba’s GMV
health, beauty & personal care, and upscale products & growth has been outperforming JD’s, and Alibaba is leading in
services, segments which are under penetrated at 9-25%, is the new retail initiative, by bringing its online presence (i.e.
another battlefield. Alibaba’s Hema Supermarket chain (盒馬鮮 users) from e-commerce to new retail. We expect Alibaba’s
生, a well-known new retail showcase) demonstrated that new market share in terms of GMV to grow from 75.9% in 2018 to
retail model can improve online sales, especially for those 77.0% in 2019F, while JD’s market share is projected to drop
product categories with low online penetration in 2018. For from 16.6% in 2018F to 15.8% in 2019F.
example, Hema Supermarkets’ online orders as a percentage of
total orders is 68% as at end July 2018, for mature stores (i.e.
in operation >1.5 years), according to its operating data.
We expect more and more retailers are likely to partner with
Internet companies to transform their traditional retail model,
and pay for new retail solutions (i.e. customer relationship
management, supply chain management, and payment
services) in 2019F.
We interviewed industry experts to analyse the five key
capabilities that “Alibaba” and “Tencent + JD” (JD partners
with Tencent in new retail) would require to succeed in new
retail: (1) Online presence (i.e. e-commerce platforms’ user
resources), (2) Mobile payment (i.e. mobile payment market
share), (3) Customer relationship management (i.e. possessing
user data for analytics to improve sales), (4) Supply chain
management (i.e. [i] express delivery and [ii] instant delivery
services), and (5) Offline presence (i.e. more offline retailer
partners and track record to improve sales productivity). We
concluded that retailers attach great importance on whether
Internet companies as partners can attract users. Retailers are
placing less emphasis on Internet companies’ supply chain
capabilities in the new retail era versus e-commerce era.
We concluded that “Alibaba” will be the dominant player, as
Alibaba brings its online presence (i.e. users) from e-commerce
to new retail. “Tencent + JD” will be a smaller player, as JD’s
logistical advantage over Alibaba is diminishing. (For details,
please refer to Asian Insights SparX: China Internet Sector:
Who will be the winners in new retail?).
Page 9
Industry Focus
Online advertising – Prefer “actionable ads” than Key trend #1: Shift in ad budget towards “actionable ads”
“brand ads”
We analysed the advertising market based on advertising
China's online advertising market is expected to grow by objectives (namely, “attention”, “interest & desire” and
27.7% in 2019F, according to iResearch. Online ads, especially “action”), instead of traditional matrix such as user numbers
“actionable ads” (performance-based ads) are more effective and time spent previously. (For details, please refer to Asian
in translating users to take “action” (i.e. sales). Insights SparX-China Internet Sector: Where does online ad
spend go?). The key conclusion is that advertisers will spend a
Based on 2017 data, Alibaba, Baidu, and Tencent have 29.0%, greater part of their budget on “actionable ads” (performance-
19.5% and 10.8% market share in China’s online advertising based ads which lead to users’ “actions” i.e. sales), rather than
market respectively. Note that online advertising accounted for “brand ads” (which lead to users’ “attention”).
48.0% and 17.0% of Alibaba’s (BABA US) and Tencent’s (700
HK) 2017 revenue. We expect an increasing trend of this budget trend in 2019F,
based on our discussions with some advertising agencies. They
expressed that “actionable ads” are more resilient to macro
China's online advertising market
headwinds in 2019F, as advertisers will be inclined to maintain
their budgets on “actionable ads” rather than “brand ads”. E-
Rmb bn commerce platforms provide the most actionable ad
700 91.7% 100% inventories. Alibaba (BABA US) operates the leading e-
83.9% 627
600 commerce platforms (i.e. Taobao and Tmall in China), and is
491 80%
500 48.5% therefore in a stronger position to benefit from this budget
80.4%
375 60% shift.
400 66.9%
288
300 218 54.4% 27.7% 40%
25.9%
200 44.5%
36.6% Key trend #2: Alibaba’s recommendation feeds monetisation
20%
100
Alibaba mainly monetises through having top placement ads in
0 0% product listings after users search for products via keyword
2015 2016 2017 2018 2019F
searches, which will then attract traffic to advertisers’ online
China's online advertising market (LHS)
stores. In 3Q18, Alibaba launched recommendation feeds, by
y-o-y (RHS)
which the company recommends targeted products to users
Online penetration rate (RHS)
based on user data analytics. While keyword searches enable
Source: iResearch, DBS HK users to search for products (i.e. famous brands and famous
products), recommendation feeds enable products, especially
Market share of China's online advertising market in new brands and new products, to be presented in front of
2017 targeted users. Management expressed that traffic of
recommendation feeds has already surpassed that of searches.
Meanwhile, the feedback on recommendation feeds have been
positive with improving click-through rates. We believe these
would accelerate gross merchandise value (GMV) growth,
which forms the base for ad monetisation in 2019F.
Alibaba
29%
Others Key trend #3: Tencent’s WeChat Moment and Mini Program
41%
monetisation
WeChat Moments’ maximum ad load increased from one ad
per user day to two ads per user day in 1Q18. Under
Baidu controlling when (i.e. 6-hour interval between each ad per
Tencent 19% user) and to whom (i.e. advertisers’ target audience) the ads
11% are delivered in order to ensure a good user experience, we
expect the ad fill rate to continue to gradually increase in
Source: iResearch, DBS HK 2019F.
Page 10
Industry Focus
Mini Program, on which users can access a variety of services commerce platforms in China (i.e. Taobao and Tmall), with an
(such as catering and food delivery) by scanning QR codes or expanding addressable market from new retail, which provide
through a keyword search, had 922m MAUs as at October the most actionable ad inventories, and will therefore be in a
2018, according to Analysys. We believe Mini Programs can better position to benefit from the shift in budgets to
connect WeChat’s users to merchants, paving the way for “actionable ads”. Tencent (700 HK) has been enhancing its
“actionable ads”. Our checks with some advertising agencies position in the online advertising space from capturing
reveal that they expect Mini Program’s ad load to ramp up in “attention” to driving “action” through Mini Program,
2019F. however material monetisation will take time.
Conclusion
Our top pick in the sector is Alibaba (BABA US). “Actionable
ads” (ads which lead to actions i.e. sales) are more resilient to
macro headwinds, versus “brand ads” (which lead to users’
“attention”). E-commerce platforms provide the most
actionable ad inventories. Alibaba operates the largest e-
Page 11
Industry Focus
Stock implications NetDragon has launched Storm Eudemons Mobile (風暴魔域

手遊, which was converted from Eudemons Online [a top 30
Tencent (700 HK)
PC game in China] and published by Tencent) in December
Tencent is China’s leading online game developer and 2018, with c.Rmb100m of gross billings in the first month.
publisher (49.6% of FY17 revenue), with 49.6% market The company will launch much anticipated Eudemons 3D
share in the online games market in terms of revenue in Mobile (魔域 3D 手遊, published by Tencent) in 2H19, of
2017. which monthly gross billings is expected to be at least the
same as Eudemons PC’s. We expect mobile game revenue
While the market is concerned as to when Tencent’s PUBG growth to accelerate from 23.1% in FY18F to 28.0% y-o-y in
Mobile will be approved for monetisation, we expect big FY19F.
games (i.e. PUBG Mobile) to come after small games have
been approved, after checking with some online game We reiterate our BUY call on NetDragon. We derive our TP of
developers. We believe PUBG Mobile has substantial HK$33 based on SOTP methodology with assumptions as
monetisation potential in 2019F, with a monthly active user follows: (1) 15x FY19F PE for online game (HK$27, using
base that is 80%+ of Honour of Kings’. We expect mobile high-cycle valuation for online games due to continuous
game revenue growth to recover from 20.4% in FY18F strong growth of Eudemons PC in FY18F and launch of
(68.2% y-o-y in 1Q18, slowing to c.10% in 2Q-4Q18) to Eudemons 3D Mobile in FY19F); and (2) valuation from series
28.0% in FY19F (single-digit-growth in 1Q19F, before A financing for online education (HK$6).
picking up to c.30%+ in 2Q-4Q19F).
We reiterate our BUY call on Tencent. We derive our TP of
HK$404 based on SOTP methodology, with the following Alibaba (BABA US)
assumptions: (1) 35x FY19F net profit for core business
(HK$378); and (2) market value for other investments Alibaba operates China’s largest e-commerce platforms,
(HK$26). Taobao and Tmall, with 74.9% market share in terms of
gross merchandise value (GMV) in 2017. It mainly monetises
through online advertising with revenue contribution
accounting for 48.0% of China’s e-commerce retail revenue
Kingsoft (3888 HK)
in 2017. Alibaba is the largest online advertising platform in
Kingsoft is a leading online game developer in China with China, with 31.5% market share in 2017.
strong IPs derived from JX (劍俠). Online games accounted We concluded that retailers attach great importance to
for 60.2% of FY17F revenue. whether Internet companies as partners can attract users,
We expect the company to launch JX3 Mobile (劍俠情緣 3 手 which is “Alibaba’s” advantage over “Tencent + JD”. We
遊) which will be converted from JX3 Online (a top 10 PC expect Alibaba’s market share in terms of GMV to grow from
game in China) and published by Tencent in 2Q19. We grow from 75.9% in 2018F to 77.0% in 2019F. We also
expect its monthly gross billings to be at least the same as checked with ad agencies that “actionable ads”, which are
JX1 Mobile’s. We expect mobile game revenue to recover more effective in leading to users’ “actions” (i.e. sales), are
from a 20.9% fall in FY18F to 33.5% y-o-y growth in FY19F. more resilient to macro headwinds in 2019F. Alibaba, which
is China’s largest e-commerce platform with expanding
We reiterate our BUY call on Kingsoft. We derive our TP of
addressable market from new retail, will be in a better
HK$18 based on SOTP methodology, with the following
position to benefit from this budget shift. We expect core
assumptions: (1) 10x FY19F net profit from online games
commerce revenue growth to be 34.8% in FY3/20F.
(HK$6, using low-cycle valuation for online games due to
decline of JX3 PC and multiple launch delays of JX3 Mobile in We reiterate our BUY call on Alibaba. We derive our TP of
FY18F); (2) 10x FY19F net profit from office software (HK$2); US$198 based on SOTP methodology pegged to (1) 17x (two
(3) valuation from series D financing for Kingsoft Cloud standard deviations below historical average) FY20F
(HK$6); and (4) FY19F net cash (HK$4). normalised net profit from e-commerce/cloud computing
(US$159/ US$6 per share); (2) market price or valuation
implied by recent equity financing of other investments
NetDragon (777 HK) (US$33).
NetDragon is a leading online game developer in China, with

strong IPs derived from Eudemons Online (魔域). Online JD (JD US)
games accounted for 43.3% of FY17 revenue.
JD operates China’s second largest e-commerce platform.
Direct sales (1P) and third party (3P) accounted for
Page 12
Industry Focus
52.1%/91.6% and 47.9%/8.4% of its total GMV/ revenue in 26.4%/15.8% in FY18F/FY19F. We expect Its profitability to
FY17. improve at a slower-than-expected pace, as GMV growth
moderates and investments in new initiatives accelerate.
JD’s GMV growth has started to underperform Alibaba’s,
with moderate market growth in electronics and home We maintain our HOLD rating on JD. We derive our TP of
appliance category, but intensifying competition in the US$25 based on SOTP methodology, with the following
apparel category. Furthermore, our proprietary research assumptions: (1) 0.3x price-to-sales ratio for e-commerce
concluded that JD’s logistical advantage over Alibaba would (US$16); (2) valuation from series A financing for JD Finance
diminish in the new retail environment versus ecommerce (US$7); and (3) valuation from series A financing for JD
era. We expect JD’s market share in terms of GMV to drop Logistics (US$2)
from 16.6% in 2018F to 15.8% in 2019F. We expect
revenue growth to moderate from 40.3% in FY17 to
Page 13
Industry Focus
Peers valuation
Mkt PE PE P/S P/S P/Bk P/Bk ROE ROE

Currency Price Cap 18F 19F 18F 19F 18F 19F 18F 19F
Company Name Code Local$ US$m x x x x x x % %
HK & China- list ed peers
Yixin Group*#^ 2858 HK HKD 1.99 1,616 34.4 10.5 2.2 1.8 0.7 0.7 (0.5) 3.8
Kingsoft* 3888 HK HKD 14.9 2,607 n.a. 23.1 3.1 2.2 1.4 1.3 (0.7) 5.9
Netdragon Websoft* 777 HK HKD 14.28 969 53.8 22.9 1.4 1.1 1.4 1.3 2.5 5.8
Cogobuy Group 400 HK HKD 2.9 546 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Hc Group 2280 HK HKD 4.59 656 12.9 10.5 0.5 0.2 n.a. n.a. 7.7 7.7
IGG 799 HK HKD 11.92 1,945 9.6 9.0 2.5 2.2 5.6 4.0 61.4 51.2
Ourgame Intl.Holdings 6899 HK HKD 0.79 110 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Boyaa Interactive Intl. 434 HK HKD 1.59 147 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Tencent Holdings*^ 700 HK HKD 346 419,769 37.3 29.8 9.1 7.3 8.6 6.7 28.7 28.1
Linekong Interactive 8267 HK HKD 1.09 51 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
Forgame Holdings 484 HK HKD 3.96 68 n.a. n.a. n.a. n.a. n.a. n.a. n.a. n.a.
A v erage 28.4 19.1 3.3 2.6 4.2 3.4 19.9 19.7
US- list ed peers
Alibaba*#^ BABA US USD 168.49 436,757 32.2 25.2 7.9 5.8 6.7 5.6 16.0 18.4
Baidu 'A' BIDU US USD 172.63 60,675 17.6 16.5 4.0 3.4 2.5 2.2 18.3 13.2
Momo MOMO US USD 30.43 5,000 12.9 10.9 2.5 2.1 5.1 3.7 35.0 31.4
YY YY US USD 69.43 4,393 9.3 8.8 1.9 1.6 1.9 1.6 19.1 19.6
Cheetah Mobile Cl.A CMCM US USD 6.77 970 10.9 10.1 1.3 1.2 1.3 1.1 11.2 12.1
Sina SINA US USD 61.42 4,390 19.9 16.7 2.1 1.7 1.3 1.2 5.7 7.0
Sohu Com Adr 1:1 SOHU US USD 20.7 806 n.a. n.a. 0.4 0.4 1.7 1.9 (39.1) (47.5)
Netease NTES US USD 251.93 32,613 35.3 29.4 3.3 2.6 4.1 3.5 14.6 16.0
Changyou Com CYOU US USD 20.25 1,210 11.6 10.6 2.5 2.6 1.4 1.3 10.4 11.3
Soufun Hdg SFUN US USD 1.69 755 8.9 8.5 2.4 1.9 1.0 0.9 4.8 11.2
Leju Holdings LEJ U US USD 1.56 212 n.a. 5.8 0.5 0.4 0.8 0.7 (6.8) n.a.
Autohome ATHM US USD 72.38 8,479 20.0 17.0 7.9 6.5 5.4 4.2 31.0 27.8
Bitauto Holdings BITA US USD 19.42 1,413 14.4 11.7 0.9 0.8 0.7 0.7 4.6 6.5
Ctrip.Com Intl. CTRP US USD 33.3 18,156 29.1 28.1 4.0 3.4 1.4 1.4 4.2 5.0
Tuniu Adr Class A TOUR US USD 4.6 557 n.a. 57.6 1.6 1.4 1.7 1.7 (4.7) 1.5
J D.com*^ J D US USD 24.85 35,841 119.0 58.6 0.5 0.5 5.0 5.3 (8.0) (5.5)
Weibo Class 'A' Adr WB US USD 60.66 14,623 22.7 19.5 8.5 6.9 6.6 4.8 35.9 29.3
A v erage 26.0 20.9 3.1 2.5 2.9 2.4 9.0 9.8
Global peers
Alphabet A GOOGL US USD 1125.9 783,086 26.9 23.9 5.7 4.8 4.4 3.7 18.5 16.8
Amazon.Com AMZN US USD 1718.7 840,406 86.5 63.6 3.6 3.0 18.9 13.2 30.8 30.4
Facebook Class A FB US USD 166.69 478,978 27.1 22.6 11.8 7.0 6.5 4.6 23.8 22.6
A v erage 46.8 36.7 7.0 4.9 10.0 7.2 24.4 23.2
# FY18: FY19; FY19: FY20
Based on 31 Jan 2019 closing
Source: Thomson Reuters, *DBS HK
Page 14
Industry Focus
Alibaba: PE band Alibaba: PB band
Share Price (US$) Share Price (US$)

300 300 9.9x
55x
250 250 8.4x
45x
200 200 6.9x
35x
150 150 5.4x
26x
3.9x
100 100
16x
50 50
0 0
Dec-18
Dec-18
Sep-14
Sep-14
Nov-17
Nov-17
Oct-15
Oct-16
Oct-15
Oct-16
Tencent: PE band Tencent: PB band
Share Price (HK$) Share Price (HK$)

