巴克莱169页重磅报告抄底中国科技行业！巴克莱 2021.11.2 169页

CORE
Equity Research
2 November 2021
China Technology
Too Important to Be Ignored;
INITIATING COVERAGE
Initiating Coverage
China Technology
POSITIVE
from N/A
We are initiating coverage of the China Technology sector with a Positive view.
For a full list of our ratings, price targets and
As China is the second largest economy in the world (the largest if using PPP), investors earnings in this report, please see table on
cannot ignore or not invest in China, in our view. Chinese internet and tech companies page 2
have permeated nearly every aspect of the Chinese economy, partly driven by the
absence of a legacy offline economy, so any investor keen to invest in China should not China Technology
overlook this sector. Jiong Shao, CFA
+1 212 526 5562
We believe the Chinese government aims to make its home-grown internet and tech jiong.shao@barclays.com
companies stronger not weaker, particularly in markets outside of China. Thus, we BCI, US
believe the recent new regulations from the government are meant to strengthen the Lian Xiu Duan
competitiveness and longer term growth prospects for these companies, while improving +1 212 526 4633
the sector’s overall health. We would view the regulations as being a bitter pill for “short lianxiu.duan@barclays.com
term pain but long term gain.” BCI, US
The recent selloff of China internet and tech companies has driven their valuations to the Jesse Chao
most attractive levels in recent memory, which we believe offers a good entry point for +1 212 526 7518
jesse.chao@barclays.com
patient investors. We are initiating coverage of Alibaba, Tencent, Baidu, JD, KE Holdings
BCI, US
and SEA with Overweight ratings, PDD at Equal Weight, and Meituan at Underweight.
Our Top Pick is BABA.
There are several risk factors when investing in Chinese tech and internet companies
including: 1) geopolitical risks – internationally, regionally in Asia or within China – which
Restricted - Internal
have been top of investors’ minds; 2) recent government regulations targeted at the
sector which could negatively impact companies and the sector in the short term,
sometimes severely (eg the crackdown in after school tutoring); and 3) the rapid pace of
innovation and changing competitive dynamics can alter a company’s positioning in a
sector quite meaningfully, and without warning.
BABA (OW) – significantly below intrinsic value with cloud and Ant stake free options
BEKE (OW) – It is effectively China’s MLS and dominant positioning in world’s biggest real
estate market
BIDU (OW) – all the exciting nuggets overlooked by market – AI, AD, cloud, IoT, chips
JD (OW) –the largest retailer (online & offline) in China getting larger
MPNGF (UW) – further upside in monetization may be a challenge plus expense pressure
PDD (EW) – incredible innovator in transition to move up-market
SE (OW) – the combo of Tencent and Alibaba for other emerging markets
TCEHY (OW) – investment portfolio intertwined with every fiber of China’s digital fabric
Barclays Capital Inc. and/or one of its affiliates does and seeks to do business with
companies covered in its research reports. As a result, investors should be aware that the
firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
PLEASE SEE ANALYST CERTIFICATION(S) AND IMPORTANT DISCLOSURES BEGINNING ON PAGE 162.
Barclays | China Technology
Summary of our Ratings, Price Targets and Earnings Estimates in this Report
Company Rating Price Price Target EPS FY1 (E) EPS FY2 (E)
Old New 01-Nov-21 Old New %Chg Old New %Chg Old New %Chg
China Technology NR Pos

Alibaba Group Holding Ltd. (BABA) N/A OW 170.17 N/A 275.00 - N/A 56.11 - N/A 69.09 -
Baidu, Inc. (BIDU) N/A OW 170.32 N/A 243.00 - N/A 66.33 - N/A 77.01 -
JD.com, Inc. (JD) N/A OW 82.50 N/A 98.00 - N/A 8.11 - N/A 6.42 -
Ke Holdings Inc. (BEKE) N/A OW 19.66 N/A 29.00 - N/A 2.19 - N/A 5.14 -
Meituan Dianping (MPNGF) N/A UW 35.72 N/A 32.00 - N/A -2.72 - N/A -2.13 -
Pinduoduo Inc. (PDD) N/A EW 93.48 N/A 103.00 - N/A 2.37 - N/A 1.65 -
SEA Ltd. (SE) N/A OW 354.04 N/A 427.00 - N/A -2.90 - N/A -1.84 -
Tencent Holdings Ltd. (TCEHY) N/A OW 61.93 N/A 84.00 - N/A 13.83 - N/A 15.72 -
Source: Barclays Research. Share prices and target prices are shown in the primary listing currency and EPS estimates are shown in the reporting currency.
FY1(E): Current fiscal year estimates by Barclays Research. FY2(E): Next fiscal year estimates by Barclays Research.
Stock Rating: OW: Overweight; EW: Equal Weight; UW: Underweight; RS: Rating Suspended
Industry View: Pos: Positive; Neu: Neutral; Neg: Negative
2 November 2021 2
CONTENTS
CHINA TECHNOLOGY – TOO BIG OR TOO IMPORTANT TO BE
IGNORED.............................................................................................................. 4
GRAPPLING WITH VALUATION – A NEW, BUSINESS MODEL FOCUSED

APPROACH ......................................................................................................... 6
ALIBABA GROUP HOLDING (BABA) –TOP PICK; PT $275 ...................... 7
KE HOLDINGS (BEKE) – OVERWEIGHT; PT $29 .......................................24
BAIDU, INC. (BIDU) – OVERWEIGHT; PT $243 .........................................38
JD.COM – OVERWEIGHT; PT $98 ................................................................55
MEITUAN (MPNGF) – UNDERWEIGHT; PT $32 .......................................68
PINDUODUO, INC. (PDD) – EQUAL WEIGHT; PT $103 ..........................83
SEA LTD.: OVERWEIGHT; PT: $427 .............................................................97
TENCENT HOLDINGS (TCEHY) – OVERWEIGHT; PT $84 ................... 116
INDUSTRY OVERVIEW ................................................................................. 134
GAMING .......................................................................................................... 140
ONLINE ADVERTISING ................................................................................ 144
2 November 2021 3
CHINA TECHNOLOGY – TOO BIG OR TOO IMPORTANT TO BE IGNORED