900 1200
800 45x 16.1x
1000
700
36x 12.5x
600 800
500 27x 8.9x
400 600
19x
300 400 5.4x
200 10x
100 200 1.8x
0
0
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Jan-14
Dec-14
Dec-15
Dec-16
Dec-17
Dec-18
Jan-14
JD.com: PS band JD.com: PB band
Share Price (U$) Share Price (U$)

120 70
1.7x
100 60
1.4x 11.0x
50
80 9.3x
1.0x 40
60 7.5x
30
0.7x
40 5.8x
20
4.0x
20 0.4x
10
0 0
Dec-18
Dec-18
May-14
May-14
Jul-15
Jul-15
Aug-16
Aug-16
Oct-17
Oct-17
Source: Thomson Reuters, DBS HK
Page 15
Industry Focus
Kingsoft: PE band Kingsoft: PB band

60 90
50x 80 6.4x
50
70
40 38x 60 5.1x
50
30 27x 3.7x
40
20 30 2.3x
16x
20
10
10 0.9x
4x
0 0
Dec-15
Mar-14
Jun-12
Jun-19
Sep-17
Jul-11
Jul-16
Jan-09
Jan-09
Jan-14
Jan-19
Oct-10
NetDragon Websoft: PE band NetDragon Websoft: PB band

80 50
4.1x
70 84x 45
40
60 3.2x
64x 35
50
30
40 25 2.3x
45x
30 20
1.4x
20 26x 15
10
10
7x 5 0.5x
0 0
Jul-11
Jul-16
Jan-09
Jan-14
Jan-19
Jul-11
Jul-16
Jan-09
Jan-14
Jan-19
Source: Thomson Reuters, DBS HK
Page 16
China / Hong Kong Company Guide
Alibaba Group
Version 5 | Bloomberg: BABA US Equity | Reuters: BABA.N
BUY Crown in new retail

Last Traded Price ( 31 Jan 2019):US$168.49(NASDAQ : 7,282) China’s largest e-commerce platform. Alibaba is China’s largest e-
Price Target 12-mth:US$198 (17.5% upside) commerce platform, with 75% market share in terms of GMV in 2017.
Analyst We have a BUY call on Alibaba, on solid earnings CAGR of 23% over
Tsz-Wang TAM, CFA+852 36684195, tszwangtam@dbs.com FY3/18-21F, driven by (1) marketplace-based core commerce revenue
Susanna Chui+852 36684194, susanna_chui@dbs.com
CAGR of 23% over FY3/18-21F, and (2) expanding addressable GMV
through new retail initiatives.
What’s New
• Marketplace-based core commerce revenue to Where we differ. Expanding addressable GMV from e-commerce to
deliver CAGR of 23% over FY3/18-21F new retail; Alibaba to be the dominant player in new retail. E-
commerce platforms drive GMV growth through higher penetration of
• Expanding addressable GMV on boost from new
product categories with low online penetration rates, with a boost
retail initiatives; Alibaba to be the leading player
from new retail initiatives. We analysed China’s new retail market
in new retail
based on Internet companies’ five key capabilities. We concluded that
• Solid earnings CAGR of 23% over FY3/18-21F retailers attach great importance on whether Internet companies as
• Reiterate BUY with TP of US$198 partners can attract users, which is “Alibaba’s” advantage over
“Tencent + JD”. We expect Alibaba’s market share in terms of GMV to
Price Relative
US$ Relative Index
grow from 75% in 2017 to 78% in 2020F.
231.7
Other critical factors. Marketplace-based core commerce revenue
219
211.7 199
CAGR of 23% over FY3/18-21F. We analysed China’s online ad market

191.7
179
171.7
159
151.7
131.7
139 based on objectives to be achieved, instead of traditional matrix such as
users and time spent. We concluded that advertisers are spending more
119
111.7
91.7 99
71.7 79
of their budgets on “actionable ads” (ads which lead to action [i.e.
51.7 59
Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
sales]). Alibaba has the largest e-commerce platform with an expanding
Alibaba Group (LHS) Relative NASDAQ (RHS)
addressable market via new retail, which has the highest “actionable
Forecasts and Valuation ad” inventories that would benefit from the budget shift. We expect
FY Mar (RMBm) 2018A 2019F 2020F 2021F marketplace-based core commerce revenue to deliver CAGR of 23%
Turnover 250,266 375,420 507,301 677,390
EBITDA 68,591 58,597 93,986 144,535 over FY3/18-21F.
Pre-tax Profit 79,611 76,465 104,184 155,206
Net Profit 63,985 64,094 87,943 131,925 Valuation:
Net Pft (Pre Ex) (core profit) 85,766 90,396 115,134 157,953 We have a BUY call on Alibaba with TP of US$198 based on SOTP
Net Profit Gth (Pre-ex) (%) 46.5 0.2 37.2 50.0 methodology: (1) 17x FY20F normalised net profit from e-
EPS (RMB) 25.06 25.11 34.45 51.67
EPS (US$) 3.74 3.75 5.14 7.71 commerce/cloud computing (US$159/ US$6 per share); (2) market
Core EPS (RMB) 33.59 35.41 45.10 61.87 value for other investments (US$33).
Core EPS (US$) 5.01 5.28 6.73 9.23
EPS Gth (%) 43.1 0.2 37.2 50.0 Key Risks to Our View:
Core EPS Gth (%) 38.9 5.4 27.4 37.2
Diluted EPS (US$) 3.66 3.67 5.03 7.54 Intensifying competition from leading e-commerce platforms.
DPS (US$) 0.00 0.00 0.00 0.00 At A Glance
BV Per Share (US$) 21.56 25.31 30.45 38.16
PE (X) 45.0 45.0 32.8 21.8 Issued Capital (m shrs) 2,597
CorePE (X) 33.6 31.9 25.0 18.2 Mkt Cap (US$m) 437,644
P/Cash Flow (X) 20.4 35.6 23.4 16.3 Major Shareholders (%)
P/Free CF (X) 35.4 137.1 45.6 24.6 SoftBank (%) 32.0
EV/EBITDA (X) 41.8 49.4 30.7 19.4 Yahoo (%) 15.4
Net Div Yield (%) 0.0 0.0 0.0 0.0 Jack Yun MA (%) 7.8
P/Book Value (X) 7.8 6.7 5.5 4.4
Free Float (%) 44.8
Net Debt/Equity (X) CASH CASH CASH CASH
ROAE(%) 19.7 16.0 18.4 22.5 3m Avg. Daily Val. (US$m) 365.2
ICB Industry :Consumer Services / General Retailers
Earnings Rev (%): Nil Nil Nil
Consensus EPS (RMB) 35.76 45.44 58.46
Other Broker Recs: B:50 S:1 H:1
Source of all data on this page: Company, DBS Bank (Hong Kong) Limited
(“DBS HK”), Thomson Reuters
ed-JS/ sa- CS /AH

Company Guide
Alibaba Group
CRITICAL FACTORS TO WATCH Annual active customers (m)

607 615 618
624
552
Critical Factors 535
E-commerce platform’s GMV growth 446
454
Alibaba drives GMV growth through expansion in product 356

categories and greater presence in lower-tier cities through
267
new retail initiatives. It is continuously building its ecosystem
178
for new retail initiatives though Koubei (口碑, China’s second-
89
largest O2O platform), Ele.me (餓了麼, China’s second-largest
0
online food-delivery platform), Hema Supermarket (盒馬超市), 2017A 2018A 2019F 2020F 2021F
Intime Department Store (銀泰百貨), etc. We expect Alibaba to Average annual spending per customer
deliver GMV CAGR of 22% over FY3/18-21F, supported by 14.1
14.4
annual active customer CAGR of 4% and average spending
11.8
CAGR of 17%. 11.5
9.8
8.3 8.7
8.7
Rising monetisation rate on its e-commerce platform
Alibaba mainly monetises its e-commerce platforms through 5.8
online advertising, which accounted for 65% of China’s total

2.9
e-commerce retail revenue in FY3/18. We expect Alibaba’s
monetisation rate (customer management and commission 0.0
2017A 2018A 2019F 2020F 2021F
revenue as a percentage of GMV) to increase from 3.3% in
China e-commerce (Retail) GMV (Rmb bn)
FY3/18F to 3.4% in FY3/21F, driven by favourable industry
trend of a budget shift towards “actionable ads”. Alibaba will 8,909 8,734.8
continue to improve its data analytic capabilities through its 7,249.6

7,128
ecosystem, such as Alipay (支付寶, China’s largest third-party 5,973.4
mobile payment service provider), Cainiao Logistics (菜鳥物流, 5,346 4,820.0
China’s largest logistics platform), AliCloud (阿里雲, China’s 3,564

3,767.0
largest public cloud service provider). We expect Alibaba’s

market share in online ads to expand from 28% in 2017 to 1,782
35% in 2020F 0
2017A 2018A 2019F 2020F 2021F
Monetisation rate (%)

5
4.67 4
4
4
3.73
3
2.80
1.87
0.93
0.00
2017A 2018A 2019F 2020F 2021F
China e-commerce (Retail) revenue (Rmb m)

450000
403,597
400000
350000 316,497
300000
244,185
250000
200000 176,559
150000
114,109
100000
50000
0
2017A 2018A 2019F 2020F 2021F
Page 18
Company Guide
Alibaba Group
Balance Sheet:
Net cash position. As of September 2018, Alibaba had a strong Leverage & Asset Turnover (x)
net cash position of Rmb34bn (Rmb138bn in debt and 0.35 0.8
0.8
Rmb172bn in cash). It recorded healthy operating cashflow of 0.30
0.7
Rmb68bn in FY3/18. 0.25 0.7
0.6
0.20
0.6
Share Price Drivers: 0.15
0.5
Rising monetisation rate on its e-commerce platform. Alibaba 0.10 0.5
mainly monetises its e-commerce platforms through online 0.05

0.4
0.4
advertising. We expect marketplace-based core commerce 0.00 0.3
(customer management and commission) revenue to deliver 2017A 2018A 2019F 2020F 2021F
CAGR of 23% over FY3/18-21F, driven by a favourable industry Gross Debt to Equity (LHS) Asset Turnover (RHS)
Capital Expenditure
trend of a shift in budgets towards “actionable ads”. We RMB m
expect Alibaba’s market share in online ads to expand from 70,000.0
28% in 2017 to 35% in 2020F. We believe algorithm upgrades 60,000.0
and recommendation feeds monetisation will provide upside to 50,000.0
its marketplace-based core commerce (customer management 40,000.0
and commission) revenue. 30,000.0
20,000.0
10,000.0
Monetisation of new retail through high-margin service fees.
0.0
Management expressed that the company is building a new 2017A 2018A 2019F 2020F 2021F
retail model from a low-margin direct sales (IP) business model, Capital Expenditure (-)
such as Hema Supermarket (盒馬鮮生), to create various ROE

showcases. The company will then offer new retail solutions
20.0%
(i.e. customer relationship management, supply chain
management, and payment services) to other retailers, and 15.0%
monetise these through high-margin service fees (i.e.
advertising fees, logistics fees, and payment fees), which will 10.0%
provide upside to EBITA margins.

5.0%
Key Risks:
Intense competition from leading e-commerce platforms. 0.0%
2017A 2018A 2019F 2020F 2021F
Alibaba may fail to bring its online presence (i.e. users) Forward PE Band
advantage from e-commerce to new retail, and may lose (x)
market share in terms of GMV to other e-commerce 38.9
+2sd: 36.8x
platforms, such as JD and Pinduoduo. 33.9
+1sd: 31.5x
Earnings drag caused by investment in new initiatives. Alibaba 28.9
Avg: 26.2x
is accelerating investments in new retail initiatives. The 23.9
earnings drag caused by investment in new initiatives may -1sd: 20.9x
largely offset the earnings growth from marketplace-based 18.9
core commerce. 13.9

-2sd: 15.6x
Apr-15 Apr-16 Apr-17 Apr-18
Company Background PB Band

(x)
Established in 1999, Alibaba has China’s largest e-commerce 10.3
platform, namely Taobao and Tmall, with 666m monthly +2sd: 9.64x
9.3
active users (MAUs) in 1HFY3/19. It has an extensive e-
+1sd: 8.45x
commerce ecosystem including Alipay, Cainiao Logistics, and 8.3
AliCloud, (1) Commerce, (2) Cloud computing, (3) Digital 7.3 Avg: 7.26x
media and entertainment (i.e. Youku Tudou and UCWeb), and 6.3
-1sd: 6.07x
(4) Innovation initiatives and others (i.e. AutoNavi) accounted 5.3
for 86%, 6%, 7%, and 1% of Alibaba's 1HFY3/19 revenue -2sd: 4.89x
4.3
respectively. Daniel Zhang is Chairman and CEO of the Mar-16 Sep-16 Mar-17 Sep-17 Mar-18 Sep-18
company, and Jack Ma is the founder. Source: Company, DBS HK
Page 19
Company Guide
Alibaba Group
Key assumptions
Rmb m F Y 3/17 F Y 3/18 F Y 3/19F F Y 3/20F F Y 3/21F

Rev enue
E-Commerce 133,880 214,020 323,028 435,427 579,593
China e-commerce (Retail, Taobao and Tmall) 114,109 176,559 244,185 316,497 403,597
Customer management (Online advertising) 79,842 114,285 142,265 174,573 208,681
Commission 34,267 46,525 61,743 73,287 90,314
Others 15,749 40,177 68,637 104,602
China e-commerce (Wholesale, 1688.com) 5,679 7,164 9,224 10,701 12,416
International e-commerce (Retail, AliExpress) 7,336 14,216 19,815 24,864 31,198
International e-commerce (Wholesale, Alibaba.com) 6,001 6,625 7,795 9,035 10,473
Cainiao logistics services 6,759 15,369 25,696 40,297
Consumer services 22,482 43,265 74,788
Other e-commerce 755 2,697 4,159 5,369 6,824
Cloud computing 6,663 13,390 22,477 34,100 49,975
Digital media and entertainment (i.e. Youku Tudou and UCWeb) 14,733 19,564 25,637 32,611 41,590
Innovation initiatives and others (i.e. AutoNavi) 2,997 3,292 4,277 5,163 6,233
T ot al 158,273 250,266 375,420 507,301 677,390
Grow t h
E-Commerce 45.0% 59.9% 50.9% 34.8% 33.1%
China e-commerce (Retail, Taobao and Tmall) 42.6% 54.7% 38.3% 29.6% 27.5%
Customer management (Online advertising) 47.2% 43.1% 24.5% 22.7% 19.5%
Commission 32.8% 35.8% 32.7% 18.7% 23.2%
Others 155.1% 70.8% 52.4%
China e-commerce (Wholesale, 1688.com) 32.4% 26.1% 28.8% 16.0% 16.0%
International e-commerce (Retail, AliExpress) 232.8% 93.8% 39.4% 25.5% 25.5%
International e-commerce (Wholesale, Alibaba.com) 10.6% 10.4% 17.7% 15.9% 15.9%
Cainiao logistics services 127.4% 67.2% 56.8%
Consumer services 92.4% 72.9%
Other e-commerce 96.1% 257.2% 54.2% 29.1% 27.1%
Cloud computing 120.7% 101.0% 67.9% 51.7% 46.6%
Digital media and entertainment (i.e. Youku Tudou and UCWeb) 270.9% 32.8% 31.0% 27.2% 27.5%
Innovation initiatives and others (i.e. AutoNavi) 64.9% 9.8% 29.9% 20.7% 20.7%
T ot al 56.5% 58.1% 50.0% 35.1% 33.5%
Gross prof it margin

E-Commerce 78.3% 69.8% 51.4% 46.8% 48.9%
Cloud computing 9.9% 10.7% 3.2% 5.8% 5.8%
Digital media and entertainment (i.e. Youku Tudou and UCWeb) -27.5% -26.4% -41.6% -39.0% -39.0%
Innovation initiatives and others (i.e. AutoNavi) -87.3% -74.3% -99.2% -99.2% -99.2%
T ot al 62.4% 57.2% 40.4% 37.1% 39.0%
Page 20
Company Guide
Alibaba Group
Sum-of-the-parts (SOTP) valuation
Business segment F Y 19F Normalised Normalised St ak e V aluat ion V aluat ion V aluat ion met hod
Rev enue NPM net prof it (US$ m) per share
(Rmb m) (Rmb m) (US$)
Core Commerce (ex new retail, 297,829 57.8% 171,996 100% 406,102 159.1 17x FY3/20F PER
consumer services, and Cainiao)
Cloud computing 34,100 18.8% 6,394 100% 15,096 5.9 17x FY3/20F PER
Other investment 85,902 33.5
Ant Financial 33% 49,500 19.4 Implied valuation from
latest round financing
Intime 100% 3,611 1.4 Fair value
Sunart 36% 4,127 1.6 Market capitalisation
Ele.me 100% 9,500 3.7 Implied valuation from
Koubei 50% 3,041 1.2 Fair value
Cainiao 51% 9,208 3.6 Implied valuation from
Youku 100% 3,500 1.4 Fair value
UC Browser 100% 3,000 1.2 Fair value
T ot al v aluat ion 198
Page 21
Company Guide
Alibaba Group
Key Assumptions
FY Mar 2017A 2018A 2019F 2020F 2021F
Annual active customers
454.0 552.0 607.3 615.1 617.6
(m)
Average annual spending
8.3 8.7 9.8 11.8 14.1
per customer
China e-commerce (Retail)
3,767.0 4,820.0 5,973.4 7,249.6 8,734.8
GMV (Rmb bn)
Monetisation rate (%) 3.0 3.7 4.1 4.4 4.6
China e-commerce (Retail)
114,109.0 176,559.0 244,184.8 316,496.6 403,597.1
revenue (Rmb m)
Segmental Breakdown (RMB m)

FY Mar 2017A 2018A 2019F 2020F 2021F
Revenues (RMB m)
E-commerce 133,880 214,020 323,028 435,427 579,593
Cloud computing 6,663 13,390 22,477 34,100 49,975
Digital media and
14,733 19,564 25,637 32,611 41,590
entertainment
Innovation initiatives and
2,997 3,292 4,277 5,163 6,233
others
Total 158,273 250,266 375,420 507,301 677,390
Gross profit (RMB m)
E-commerce 104,799 149,393 165,917 203,866 283,404
Cloud computing 657 1,434 727 1,967 2,882
Digital media and
(4,048) (5,159) (10,653) (12,734) (16,238)
entertainment
(2,618) (2,447) (4,244) (5,123) (6,184)
others
Total 98,790 143,222 151,747 187,976 263,863
Gross profit Margins (%)
E-commerce 78.3 69.8 51.4 46.8 48.9
Cloud computing 9.9 10.7 3.2 5.8 5.8
Digital media and
(27.5) (26.4) (41.6) (39.0) (39.0)
entertainment
(87.3) (74.3) (99.2) (99.2) (99.2)
others
Total 62.4 57.2 40.4 37.1 39.0
Page 22
Company Guide
Alibaba Group
Income Statement (RMB m)

FY Mar 2017A 2018A 2019F 2020F 2021F
Revenue 158,273 250,266 375,420 507,301 677,390
Cost of Goods Sold (59,483) (107,044) (223,673) (319,325) (413,527)
Gross Profit 98,790 143,222 151,747 187,976 263,863
Other Opng (Exp)/Inc (50,735) (73,414) (115,870) (129,975) (166,972)
Operating Profit 48,055 69,808 35,876 58,001 96,892
Other Non Opg (Exp)/Inc 6,086 3,666 (2,360) 0 2,360
Associates & JV Inc (5,027) (20,792) 1,877 3,805 6,774
Net Interest (Exp)/Inc 5,888 26,929 41,072 42,378 49,180
Dividend Income 0 0 0 0 0
Exceptional Gain/(Loss) 0 0 0 0 0
Pre-tax Profit 55,002 79,611 76,465 104,184 155,206
Tax (13,776) (18,199) (15,293) (20,837) (31,041)
Minority Interest 2,449 2,573 2,922 4,595 7,760
Preference Dividend 0 0 0 0 0
Net Profit 43,675 63,985 64,094 87,943 131,925
Net Profit before Except. 60,309 85,766 90,396 115,134 157,953
EBITDA 59,520 68,591 58,597 93,986 144,535
Growth
Revenue Gth (%) 56.5 58.1 50.0 35.1 33.5
EBITDA Gth (%) 21.7 15.2 (14.6) 60.4 53.8
Opg Profit Gth (%) 65.1 45.3 (48.6) 61.7 67.1
Net Profit Gth (%) (38.9) 46.5 0.2 37.2 50.0
Margins & Ratio
Gross Margins (%) 62.4 57.2 40.4 37.1 39.0
Opg Profit Margin (%) 30.4 27.9 9.6 11.4 14.3
Net Profit Margin (%) 27.6 25.6 17.1 17.3 19.5
ROAE (%) 17.5 19.7 16.0 18.4 22.5
ROA (%) 10.0 10.5 8.6 10.6 13.9
ROCE (%) 9.7 10.6 4.6 6.7 9.6
Div Payout Ratio (%) 0.0 0.0 0.0 0.0 0.0
Net Interest Cover (x) NM NM NM NM NM
Interim Income Statement (RMB m)

FY Mar 1H2017 2H2017 1H2018 2H2018 1H2019
Revenue 66,446 91,827 105,306 144,960 166,068

Gross Profit 41,579 57,211 65,844 77,378 75,562
Other Oper. (Exp)/Inc (23,720) (27,015) (31,747) (41,667) (54,041)
Other Non Opg (Exp)/Inc 2,631 3,455 3,624 42 (1,615)
Associates & JV Inc (2,035) (2,992) (2,270) (18,522) 599
Net Interest (Exp)/Inc (125) 6,013 3,360 23,569 11,328
Pre-tax Profit 18,330 36,672 38,811 40,800 31,833
Tax (4,113) (9,663) (7,372) (10,827) (5,942)
Minority Interest 956 1,493 912 1,661 2,827
Net Profit 15,173 28,502 32,351 31,634 28,718
Net profit bef Except. 25,893 34,416 43,014 42,752 46,366
Growth
Revenue Gth (%) 56.7 56.4 58.5 57.9 57.7
Opg Profit Gth (%) 54.5 72.1 90.9 18.3 (36.9)
Net Profit Gth (%) (71.7) 59.6 113.2 11.0 (11.2)
Margins
Gross Margins (%) 62.6 62.3 62.5 53.4 45.5
Opg Profit Margins (%) 26.9 32.9 32.4 24.6 13.0
Net Profit Margins (%) 22.8 31.0 30.7 21.8 17.3
Page 23
Company Guide
Alibaba Group
Balance Sheet (RMB m)

FY Mar 2017A 2018A 2019F 2020F 2021F
Net Fixed Assets 24,897 75,866 120,693 156,554 185,243

Invts in Associates & JVs 120,368 139,700 139,700 139,700 139,700
Other LT Assets 179,031 244,703 293,878 343,043 393,050
Cash & ST Invts 153,456 213,627 182,332 195,257 265,855
Inventory 0 0 0 0 0
Debtors 0 0 0 0 0
Other Current Assets 29,060 43,228 43,228 43,228 43,228
Total Assets 506,812 717,124 779,831 877,782 1,027,076
ST Debt 14,897 6,028 9,042 12,219 16,316

Creditors 0 0 0 0 0
Other Current Liab 78,874 129,782 131,386 136,930 147,134
LT Debt 76,835 119,525 119,525 119,525 119,525
Other LT Liabilities 12,085 22,350 19,266 25,149 35,978
Shareholder’s Equity 281,791 368,823 432,917 520,860 652,785
Minority Interests 42,330 70,616 67,694 63,099 55,339
Total Cap. & Liab. 506,812 717,124 779,831 877,782 1,027,076
Non-Cash Wkg. Capital (49,814) (86,554) (88,158) (93,702) (103,906)

Net Cash/(Debt) 61,724 88,074 53,765 63,513 130,014
Debtors Turn (avg days) N/A N/A N/A N/A N/A
Creditors Turn (avg days) N/A N/A N/A N/A N/A
Inventory Turn (avg days) N/A N/A N/A N/A N/A
Asset Turnover (x) 0.4 0.4 0.5 0.6 0.7
Current Ratio (x) 1.9 1.9 1.6 1.6 1.9
Quick Ratio (x) 1.6 1.6 1.3 1.3 1.6
Net Debt/Equity (X) CASH CASH CASH CASH CASH
Net Debt/Equity ex MI (X) CASH CASH CASH CASH CASH
Capex to Debt (%) 14.9 47.6 46.7 45.5 44.2
Z-Score (X) NA NA NA NA NA
Cash Flow Statement (RMB m)

FY Mar 2017A 2018A 2019F 2020F 2021F
Pre-Tax Profit 55,002 79,611 76,465 104,184 155,206

Dep. & Amort. 10,406 15,909 23,204 32,180 38,510
Tax Paid (13,776) (18,199) (15,293) (20,837) (31,041)
Assoc. & JV Inc/(loss) 5,027 20,792 (1,877) (3,805) (6,774)
(Pft)/ Loss on disposal of FAs 0 0 0 0 0
Chg in Wkg.Cap. 23,915 43,169 (1,480) 11,427 21,033
Other Operating CF 0 0 0 0 0
Net Operating CF 80,574 141,282 81,020 123,149 176,933
Capital Exp.(net) (13,676) (59,758) (60,000) (60,000) (60,000)
Other Invts.(net) (59,695) (63,946) (57,206) (57,206) (57,206)
Invts in Assoc. & JV (33,934) (40,124) 1,877 3,805 6,774
Div from Assoc & JV 0 0 0 0 0
Other Investing CF (2,214) (8,846) 0 0 0
Net Investing CF (109,519) (172,674) (115,329) (113,401) (110,432)
Div Paid 0 0 0 0 0
Chg in Gross Debt 34,166 33,821 3,014 3,177 4,097
Capital Issues 20,779 23,047 0 0 0
Other Financing CF 12,227 30,859 0 0 0
Net Financing CF 67,172 87,727 3,014 3,177 4,097
Currency Adjustments 0 0 0 0 0
Chg in Cash 38,227 56,335 (31,295) 12,925 70,598
Opg CFPS (RMB) 22.73 38.43 32.31 43.76 61.07
Free CFPS (RMB) 26.83 31.93 8.23 24.74 45.80
Page 24
Company Guide
Alibaba Group
Target Price & Ratings History
S.No. Dat e Closing 12- mt h Rat ing

USD
Pric e T arget
Pric e
217.0
1: 15-Mar-18 US$188.41 US$234.00 Buy
4 2: 9-Apr-18 US$172.57 US$234.00 Buy
197.0
3: 7-May -18 US$188.89 US$232.00 Buy
8
177.0 4: 8-May -18 US$188.89 US$232.00 Buy
1 5: 24-Aug-18 US$172.23 US$222.0 Buy
7
157.0 6: 21-Sep-18 US$162.63 US$222.0 Buy
5
7: 5-Nov -18 US$147.59 US$198.0 Buy
3 6
137.0 2 8: 18-J an-19 US$155.97 US$198.00 Buy
117.0
Dec-18
Mar-18
Jun-18
May-18
May-18
Apr-18
Sep-18
Jul-18
Nov-18
Jan-19
Feb-18
Feb-19
Aug-18
Oct-18
Source: DBS HK
Analyst: Tsz-Wang TAM, CFA
Susanna Chui
Page 25
Tencent
Version 13 | Bloomberg: 700 HK Equity | Reuters: 0700.HK
BUY Rising from the ashes

Last Traded Price ( 31 Jan 2019):HK$346.00(HSI : 27,643)
Price Target 12-mth:HK$404 (16.8% upside) China’s largest social communication platform. Tencent’s WeChat is
China’s largest social communication platform, with monthly-active-
Analyst
users (MAUs) of 1,058m as of end-June 2018. We reiterate our BUY
Tsz-Wang TAM, CFA+852 36684195, tszwangtam@dbs.com
Susanna Chui+852 36684194, susanna_chui@dbs.com call on Tencent on its solid earnings CAGR of 25% over FY17-20F,
supported by (i) mobile game growth as the game approval process has
What’s New resumed, and (ii) increasing monetisation of online advertising from
• Game revenue growth to accelerate from 2Q19, as WeChat’s Moments and Mini Program.
game approval process has resumed earlier than
expected Where we differ. Online ads catching up. Tencent has been enhancing
its position in the online advertising business from capturing
• Remain positive on advertising revenue, with ramp
“attention” to driving “action”, through partnerships with e-commerce
up of ad loads on WeChat’s Mini Program in FY19F
platforms such as JD and Meituan. However, we are positive on ad load
• Solid earnings CAGR of 25% over FY17-20F growth from under-monetised WeChat Moment and Mini Program.
• Reiterate BUY with TP of HK$404 We expect its online ad market share to increase from 11% in 2017 to
15% in 2020F and online ad revenue to deliver CAGR of 32% over
Price Relative FY17-20F.
HK$ Relative Index
512.5
287
462.5
412.5
237
Other critical factors. Online game arsenal. Regulators had stopped
accepting applications for licences for new games since March 2018.
362.5
312.5 187
262.5
212.5 137
We expect mobile game revenue growth to moderate to 25% in
162.5
112.5 87
FY18F. However, game approvals resumed in December 2018. Once
PUBG Mobile, with a monthly active user base that is 80%+ of Honour
of Kings’, receives a licence for monetisation, PUBG Mobile’s
Tencent (LHS) Relative HSI (RHS)
Forecasts and Valuation monetisation potential will be substantial in FY19F. We expect mobile
FY Dec (RMBm) 2017A 2018F 2019F 2020F
Turnover 237,760 311,562 390,211 497,675 game revenue growth to recover to 28% in FY19F and 34% in FY20F.
EBITDA 110,685 135,608 172,898 229,258
Pre-tax Profit 88,215 105,376 132,294 178,895 Valuation:
Net Profit 71,510 84,076 105,482 142,542
Net Pft (Pre Ex) (core profit) 65,126 75,293 93,992 126,364 We have a BUY call on Tencent with TP of HK$404 based on SOTP
Net Profit Gth (Pre-ex) (%) 74.0 17.6 25.5 35.1 methodology: (1) 35x FY19F net profit for core business (HK$378); and
EPS (RMB) 7.60 8.93 11.21 15.15
EPS (HK$) 8.87 10.43 13.09 17.69
(2) market value for other investments (HK$26).
Core EPS (RMB) 6.92 8.00 9.99 13.43
Core EPS (HK$) 8.08 9.34 11.66 15.68 Key Risks to Our View:
EPS Gth (%) 73.4 17.6 25.5 35.1
Core EPS Gth (%) 42.9 15.6 24.8 34.4 PUBG mobile, with increasing gamer base, has yet to receive a licence
Diluted EPS (HK$) 8.76 10.30 12.92 17.45 for monetisation to take place. Lack of new hit monetisable games is a
DPS (HK$) 0.93 1.10 1.38 1.86 risk to Tencent’s growth.
BV Per Share (HK$) 31.43 40.49 51.78 66.93
PE (X) 39.0 33.2 26.4 19.6
CorePE (X) 42.8 37.0 29.7 22.1 At A Glance
P/Cash Flow (X) 21.5 19.8 17.1 13.0 Issued Capital (m shrs) 9,520
P/Free CF (X) 24.3 22.8 20.0 15.2 Mkt. Cap (HK$m/US$m) 3,294,026 / 420,001
EV/EBITDA (X) 25.3 20.8 16.4 12.3
Major Shareholders
Net Div Yield (%) 0.3 0.3 0.4 0.5
P/Book Value (X) 11.0 8.5 6.7 5.2 Naspers Limited (%) 31.1
Net Debt/Equity (X) CASH 0.0 0.0 CASH Ma Huateng (%) 8.6
ROAE(%) 33.2 28.7 28.1 29.5 Free Float (%) 60.3
Earnings Rev (%): Nil Nil Nil 3m Avg. Daily Val. (US$m) 913.3
Other Broker Recs: B:54 S:0 H:4 ICB Industry :Technology / Software & Computer Services
ed-JS/ sa- CS /AH

Company Guide
Tencent
CRITICAL FACTORS TO WATCH Weixin and WeChat MAU (m)

1084 1089 1095
1,106
989
Critical Factors 948 889
Mobile games: Number of paying gamers and ARPU growth 790
Tencent’s online games segment accounted for 41% of FY17 632
revenue. The number of paying gamers and ARPU depends on
474
the popularity of the game titles. The number of game titles in
316
the top 10 (based on gross billings) is an indicator of mobile
158
game revenue in the medium term. Tencent’s Honour of Kings
0
(王者榮耀) has dominated the charts in the past 1-2 years. We 2016A 2017A 2018F 2019F 2020F
expect the company to diversify into other game genres, Tencent's mobile game paying gamers (m)
including casual games such as QQ Speed Mobile (QQ 飛車手 550.2
遊), strategy games such as Red Alert OL (红警 OL), as well as
561
471.2
survival games such as PUBG (絕地求生). We expect the 449 414.3 423.4
number of paying mobile gamers and ARPU to expand at

337
CAGR of 10% and 17% respectively during FY17-20F. We 248.6
expect Tencent to deliver segmental revenue CAGR of 29% 224
during FY17-20F.
112
Online advertising: Increasing monetisation 0