We are initiating coverage of the China Technology sector with a Positive rating. The
development of the China Technology sector over the past 15-20 years has been remarkable.
When Alibaba was founded in 1999, it had ambitions to become the Ebay of China, and
Tencent was a fledgling online gaming company when it listed in 2004, but recall South
African media conglomerate Naspers purchased +40% of the company for merely $100mn
from Hong Kong tycoon Richard Li’s PCCW in 2001. Now both Tencent and Alibaba are
among the largest and most influential Internet companies in the world, boasting market caps
close to $1 trillion each as recently as of February 2021. The China Internet industry has seen
tremendous growth just in the last 10 years with several companies in the selective $100bn
market cap club of Internet companies around the world. Almost half of the largest internet
companies in the world are from China. In addition, these companies have established
dominant positions in wide-ranging economic sectors from ecommerce and social media to
food delivery and ride sharing. There is no stone that has been left unturned by Internet
entrepreneurs in China.
There was a clear tailwind that drove this impressive growth. China never had a modern
offline economy, and was able to skip the substitution phase (online substitutes offline)
experienced by other countries such as the US eg. how Amazon beat Barnes & Noble when it
was just an online bookseller. China’s offline retail had limited presence when ecommerce
arrived at the scene 20 years ago, which is why it took off like a rocket. Unlike other countries,
China never had a console gaming market and went straight to PC games, and more recently
to mobile games, and now Tencent is the largest gaming company, not just in China but
globally, on any metric. These are just some examples of why China appears to have
leapfrogged into the digital economy much faster than some of the more developed western
countries.
Fast forward to today, the Chinese government's recent avalanche of regulations on the
sector have made many investors wary, prompting them to reduce their exposure
significantly to China Tech and Internet stocks. Indeed, we think some
investors may have exited completely for now, until the dust settles. While tech regulations
and tech policies have increasingly become a focus for governments around the world, we
would still recommend that investors start building new or adding to existing positions in the
China Technology sector. Our bullish stance is based on the following key points.
First, we believe that the Chinese government fundamentally wants to have stronger not
weaker Internet and tech companies. A country’s influence in the world today partly depends
on the competitiveness of its home-grown companies. With companies like Tencent having
invested in many internet companies, not just in China but overseas, or even China EV
companies selling EVs to other countries such as Germany and Norway, it would be
strategically important for the Chinese government to help them become more competitive
globally. The recent regulations seem designed as a “short-term pain for long-term gain”
bitter pill for the sector and the leading players should emerge stronger at the end.
Second, the government's “common prosperity1 initiative should underpin both growth and
value creation for China tech and internet companies over time. Tech and Internet companies
around the world have often been the target of ire of the general public and politicians
because they are often perceived as making oversized profits with little consideration of
the societal impact of some of their actions. Google’s “do no evil” mantra seems to have been
forgotten by many in the industry and recent revelations about Facebook’s alleged pursuit of
profits above social responsibilities reported in the news are just the latest examples of that.
1 What ‘Common Prosperity’ Means and Why Xi Wants It (Bloomberg, 9/3/21)
2 November 2021 4
In China, the situation is no different. Chinese tech and internet companies have raised
billions from capital markets, or generated billions in profits from their highly profitable
operations. Enormous wealth has been created for their founders and early investors. But on
the flip side, many workers or small businesses in their orbits are struggling with few safety
nets (a literal example, accidental insurance is not provided for many food delivery riders). To
avoid exacerbating the social divide, the Chinese government's “common prosperity”
initiative is aimed to alleviate social tensions and build a healthier industry that would benefit
the wider society.
Third, we are not overly concerned about the variable interest entity (VIE) structure. We
understand the inherent risks and its ambiguous legal nature. The breakdown of this
structure would be unpalatable for investors, to say the least, as it has long been the working
model for foreign capital investment in China's regulated areas, such as Internet. And despite
the headlines, we believe China continues to welcome foreign capital. Because without it, the
likes of Alibaba or Tencent probably would not have existed today or at least not in their
current dominant form.
Last, since the recent selloff, China tech and internet company valuations have fallen to
extremely compelling risk-reward levels, in our view. For example, Alibaba’s enterprise value
is around $350-400bn, with GMV in the last fiscal year ending March 2021 at over $1 trillion
(more than 2x Amazon's). BABA trades at an EV/GMV multiple of ~0.3x, a fraction of its
global peers (3.6x for Amazon), but with arguably a better competitive positioning and
execution track record than some of these same peers. Its cloud business ranks #1 in China
and #3 in the world according to Gartner, and we estimate it should generate about $12bn
in revenue this fiscal year, but there seems little value attributed to it by the market. The
company also owns about a third of Ant Financial, which according to New York Times, was
eyeing a $225bn valuation for its IPO in 2020, may be worth billions of dollars. The bottom
line is China is likely to remain the #2 economy in the world (closely behind the US) in the
next few years (it's already the #1 economy based on Purchasing Power Parity according to
world bank estimates), and we believe China should be a meaningful part of asset allocation
in any global investment portfolio, mandates permitting.
In the near-term, we acknowledge weaker consumption trends in 3Q in China as certain

regions implemented lock downs following another wave of Covid outbreaks, alongside
a potentially softer advertising market driven partially by business shutdowns from power
shortages. However, we consider this near-term noise and advise investors to focus
on intermediate to longer term fundamentals when investing in China's tech and internet
companies. We are initiating coverage of Alibaba, Tencent, Baidu, JD, KE Holdings and SEA
with Overweight ratings, PDD with an Equal Weight rating, and Meituan with an Underweight
rating. Our Top Pick is BABA.
2 November 2021 5
GRAPPLING WITH VALUATION – A NEW, BUSINESS MODEL FOCUSED APPROACH

Valuing tech and internet companies has always been more of an art than science.
Conventional ways to value these companies include DCF, PE, PS, EV/Sales, EV/EBITDA, or
EV/GMV, to name a few. First off, we are sceptical about using DCF to value tech and internet
companies, as often times 95% of the value is driven by the terminal value 10 to 15 years
from now while these companies and their respective industries can change dramatically
from one year to the next. Few companies, if any, would look the same 10 years from now.
But there are a number of issues when using conventional multiples. First, internet companies
often don’t yet have earnings or EBITDA, so PE or EV/EBITDA multiples may not work for
them. Using sales or GMV multiples can be equally challenging. Not all the sales or GMVs are
comparable because of their profit margin profiles. For example, the GMV for 1P ecommerce
players is quite different from 3P ecommerce marketplaces, as are their profit margins,
(whether operating, EBITDA or net). For example, the EBITDA margins of 1P ecommerce
companies are often low single digit but that of 3P ecommerce players could easily be in the
20-30% range, sometimes even higher. The same logic applies to the sales multiple.
Our over-arching conclusion is that conventional valuation multiples have several significant
drawbacks, making it virtually impossible to compare valuation across different business
models or companies with very different margin profiles. For example, one should not
compare the GMV or PS multiples of JD and Alibaba.
We introduce a business model focused valuation methodology. It uses nominal margins or

profits for a particular company’s business model in its addressable market, as opposed to
actual expected margins or profits. For example, we estimate a 3P ecommerce player should
have roughly 25% EBITDA margins in the long run, a figure which has been validated by
mature operators such as BABA. Even if a company isn't EBITDA positive at the moment or
anytime soon because of heavy investment expenditures, we calculate EBITDA
potential when it has reached a steady-state, based on its nominal EBITDA margin. Once we
have the nominal EBITDA, we can assign a target multiple, taking into account different
factors such as growth rate and competitive positioning, to reach a more
informed valuation estimate. This methodology would allow investors to consistently value
companies in different sub-sectors at different growth stages, with different near-term profit
outlooks. We have used this methodology to value all the stocks that we are initiating
coverage on in this report.
2 November 2021 6
ALIBABA GROUP HOLDING (BABA) –TOP PICK; PT $275

Alibaba Group Holding Ltd.(BABA): Quarterly and Annual EPS (CNY)
BABA
2021 2022 2023 Change y/y
Stock Rating
OVERWEIGHT FY Mar Actual Old New Cons Old New Cons 2022 2023
Industry View Q1 14.82A N/A 16.61A 16.60A N/A 17.96E 16.96E 12% 8%
POSITIVE Q2 17.97A N/A 11.15E 12.41E N/A 14.58E 15.26E -38% 31%
Price Target Q3 22.03A N/A 16.79E 19.61E N/A 21.75E 21.78E -24% 30%
USD 275.00 Q4 10.31A N/A 11.57E 11.20E N/A 14.79E 13.55E 12% 28%
Price (01-Nov-2021) Year 65.12A N/A 56.11E 58.87E N/A 69.09E 67.70E -14% 23%
USD 170.17 P/E 16.7 19.4 15.8
Potential Upside/Downside Source: Barclays Research.
+61.6% Consensus numbers are from Bloomberg received on 01-Nov-2021; 12:50 GMT
We are initiating coverage of BABA with an Overweight

rating and price target of $275
 We believe BABA offers one of the most compelling valuations not just among Chinese
ADRs but global peers under Barclays’ coverage. With GMV of over $1tn, 2x Amazon’s,
and with net cash balance of over $51bn and investment portfolio worth ~$75bn, the
current BABA’s enterprise value (which does not include investment portfolio in our
calculation) of ~$350-400bn seems to significantly undervalue its businesses. Plus, the
market appears to be giving almost no value to both its cloud business (#1 in China
and #3 in the world with annual revenue of $12bn this year, in our estimates) and to its
stake (33%) in Ant.
 Despite some market share loss to competitors in recent years, BABA retains a dominant
position in the China's ecommerce market, which still provides meaningful growth
potential at the current 25-30% penetration rate. In addition to its cloud infrastructure
business, the company is making significant inroads in the enterprise cloud SaaS market
with DingDing, BABA’s enterprise collaboration offering, boasting over 500mn users at
almost 20mn enterprises and schools.
 Outside of China, BABA has made some good progress in recent years with ecommerce
operations in Southeast Asia (Lazada), Turkey and Eastern European (Trendyol). We
believe BABA is poised to expand its efforts to further push its ecommerce business, as
well as its logistics and cloud businesses beyond China’s borders. BABA can leverage its
technological and operational expertise to tap into the significant growth opportunity of
the international markets. Our price target is $275, based on 15x FY23E nominal core
commerce EBITA plus its cash and investment with its cloud business and Ant stake being
free options.
2 November 2021 7
Investment Thesis
The grand entrance into the Middle