2016A 2017A 2018F 2019F 2020F
Tencent’s key asset, WeChat, has a massive user base (monthly
Tencent's mobile game ARPU mid-point (Rmb)
active users [MAUs]: 1,082m as at June 2018), which is
naturally good value for online ads in gaining “attention”. In 250 244.7
view of the rising expenditure for “actionable ads”, Tencent 212.8

200 185.0
has been improving its ecosystem through partnerships with e-
154.5 151.6
commerce platforms such as JD (JD US), O2O platforms such as 150
Meituan (美團, 3690 HK), and offline retailers such as Yonghui 100
(永輝超市, 601933 CH), and Carrefour China (家樂福中國).
We expect Tencent to monetise its user base further through 50
online ads. We expect its market share in online advertising to 0

increase from 11% in 2017 to 15% in 2020F, and Tencent to 2016A 2017A 2018F 2019F 2020F
deliver segmental revenue CAGR of 32% during FY17-20F. China's online advertising market (Rmb bn)
567
572
511
458 448
383
343
290
229
114
0
2016A 2017A 2018F 2019F 2020F
Tencent's share of China's online advertising market (%)

18
16.6
16 14.7
14 12.9
12
10.6
10 9.3
8
6
4
2
0
2016A 2017A 2018F 2019F 2020F
Page 27
Company Guide
Tencent
Balance Sheet:
Leverage & Asset Turnover (x)
Net debt position. As of June 2018, Tencent was in a net debt 0.6
position of Rmb35bn (Rmb169bn in debt and Rmb134bn in 0.60 0.6

0.6
cash). Operating cashflow was healthy at Rmb41bn. 0.50
0.5
0.40 0.5
0.5
Resumption of game approvals and monetisation of PUBG. 0.5

0.20 0.5
Regulators were undergoing restructuring and were not 0.4
0.10
accepting applications for licences for new games since March 0.4
2018. The resumption in December 2018 was earlier than our 0.00
2016A 2017A 2018F 2019F 2020F
0.4
expectation of 1Q19F. Once PUBG receives a licence for Gross Debt to Equity (LHS) Asset Turnover (RHS)
monetisation, PUBG’s monetisation potential will be substantial Capital Expenditure

in FY19F in view of its large gamer base, and should be a RMB m
35,000.0
catalyst. 30,000.0
25,000.0
Rising ad monetisation of WeChat. Tencent’s WeChat is well 20,000.0
positioned for online ads for “attention”. However, in view of 15,000.0
the rising budget for “actionable ads”, Tencent has been 10,000.0
improving its WeChat ecosystem through partnerships with e- 5,000.0
commerce platforms such as JD and O2O platforms such as 0.0

2016A 2017A 2018F 2019F 2020F
Meituan. We expect its market share in online advertising to
Capital Expenditure (-)
increase from 11% in 2017 to 15% in 2020. Rising ad ROE
monetisation of WeChat (i.e. Moments and Mini Program) will
be another share price driver. 30.0%
25.0%
Key Risks: 20.0%

Competition from other social-communication platforms.
15.0%
Tencent has been successful in transiting its large and sticky
user base from QQ and Qzone in the PC era to WeChat in the 10.0%
mobile era. However, successful evolution (i.e. from text- or 5.0%
picture-based communication to short-form-video-based 0.0%

2016A 2017A 2018F 2019F 2020F
communication) is not always guaranteed, amid competition
from emerging platforms such as Bytedance's Douyin. Forward PE Band
(x)
51.7
Lack of top game titles. Tencent’s Honour of Kings has been 46.7
key growth driver for its mobile game segment in the past 41.7 +2sd: 42.6x
two years. PUBG Mobile, with increasing user base, has yet to 36.7 +1sd: 36.6x
receive a licence for monetisation. 31.7
Avg: 30.6x
26.7
Slower-than-expected monetisation through online ads. The -1sd: 24.6x
21.7
market has high expectations on Tencent’s monetisation of its -2sd: 18.6x
16.7
huge user base. But the company may be cautious on these Jan-15 Jan-16 Jan-17 Jan-18 Jan-19
plans before there is an improvement in its ecosystem and PB Band

data analytics to ensure good user experience which is (x)
essential for long-term growth. 15.0
14.0
+2sd: 13.37x
13.0
Company Background 12.0 +1sd: 11.89x
Established in 1998, Tencent has China’s largest social 11.0
Avg: 10.42x
communication platform in China, namely WeChat. It has 10.0
9.0 -1sd: 8.95x
1,058m monthly active users (MAUs) as at June 2018. (1)
8.0
Value added services (PC games, mobile games, and digital 7.0
-2sd: 7.47x
content subscription), (2) online advertising, and (3) others 6.0

(i.e. payment and cloud services) accounted for 60%, 17%,
and 23% of 1H18 revenue respectively. Pony Ma, Chairman Source: Company, DBS HK
and Chief Executive Officer, is the founder of the company.
Page 28
Company Guide
Tencent
Key assumptions
Rmb m F Y 16 F Y 17 F Y 18F F Y 19F F Y 20F

Rev enue
V alue-added services 107,810 153,983 179,668 217,141 271,079
PC game 44,700 55,100 52,620 54,231 55,926
Mobile game 38,400 62,800 78,324 100,241 134,605
Social networks 24,710 36,083 48,724 62,669 80,548
Online advertising 26,970 40,439 57,905 75,258 93,895
Media brand ads 11,164 14,829 19,670 25,961 32,415
Social performance ads 15,806 25,610 35,410 45,683 56,937
Others 17,158 43,338 73,988 97,812 132,701
T ot al 151,938 237,760 311,562 390,211 497,675
Grow t h
V alue-added services 33.6% 42.8% 16.7% 20.9% 24.8%
PC game 26.7% 23.3% -4.5% 3.1% 3.1%
Mobile game 80.3% 63.5% 24.7% 28.0% 34.3%
Social networks 2.6% 46.0% 35.0% 28.6% 28.5%
Online advertising 54.4% 49.9% 43.2% 30.0% 24.8%
Media brand ads 27.1% 32.8% 32.6% 32.0% 24.9%
Social performance ads 82.0% 62.0% 38.3% 29.0% 24.6%
Others 263.1% 152.6% 70.7% 32.2% 35.7%
T ot al 47.7% 56.5% 31.0% 25.2% 27.5%
Gross prof it margin

V alue-added services 65.1% 60.1% 58.9% 57.2% 57.3%
PC game 70.0% 70.0% 70.0% 70.0% 70.0%
Mobile game 50.0% 60.0% 60.0% 60.0% 60.0%
Social networks 79.7% 45.3% 45.3% 41.6% 44.1%
Online advertising 42.9% 36.7% 33.6% 40.1% 40.1%
Media brand ads 4.6% -20.7% -41.0% -20.5% -20.5%
Social performance ads 70.0% 70.0% 77.7% 77.7% 77.8%
Others 16.0% 21.9% 23.1% 21.7% 24.2%
T ot al 55.6% 49.2% 45.7% 45.0% 45.2%
Page 29
Company Guide
Tencent
Tencent's sum-of-the-parts (SOTP) valuation
Business segment F Y 19F Normalised Normalised St ak e V aluat ion V aluat ion V aluat ion met hod
Rev enue NPM net prof it (HK $ m) per share
(Rmb m) (Rmb m) (HK $)
Core business 390,211 24.1% 93,992 100% 3,554,715 377.7 35x FY19F PE
Other investment 244,282 26.0
J D (J D US) 18% 51,603 5.5 Market capitalisation
Meituan Dianping (3690 HK) 19% 46,713 5.0 Market capitalisation
Didi 10% 41,357 4.4 Historical transaction value
Supersell 39% 32,481 3.5 Historical transaction value
58.com (WUBA US) 23% 14,622 1.6 Market capitalisation
Tesla (TSLA US) 5% 22,448 2.4 Market capitalisation
Spotify (SPOT US) 8% 11,932 1.3 Market capitalisation
Sogou (SOGO US) 44% 7,461 0.8 Market capitalisation
Snap (SNAP US) 10% 5,790 0.6 Market capitalisation
Yonghui Supermarket (601933 CH) 5% 4,287 0.5 Market capitalisation
Heilan Home (600398 CH) 5% 2,169 0.2 Market capitalisation
Kingsoft (3888 HK) 8% 1,252 0.1 Market capitalisation
Cheetah (CMCM US) 17% 1,159 0.1 Market capitalisation
BitAuto (BITA US) 8% 1,009 0.1 Market capitalisation
T ot al v aluat ion 404
Page 30
Company Guide
Tencent
Key Assumptions
FY Dec 2016A 2017A 2018F 2019F 2020F
Weixin and WeChat MAU
889.3 988.6 1,083.8 1,089.2 1,094.6
(m)
Tencent's mobile game
248.6 414.3 423.4 471.2 550.2
paying gamers (m)
Tencent's mobile game
154.5 151.6 185.0 212.8 244.7
ARPU mid-point (Rmb)
China's online advertising
290.3 382.8 447.9 510.6 566.7
market (Rmb bn)
Tencent's share of China's
online advertising market 9.3 10.6 12.9 14.7 16.6
(%)

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenues (RMB m)
Value added services (VAS) 107,810 153,983 179,668 217,141 271,079
Others 17,158 43,338 73,988 97,812 132,701
Total 151,938 237,760 311,562 390,211 497,675
Value added services (VAS) 70,188 92,594 105,904 124,193 155,452
Others 2,737 9,478 17,077 21,185 32,060
Total 84,499 116,925 142,437 175,563 225,149
Value added services (VAS) 65.1 60.1 58.9 57.2 57.3
Online advertising 42.9 36.7 33.6 40.1 40.1
Others 16.0 21.9 23.1 21.7 24.2
Total 55.6 49.2 45.7 45.0 45.2
Page 31
Company Guide
Tencent

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenue 151,938 237,760 311,562 390,211 497,675
Gross Profit 84,499 116,925 142,437 175,563 225,149
Other Non Opg (Exp)/Inc 3,594 20,140 26,422 33,130 42,302
Associates & JV Inc (2,522) 821 2,794 5,652 9,953
Net Interest (Exp)/Inc 664 1,032 1,565 911 467
Pre-tax Profit 51,640 88,215 105,376 132,294 178,895
Tax (10,193) (15,744) (20,096) (25,230) (34,117)
Minority Interest (352) (961) (1,204) (1,583) (2,236)
Net Profit 41,095 71,510 84,076 105,482 142,542
EBITDA 63,622 110,685 135,608 172,898 229,258
Growth
Revenue Gth (%) 47.7 56.5 31.0 25.2 27.5
EBITDA Gth (%) 51.0 74.0 22.5 27.5 32.6
Opg Profit Gth (%) 37.0 32.7 12.6 24.1 36.3
Net Profit Gth (%) 42.7 74.0 17.6 25.5 35.1
Margins & Ratio
Gross Margins (%) 55.6 49.2 45.7 45.0 45.2
Opg Profit Margin (%) 32.8 27.9 23.9 23.7 25.4
Net Profit Margin (%) 27.0 30.1 27.0 27.0 28.6
ROAE (%) 27.9 33.2 28.7 28.1 29.5
ROA (%) 11.7 15.0 13.8 14.4 16.2
ROCE (%) 15.8 14.9 13.0 13.4 15.1
Div Payout Ratio (%) 12.3 10.6 10.6 10.6 10.6

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 67,686 84,252 106,158 131,602 147,203

Gross Profit 39,045 45,454 53,749 63,176 71,488
Associates & JV Inc (1,381) (1,141) (180) 454 1,320
Net Interest (Exp)/Inc 461 203 117 0 0
Pre-tax Profit 25,478 26,162 44,245 58,027 66,422
Tax (5,330) (4,863) (8,305) (10,356) (12,667)
Minority Interest (228) (124) (356) (632) (759)
Net Profit 19,920 21,175 35,584 47,039 52,996
Net profit bef Except. 21,351 24,069 33,479 42,760 49,868
Growth
Revenue Gth (%) 47.7 47.7 56.8 56.2 38.7
Opg Profit Gth (%) 44.7 30.2 45.4 86.3 44.9
Net Profit Gth (%) 40.3 44.9 78.6 122.1 48.9
Margins
Gross Margins (%) 57.7 54.0 50.6 48.0 48.6
Net Profit Margins (%) 29.4 25.1 33.5 35.7 36.0
Page 32
Company Guide
Tencent

FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 13,900 23,597 35,603 50,613 71,003

Other LT Assets 147,131 202,683 250,695 298,729 341,830
Cash & ST Invts 129,286 148,251 132,161 125,525 161,289
Inventory 263 295 413 524 665
Debtors 10,152 16,549 21,686 27,160 34,640
Total Assets 395,899 554,672 668,137 794,412 965,570
ST Debt 15,744 20,448 26,795 33,559 42,801

Creditors 27,413 50,085 70,101 88,970 112,959
LT Debt 93,753 113,611 113,611 113,611 113,611
Minority Interests 11,623 21,019 22,223 23,806 26,042
Total Cap. & Liab. 395,899 554,672 668,137 794,412 965,570

Net Cash/(Debt) 19,789 14,192 (8,245) (21,645) 4,876
Debtors Turn (avg days) 20.7 20.5 22.4 22.8 22.7
Creditors Turn (avg days) 143.6 145.3 159.7 167.7 166.2
Inventory Turn (avg days) 1.6 1.0 0.9 1.0 1.0
Asset Turnover (x) 0.4 0.5 0.5 0.5 0.6
Current Ratio (x) 1.5 1.2 0.9 0.8 0.8
Quick Ratio (x) 1.3 1.1 0.8 0.7 0.7
Net Debt/Equity (X) CASH CASH 0.0 0.0 CASH
Net Debt/Equity ex MI (X) CASH CASH 0.0 0.1 CASH
Capex to Debt (%) 7.0 10.9 13.6 16.3 19.5

FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 51,640 88,215 105,376 132,294 178,895

Dep. & Amort. 12,646 23,502 31,797 41,515 50,829
Tax Paid (10,193) (15,744) (20,096) (25,230) (34,117)
Assoc. & JV Inc/(loss) 2,522 (821) (2,794) (5,652) (9,953)
Chg in Wkg.Cap. 28,443 34,272 26,867 20,365 28,629
Net Operating CF 85,058 129,424 141,150 163,292 214,283
Capital Exp.(net) (7,643) (14,577) (19,102) (23,924) (30,512)
Other Invts.(net) (77,054) (67,604) (70,006) (77,442) (78,280)
Invts in Assoc. & JV (15,876) (63,461) (61,488) (58,630) (54,329)
Other Investing CF (8,159) (6,570) (2,707) (3,193) (5,528)
Net Investing CF (108,732) (152,212) (153,302) (163,189) (168,649)
Div Paid (5,052) (7,610) (8,947) (11,225) (15,169)
Chg in Gross Debt 44,168 24,562 6,347 6,764 9,242
Capital Issues 18,546 17,550 (1,337) (2,278) (3,944)
Other Financing CF 9,206 8,435 0 0 0
Net Financing CF 66,868 42,937 (3,937) (6,739) (9,871)
Chg in Cash 43,194 20,149 (16,090) (6,636) 35,764
Opg CFPS (RMB) 6.04 10.11 12.14 15.19 19.73
Free CFPS (RMB) 8.26 12.20 12.97 14.81 19.53
Page 33
Company Guide
Tencent
HK$ S.No. Dat e Closing 12- mt h Rat ing

Price T arget
Price
476.0
1: 15-Mar-18 HK$462.80 HK$512.00 Buy
1 2&3 5 2: 22-Mar-18 HK$462.60 HK$560.00 Buy
426.0 6
3: 22-Mar-18 HK$462.60 HK$560.00 Buy
8 9
376.0 4 4: 3-Apr-18 HK$409.40 HK$560.00 Buy
11 12 5: 17-May-18 HK$396.20 HK$540.00 Buy
326.0 6: 21-May-18 HK$396.20 HK$540.00 Buy
7 7: 16-Aug-18 HK$336.00 HK$428.00 Buy
276.0 8: 20-Aug-18 HK$337.00 HK$428.00 Buy
10 9: 28-Aug-18 HK$361.00 HK$410.00 Buy
226.0 10: 12-Nov-18 HK$279.20 HK$336.00 Buy
Dec-18
Mar-18
Jun-18
May-18
Apr-18
Sep-18
Jul-18
Jan-18
Nov-18
Jan-19
Jan-19
Feb-18
Aug-18
Oct-18
11: 3-J an-19 HK$306.60 HK$404.00 Buy

12: 18-J an-19 HK$331.20 HK$404.00 Buy
Source: DBS HK
Analyst: Tsz-Wang TAM, CFA
Susanna Chui
Page 34
JD.com Inc
Version 15 | Bloomberg: JD US Equity | Reuters: JD.O
HOLD Losing ground

Last Traded Price ( 31 Jan 2019):US$24.85(NASDAQ : 7,282)
Price Target 12-mth:US$25.00 (0.6% upside) China’s second-largest e-commerce platform. JD is China’s second-
largest e-commerce platform, with 314m annual active customers as at
Analyst
Susanna Chui+852 36684194, susanna_chui@dbs.com end-June 2018. We have a HOLD call on JD, as JD’s GMV growth has
Tsz-Wang TAM, CFA+852 36684195, tszwangtam@dbs.com started to underperform Alibaba’s, amid intensifying competition in the
apparel category and its diminishing advantage in the new retail
What’s New environment. Its profitability has been improving at a slower pace, as
• Intensifying competition in apparel category GMV growth is moderating and investments accelerate.
weighing on GMV growth
• JD’s logistical advantage over Alibaba’s to Where we differ: Intensifying competition in apparel sector weighing
diminish in this new retail era versus e-commerce on GMV growth; JD’s logistical advantage over Alibaba to diminish in
era the new retail environment versus e-commerce. JD’s GMV growth has
started to underperform Alibaba’s, with moderate market growth in
• Moderating GMV growth and accelerating
electronics and home appliance category, and intensifying competition
investments will be a drag on margins
in the apparel category. Furthermore, our proprietary research
• Maintain HOLD with TP of US$25 concluded that JD’s logistical advantage over Alibaba would diminish in
the new retail environment versus e-commerce era. We expect JD’s
Price Relative
US$ Relative Index market share in terms of GMV to drop from 16% in 2017 to 15% in
52.3 207 2020F. We expect JD’s revenue growth to moderate from 40% in FY17
to 26%/16% in FY18F/FY19F, versus consensus’ 27%/19%.
47.3 187
167
42.3
147
37.3
127
32.3
27.3
107
87
Other critical factors: Moderating GMV growth and accelerating
investments will be a drag on margins. We expect weaker margins on
22.3 67
17.3 47
moderating sales growth, and accelerating investments in new

JD.com Inc (LHS) Relative NASDAQ (RHS)

initiatives (entry into lower tier cities, product category expansion, and
Forecasts and Valuation retail infrastructure [technology and logistics]) in response to Alibaba’s
FY Dec (RMBm) 2017A 2018F 2019F 2020F
Turnover 362,332 458,103 530,520 606,930 rising traction in new retail and Pinduoduo's success in lower tier cities.
EBITDA 332 (5,040) (3,353) (1,139) We expect net margins to decline from 1.4% in FY17 to 0.4%/0.8% in
Pre-tax Profit 121 (4,009) (2,601) (737)
Net Profit (152) (3,997) (2,593) (645)
FY18F/FY19F, versus consensus’ 0.5%/0.9%.
Net Pft (Pre Ex) (core profit) 4,968 2,007 4,079 6,732
Net Profit Gth (Pre-ex) (%) 92.4 (2,525.1) 35.1 75.1 Valuation:
EPS (RMB) (0.11) (2.81) (1.82) (0.45) We have a HOLD call on JD with TP of US$25 based on SOTP
EPS (US$) (0.02) (0.42) (0.27) (0.07) methodology: (1) 0.3x price-to-sales ratio for e-commerce (US$16); and
Core EPS (RMB) 3.49 1.41 2.87 4.73
Core EPS (US$) 0.52 0.21 0.43 0.71 (2) market values for JD Finance and JD Logistics (US$9).
EPS Gth (%) 92.5 (2,525.1) 35.1 75.1
Core EPS Gth (%) 136.8 (59.6) 103.2 65.0 Key Risks to Our View:
Diluted EPS (US$) (0.02) (0.41) (0.27) (0.07) Intensifying competition from leading e-commerce platforms.
DPS (US$) 0.00 0.00 0.00 0.00
BV Per Share (US$) 5.46 5.04 4.77 4.70
PE (X) nm nm nm nm At A Glance
CorePE (X) 47.7 118.0 58.1 35.2 Issued Capital (m shrs) 1,252
P/Cash Flow (X) 12.8 91.3 55.7 43.7 Mkt. Cap (US$m) 31,118
P/Free CF (X) 18.2 nm nm nm Major Shareholders
EV/EBITDA (X) 671.0 nm nm nm
Net Div Yield (%) 0.0 0.0 0.0 0.0 Richard Qiangdong Liu (%) 15.4
P/Book Value (X) 4.6 4.9 5.2 5.3 Tencent (%) 18.0
Net Debt/Equity (X) CASH CASH CASH CASH Walmart (%) 10.1
ROAE(%) (0.4) (8.0) (5.5) (1.4) Free Float (%) 56.5
Earnings Rev (%): Nil Nil Nil 53.1
3m Avg. Daily Val. (US$m)
Other Broker Recs: B:16 S:1 H:24 ICB Industry :Consumer Services / General Retailers
ed-JS/ sa- CS /AH

Company Guide
JD.com Inc
CRITICAL FACTORS TO WATCH Annual active customers (m)

381
385
349
Gross merchandise value (GMV) 275 263
Gross merchandise value (GMV) is one of the key indicators of 220 196
revenue. JD’s GMV growth has started to underperform
165
Alibaba’s, with moderate market growth in electronics and
110
home appliance category, and intensifying competition in the
55
apparel category. Furthermore, our proprietary research
0
concluded that JD’s logistical advantage over Alibaba’s would 2016A 2017A 2018F 2019F 2020F
diminish during the new retail environment versus e-commerce Average annual spending per customer (Rmb)
era. We expect JD’s market share in terms of GMV to drop 4,210.7
4,295 4,076.6
from 16% in 2017 to 15% in 2020F. We expect JD to deliver 3,803.6
3,940.4
GMV CAGR of 17% during FY17-20F: 3,436 3,364.6
(1) Growth in annual active customers: We expect JD to

2,577
deliver annual active customer CAGR of 13% during
FY17-20F, supported by JD's partnership with Tencent 1,718
(JD’s largest shareholder), granting JD entry into WeChat

859
to drive its customer base.
(2) Growth in average annual spending per customer: We 0
2016A 2017A 2018F 2019F 2020F
expect JD to deliver average annual spending per customer
Average 1P revenue per customer (Rmb)
CAGR of 3% during FY17-20F, amid intensifying
competition in apparel category. 1,423
1,305.2
1,350.4
1,394.9
1,216.3 1,259.8
1,138
Third party marketplace (3P) monetisation
3P monetisation is another key indicator of revenue. JD’s third- 854
party marketplace (3P) GMV is mainly monetised through 569

transaction-based commissions, online advertising, and logistics
services. We expect first-party direct sales (1P)/ third-party 285
marketplace (3P) revenue per customer to expand by 4%/19% 0

CAGR during FY17-20F. The faster growth of 3P revenue per 2016A 2017A 2018F 2019F 2020F
customer will be driven by increasing contribution from online Average 3P revenue per customer (Rmb)
advertising and logistics services from merchants. 199
197
169
Non-GAAP net margin 159

141
We expect weaker margins on moderating scale growth in JD 120 104

116
Mall, and accelerating investments in new initiatives (entry into

80
lower tier cities, product category expansion, and retail
infrastructure [technology and logistics]) in response to 40
Alibaba’s traction in new retail and Pinduoduo's success in

0
lower tier cities. We expect net margin to decline from 1.4% in 2016A 2017A 2018F 2019F 2020F
FY17 to 0.4%/0.8% in FY18F/FY19F.
Non-GAAP net margin (%)
2
1 1.37
1 1.11
1
0.8 0.77
1
1
0.44
0
0
2016A 2017A 2018F 2019F 2020F
Balance Sheet:
Page 36
Company Guide
JD.com Inc
Net cash position. As at end-June 2018, JD had a net cash

position of Rmb34.1bn (Rmb18.7bn debt and Rmb52.8bn Leverage & Asset Turnover (x)
cash). Management disclosed that it will increase capex on its 0.80
2.7
logistics business. 0.70 2.6
0.60
2.5
2.4
GMV market share gain. JD’s GMV growth has started to 0.40
underperform Alibaba’s, with moderate market growth in 0.30 2.3

0.20
electronics and home appliance category, but intensifying 2.2
0.10
competition in the apparel category. Furthermore, our 0.00 2.1
proprietary research concluded JD’s logistical advantage over 2016A 2017A 2018F 2019F 2020F
Alibaba would diminish during the new retail environment Gross Debt to Equity (LHS) Asset Turnover (RHS)
Capital Expenditure
versus e-commerce era. We expect JD’s market share in terms RMB m
of GMV to drop from 16% in 2017 to 15% in 2020F. 10,000.0
9,000.0
However, successful expansion in lower tier cities and product 8,000.0
categories will provide upside to GMV. 7,000.0
6,000.0
5,000.0
Margin expansion. We expect FY18F non-GAAP net margin to 4,000.0
3,000.0
decline from 1.4% in FY17 to 0.4%/0.8% in FY18F/FY19F, on 2,000.0
JD Mall’s moderating expansion pace, and accelerating 1,000.0
0.0
investments in new initiatives. However, JD Logistics Asset 2016A 2017A 2018F 2019F 2020F
Management’s monetisation through asset sales, will provide Capital Expenditure (-)
upside to margins. ROE

-0.4%
2016A 2017A 2018F 2019F 2020F
-1.4%
Key Risks: -2.4%
Intense competition from leading e-commerce platforms. JD -3.4%
may fail to carry over its logistical advantage from e- -4.4%
commerce to new retail, and may lose market share in terms -5.4%
of GMV to other e-commerce platforms, such as Alibaba and -6.4%
Pinduoduo. -7.4%
-8.4%
Investment in new initiatives may result in continuous margin -9.4%
decline. JD is accelerating investments in new initiatives (lower Forward PE Band

tier cities, product category expansion, and retail (x)
infrastructure [technology and logistics]) in response to 424.3
Alibaba’s traction in new retail and Pinduoduo's success in

374.3
324.3
lower tier cities. The drag on margins from investments in new 274.3 +2sd: 285.3x
initiatives may be larger than potential margin improvement 224.3
+1sd: 206.8x
after JD Logistics Asset Management’s monetisation through 174.3
asset sales, which may lead to a continuous decline in 124.3 Avg: 128.4x
74.3
margins. 24.3
-1sd: 49.9x
-25.7
Feb-15 Feb-16 Feb-17 Feb-18
Company Background
Established in 1998, JD is the second largest e-commerce PB Band
(x)
platform in China, with 314m annual active customers as at
10.5
end-June 2018. In 2004, JD started its direct-sales (1P) B2C e-
9.5 +2sd: 9.72x
commerce platform of 3C (computer, communication &
8.5 +1sd: 8.48x
consumer electronics) products in China. In 2010, JD
7.5
introduced a third-party (3P) B2C e-commerce platform. (1) Avg: 7.23x
6.5
Direct-sales (1P) and (2) third-party marketplace (3P) revenue -1sd: 5.99x
5.5
accounted for 91% and 9% of 1H18 revenue respectively.
4.5
-2sd: 4.74x
Richard Liu, Chairman and Chief Executive Officer, is the
3.5
founder of the company. Feb-15 Feb-16 Feb-17 Feb-18
Page 37
Company Guide
JD.com Inc
Key assumptions
Rmb m F Y 16A F Y 17A F Y 18F F Y 19F F Y 20F

Rev enue
Direct-sale (1P) 237,944 331,824 413,330 471,616 531,711
Third party (3P) 20,346 30,507 44,773 58,904 75,220
T ot al 258,290 362,332 458,103 530,520 606,930
Grow t h
Direct-sale (1P) 41.7% 39.5% 24.6% 14.1% 12.7%
Third party (3P) 55.2% 49.9% 46.8% 31.6% 27.7%
T ot al 42.7% 40.3% 26.4% 15.8% 14.4%
GPM
Direct-sale (1P) 6.3% 7.6% 8.1% 8.3% 8.6%
Third party (3P) 100.0% 84.4% 66.3% 58.3% 52.1%
T ot al 13.7% 14.0% 13.8% 13.9% 14.0%
Source: Company, DBS Vickers
F Y 19F Rev enue V aluat ion V aluat ion per

St ak e V aluat ion met hod
(Rmb m) (Rmb m) share (US$)
E-commerce 530,520 100% 159,156 16 0.3x FY19F PSR
J D Logistics 81% 76,190 7 Implied valuation from Series A financing
J D Finance 40% 18,660 2 Implied valuation from Series A financing
T ot al V aluat ion 135,643 25
Source: Company, DBS Vickers
Page 38
Company Guide
JD.com Inc
Key Assumptions
FY Dec 2016A 2017A 2018F 2019F 2020F
Annual active customers
195.6 263.4 316.7 349.2 381.2
(m)
Average annual spending
3,364.6 3,803.6 3,940.4 4,076.6 4,210.7
per customer (Rmb)
Average 1P revenue per
1,216.3 1,259.8 1,305.2 1,350.4 1,394.9
customer (Rmb)
Average 3P revenue per
104.0 115.8 141.4 168.7 197.3
customer (Rmb)
Non-GAAP net margin
0.8 1.4 0.4 0.8 1.1
(%)

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenues (RMB m)
Direct sales (1P) 237,944 331,824 413,330 471,616 531,711
Thirty-party marketplace
20,346 30,507 44,773 58,904 75,220
(3P)
Total 258,290 362,332 458,103 530,520 606,930
Direct sales (1P) 15,026 25,104 33,362 39,245 45,575
20,346 25,738 29,678 34,367 39,191
(3P)
Total 35,373 50,842 63,040 73,612 84,766
Direct sales (1P) 6.3 7.6 8.1 8.3 8.6
100.0 84.4 66.3 58.3 52.1
(3P)
Total 13.7 14.0 13.8 13.9 14.0
Page 39
Company Guide
JD.com Inc

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenue 258,290 362,332 458,103 530,520 606,930
Gross Profit 35,373 50,842 63,040 73,612 84,766
Operating Profit (1,252) (835) (6,476) (5,234) (3,604)
Associates & JV Inc (2,782) (1,927) (2,006) (1,825) (1,517)
Net Interest (Exp)/Inc 608 1,567 2,809 2,530 2,179
Pre-tax Profit (1,882) 121 (4,009) (2,601) (737)
Tax (166) (140) 12 8 92
Minority Interest 48 (134) 0 0 0
Net Profit (2,000) (152) (3,997) (2,593) (645)
EBITDA (881) 332 (5,040) (3,353) (1,139)
Growth
Revenue Gth (%) 42.7 40.3 26.4 15.8 14.4
EBITDA Gth (%) 78.9 N/A N/A 33.5 66.0
Opg Profit Gth (%) (52.0) (33.3) 675.1 (19.2) (31.1)
Net Profit Gth (%) 74.1 92.4 (2,525.1) 35.1 75.1
Margins & Ratio
Gross Margins (%) 13.7 14.0 13.8 13.9 14.0
Opg Profit Margin (%) (0.5) (0.2) (1.4) (1.0) (0.6)
Net Profit Margin (%) (0.8) 0.0 (0.9) (0.5) (0.1)
ROAE (%) (6.2) (0.4) (8.0) (5.5) (1.4)
ROA (%) (1.6) (0.1) (2.1) (1.2) (0.3)
ROCE (%) (2.4) 0.2 (8.3) (6.8) (4.6)
Div Payout Ratio (%) N/A N/A N/A N/A N/A

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 118,705 139,585 168,420 193,912 222,419

Gross Profit 15,886 19,487 23,482 27,361 30,700
Operating Profit (679) (573) 258 (1,094) (1,029)
Other Non Opg (Exp)/Inc 0 79 0 1,157 618
Associates & JV Inc (1,244) (1,538) (893) (1,034) (757)
Net Interest (Exp)/Inc 1,706 367 675 1,051 683
Pre-tax Profit (217) (1,665) 41 80 (486)
Tax (64) (103) (73) (66) (314)
Minority Interest 9 39 44 91 112
Net Profit (272) (1,729) 12 105 (687)
Net profit bef Except. 805 1,264 2,298 2,670 1,047
Growth
Revenue Gth (%) 43.8 41.4 41.9 38.9 32.1
Opg Profit Gth (%) (56.1) (73.5) (138.1) 90.9 (498.5)
Net Profit Gth (%) 77.7 78.8 N/A N/A N/A
Margins
Gross Margins (%) 13.4 14.0 13.9 14.1 13.8
Opg Profit Margins (%) (0.6) (0.4) 0.2 (0.6) (0.5)
Net Profit Margins (%) (0.2) (1.2) 0.0 0.1 (0.3)
Page 40
Company Guide
JD.com Inc

FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 7,023 12,574 19,592 27,719 37,017

Other LT Assets 31,789 37,901 35,952 34,179 32,305
Cash & ST Invts 46,563 38,386 37,539 36,231 35,165
Inventory 28,909 41,700 52,889 61,168 69,904
Debtors 16,141 16,359 20,683 23,953 27,403
Total Assets 160,374 184,055 201,783 216,554 233,581
ST Debt 11,109 12,885 16,291 18,866 21,583