Kingdom
We are initiating coverage of Alibaba with an Overweight rating and
$275 price target.
Alibaba has a very different corporate strategy from its main platform rival, Tencent. Alibaba
has expanded its scope of ecosystem primarily by “doing it on its own” model with a primary
focus on commerce-related industries with the exception of its cloud business. In our view,
Alibaba has one of the best execution track records among China’s digital corporations. This
is particularly impressive because many internet companies in China and globally tend to
struggle when they expand into newer markets or operate out of their comfort zone. Over the
last 10-15 years, Alibaba has successfully added on top of primarily a C2C marketplace: a B2C
virtual shopping mall, an asset-light tech-driven logistics business (Cainiao), the #1 cloud
service business in China (#3 in the world). And the list goes on. Unlike its main ecommerce
competitor JD, Alibaba owns almost all of its subsidiaries, so its shareholders own almost all
of its subsidiaries as well. We consider this a shareholder friendly capital market strategy or
model.
Within ecommerce, despite the emergence of some newer players such as PDD, Alibaba has
maintained its dominant position in the minds of the brands. Alibaba’s platform now has been
mostly cleansed of fake products, and both brands and consumers have built enough trust in
the platform. This trust is very difficult for competitors to emulate or replicate, at least in the
short term. Taobao and Tmall have become a way of life for nearly all the Chinese citizens
who shop online or shop anywhere at all. Despite some recent regulatory challenges, we are
confident in Alibaba’s ability to continue to execute effectively with its battle hardened senior
management plus a deep bench.
One suggestion we would make to Alibaba's management is: don't worry about margins and
profits in the near term but invest more heavily in areas such as logistics, including building a
strong in-house logistics operation. We understand Alibaba's core strategy has been to
stay asset-light. But, if the company had aggressively invested in in-house logistics
or customer acquisitions in lower tier cities, some of its competitors (JD, PDD, among others)
would probably not have been as strong as they are today. Its arch rival in ecommerce, JD,
can provide white glove delivery services since they own the delivery operation, but Alibaba
is unable to offer such a service since it relies on third-party logistics partners instead. The
capabilities in logistics goes beyond getting the goods into consumers' hands; it is a customer
services and customer retention issue.
In our view, Alibaba should have made far more significant investments and forgone part of
its profits in recent years, to build a moat so wide that would deter potential competitors.
Instead, competitors have been slowly chipping away Alibaba's market share with lower cost
solutions (no annual platform fees to merchants, for example) or free & fast delivery services.
We think it is not too late to make the necessary investments to minimize further market
share erosion. Overall, in China and in many parts of the world, for internet companies to
make too much profit is something criticized by nearly everyone - governments, regulators,
consumers, merchant partners. Investors sometimes don't even seem to reward the
companies for their profits either.
Overall, we consider BABA's valuation one of the most compelling in our China tech and
internet coverage in view of its: 1) dominant industry positioning, 2) current EV/GMV
2 November 2021 8
multiple being a fraction of global peers (BABA's GMV is more than twice that of Amazon's
but trades at one tenth of its EV/GMV multiple ), 3) ability to generate profits with highly
attractive margin profiles (adjusted EBITA margin 20% last quarter), 4) a valuable cloud
business (#1 in China and #3 in the world), which we expect will generate $12bn in revenues
this fiscal year, and 5) its one-third stake in Ant Financial. It is our view that BABA’s share
price is significantly below its intrinsic value and that the Street currently gives almost no
value to its non-ecommerce business such as cloud, or its holding in Ant.
Business Overview
Business segmentation
BABA is the largest ecommerce platform in China, and has been a big contributor to the
overall growth of China's ecommerce market. From 2016 to 2020, BABA's online
GMV increased at a CAGR of roughly 20% according to company reports During FY21
(March year-end), BABA had 891mn annual active consumers in the domestic market and
240m internationally. Total GMV in FY21 was RMB 8.1tn ($1.3tn), a majority of which (RMB
7.5tn) are from its China retail marketplaces (Taobao and Tmall). BABA divides its business
into core commerce, cloud computing, digital media and entertainment, and innovation
initiatives segments, with respective revenue contributions of 87%, 8%, 4%, and 1%in FY21.
Core commerce – China

Online retail
BABA’s retail commerce business in China consists of its two largest marketplaces – Taobao
and Tmall, contributing roughly 66% of BABA’s total revenues in FY21. Taobao is BABA’s
original 3P business in which small merchants sell to retail consumers. Tmall is a marketplace
in which higher-end brands and retailers operate virtual flagship stores. As of FY21, over
250,000 brands and merchants opened their stores on Tmall. During the 11.11 shopping
festival in 2020, GMV on Tmall increased 26% y/y to $74.1bn.
FIGURE 1 FIGURE 2
BABA online retail GMV (RMB bn) BABA China retail annual active buyers (mn)
8,000 40% 900 25%

7,000 35% 800
700 20%
6,000 30%
600
5,000 25% 15%
500
4,000 20%
400
3,000 15% 10%
300
2,000 10% 200 5%
1,000 5% 100
0 0% 0 0%
FY2018 FY2019 FY2020 FY2021 FY2018 FY2019 FY2020 FY2021
China retail GMV (RMB bn) y/y growth Annual active buyers y/y growth
Source: Company Reports, Barclays Research Source: Company Reports, Barclays Research
2 November 2021 9
FIGURE 3 FIGURE 4
Tmall App - focuses on brands and higher ticket goods Taobao App - an entry point for BABA’s various
offerings
Source: Tmall App, Barclays Research Source: Taobao App, Barclays Research
In addition, Alibaba operates Taobao Deals, an e-commerce platform targeting users who are
more price-sensitive, as most items on Taobao Deals are priced lower than somewhat similar
items on Taobao and Tmall, and are sourced directly from manufacturers. Similar to PDD,
Taobao Deals includes mini games which users can play to win cash rewards, bringing
gamification and socialization to the e-commerce experience. As of end of June 2021, Taobao
Deals had an annual active customer base of 190mn, up from 150mn at end-March 2021 and
100mn at end-December 2020. Taobao Deals is one of Alibaba’s fastest growing apps.
2 November 2021 10
FIGURE 5
Taobao Deals App - focuses on heavily-discounted items and gamified content
Source: Taobao Deals App, Barclays Research:
Customers can now also access Alibaba’s second-hand marketplace called Idle Fish, in which
most sellers are individuals selling pre-owned items to consumers. In 2019, Alibaba launched
the Idle Fish Select, on which consumers can purchase authenticated second-hand goods
from verified sellers.
In the quarter ended June 2021, there were 925mn mobile MAUs on BABA’s China retail
platforms, and annual active consumers reached 811mn in FY21. With BABA’s push into
lower tier cities, 70% of new active consumers came from these less developed regions.
In FY21, annual average GMV per consumer on BABA’s China retail platforms was RMB 9,240
(~$1,400), and over 200mn Chinese consumers spent >RMB 6,500 on BABA’s retail platforms.
We also highlight the success of Taobao Live, on which GMV almost doubled to over RMB
500bn in FY21. Today, Taobao Live is the No. 1 ecommerce live-streaming platform in China.
2 November 2021 11
FIGURE 6
GMV per China retail annual active buyer (RMB)
10,000 9,076 9,240

8,716
9,000
8,000 7,534
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
FY2018 FY2019 FY2020 FY2021
GMV per AAB -China retail (RMB)
Source: Company Reports, Barclays Research
Offline retail (The "New Retail" model)

Over the last five years, BABA has been gradually building up its offline retail operations to
augment its online ecommerce infrastructure. BABA calls this its New Retail strategy. The
company has executed its offline retail buildout through home grown green-field builds, such
as Freshippo (aka Hema), an exclusively self-checkout enabled retail chain resembling a
modernized farmers’ market. This has been done through investments in existing offline
grocery stores (such as Sun Art) and through investments in electronics and home appliance
retailers (such as Sunning). The goal of the strategy is to provide consumers a shopping
experience that seamlessly integrates all of BABA’s online and offline capabilities. While we
believe the offline retail business is still a profit drag, it is an integral part of BABA’s commerce
and logistics infrastructure.
2 November 2021 12
FIGURE 7
Hema App - focused exclusively on groceries and FMCG product
Source: Hema App, Barclays Research
Monetization model within China Commerce Retail

Around two-thirds of China commerce retail revenue came from BABA's customer
management sub-segment in FY21, which were paid for by merchants on Tmall, Taobao,
and, to a lesser extent, Idle Fish. Consumer management revenue consists of P4P marketing
services, in-feed marketing services, display marketing services, and advertising services
listed on properties of third-party affiliates. In addition, merchants pay Alibaba transaction
commissions for doing business on its platform. These commissions are charged on a
percentage of transaction value basis and vary from 0.3% to 5.0%, depending on the
marketplace and product category, according to the company.
The other third of China retail commerce revenue comes from the New Retail business (offline
businesses primarily) and direct 1P sales (e.g., its online grocery business).
2 November 2021 13
FIGURE 8
Tmall take rates vs. JD take rates (SOP: fulfilled by seller; FBP fulfilled by JD)
JD T-Mall
SOP Take Rate Service Fee Rate

Clothing 5%-8% 5%
Footwear 8% 5%
Bages and Luggage 1%-10% 5%
Watch 4%-8% 5%
Sports and Outdoor 4%-8% 5%
Textiles 6%-8% 5%
Daily Necessity 4%-8% 2.5%-5%
Kitchen 8% 5%
Furniture 5%-8% 2%-3%
Car Accessories 2%-8% 3%-4%
Medical Cares 5%-10% 2%-5%
Infant 2%-8% 2%
Food & Beverages 3%-5% 2%
Fresh Food 3% 2%
3C 2%-8% 2%
Household Appliance 5%-9% 2%-5%
Used Products 2%-8% /
Source: Company Websites, Barclays Research
FIGURE 9
Security deposit requirements for platforms
Depend on Product
Security Deposit (in RMB) Store Type Base Deposit All In Deposit
Category
Taobao All Store 1,000 1,000-50,000 2,000-51,000
Tmall Flagship Store N/A 50,000-100,000 50,000-100,000
Franchise Store N/A 100,000-150,000 100,000-150,000
Hypermarket N/A 150,000 150,000
Jd.com Local Brand N/A 30,000-100,000 30,000-100,000
International Brand N/A 100,000-500,000 100,000-500,000
Jingxi (Jd) Individual Seller 1,000 N/A 1,000
SME 4,000-30,000 N/A 4,000-30,000
Larger Brand 4,000-20,000 N/A 4,000-20,000
Jd International SME 10,000-40,000 (USD) N/A 10,000-40,000 (USD)
Larger Brand 5,000-15,000 (USD) N/A 5,000-15,000 (USD)
Pinduoduo GMV 50,000-100,000 3,000 5,000-100,000 8,000-103,000
GMV 100,000-500,000 6,000 5,000-100,000 11,000-106,000
GMV >500,000 11,000 5,000-100,000 16,000-110,000
Source: Company Websites, Barclays Research
Wholesale commerce – China

One of the BABA’s original businesses is 1688.com, which is a domestic wholesale
marketplace that connects wholesale buyers and sellers across a variety of product
categories. Unlike BABA’s consumer facing e-commerce business, this B2B business is
2 November 2021 14
monetized via a membership program and value-added services. Sellers on 1688.com

purchase a China TrustPass membership to avoid fees when transacting on the platform.
1688.com’s over 990,000 members can also purchase value-added services, such as
premium data analytics and storefront management services. In FY21, more than half of
1688.com revenue was attributable to value-added services.
Retail commerce – cross-border and global

BABA has several business units focusing on cross-border and global ecommerce
opportunities:
Lazada – Acquired by BABA in 2016, Lazada is a major ecommerce marketplace in Southeast

Asia. Its platform connects not only SMEs, but also major regional and global brands with
consumers in Southeast Asia. In FY21, Lazada had over 100mn annual active consumers.
AliExpress – is an international retail marketplace that enables consumers outside of China to

purchase directly from manufacturers and distributors in China and around the world.
AliExpress charges a take rate between 5-8% of transaction value.
Tmall Global – serves the reverse function of AliExpress and enables Chinese consumers to
purchase directly from overseas brands and retailers.
Additionally, BABA acquired an import oriented ecommerce business, Kaola, from Netease in
2019. It also operates several other overseas ecommerce platforms – including Trendyol in
Turkey and Daraz in South Asia.
Wholesale commerce – cross-border and global

Alibaba.com is a cross-border wholesale ecommerce platform that enables wholesalers and
distributors in approximately 190 countries to purchase products directly from
manufacturers in China. BABA monetizes Alibaba.com via a membership program, similar to
its domestic wholesale platform 1688.com, and value-added services. In FY21, over 34mn
buyers completed transactions or sourced business opportunities on Alibaba.com, which had
over 230,000 paying members. Sellers may purchase value-added services from Alibaba.com,
such as storefront management tools, marketing and advertising services, customs clearance
assistance, etc. In FY21, value-added services accounted for over half of Alibaba.com’s
revenues.
2 November 2021 15
FIGURE 10
Tmall Global offers items directly purchased from overseas or imported goods
Source: Tmall Global App
Cainiao
Unlike traditional logistics providers, BABA’s logistics business unit, Cainiao Network, is a
technology-driven platform that connects trucks, drivers, and warehouses of its logistics
partners.
In addition to providing order fulfilment services to merchants in the Alibaba ecosystem,

Cainiao provides end-to-end supply chain management, warehousing services, and inventory
logistics services to external customers who are not in Alibaba’s ecosystem.
Cainiao also has built a fulfilment network that operates hubs, package sorting centers, and
distribution centers at key strategic locations. These hubs and centers are either owned,
leased by Cainiao or accessed through Cainiao’s partnerships with third-party logistics
providers. Over the last few years, Cainiao has not only built a massive, technology-driven
domestic logistics infrastructure, it has also built out an extensive global fulfilment network.
In March 2021, average daily cross-border packages reached over 5mn.
Additionally, Cainiao runs Cainiao Post, its network of pick-up points in numerous
neighborhoods, campuses, and rural villages. While Cainiao is one of BABA’s newer
businesses, its revenue has already surpassed the combined revenue of BABA’s domestic
wholesale and international wholesale businesses.
Local consumer services