Creditors 46,036 74,338 94,283 109,042 124,616
LT Debt 9,149 10,923 10,923 10,923 10,923
Minority Interests 7,327 348 348 348 348
Total Cap. & Liab. 160,374 184,055 201,783 216,554 233,581

Net Cash/(Debt) 26,304 14,579 10,325 6,443 2,659
Asset Turnover (x) 2.1 2.1 2.4 2.5 2.7
Current Ratio (x) 1.0 1.0 0.9 0.9 0.9
Quick Ratio (x) 0.6 0.5 0.4 0.4 0.4
Capex to Debt (%) 3.9 23.3 25.8 27.3 28.6

FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit (1,882) 121 (4,009) (2,601) (737)

Dep. & Amort. 1,609 1,778 1,778 1,778 1,778
Tax Paid (166) (140) 12 8 92
Assoc. & JV Inc/(loss) 2,782 1,927 2,006 1,825 1,517
Chg in Wkg.Cap. 3,966 14,845 2,806 3,240 2,769
Net Operating CF 6,309 18,531 2,593 4,249 5,418
Capital Exp.(net) (790) (5,551) (7,018) (8,127) (9,298)
Other Invts.(net) (19,784) (7,727) 0 0 0
Invts in Assoc. & JV (8,546) (5,849) 0 0 0
Other Investing CF (2,013) (163) 172 (5) 96
Net Investing CF (31,134) (19,289) (6,846) (8,132) (9,202)
Div Paid 0 0 0 0 0
Chg in Gross Debt 13,885 3,549 3,406 2,575 2,717
Capital Issues 5,215 18,300 0 0 0
Other Financing CF 7,375 (7,113) 0 0 0
Net Financing CF 26,475 14,736 3,406 2,575 2,717
Chg in Cash 1,649 13,978 (848) (1,307) (1,066)
Opg CFPS (RMB) 1.67 2.59 (0.15) 0.71 1.86
Free CFPS (RMB) 3.94 9.13 (3.11) (2.73) (2.73)
Page 41
Company Guide
JD.com Inc
USD S.No. Dat e Closing 12- mt h Rat ing

Pric e T arget
48.0 Pric e
1: 5-Mar-18 US$46.21 US$61.00 Buy
43.0
2: 5-Mar-18 US$46.21 US$61.00 Buy
38.0 3 3: 9-Mar-18 US$44.41 US$61.00 Buy
6
4 4: 15-Mar-18 US$44.32 US$61.00 Buy
33.0 9 5: 30-J ul-18 US$36.64 US$55.00 Buy
8
6: 17-Aug-18 US$32.36 US$43.00 Buy
28.0 1&2
5 7: 20-Aug-18 US$31.97 US$43.00 Buy
23.0 7 8: 16-Nov -18 US$24.20 US$25.00 Buy
9: 18-J an-19 US$22.14 US$25.00 Hold
18.0
Dec-18
Mar-18
May-18
May-18
Jun-18
Sep-18
Apr-18
Jul-18
Nov-18
Jan-19
Feb-18
Feb-19
Oct-18
Aug-18
Source: DBS HK
Analyst: Susanna Chui
Tsz-Wang TAM, CFA
Page 42
Kingsoft Corp
Version 7 | Bloomberg: 3888 HK EQUITY | Reuters: 3888.hk
BUY JX3 Mobile to support recovery in FY19F

Last Traded Price ( 31 Jan 2019):HK$14.90(HSI : 27,942) Dual growth engines of online games and Kingsoft Cloud. We have a
Price Target 12-mth:HK$18.00 (20.8% upside) BUY recommendation on Kingsoft, which is a leading online game
Analyst developer in China. We like Kingsoft’s strong PC game intellectual
Susanna Chui+852 36684194, susanna_chui@dbs.com
property (IP), and its JX series (劍俠系列), which continues to succeed
Tsz-Wang TAM, CFA+852 36684195, tszwangtam@dbs.com
in mobile versions, is a near-term earnings driver. We also see strong
What’s New potential for Kingsoft Cloud, with next round financing as a share price
• Expect online game revenue growth to recover to catalyst.
34% y-o-y in FY19F, versus FY18’s -21%; JX3 Mobile Where we differ. JX3 Mobile to support earnings recovery in FY19F.
(converted from JX3 Online and published by We are bullish on online game developers which still have a PC-to-
Tencent) will be launched in 2Q19 mobile game pipeline in 2019F such as Kingsoft. We expect the
• Kingsoft Cloud revenue to grow 48% y-o-y in FY19F, company’s online game revenue growth to decline 21% y-o-y in
with operating margin improvement FY18F, due to maturity of JX1 Mobile (劍俠情緣1 手遊) amid
• WPS revenue to grow 40% y-o-y in FY19F; on track to competition from survival game PUBG Mobile (绝地求生手遊), and
be listed on Shenzhen Stock Exchange delay of JX2 Mobile & JX3 Mobile. However, the company expects JX3
Mobile (converted from JX3 Online [a top 10 PC game in China] and
• Reiterate BUY with TP of HK$18
published by Tencent) to be published by Tencent in 2Q19F. We expect
Price Relative its monthly gross billings to be at least the same as JX1 Mobile’s. We
HK$ Relative Index
expect mobile game revenue growth to recover to 34% y-o-y in FY19F.
34.1 209
29.1
189
169
Other critical factors Kingsoft Cloud to continue to gain market share
24.1 149
129
with improving profitability. We expect Kingsoft Cloud, as one of the
top 3-5 IaaS cloud vendors in China, to gain market share with
19.1 109
89
14.1
9.1
69
49
improving profitability. We expect Kingsoft’s revenue from Kingsoft
Cloud to grow 60%/48% in FY18F/FY19F (market share to expand
Kingsoft Corp (LHS) Relative HSI (RHS)

from 9% in FY18 to 10% in FY19F), with operating profit margin
Forecasts and Valuation
improvement. Kingsoft Cloud completed its series D financing in
FY Dec (RMBm) 2017A 2018F 2019F 2020F
Turnover 5,181 5,619 7,880 9,884 December 2017. Valuation of Kingsoft’s 52% stake in Kingsoft Cloud
EBITDA 1,481 389 1,501 1,991 was 73% higher than that in series C financing. The next round
Pre-tax Profit 3,430 48 1,012 1,523
Net Profit 3,202 (84) 716 1,150 financing will be a catalyst to Kingsoft’s valuation.
Net Pft (Pre Ex) (core profit) 1,064 (84) 716 1,150
Net Profit Gth (Pre-ex) (%) N/A N/A N/A 60.5 Valuation:
EPS (RMB) 2.48 (0.07) 0.56 0.89 Our TP of HK$18 is derived from SOTP valuation: (1) 10x FY19F net
EPS (HK$) 2.90 (0.08) 0.65 1.04 profit from online games (HK$6); (2) 10x FY19F net profit from office
Core EPS (RMB) 0.82 (0.07) 0.56 0.89
Core EPS (HK$) 0.96 (0.08) 0.65 1.04 software (HK$2); (3) valuation from series D financing for Kingsoft
EPS Gth (%) N/A N/A N/A 60.5 Cloud (HK$6); and (5) FY19F net cash (HK$4).
Core EPS Gth (%) N/A N/A N/A 60.5
Diluted EPS (HK$) 2.90 (0.08) 0.65 1.04 Key Risks to Our View:
DPS (HK$) 0.11 0.11 0.11 0.11
BV Per Share (HK$) 10.83 10.64 11.17 12.09
Competition from other mobile games with strong IPs and other game
PE (X) 5.1 nm 23.0 14.3 genres (such as survival games).
CorePE (X) 15.5 nm 23.0 14.3
P/Cash Flow (X) 12.6 nm 20.6 13.9 At A Glance
P/Free CF (X) 21.9 nm nm 135.7
EV/EBITDA (X) 7.2 30.2 7.9 5.9 Issued Capital (m shrs) 1,373
Net Div Yield (%) 0.7 0.7 0.7 0.7 Mkt. Cap (HK$m/US$m) 20,454 / 2,608
P/Book Value (X) 1.4 1.4 1.3 1.2 Major Shareholders
Net Debt/Equity (X) CASH CASH CASH CASH
Lei Jun (%) 25.9
ROAE(%) 32.1 (0.7) 5.9 8.9
Earnings Rev (%): Nil Nil Nil Kau Pak Kwan (%) 7.9
Consensus EPS (RMB) 0.20 0.65 0.81 Tencent Holdings Limited (%) 7.8
Other Broker Recs: B:25 S:0 H:3 Free Float (%) 58.4
Source of all data on this page: Company, DBS Bank (Hong Kong) Limited 3m Avg. Daily Val. (US$m) 15.2
(“DBS HK”), Thomson Reuters ICB Industry :Technology / Software & Computer Services
ed-JS/ sa- CS /AH

Company Guide
Kingsoft Corp
CRITICAL FACTORS TO WATCH Online game's monthly average paying accounts (APA, m)
5.45
5.50
Critical Factors 4.71
4.72
4.2
Online games’ APA and ARPU growth 3.93
4.14
3.93
Average paying accounts (APA) and average revenue per 3.14

paying user (ARPU) are key indicators of online game revenue.
2.36
Kingsoft’s online games’ monthly APA decreased 1%/5% y-oy
1.57
in FY17/FY18F, while ARPU increased 24% in FY17 but
0.79
decreased 17% in FY18F, as JX1 Mobile (劍俠情缘 1 手游) has
0.00
reached a matured phase amid competition from survival game 2016A 2017A 2018F 2019F 2020F
PUBG Mobile (绝地求生手遊), and delay of JX2 Mobile (劍俠情 Online game's monthly average revenue per paying user
緣 2 手遊) & JX3 Mobile (劍俠情緣 3 手遊, converted from JX3 (ARPU, Rmb)
Online, a top 10 PC game in China). However, driven by strong 64.0 62.8
58.1
online game pipeline (JX2 Mobile and the highly anticipated 52.3 53.4
50.5
JX3 Mobile), we expect online games’ monthly APA/ARPU to 51.2
grow 20%/11% in FY19F. We expect Kingsoft’s online game 38.4

revenue to grow at 34% in FY19F.
25.6
Kingsoft Cloud’s market share growth 12.8

Market share gains will improve Kingsoft Cloud’s margins from
economies of scale. Kingsoft Cloud is solidifying its position in 0.0
2016A 2017A 2018F 2019F 2020F
games and videos, and expanding to the healthcare and
China's IaaS market (Rmb m)
government sectors. We expect Kingsoft’s revenue from cloud
43,474.2
to grow at 60%, driven by Kingsoft Cloud’s higher market 44,344
share in China’s IaaS market, from 8%/9% in FY17/FY18 to 35,475 32,810.7

10% in FY19F.
26,606 23,336.2
17,737 15,495.5
9,223.5
8,869
0
2016A 2017A 2018F 2019F 2020F
Kingsoft Cloud's market share (%)

10
10.2 10
9
9
8
8.2
6.1
4.1
2.0
0.0
2016A 2017A 2018F 2019F 2020F
Page 44
Company Guide
Kingsoft Corp
Balance Sheet:
Net cash position. As of June 2018, Kingsoft had a net cash Leverage & Asset Turnover (x)
position of Rmb6,527m (Rmb3,810m debt and Rmb10,337m 0.6
0.50
cash). This is attributed to Rmb362m operating cash inflows. 0.6
0.40 0.5
0.5
0.4
JX3 Mobile to support recovery in FY19F. We are bullish on
0.20 0.4
online game developers which still have a PC-to-mobile game
0.3
pipeline in 2019F, such as Kingsoft. We expect the company’s 0.10
0.3
online game revenue growth to decline 21% y-o-y in FY18F, 0.00 0.2
due to maturity of JX1 Mobile (劍俠情緣 1 手遊) amid 2016A 2017A 2018F 2019F 2020F
competition from survival game PUBG Mobile (绝地求生手遊), Gross Debt to Equity (LHS) Asset Turnover (RHS)
Capital Expenditure
and delay of JX2 Mobile & JX3 Mobile. However, the company RMB m
expects JX3 Mobile (converted from JX3 Online [a top 10 PC 1,200.0
game in China] and published by Tencent) to be published by 1,000.0
Tencent in 2Q19F. We expect its monthly gross billings to be at 800.0
least the same as JX1 Mobile’s. We expect mobile game 600.0

revenue growth to recover to 34% y-o-y in FY19F. 400.0
200.0
Kingsoft Cloud to continue to gain market share with
0.0
improving profitability. We expect Kingsoft Cloud, as one of 2016A 2017A 2018F 2019F 2020F
the top 3-5 IaaS cloud vendors in China, to gain market share Capital Expenditure (-)
with improving profitability. We expect Kingsoft’s revenue from ROE

Kingsoft Cloud to grow 60% in FY18F (market share to expand 30.0%
from 8.5% in FY17 to 9.0% in FY18F), with operating profit 25.0%

margin improvement.
20.0%
Key Risks: 15.0%
Competition from other mobile games. Other mobile games 10.0%
with strong intellectual properties (IPs) and other game genres

5.0%
(such as survival games), may hinder the success of
NetDragon’s Eudemons 3D Mobile. 0.0%
2016A 2017A 2018F 2019F 2020F
Forward PE Band
Intensifying competition from other leading IaaS providers.
x
AliCloud’s revenue is 8x Kingsoft Cloud’s. AliCloud could 60
hinder Kingsoft Cloud from gaining share and improve 50
margins from economies of scale. 40
30 +1SD: 27.5x
Company Background 20 Avg: 15.9x

Established in 1988, Kingsoft is an incubator of new Internet 10
-1SD: 4.3x
and mobile Internet ventures, with four key assets: (1) WPS, a 0
Jun- 10
Jun- 14
Jun- 18
Oct-07
Oct-11
Feb-09
Feb-13
Feb-17
Oct-15
Oct-19
first mover and a leading office software suite in China, (2)

online games, one of the first movers and a leading online
game developer in China, with flagship PC game - JX Online PB Band
3 (劍俠情緣 III), and (3) Kingsoft Cloud, China’s fifth largest x
7.0
IaaS provider. (1) WPS, (2) online games, and (3) Kingsoft 6.0
Cloud and mobile marketing accounted for 19%, 47%, and 5.0
34% of 1H18 revenue respectively. Jun Lei (雷軍), Chairman, 4.0 +1SD: 3.5x
is the co-founder of the company. 3.0
Avg: 2.4x
2.0
-1SD: 1.3x
1.0
0.0
Jun- 10
Jun- 14
Jun- 18
Oct-07
Oct-11
Oct-15
Feb-09
Feb-13
Feb-17
Oct-19
Page 45
Company Guide
Kingsoft Corp
Key assumptions
Rmb m F Y 16 F Y 17 F Y 18F F Y 19F F Y 20F

Rev enue
Online games 2,546 3,120 2,467 3,294 3,492
Cloud 737 1,333 2,132 3,158 4,393
WPS 551 729 1,020 1,428 1,999
T ot al 3,834 5,181 5,619 7,880 9,884
Grow t h
Online games 86.0% 22.6% -20.9% 33.5% 6.0%
Cloud 186.8% 80.8% 60.0% 48.1% 39.1%
WPS 12.7% 40.0% 40.0% 40.0% 40.0%
T ot al 81.3% 35.2% 8.5% 40.2% 25.4%
F Y 19F Normalised V aluat ion

Rev enue Normalised net prof it V aluat ion per share
Business segment (Rmb m) NPM (Rmb m) St ak e (Rmb m) (HK D) V aluat ion met hod
Online games 3,294 30% 988 67% 6,622 5.8 10x FY18F PER
WPS 1,428 25% 357 69% 2,463 2.2 10x FY18F PER
Cloud 52% 6,417 5.7 Implied valuation from D round
financing
Net Cash 100% 5,281 4.7 as at FY19F
Page 46
Company Guide
Kingsoft Corp
Key Assumptions
FY Dec 2016A 2017A 2018F 2019F 2020F
Online game's monthly
average paying accounts 4.2 4.1 3.9 4.7 5.4
(APA, m)
average revenue per 50.5 62.8 52.3 58.1 53.4
paying user (ARPU, Rmb)
China's IaaS market (Rmb
9,223.5 15,495.5 23,336.2 32,810.7 43,474.2
m)
Kingsoft Cloud's market
8.0 8.6 9.1 9.6 10.1
share (%)

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenues (RMB m)
Online games 2,546 3,120 2,467 3,294 3,492
Cloud 737 1,333 2,132 3,158 4,393
WPS 551 729 1,020 1,428 1,999
Cheetah Mobile N/A N/A N/A N/A N/A
Total 3,834 5,181 5,619 7,880 9,884
Operating profit (before
unallocated expenses)
(RMB m)
Online games 1,280 1,361 1,129 1,577 1,746
Cloud 628 447 502 611 697
WPS (78) (297) (360) (313) (79)
Total 1,829 1,511 1,270 1,875 2,364
Operating profit (before
unallocated expenses)
Margins (%)
Online games 50.3 43.6 45.7 47.9 50.0
Cloud 85.1 33.5 23.5 19.3 15.9
WPS (14.1) (40.8) (35.3) (21.9) (3.9)
Total 47.7 29.2 22.6 23.8 23.9
Page 47
Company Guide
Kingsoft Corp

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenue 3,834 5,181 5,619 7,880 9,884
Gross Profit 2,541 3,012 2,737 3,992 4,658
Operating Profit 936 765 (82) 863 1,368
Other Non Opg (Exp)/Inc (1,164) (107) (200) (200) (200)
Associates & JV Inc 61 466 280 337 350
Exceptional Gain/(Loss) 0 2,224 0 0 0
Pre-tax Profit (115) 3,430 48 1,012 1,523
Tax (177) (134) (7) (152) (228)
Minority Interest 22 (95) (124) (144) (144)
Net Profit (271) 3,202 (84) 716 1,150
Net Profit before Except. (271) 1,064 (84) 716 1,150
EBITDA 117 1,481 389 1,501 1,991
Growth
Revenue Gth (%) (32.5) 35.2 8.5 40.2 25.4
EBITDA Gth (%) (84.4) 1,165.7 (73.8) 286.1 32.7
Opg Profit Gth (%) 15.5 (18.4) (110.7) (1,151.5) 58.5
Net Profit Gth (%) N/A N/A N/A N/A 60.5
Margins & Ratio
Gross Margins (%) 66.3 58.1 48.7 50.7 47.1
Opg Profit Margin (%) 24.4 14.8 (1.5) 11.0 13.8
Net Profit Margin (%) (7.1) 61.8 (1.5) 9.1 11.6
ROAE (%) (3.4) 32.1 (0.7) 5.9 8.9
ROA (%) (1.6) 18.1 (0.5) 4.0 5.8
ROCE (%) 6.9 5.0 (0.5) 4.7 6.7
Div Payout Ratio (%) N/A 3.8 N/A 17.1 10.6

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 1,417 2,416 2,498 2,684 2,610

Cost of Goods Sold (444) (848) (998) (1,171) (1,323)
Gross Profit 973 1,568 1,499 1,513 1,287
Other Oper. (Exp)/Inc (707) (898) (1,021) (1,227) (1,284)
Operating Profit 267 670 479 286 3
Other Non Opg (Exp)/Inc (44) 1,423 1,608 1,676 1,678
Associates & JV Inc (112) 173 230 236 118
Exceptional Gain/(Loss) (848) (1,696) (1,696) (1,696) (1,696)
Pre-tax Profit (706) 597 668 560 130
Tax (78) (99) (94) (40) (100)
Minority Interest 112 (90) (76) (18) (36)
Net Profit (672) 413 507 515 11
Net profit bef Except. 205 1,803 1,942 2,085 (1,647)
Growth
Revenue Gth (%) (40.7) (26.4) 76.2 11.1 4.5
Opg Profit Gth (%) (21.0) 41.5 79.5 (57.3) (99.4)
Net Profit Gth (%) N/A 157.1 N/A 24.7 (97.9)
Margins
Gross Margins (%) 68.7 64.9 60.0 56.4 49.3
Net Profit Margins (%) (47.4) 17.1 20.3 19.2 0.4
Page 48
Company Guide
Kingsoft Corp

FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 1,098 1,329 1,542 1,887 2,475

Invts in Associates & JVs 572 4,056 4,056 4,056 4,056
Other LT Assets 2,804 1,833 1,734 1,843 1,899
Cash & ST Invts 10,198 8,687 7,893 8,481 9,238
Inventory 11 10 14 19 25
Debtors 1,774 1,168 1,266 1,776 2,228
Other Current Assets 1,122 680 680 680 680
Total Assets 17,579 17,762 17,185 18,741 20,600
ST Debt 380 1,207 1,309 1,836 2,303

Creditors 560 179 238 321 432
LT Debt 3,647 1,276 1,276 1,276 1,276
Other LT Liabilities 199 79 24 87 121
Minority Interests 2,115 464 589 733 877
Total Cap. & Liab. 17,579 17,762 17,185 18,741 20,600
Non-Cash Wkg. Capital (444) (789) (145) 142 413

Net Cash/(Debt) 6,172 6,205 5,308 5,369 5,660
Asset Turnover (x) 0.2 0.3 0.3 0.4 0.5
Current Ratio (x) 3.5 2.7 2.9 2.6 2.5
Quick Ratio (x) 3.2 2.6 2.7 2.5 2.4
Capex to Debt (%) 9.9 22.4 23.3 27.1 29.6

FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit 1,085 1,206 48 1,012 1,523

Dep. & Amort. 283 357 391 501 474
Tax Paid (177) (134) (7) (152) (228)
Assoc. & JV Inc/(loss) (61) (466) (280) (337) (350)
Chg in Wkg.Cap. (419) 342 (700) (223) (237)
Net Operating CF 711 1,305 (548) 801 1,181
Capital Exp.(net) (399) (555) (602) (844) (1,059)
Other Invts.(net) (470) 940 0 0 0
Invts in Assoc. & JV (187) (3,017) 280 337 350
Other Investing CF 3 2,222 96 (110) (58)
Net Investing CF (1,053) (411) (226) (617) (767)
Div Paid (116) (122) (122) (122) (122)
Chg in Gross Debt 1,169 (1,543) 102 527 467
Capital Issues 403 1,122 0 0 0
Other Financing CF 95 (1,745) 0 0 0
Net Financing CF 1,552 (2,289) (20) 404 344
Chg in Cash 1,210 (1,394) (795) 588 758
Opg CFPS (RMB) 0.88 0.75 0.12 0.79 1.10
Free CFPS (RMB) 0.24 0.58 (0.89) (0.03) 0.09
Page 49
Company Guide
Kingsoft Corp
HK$
S.No. Dat e Closing 12- mt h Rat ing
Pric e T arget
1
29.0 Pric e
3
1: 15-Mar-18 HK$28.35 HK$34.00 Buy
2 2: 23-Mar-18 HK$26.60 HK$31.00 Buy
24.0 5
3: 27-Mar-18 HK$26.25 HK$31.00 Buy
4
4: 3-Apr-18 HK$24.90 HK$31.00 Buy
19.0 5: 16-J ul-18 HK$22.00 HK$31.00 Buy
6 6: 22-Aug-18 HK$14.44 HK$18.00 Buy
7: 28-Sep-18 HK$14.28 HK$18.00 Buy
14.0
7
9.0
Dec-18
Mar-18
May-18
Jun-18
Apr-18
Sep-18
Jul-18
Jan-18
Nov-18
Jan-19
Jan-19
Feb-18
Oct-18
Aug-18
Source: DBS HK
Tsz-Wang TAM, CFA
Page 50
NetDragon Websoft
Version 8 | Bloomberg: 777 HK EQUITY | Reuters: 0777.HK
BUY Dual engines of games and education

Last Traded Price ( 31 Jan 2019):HK$14.28(HSI : 27,942) Track record as a pioneer in Internet and mobile Internet. We have a
Price Target 12-mth:HK$33.00 (131.1% upside) BUY call on NetDragon. It is China’s leading online game developer,
Analyst supported by Eudemons’ (魔域) strong IP. It also has a successful track
Susanna Chui+852 36684194, susanna_chui@dbs.com record as a pioneer in Internet and mobile Internet, including
Tsz-Wang TAM, CFA+852 36684195, tszwangtam@dbs.com 17173.com (China’s first online game portal) and 91 Wireless (China's
leading app-store platform). We believe it can replicate its past
What’s New successes in online education, which could become the new earnings
• Continuous revenue growth from Eudemons PC in driver.
FY18F, driven by the launch of its expansion pack
Where we differ. Continuous revenue growth from Eudemons PC, with
• Eudemons 3D Mobile (converted from Eudemons PC
Eudemons 3D Mobile as driver in FY19F. We expect NetDragon’s online
and published by Tencent) to be an earnings driver in
game revenue to grow 23% in FY18F, driven by the launch of
FY19F
Eudemons PC’s expansion pack in 1Q18 and 4Q18. Management
• Online education’s margin to continue to improve on expects Eudemons 3D Mobile (converted from Eudemons PC [a top 30
operating leverage PC game in China] and published by Tencent), to be launched in 2H19.
• Reiterate BUY with TP of HK$33 We expect its monthly gross billings to be at least the same as
Eudemons PC’s. This should accelerate NetDragon’s online game
Price Relative
HK$
revenue growth to 28% in FY19F.
Relative Index
Other critical factors. Online education’s margin to continue to

275
40.6
35.6
225
30.6
25.6 175
improve. Many investors were concerned about online education’s
20.6
15.6
125 profitability. However, online education’s operating profit margin
10.6
Jan-15 Jan-16 Jan-17 Jan-18
75
Jan-19
(OPM) improved from -29% in FY16 to -18% in FY17, on the back of
NetDragon Websoft (LHS) Relative HSI (RHS) operating leverage. We expect segmental OPM to continue to improve
Forecasts and Valuation to -15%/-12% in FY18F/19F. NetDragon will launch the cloud version
FY Dec (RMBm) 2017A 2018F 2019F 2020F of Active Inspire in 1H19, on which teachers can deliver interactive
Turnover 3,868 4,790 5,913 6,915
EBITDA 170 266 453 542 lessons and connect to the mobile devices of students and parents, to
Pre-tax Profit (32) 46 228 309 pave the way for high-margin content monetisation later on.
Net Profit (21) 116 272 347
Net Pft (Pre Ex) (core profit) 66 181 354 445 Valuation:
Net Profit Gth (Pre-ex) (%) 93.1 N/A 135.3 27.6 Our TP of HK$33 is derived from SOTP valuation: (1) 15x FY19F PE for
EPS (RMB) (0.04) 0.23 0.54 0.69
EPS (HK$) (0.05) 0.27 0.63 0.80 the online game segment (HK$27); and (2) valuation from series A
Core EPS (RMB) 0.13 0.36 0.70 0.88 financing for online education (HK$6).
Core EPS (HK$) 0.15 0.42 0.82 1.03
EPS Gth (%) 89.9 N/A 135.3 27.6 Key Risks to Our View:
Core EPS Gth (%) N/A 174.9 95.2 25.9
Diluted EPS (HK$) (0.05) 0.27 0.63 0.80
Competition from other mobile games with strong IPs and other game
DPS (HK$) 0.20 0.20 0.20 0.20 genres (such as survival games).
BV Per Share (HK$) 10.48 10.55 10.97 11.57
PE (X) nm 53.5 22.7 17.8 At A Glance
CorePE (X) 93.9 34.1 17.5 13.9 Issued Capital (m shrs) 531
P/Cash Flow (X) 331.6 58.9 13.6 13.4 Mkt. Cap (HK$m/US$m) 7,585 / 967
P/Free CF (X) nm nm 37.3 49.7 Major Shareholders
EV/EBITDA (X) 27.0 17.7 10.1 8.2
Net Div Yield (%) 1.4 1.4 1.4 1.4 DJM Holding Ltd. (%) 36
P/Book Value (X) 1.4 1.4 1.3 1.2 IDG Capital Partners (%) 14.7
Net Debt/Equity (X) CASH CASH CASH CASH Hui Zheng (%) 6.5
ROAE(%) (0.5) 2.5 5.8 7.1 Luyuan Liu (%) 5.3
Earnings Rev (%): Nil Nil New Free Float (%) 37.5
Consensus EPS (RMB) 0.32 0.54 0.58 3m Avg. Daily Val. (US$m) 0.8
Other Broker Recs: B:12 S:0 H:2 ICB Industry :Technology / Software & Computer Services
ed-JS/ sa- CS /AH

Company Guide
NetDragon Websoft
CRITICAL FACTORS TO WATCH Online game's average concurrent users (ACU, k)

392 401
405
357
320
Growth in online games’ ACU and ARPU 289
Average paying accounts (APA) and average revenue per 231
paying user (ARPU) are key indicators of online game revenue.
173
We expect NetDragon’s revenue from online games to grow
116
16%/28% in FY18F/19F. Thanks to Eudemons PC (魔域) and
58
Eudemons 3D Mobile (魔域 3D 手遊), we expect online games’
0
average concurrent users (ACU) to grow 7%/10% in 2016A 2017A 2018F 2019F 2020F
FY18F/19F. Monthly average revenue per paying user (ARPU) is Online game's monthly average revenue per paying user
expected to increase 15%/17% in FY18F/19F. (ARPU, Rmb)
633 620.3
Growth in online education’s revenue and OPM 560.5
We expect NetDragon’s revenue from online education to 506 480.8

418.6
grow 25%/20% in FY18F/19F. The company sees significant 380
opportunities in emerging countries. Online education’s 315.6
operating profit margin (OPM) improved from -29% in FY16 to 253
-18% in FY17, on the back of operating leverage. We expect 127

segmental OPM to continue to improve to -15%/-12% in
FY18F/19F. NetDragon will launch the cloud version of Active 0
2016A 2017A 2018F 2019F 2020F
Inspire in 1H19, on which teachers can deliver interactive
Online education's revenue (Rmb m)
lessons and connect to the mobile devices of students and
3,778.5
parents, to pave the way for high-margin content monetisation 3,854
later on. 3,083

3,148.7
2,623.9
2,312 2,105.3
1,526.3
1,542
771
0
2016A 2017A 2018F 2019F 2020F
Online education's operating profit margin (%)

-9.45
-13.91 -12
-15
-18.36 -18
-22.81
-27.26
-29
-31.72
2016A 2017A 2018F 2019F 2020F
Page 52
Company Guide
NetDragon Websoft
Balance Sheet:
Net cash position. As of end-June 2018, NetDragon had a net Leverage & Asset Turnover (x)
cash position of Rmb737m (Rmb508bn debt and Rmb1,245m 0.25 1.2
cash). Its capex was Rmb250m, with Rmb157m operating cash 0.20
1.1
outflows. 1.0
0.15
0.9

0.8
Eudemons 3D Mobile continues Eudemons PC’s success. We 0.7

expect NetDragon’s online game revenue to grow 23% in 0.05
0.6
FY18F, driven by the launch of Eudemons PC’s expansion pack 0.00 0.5
in 1Q18 in 4Q18. Management expects Eudemons 3D Mobile 2016A 2017A 2018F 2019F 2020F
3D (converted from Eudemons PC and published by Tencent), Gross Debt to Equity (LHS) Asset Turnover (RHS)
Capital Expenditure
to be launched in 2H19, to accelerate NetDragon’s online RMB m
game revenue growth to 28% in FY19F. 400.0
350.0
300.0
Monetisation of online education via sale of high-margin
250.0
content. Hardware currently contributes the majority of 200.0
NetDragon's online education revenue. NetDragon will launch 150.0
the cloud version of Active Inspire in 1H19, on which teachers 100.0
can deliver interactive lessons and connect to the mobile 50.0

0.0
devices of students and parents, to pave the way for high- 2016A 2017A 2018F 2019F 2020F
margin content monetisation later on. We believe increasing Capital Expenditure (-)
monetisation will provide upside to segmental OPM. ROE

7.0%
Key Risks: 6.0%
Competition from other mobile games. Other mobile games 5.0%
with strong intellectual properties (IPs) and other game genres 4.0%
(such as survival games), may hinder the success of 3.0%

NetDragon’s Eudemons Mobile.
2.0%
1.0%
Online education may not replicate its past successes in
17173.com and 91 Wireless. This may result from slower- 0.0%
2016A 2017A 2018F 2019F 2020F
than-expected adoption of online education, as well as Forward PE Band
competition from other Internet platforms.
x
90
Company Background 80
70
Established in 1999, NetDragon is a leading online game 60
50
developer in China, with a highly successful track record as a 40 +1SD: 35.8x
pioneer in Internet and mobile Internet, including 17173.com 30 Avg: 22.3x
20
(the first online game portal in China) and 91 Wireless 10 -1SD: 8.9x
0
(China's leading app-store platform), which were sold to Sohu
Jul-1 0
Jul-1 4
Jul-1 8
Nov -07
Nov -11
Nov -15
Nov -19
Mar-13
Mar-17
Mar-09
for US$20.5m in 2003 and to Baidu for US$1.9bn in 2013

respectively. Online education will be its next business to
boom. (1) Online games, (2) education, and (3) mobile PB Band
solutions and mobile marketing accounted for 42%, 56%, x
4.5
and 2% of 1H18 revenue respectively. Liu Dejian (劉德建), 4.0
3.5
Chairman, is the founder of the company. 3.0
2.5 +1SD: 2.3x
2.0
1.5 Avg: 1.5x
1.0
-1SD: 0.8x
0.5
0.0
Jul-1 0
Jul-1 4
Jul-1 8
Nov -07
Nov -11
Nov -19
Nov -15
Mar-09
Mar-13
Mar-17
Page 53
Company Guide
NetDragon Websoft
Rev enue Normalised Normalised V aluat ion V aluat ion