In 2018, BABA purchased Ele.me, the number 2 food delivery player in China. After BABA
ramped up its investments in the segment, the platform saw 20% y/y annual active consumer
growth in FY21 and 50% y/y order growth in the quarter ended June 2021. That said, the
market share gap between Ele.me and Meituan (No. 1 in the space) remains large, at ~40%
according to our estimate based on company data.
2 November 2021 16
In addition to Ele.me, the local consumer services segment runs an express local delivery
service platform, Fengniao. With Ele.me and Fengniao, BABA delivers not just food but also
groceries, FMCG products, and pharmaceutical products to consumers on-demand.
Within its local consumer services segment, BABA also runs Koubei, a restaurant and local
services review app, and Fliggy, BABA’s answer to Ctrip in the OTA sector.
FIGURE 11
Ele.me homepage - recommended stores based on ad spending and coupon offering
Source: Ele.me App, Barclays Research
Cloud computing
Ali Cloud is the largest cloud service provider in Asia and the third largest in the world,
according to a Gartner 2021 report. With a focus on cloud infrastructure, Ali Cloud offers a
wide range of cloud services including storage, computing, database, security, and analytics.
Ali Cloud provides a suite of solutions for several industry verticals, and currently has over
4mn paying customers. In June-Q 2021, BABA's cloud computing revenue grew 29% y/y,
compared to 37% and 50% in March-Q 2021 and Dec-Q 2020, respectively. Management
attributed the June-Q 2021 slowdown to the contract termination of a top international
customer who had to move their servers out of Ali cloud due to local regulations.
Management has commented that outside this particular customer, Ali cloud’s customer
base is quite diversified and customer concentration not an issue.
2 November 2021 17
FIGURE 12
2020 global IaaS cloud service market shares by revenue
Other
20%
Amazon
Huawei 42%
4%
Google
6%
Alibaba
10%
Microsoft
18%
Source: Gartner, Barclays Research
Additionally, amid Covid-19, BABA has been aggressively promoting its enterprise-grade
communication and collaboration platform, DingTalk, to facilitate the digital transformation
of enterprises and small businesses in China. As of October 2021, DingTalk has 500mn active
users and provides services to over 19mn corporations and schools.
With the cloud market in China estimated at only ~10% of the market in the U.S according to
IDC, the cloud industry is still at an early stage of its development. In 2020, IDC estimated that
the public cloud market in China, comprising PaaS, IaaS and SaaS, was almost worth $20bn.
Digital media and entertainment

BABA entered the digital media and entertainment industry through its acquisition of Youku
in 2015 and its acquisition of ChinaVision Media (the predecessor of Alibaba Pictures) in
2014. In FY21, Youku’s average daily paying subscribers increased 35% y/y. Youku is one of
the top three video streaming players in China (the other two major players are Tencent Video
and Baidu’s iQiyi).
Innovative initiatives
BABA maintains a strong pipeline of innovative initiatives. One of the key initiatives is Amap,
acquired by BABA in 2014. Amap is considered by many to be the best map app in China. Its
rich features, including real-time traffic information and road blockage status, have made it a
go-to app for many Chinese consumers and businesses. Like many mega-cap internet
companies, BABA incubates a number of newer technological and business initiatives. Should
such initiatives become commercially viable, BABA could move them into one of its major
business segments (e.g., Dingtalk was recently moved from Innovative Initiatives to Cloud) or
create a new reporting segment (e.g., Cainiao and Cloud are now stand-alone business unit
within BABA).
Lastly, BABA appears to be laying the groundwork should the smart home concept take off.
Tmall Genie is BABA’s own IoT-enabled smart device product line (speakers, lights, etc.)
which shipped over 12.9mn units in FY21, according to our calculations.
Ant Group – Alipay is the crown jewel

Alibaba currently owns 33% of Ant Group. It was reported by the New York Times that Ant
was valued at $225bn just prior to its aborted IPO in 2020. Previously, through Ant Group’s
funding rounds in 2018, 2017, and 2015, Ant was valued at $150bn, $60bn, and $45bn,
2 November 2021 18
respectively. Ant Group’s TPV of transactions completed in mainland China in LTM June 2020
were RMB 118.0tn. Mainland China TPV in 2019, 2018, and 2017 were RMB 111.1tn, RMB
90.8tn, and RMB 68.5tn, respectively, according to company filings.
Consumers use Alipay, a key part of Ant, for digital payments and financial services.
According to the IPO prospectus, as of June 2020, Alipay app had 987mn annual active users
(AAUs). Digital payment revenues, which constituted 36% of Ant Group’s revenue in 1H20,
are mainly generated by charging merchants transaction fees, based on a percentage of
transaction value. In 2019, digital payments generated 44% of Ant Group’s revenue.
FIGURE 13
Alipay App - aims to become a super app similar to Meituan & Wechat
Source: Alipay App
Ant Group’s credit, wealth management, and insurance products

Ant’s CreditTech arm provides credit to small businesses and consumers, as they are often
under-served by banks. As of June 2020, 98% of Ant Group’s consumer and small business
credit balances were underwritten by partner financial institutions or securitized. Ant Group
generates revenue through fees charged to partner banks based on a percentage of interest
income the bank receives through Ant credit products. CreditTech accounted for 39% of Ant
Group’s revenue in 1H20.
Ant Group’s wealth management services, or InvestmentTech, offers users the ability to
invest their Alipay balances into capital markets. As of June 2020, Ant Group had over RMB
4.1tn in AUM. Of this, 33% was managed by Ant Group’s asset management subsidiary,
Tianhong. In addition to offering financial products, Ant InvestmentTech provides AI driven
advisory services (Robo-advisor), educational material, and risk management tools.
InvestmentTech contributed 16% of total revenue in 1H20.
2 November 2021 19
FIGURE 14
Yue Bao page within Alipay - allows for easy enrollment in Alipay’s wealth management
offering; The balance would automatically earn cash management interest even without
purchasing any wealth management products
Source: Alipay App, Barclays Research:
InsureTech made up 8% of Ant Group’s revenue in 1H20. Insurance products sold through
the Ant platform are mainly underwritten by partner institutions and generate fee revenue
based on a percentage of insurance premiums sold through the platform. A minority of
insurance policies are underwritten by Cathay Insurance, Ant Group’s insurance subsidiary.
Ant offers mutual aid, life, health, and P&C insurance products through its InsureTech
platform.
Financials
Revenue
BABA’s total revenue grew to RMB205.7bn in June quarter 2021, +33.8% y/y. We forecast
FY2022E, FY2023E and FY2024E revenue growth will decelerate to +25.4% y/y, +19.3% y/y
and +18.0% y/y, reaching RMB899.3bn, RMB1,072.7bn and RMB1,266.1bn, respectively, due
to increased regulation and macro headwinds.
We expect Core Commerce revenue to grow +26.3% y/y, +18.8% y/y, and +17.2% y/y to
RMB784.7bn, RMB931.9bn, and RMB1,092.3bn in FY2022E, FY2023E, and FY2024E,
respectively. Within Core Commerce, we believe China Commerce Retail revenue growth will
decelerate in line with overall revenue, +24.6% y/y in FY2022E, +16.7% y/y in FY2023E, and
+15.6% y/y in FY2024E.
Gross margins
BABA’s cost of revenue consists of inventory costs, logistics costs, mobile and web platform
maintenance costs, traffic acquisition costs, content acquisition costs, and other associated
costs. We expect gross margins to contract from >42% in FY2020 and FY2021 to 37-39%
from FY2022E to FY2024E. As a result, we forecast gross profit at RMB340.9bn, RMB421.5bn
and RMB488.7bn for FY2022E, FY2023E and FY2024E, respectively.
2 November 2021 20
Operating expenses
Sales and marketing, BABA’s most significant operating expense, mainly consists of
advertisements, promotions, marketing employee salaries, and other related expenses. We
model sales and marketing expenses to increase slightly as a percent of revenue due to
Taobao Deals subsidies. In FY2021, S&M spend was RMB76.2bn, making up 10.6% of
revenue. In FY2022E, FY2023E and FY2024E, we expect S&M spend to be RMB116.1bn,
RMB135.0bn and RMB152.9bn, totaling 12.9%, 12.6%, and 12.1percent of revenue,
respectively.
The company’s product development expenses consist of salaries, bonuses, benefits, and SBC
paid to R&D employees, as well as other costs associated with the development of new
technologies and products. We forecast product development expenses of 4.7%, 4.6% and
4.4% as a percent of revenue in FY2022E, FY2023E and FY2024E.
BABA’s general and administrative expenses primarily consist of compensation for

management, administrative employees,and other overhead costs. We expect G&A expenses
as percent of revenue to be 3.1% in FY2022E, 3.2% in FY2023E and 3.1% in FY2024E, from
4.2% in FY2020 and 3.5% in FY2021.
Tempered profitability
In the past two fiscal years, BABA had adjusted EBITA margins in the mid-20s. We forecast
adj. EBITA margins to be slightly lower, at 17.1% (RMB154.2bn) in FY2022E, due to large
investments in strategic initiatives. In FY2023E and FY2024E, we model a slight rebound with
adj. EBITA margins of 18.9% (RMB202.3bn) and 19.0% (RMB240.2bn). We forecast FY2022E,
FY2023E, and FY2024E non-GAAP net income of RMB155.1bn, RMB192.7bn and
RMB227.6bn, representing non-GAAP net margins of 17.2%, 18.0% and 18.0%, respectively.
2 November 2021 21
FIGURE 15
Alibaba Financial Summary
BABA Financial
Jun-20 Sep-20 Dec-20 Mar-21 FY21 Jun-21 Sep-21E Dec-21E Mar-22E FY22E FY23E FY24E
Summary
Revenue (RMB bn) 153.8 155.1 221.1 187.4 717.3 205.7 204.1 263.6 225.8 899.3 1,072.7 1,266.1
Revenue growth yoy

33.8% 30.3% 36.9% 63.9% 40.7% 33.8% 31.6% 19.2% 20.5% 25.4% 19.3% 18.0%
(%)
Gross margin (%) 46.3% 45.5% 46.1% 34.0% 42.8% 40.5% 36.8% 38.7% 35.6% 37.9% 39.3% 38.6%
Product development
5.2% 5.6% 4.3% 5.1% 5.0% 4.7% 5.0% 4.5% 4.8% 4.7% 4.6% 4.4%
% rev
S&M % rev 8.4% 9.6% 11.0% 12.9% 10.6% 12.7% 13.5% 12.5% 13.0% 12.9% 12.6% 12.1%
G&A % rev 3.2% 3.7% 3.1% 4.0% 3.5% 2.8% 3.2% 3.0% 3.5% 3.1% 3.2% 3.1%
Adj. EBITA (RMB bn) 45.4 41.2 61.3 22.6 170.5 41.7 30.8 49.3 32.4 154.2 202.3 240.2
Adj. EBITA margin (%) 29.5% 26.6% 27.7% 12.1% 23.8% 20.3% 15.1% 18.7% 14.3% 17.1% 18.9% 19.0%
non-GAAP net income

40.6 49.3 60.6 28.4 179.0 45.7 30.8 46.5 32.1 155.1 192.7 227.6
(RMB bn)
Source: Company Data, Barclays Research
Management
Daniel Zhang – Chairman and Chief Executive Officer
Prior to his current role, Mr. Zhang served as COO of Alibaba Group from 2013 to 2015. Mr.
Zhang joined the company in 2007 as CFO of Taobao Marketplace and served in this position
until 2011. From 2011 to 2013, Mr. Zhang served as the president of Tmall.com.
Mr. Zhang received his bachelor’s degree in finance from Shanghai University of Finance and
Economics.
Joe Tsai – Executive Vice Chairman

Mr. Tsai joined the company as a member of the Alibaba founding team. He was CFO until
2013 and is currently Alibaba’s executive vice chairman, serving on the investment
committee and Ant Group’s investment committee.
Prior to joining Alibaba, Mr. Tsai was a private equity investor based in HK with investor AB
from 1995 to 1999. Prior to that, Mr. Tsai was general counsel of Rosecliff, Inc., a
management buyout firm based in NY.
Mr. Tsai received his bachelor’s degree in Economics and East Asian Studies from Yale College
and a juris doctor degree from Yale Law School.
Maggie Wu – Director and Chief Financial Officer

Ms. Wu has been the company’s director since 2020, CFO since 2013 and head of strategic
investments since 2019.
Ms. Wu joined Alibaba in 2007 as CFO of Alibaba.com. Prior to this, Ms. Wu was an audit
partner at KPMG Beijing.
2 November 2021 22
Ms. Wu is a member of the Association of Chartered Certified Accountants (ACCA). She

received a bachelor’s degree in accounting from Capital University of Economics and
Business.
Valuation
Valuation methodology
We use our business model focused valuation methodology when valuing Alibaba. We value
BABA based on: 1) the value of its core commerce business using a EV/nominal EBITA
multiple, and 2) the value of its holdings of cash and discounted value of its equity
investments. We have currently assigned no value to BABA’s cloud business (which can be
valued on a P/S multiple with AWS as a comp) and to its Ant stake. This means that these
businesses are free options in today’s share price, based on our valuations.
We calculate our FY23E EBITA by applying a 25% nominal margin to our FY23E core
commerce revenue, which gives a nominal core commerce EBITA of $43.7bn. We believe that
25% should be the base case for longer-term EBITA margins given BABA’s 3P-focused
business model and the fact that BABA has surpassed this level in the June-21 quarter. By
applying a target EV/EBITA multiple of 15x, we reach a target EV for the core commerce
business at $655bn, or $234 per ADS. Adding $18 net cash per share and $23 discounted
equity investment value per share, we reach a price target of $275.
The potential valuation upside could come from the cloud business and Ant stake. For
illustrative purposes, if we apply a 8x FY23 EV/S multiple on our FY23E cloud revenue
estimate, in line with AWS cloud business multiple, according to Barclays estimates, we reach
a target EV of $124bn, or $44 per share. BABA owns 33% of Ant, which was valued at $225bn
just prior to its aborted IPO in 2020, according to New York Times report. For illustrative
purposes, using that valuation of $225bn for Ant implies the stake is worth ~$75bn, or $27
per share.
In summary, BABA shares are significantly undervalued currently, in our view, even when just
valuing its core commerce business and its cash and investments. The cloud business and Ant
stake, among others, are effectively free options for patient investors.
Price target
Our price target is $275, based on 15x FY23E nominal core commerce EBITA plus its cash and
discounted investments.
Our upside case is $346, based on 15x FY23E nominal core commerce EBITA plus net cash
and equity investment plus cloud value and Ant stake.
Our downside case is $156, based on 10x FY23E core commerce EBITA.
Risks
1. Regulatory changes, particularly in the anti-monopoly areas, may negatively impact the
company’s competitiveness in certain businesses;
2. Competitors continue to take away market share particularly among BABA’s core
merchants, the domestic and international brands
3. Should the company make more significant investments, the decline in profit margins
may be viewed negatively by some investors in the near term.
2 November 2021 23
KE HOLDINGS (BEKE) – OVERWEIGHT; PT $29

Ke Holdings Inc.(BEKE): Quarterly and Annual EPS (CNY)
BEKE
2020 2021 2022 Change y/y
Stock Rating
OVERWEIGHT FY Dec Actual Old New Cons Old New Cons 2021 2022
Industry View Q1 -3.64A N/A 1.25A 1.28A N/A 0.23E 0.34E 134% -82%
POSITIVE Q2 2.23A N/A 1.37A 1.40A N/A 1.59E 1.41E -39% 16%
Price Target Q3 1.38A N/A -0.49E -0.21E N/A 1.20E 1.54E N/A 345%
USD 29.00 Q4 1.71A N/A 0.06E 0.00E N/A 2.13E 1.28E -96% 3450%
Price (01-Nov-2021) Year 1.68A N/A 2.19E 2.45E N/A 5.14E 4.79E 30% 135%
USD 19.66 P/E 74.8 57.3 24.5
We are initiating coverage of KE Holdings with an Overweight