(Rmb m) NPM net prof it St ak e (Rmb m) per share V aluat ion met hod
Online game 2,636 30% 791 100% 11,861 27 15x FY18F PER
Education 78% 2,523 Implied valuation from A round
6 financing
Page 54
Company Guide
NetDragon Websoft
Key Assumptions
FY Dec 2016A 2017A 2018F 2019F 2020F
Online game's average
319.5 333.0 356.9 391.9 400.6
concurrent users (ACU, k)
average revenue per 315.6 418.6 480.8 560.5 620.3
paying user (ARPU, Rmb)
Online education's
1,526.3 2,105.3 2,623.9 3,148.7 3,778.5
revenue (Rmb m)
Online education's
operating profit margin (28.8) (17.7) (14.8) (12.1) (9.4)
(%)

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenues (RMB m)
Online game 1,210 1,673 2,059 2,636 2,982
Education 1,526 2,105 2,624 3,149 3,778
Mobile solutions and
57 89 107 129 155
mobile marketing
Total 2,793 3,868 4,790 5,913 6,915
Online game 1,128 1,565 1,927 2,466 2,791
Education 455 590 738 886 1,063
7 25 31 38 46
mobile marketing
Total 1,590 2,180 2,695 3,390 3,900
Online game 93.2 93.6 93.6 93.6 93.6
Education 29.8 28.0 28.1 28.1 28.1
11.6 27.6 28.4 29.2 30.0
mobile marketing
Total 56.9 56.4 56.3 57.3 56.4
Page 55
Company Guide
NetDragon Websoft

FY Dec 2016A 2017A 2018F 2019F 2020F
Revenue 2,793 3,868 4,790 5,913 6,915
Gross Profit 1,590 2,180 2,665 3,352 3,854
Operating Profit (411) (24) 57 244 329
Other Non Opg (Exp)/Inc 24 (5) 0 0 0
Associates & JV Inc (1) (1) (2) (2) (2)
Net Interest (Exp)/Inc (9) (8) (9) (14) (18)
Pre-tax Profit (209) (32) 46 228 309
Tax (28) (57) (9) (46) (62)
Net Profit (203) (21) 116 272 347
Net Profit before Except. (411) 66 181 354 445
EBITDA (111) 170 266 453 542
Growth
Revenue Gth (%) 119.5 38.5 23.9 23.4 16.9
EBITDA Gth (%) N/A N/A 56.6 70.2 19.6
Opg Profit Gth (%) 91.0 (94.3) (341.7) 328.6 34.7
Net Profit Gth (%) (41.8) 89.7 N/A 135.3 27.6
Margins & Ratio
Gross Margins (%) 56.9 56.4 55.6 56.7 55.7
Opg Profit Margin (%) (14.7) (0.6) 1.2 4.1 4.8
Net Profit Margin (%) (7.3) (0.5) 2.4 4.6 5.0
ROAE (%) (5.0) (0.5) 2.5 5.8 7.1
ROA (%) (3.9) (0.4) 2.0 4.6 5.5
ROCE (%) (9.3) (0.5) 0.9 3.9 5.0
Div Payout Ratio (%) N/A N/A 75.9 32.3 25.3
Net Interest Cover (x) (47.5) (3.0) 6.2 17.7 18.5

FY Dec 1H2016 2H2016 1H2017 2H2017 1H2018
Revenue 1,359 1,435 1,775 2,092 2,470

Cost of Goods Sold (575) (629) (742) (946) (1,068)
Gross Profit 784 806 1,033 1,146 1,402
Other Oper. (Exp)/Inc (958) (1,043) (1,034) (1,170) (1,184)
Operating Profit (174) (237) 0 (23) 218
Other Non Opg (Exp)/Inc 55 (31) 20 (25) (6)
Associates & JV Inc (1) 0 0 (1) 0
Net Interest (Exp)/Inc (5) (4) (4) (4) (4)
Exceptional Gain/(Loss) 93 95 9 (3) 23
Pre-tax Profit (31) (178) 24 (56) N/A
Tax (13) (15) (32) (26) (53)
Net Profit (43) (160) 26 (47) N/A
Net profit bef Except. (136) (254) 17 (44) 169
Growth
Revenue Gth (%) 165.2 88.8 30.7 45.9 39.1
Opg Profit Gth (%) 255.1 42.5 (99.8) (90.2) (69,232.7)
Net Profit Gth (%) (133.4) (28.3) N/A 70.8 N/A
Margins
Gross Margins (%) 57.7 56.2 58.2 54.8 56.8
Opg Profit Margins (%) (12.8) (16.5) 0.0 (1.1) 8.8
Net Profit Margins (%) (3.2) (11.1) 1.5 (2.2) N/A
Page 56
Company Guide
NetDragon Websoft

FY Dec 2016A 2017A 2018F 2019F 2020F
Net Fixed Assets 1,284 1,373 1,500 1,671 1,878

Invts in Associates & JVs 17 33 33 33 33
Other LT Assets 1,696 1,734 1,626 1,535 1,450
Cash & ST Invts 1,140 1,913 1,745 1,874 1,957
Inventory 125 106 134 161 193
Debtors 352 380 436 533 629
Other Current Assets 165 296 296 296 296
Total Assets 4,779 5,836 5,770 6,103 6,437
ST Debt 133 192 238 294 344

Creditors 216 242 305 367 439
Other Current Liab 471 602 588 624 641
LT Debt 0 182 182 182 182
Other LT Liabilities 131 133 24 107 144
Minority Interests (26) (65) (144) (233) (333)
Total Cap. & Liab. 4,779 5,836 5,770 6,103 6,437
Non-Cash Wkg. Capital (45) (62) (27) (2) 38

Net Cash/(Debt) 1,007 1,539 1,325 1,398 1,431
Asset Turnover (x) 0.5 0.7 0.8 1.0 1.1
Current Ratio (x) 2.2 2.6 2.3 2.2 2.2
Quick Ratio (x) 1.8 2.2 1.9 1.9 1.8
Capex to Debt (%) 140.1 50.4 55.6 60.6 64.1

FY Dec 2016A 2017A 2018F 2019F 2020F
Pre-Tax Profit (209) (32) 46 228 309

Dep. & Amort. 276 200 211 211 216
Tax Paid (28) (57) (9) (46) (62)
Assoc. & JV Inc/(loss) 1 1 2 2 2
Chg in Wkg.Cap. (270) (94) (145) 58 (4)
Net Operating CF (229) 19 105 454 462
Capital Exp.(net) (186) (189) (234) (288) (337)
Other Invts.(net) 84 (148) 0 0 0
Invts in Assoc. & JV 1 (18) (2) (2) (2)
Other Investing CF (57) 10 3 (3) (1)
Net Investing CF (158) (345) (232) (293) (341)
Div Paid (87) (88) (88) (88) (88)
Chg in Gross Debt (171) 241 46 56 50
Capital Issues (150) 804 0 0 0
Other Financing CF (1) 29 0 0 0
Net Financing CF (409) 986 (42) (32) (38)
Chg in Cash (796) 660 (169) 129 83
Opg CFPS (RMB) 0.08 0.22 0.49 0.78 0.92
Free CFPS (RMB) (0.84) (0.34) (0.25) 0.33 0.25
Page 57
Company Guide
NetDragon Websoft
HK$ S.No. Dat e Closing 12- mt h Rat ing

1 Pric e T arget
2
23.0 Pric e
1: 15-Mar-18 HK$21.65 HK$36.00 Buy
21.0 2: 19-Mar-18 HK$22.75 HK$36.00 Buy
4&5
19.0 3: 26-Mar-18 HK$19.10 HK$29.00 Buy
3 8 4: 27-Mar-18 HK$19.26 HK$29.00 Buy
6
17.0 5: 27-Mar-18 HK$19.26 HK$29.00 Buy
7
6: 9-Apr-18 HK$18.40 HK$29.00 Buy
15.0 7: 30-Aug-18 HK$15.48 HK$29.00 Buy
13.0 8: 31-Aug-18 HK$17.90 HK$33.00 Buy
9 9: 3-J an-19 HK$11.96 HK$33.00 Buy
11.0
Dec-18
Mar-18
May-18
Jun-18
Apr-18
Sep-18
Jul-18
Jan-18
Nov-18
Jan-19
Jan-19
Feb-18
Oct-18
Aug-18
Source: DBS HK
Tsz-Wang TAM, CFA
Page 58
Industry Focus
DBS HK recommendations are based an Absolute Total Return* Rating system, defined as follows:
STRONG BUY (>20% total return over the next 3 months, with identifiable share price catalysts within this time frame)
BUY (>15% total return over the next 12 months for small caps, >10% for large caps)
HOLD (-10% to +15% total return over the next 12 months for small caps, -10% to +10% for large caps)
FULLY VALUED (negative total return i.e. > -10% over the next 12 months)
SELL (negative total return of > -20% over the next 3 months, with identifiable catalysts within this time frame)
* Share price appreciation + dividends
Completed Date: 8 Feb 2019 9:50:00 (HKT)

Dissemination Date: 8 Feb 2019 10:55:31 (HKT)
Sources for all charts and tables are DBS HK unless otherwise specified.
GENERAL DISCLOSURE/DISCLAIMER
This report is prepared by DBS Bank (Hong Kong) Limited (“DBS HK”). This report is solely intended for the clients of DBS Bank Ltd., DBS HK, DBS
Vickers (Hong Kong) Limited (“DBSV HK”), and DBS Vickers Securities (Singapore) Pte Ltd. (“DBSVS”), its respective connected and associated
corporations and affiliates only and no part of this document may be (i) copied, photocopied or duplicated in any form or by any means or (ii)
redistributed without the prior written consent of DBS HK.
The research set out in this report is based on information obtained from sources believed to be reliable, but we (which collectively refers to DBS
Bank Ltd., DBS HK, DBSV HK, DBSVS, its respective connected and associated corporations, affiliates and their respective directors, officers,
employees and agents (collectively, the “DBS Group”) have not conducted due diligence on any of the companies, verified any information or
sources or taken into account any other factors which we may consider to be relevant or appropriate in preparing the research. Accordingly, we
do not make any representation or warranty as to the accuracy, completeness or correctness of the research set out in this report. Opinions
expressed are subject to change without notice. This research is prepared for general circulation. Any recommendation contained in this document
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for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees, who should obtain
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(including any claims for loss of profit) arising from any use of and/or reliance upon this document and/or further communication given in relation
to this document. This document is not to be construed as an offer or a solicitation of an offer to buy or sell any securities. The DBS Group, along
with its affiliates and/or persons associated with any of them may from time to time have interests in the securities mentioned in this document.
The DBS Group, may have positions in, and may effect transactions in securities mentioned herein and may also perform or seek to perform
broking, investment banking and other banking services for these companies.
Any valuations, opinions, estimates, forecasts, ratings or risk assessments herein constitutes a judgment as of the date of this report, and there can
be no assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk assessments.
The information in this document is subject to change without notice, its accuracy is not guaranteed, it may be incomplete or condensed, it may
not contain all material information concerning the company (or companies) referred to in this report and the DBS Group is under no obligation to
update the information in this report.
This publication has not been reviewed or authorized by any regulatory authority in Singapore, Hong Kong or elsewhere. There is no planned
schedule or frequency for updating research publication relating to any issuer.
The valuations, opinions, estimates, forecasts, ratings or risk assessments described in this report were based upon a number of estimates and
assumptions and are inherently subject to significant uncertainties and contingencies. It can be expected that one or more of the estimates on
which the valuations, opinions, estimates, forecasts, ratings or risk assessments were based will not materialize or will vary significantly from actual
results. Therefore, the inclusion of the valuations, opinions, estimates, forecasts, ratings or risk assessments described herein IS NOT TO BE RELIED
UPON as a representation and/or warranty by the DBS Group (and/or any persons associated with the aforesaid entities), that:
(a) such valuations, opinions, estimates, forecasts, ratings or risk assessments or their underlying assumptions will be achieved, and
(b) there is any assurance that future results or events will be consistent with any such valuations, opinions, estimates, forecasts, ratings or risk
assessments stated therein.
Please contact the primary analyst for valuation methodologies and assumptions associated with the covered companies or price targets.
Any assumptions made in this report that refers to commodities, are for the purposes of making forecasts for the company (or companies)
mentioned herein. They are not to be construed as recommendations to trade in the physical commodity or in the futures contract relating to the
commodity referred to in this report.
DBS Vickers Securities (USA) Inc (“DBSVUSA”), a US-registered broker-dealer, does not have its own investment banking or research department,
has not participated in any public offering of securities as a manager or co-manager or in any other investment banking transaction in the past
twelve months and does not engage in market-making.
Page 59
Industry Focus
ANALYST CERTIFICATION
The research analyst(s) primarily responsible for the content of this research report, in part or in whole, certifies that the views about the
companies and their securities expressed in this report accurately reflect his/her personal views. The analyst(s) also certifies that no part of his/her
compensation was, is, or will be, directly or indirectly, related to specific recommendations or views expressed in the report. The research analyst (s)
primarily responsible for the content of this research report, in part or in whole, certifies that he or his associate1 does not serve as an officer of
the issuer or the new listing applicant (which includes in the case of a real estate investment trust, an officer of the management company of the
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DBS Group.
COMPANY-SPECIFIC / REGULATORY DISCLOSURES
1. DBS Bank Ltd, DBS HK, DBSVS or their subsidiaries and/or other affiliates have proprietary positions in Kingsoft Corp Ltd (3888 HK)
and Tencent Holdings Ltd (700 HK) recommended in this report as of 01 Feb 2019.
2. Neither DBS Bank Ltd nor DBS HK market makes in equity securities of the issuer(s) or company(ies) mentioned in this Research
Report.
3. Compensation for investment banking services:

DBSVUSA does not have its own investment banking or research department, nor has it participated in any public offering of securities
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obtain further information, including any clarification on disclosures in this disclaimer, or to effect a transaction in any security
discussed in this document should contact DBSVUSA exclusively.
4. Disclosure of previous investment recommendation produced:

DBS Bank Ltd, DBSVS, DBS HK, their subsidiaries and/or other affiliates of DBSVUSA may have published other investment
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China / Hong Kong Industry Focus

China Internet Sector

DBS Group Research . Equity 8 Feb 2019

After rain comes sunshine in 2019 HSI: 27,942

ed- JS/ sa-CS / AH

China Internet Sector

Introduction 48.0%, and 86.2% of Tencent’s, Alibaba’s, and Baidu’s

Revenue mix - Tencent (2017) Revenue mix - Alibaba (2017)

Revenue mix - Baidu (2017) Revenue mix - JD (2017)

Source: Company, DBS HK

China Internet Sector

Source: iResearch, DBS HK

China Internet Sector

non-Chinese culture and violence, Tencent has a good track 120

record in revising games based on regulators’ feedback for 100

approval to take place. 80

Another concern is when the games (i.e. Tencent’s PUBG

China Internet Sector

Source: Company, DBS HK

China Internet Sector

MAUs of Honour of Kings

MAUs (m) (LHS) Growth (RHS)

Source: Questmobile, DBS HK

Source: App Annie, DBS HK

China Internet Sector

Source: App Annie, DBS HK

China M obile games Publishers Global M obile games Publishers

Source: App Annie, DBS HK

China Internet Sector

Market share of China's e-commerce market in 2017

China's e-commerce market is expected to grow by 21.3% in

China Internet Sector

Key trend #2: Alibaba is leading in new retail initiative Conclusion

China Internet Sector

China Internet Sector

China Internet Sector

Stock implications NetDragon has launched Storm Eudemons Mobile (風暴魔域

NetDragon is a leading online game developer in China, with

China Internet Sector

China Internet Sector

Mkt PE PE P/S P/S P/Bk P/Bk ROE ROE

# FY18: FY19; FY19: FY20

Based on 31 Jan 2019 closing

Source: Thomson Reuters, *DBS HK

China Internet Sector

Alibaba: PE band Alibaba: PB band

Share Price (US$) Share Price (US$)

Tencent: PE band Tencent: PB band

Share Price (HK$) Share Price (HK$)

JD.com: PS band JD.com: PB band

Share Price (U$) Share Price (U$)

Source: Thomson Reuters, DBS HK

China Internet Sector

Kingsoft: PE band Kingsoft: PB band

Share Price (HK$) Share Price (HK$)

NetDragon Websoft: PE band NetDragon Websoft: PB band

Share Price (HK$) Share Price (HK$)

Source: Thomson Reuters, DBS HK

DBS Group Research . Equity 8 Feb 2019

BUY Crown in new retail

CAGR of 23% over FY3/18-21F. We analysed China’s online ad market

ed-JS/ sa- CS /AH