 BEKE is the dominant online and offline real estate agency in China. BEKE is like a MLS
(multiple listing service), Zillow, and Realogy2 all wrapped in one.
 With no MLS in China, BEKE was founded to fill this gap and has become an accurate and
reliable source for real estate listings. The company was originally China's largest real
estate broker and operated under the brand Lianjia, and along the way acquired smaller
brokers to expand its physical footprint. Lianjia started the BEKE platform in 2018 to list
existing and new homes for sale with 100% verified information. Today, this platform has
emerged as the gold standard and a dominant platform for those looking to buy or
rent homes.
 Its GTV is roughly evenly split between existing home sales and new home sales. One of
the most appealing features of BEKE's offering is that it is an open platform. This allows
third party agents to post their own listings on BEKE and earn commissions from
transacting on homes listed on BEKE. Today, about 60% of existing homes are sold by 3rd
party agents and 80% of new homes are sold by 3rd party agents.
 BEKE verifies the information of 3rd party listings and provides photo shoots to ensure
a consistent quality of photos or virtual videos for listings. BEKE has developed industry
leading VR technologies which can potentially be used in areas other than residential real
estate. The company has also ventured into tangential areas such as home renovation
and bridge loan financing to home buyers.
Our price target of $29 is based on 10x EV/nominal EBITDA on our FY23E nominal EBITDA
estimate of $2.85bn plus net cash.
2Realogy (covered by Matthew Bouley) is a leading and integrated provider of residential real estate services in the
United States
2 November 2021 24
Investment Thesis
Attractively positioned in the largest

property market in the world
We initiate coverage of KE Holdings with an Overweight rating and $29

price target.
Similar to other parts of the Chinese economy, the real estate brokerage business is relatively
new as private home ownership only became a reality about 30 years ago. The industry has
been mired with several serious problems, the biggest of which has been the lack of
accurate information (both online and offline) on homes listed for sale. Real estate agents in
China don’t need to have any professional credentials or industry licenses. Many real estate
agents tend to regularly use “bait and switch” tactics with potential home buyers. There is
usually no exclusivity when listing one’s home for sale either.
Until BEKE came along in 2018, there was little authenticity about home listings on websites
or online apps or billboards. Leveraging its position of being one of the largest offline real
estate brokers (Lianjia) in China, BEKE launched an online platform Beike in 2018. Every listing
on BeiKe needs to be authenticated and its information verified, making it unique in the
industry in this aspect. China does not have an MLS or national database for home listings,
so home buyers tend to view BEKE as the gold standard for information for home listings– it
is analogous to Zillow, real.com, plus a few leading brokers all wrapped into one.
Given where China is in its development cycle and home ownership culture, the residential
real estate transaction volume is enormous. Almost 1.95bn square meters of residential
housing were transacted in 2020 with a total transaction value of RMB 22.8tn ($3.5tn).
The BEKE platform has reported GTV of >RMB1tn ($150bn) every quarter for the past
several quarters. The market opportunity seems immense, and we see no serious
competition to BEKE, at least for now. There has been some news flow3 that the government
may launch sites to show legitimate home listings with accurate information. We would not
view this a threat to BEKE at least in the medium term.
It has been estimated by NBS that the real estate industry overall contributes at least 25% of
China’s GDP, and the industry is often the target of government tightening and regulations
given relentlessly rising home prices in China. An apartment in Beijing or Shanghai can easily
cost more than one of similar size in a nice neighborhood in New York City or London. We
see government regulation and tightening measures as the biggest risk when investing in
BEKE. Following the most recent round of tightening started in July, BEKE's share price has
fallen about 70% from the peak earlier this year (vs KWEB's -30%). We think this presents an
attractive entry point for investors, as we see plenty of room for growth with BEKE's dominant
position in the space.
But most importantly for the near term, it is possible we may be at the later stages of the
current tightening cycle as there are some early signs of policy loosening. We understand
that half of local government budgets tend to come from land sales, and the ripple effect
of slower property sales stalling land sales may lead to selective loosening.
3 Translated from SINA.com (8/30/21) “Hangzhou’s official second hand housing trading platform listings surge 10
fold”
2 November 2021 25
Business Overview
Business Segmentation
Lianjia Real Estate Brokerage was founded in Beijing 20 years ago by its late former chairman,
Zuo Hui. Under Zuo’s leadership, Lianjia later established its financial services arm, Yiju Taihe,
in 2010. In 2018, concurrent with the creation of Beike platform, KE Holdings (BEKE) was
incorporated and became the parent company of Lianjia, Yiju Taihe, and Beike platform. KE
Holdings’ deep roots in the offline, traditional real estate brokerage business has contributed
significantly to BEKE’s success as the dominant provider of authentic home listings in China.
Today, BEKE operates a residential real estate ecosystem consisting of an integrated online
and offline presence that aggregates home listings, facilitates real estate transactions, and
offers real estate related services to buyers, renters, brokerages, and developers. In 2020,
BEKE generated a GTV of RMB3,499bn (~$550bn), +64% y/y, and completed 3.6mn
transactions, +64% y/y, on its platform.
BEKE reports its revenues along three major business lines: Existing home transaction
services, new home transaction services, and emerging and other services.
FIGURE 16
BEKE Revenue (RMB mn)
30,000
25,000
20,000
15,000
10,000
5,000
0
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
existing home transaction services new home transaction services

emerging and other services
Transaction services
BEKE generated 97% of its revenue from commissions and service fees earned in existing and
new homes transactions in 2020. Commission rates differ based on whether the transacted
home is new or existing, and whether the transacting agent is employed by Lianjia or a third
party broker. In China, both buyers and sellers typically pay an equal amount of commissions
to the agents (1.5% of the transaction value each from the buyer and the seller, for example).
Existing homes
In existing home transactions, BEKE recognizes revenues by taking gross commissions
generated by Lianjia agents, net commissions and franchise fees taken from third party
agents using Beike's platform, and other value added services, such as transaction closing
services and on-site verification services.
For Lianjia’s own listings of existing homes, the commission rate taken by BEKE is 2.58%, as
of 2Q21. This take rate has stayed relatively stable since 2018, fluctuating between 2.5-2.7%.
2 November 2021 26
For existing home listings from third party brokers, the gross take rate has trended upwards
from 2.1-2.2% in 2019, to 2.34% in 2Q21, a record high.
Contribution from existing home sales, which is defined as revenue less compensation to
internal agents, sales professionals, third party agents, and other sales channels, for existing
home transactions was RMB 12.5bn in 2020, representing a 40.9% contribution margin.
Contribution margin for this segment has been on an upward trend from 30.5% in 2017. The
is attributed to an increase in platform and franchise fees after the launch of the Beike
platform.
FIGURE 17
Take rates on existing home transactions
2.80% 2.66% 2.61%

2.57% 2.57% 2.53% 2.58%
2.50% 2.52%
2.60%
2.40%
2.20% 2.34%
2.00% 2.23% 2.23% 2.24%
2.14% 2.14% 2.15%
2.08%
1.80%
1.60%
1.40%
1.20%
1.00%
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Lianjia agents Connected agents
New homes
New home revenues are generated by charging developers sales commissions. The average
commission rate of new home transactions has improved slightly from 2.74% in 1Q19 to
2.79% in 2Q21. New homes listed on Beike's platform are available to all agents, including
Lianjia and third party agents. The first agent who sells the property earns the allotted portion
of commission.
Contribution for this segment was RMB 8.1bn, implying a contribution margin of 21.5%, vs
44.7% in 2017. This margin has decreased dramatically because the launch of Beike's
platform has led to a higher percentage of new home transactions managed by third party
agents. Because of this, a significant part of the revenues from new home sales recognized
by BEKE can be considered pass-through (ie. passing the bulk of gross commissions from
developers to these third party agents). As a result, the contribution margins naturally are
lower for new home sales compared to existing home sales, for which BEKE recognizes a net
commission after the payout to third party agents for such transactions.
2 November 2021 27
FIGURE 18
Take rates on new home transactions
3.50%
2.96% 2.89%
3.00% 2.78% 2.79% 2.75% 2.79%
2.69% 2.63%
2.50%
2.00%
1.50%
1.00%
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Lianjia & Connected agents
Why do real estate developers need Beike now?

In the past, real estate developers had land inventories in city centers. Home prices in city
centers are higher, making it profitable to maintain a direct sales force. As land supply falls in
metropolitan areas, developers are forced to look at surrounding areas for opportunities.
These properties have lower value, disrupting the previously profitable model of having a
direct sales force. In addition, because developers are building properties in peripheral areas,
developers’ city-based sales offices have neither the client base not the familiarity to target
appropriate buyers. BEKE leverages its online presence to target as many potential buyers as
possible. Because of this supply and demand dynamic, new home projects listed on Beike's
platform increased from 3,486 to 8,639 from December 2018 to December 2020.
FIGURE 19
BEKE market share
30% 27%
25%
19%
20%
15% 12% 13%

9%
10%
5%
5% 2% 2%
0%
2017 2018 2019 2020
New home Existing home
Source: NBS, Company Reports, Barclays Research
Other housing services

In addition to transaction services, BEKE generates revenue from other home-related services,
such as financial services and home renovations. The emerging and other services segment
contributed 3% of BEKE revenue, generated RMB2bn in 2020.
2 November 2021 28
Financial services include payment and escrow services, mortgage facilitation services, and
title clearance services. BEKE provides bridge loans, title insurance, and guaranteed payments
to further drive the transaction completion rate. As BEKE leverages the extensive market data
collected over the years and its robust in-house risk management process, the company can
effectively reduce its risk exposure from these financial services products, according to
management.
BEKE also provides home renovations, furnishing, and re-modeling services and has a list of
interior designers for customers to view online. BEKE is able to purchase, distribute, and
deliver the materials, as well as manage the contractors who do the actual renovations.
FIGURE 20
Beike's standardized decoration offerings
Source: Beike App
Comprehensive Online presence

Home buyers and renters can access Beike’s online listings through its website, mobile app,
and WeChat Mini Program. Similar to Zillow or Redfin, users can search for homes and rentals
that fit their preferences through applying filters. Each listing includes information about each
property’s size, neighborhood, price, etc., as well as relevant information about the
transportation, healthcare, education, etc. options in the area.
Substantial Offline presence

Lianjia
BEKE’s offline brokerage business, Lianjia, is China’s largest real estate brokerage brand and
the company’s biggest revenue contributor. Lianjia’s primary strengths are its scale and its
brand. Lianjia, as of December 2020, had 139,000 agents and 7,800 brokerage stores in 29
cities. In Beijing and Shanghai, Lianjia had 27,000 and 21,000 agents, respectively. We note
that in strategically important cities such as Beijing and Shanghai, the use of Beike's platform
is exclusive to Lianjia agents. In Beijing and Shanghai, BEKE had 58% and 19% of brokerage
market share in 1Q21, per CREIS. Lianjia has achieved much of its growth and market
dominance from acquiring smaller brokerage firms over the years.
Together with Lianjia’s scale, its brand is its competitive advantage. Due to a lack of training,
high churn rates, and shady sales tactics, real estate brokers in China have had a disreputable
image in the past. Lianjia has a goal to change the status quo. Its stores are clean and brightly
2 November 2021 29
lit, information provided by Lianjia is reliable and accurate, and its agents are vetted more
thoroughly.
FIGURE 21
BEKE number of offline stores and GTV per store (RMB mn)
50,000 46,946 140

45,000
37,514 120
40,000
35,000 100
30,000 80
25,000
20,000 60
15,809
15,000 40
8,030
10,000
20
5,000
0 0
2017 2018 2019 2020
number of stores GTV per store (RMB mn)(right)
Additional brokerage brands

As of December 2020, third party brokerage chains added 39,000 stores and 354,000 agents
to Beike’s platform, greatly increasing its penetration and geographic reach in China. As of
1H21, over 81.5% of existing home listings on Beike’s platform were posted by third party
agents. Along with these economy-of-scale benefits, the inclusion of third party brokerage
chains has enabled BEKE to charge additional platform fees and commissions. Third party
agents have been contributing roughly half the GTV of existing home sales and 80% of GTV
of new home sales in the last few quarters
Third party brokerage stores have an option of becoming a franchisee under BEKE’s Deyou
brand (originally acquired in Shanghai in 2015). Franchisees benefit from BEKE's branding
and infrastructure.
2 November 2021 30
FIGURE 22
GTV split between Lianjia and connected agents
1,400.0
1,200.0
1,000.0
800.0
600.0
400.0
200.0
0.0
3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Lianjia agents Connected agents
Residential Real Estate Database

BEKE’s platform is China's equivalent of Zillow and MLS. As of December 2020, BEKE had
~3.7m existing property listings on its platform. Being the leading authentic property listing
aggregator in China is arguably BEKE’s most notable value proposition. Previously, there was
no centralized service platform where agents and users could access accurate information on
the real estate market. Duplicate listings and fictitious listings were, and still are, common on
other real estate listing sites. BEKE’s Housing Dictionary has addressed these issues. BEKE
verifies the accuracy of information, including the existence, availability, address, and price of
the properties listed on its platform and makes the information available to customers and
brokers through its online site and its apps.
BEKE’s Agent Cooperation Network

BEKE’s Agent Cooperation Network is a disruptor in the housing transaction process in China,
in our view. The Chinese real estate brokerage market is highly fragmented. Homebuyers
often have to contact multiple brokers, and different brokers routinely keep information from
each other as a way of protecting and maximizing their own interests.
The ACN addresses this issue by defining the steps in which a real estate transaction takes
place (e.g. listing, on-site photo taking, contract preparation), and assigning one or
more agents to one or all of those steps. Once a transaction is closed, the ACN allocates
commissions to each agent accordingly, based on each agent’s contribution to the
transaction. By bringing transparency to the process, agents can collaborate and expand their
opportunities for income beyond a specific specialization or neighborhood. As of 2020, >70%
of existing home transactions involved cross-store collaboration.
2 November 2021 31
FIGURE 23
BEKE ACN – Steps in the real estate transaction process
Source: Barclays Research
Realsee VR
BEKE started its VR lab in 2016. VR has natural applications in the real estate market, allowing
for immersive viewings of multiple properties from one’s computer or smartphone.
RealSee, BEKE’s VR division, develops VR cameras and software used in 3D reconstructions

of real estate properties. RealSee VR is also used to show renderings of expected results to
home renovation customers. In 2020, RealSee VR property showings had ~1.29bn views and
~59mn hours of viewing time. As of June 2020, BEKE had 160 employees on its RealSee VR
R&D team.
FIGURE 24
VR showing of existing listings
Source: Beike App
We believe 3D digital rendering technology has applications beyond real estate sales. The
number of use cases for 3D reconstruction is unknown, but the technology has potential
uses for property appraisals, facilities management, construction architecture, and
hospitality. As an example, in home insurance, pre-captured 3D digital images can determine
the validity of property damage claims.
2 November 2021 32
We view BEKE’s Realsee technology as similar in function to Matterport, a 3D image capturing

and data company based in Sunnyvale California, that listed under the Gores Holdings VI
SPAC in early 2021. As of October 2021, Matterport has a market capitalization of USD5.4bn.
Macro Chinese Real Estate Landscape

According to China Insights Industry Consultancy (CIC) reports, China’s housing market GTV
increased from RMB9.7tn to RMB 22.3tn ($3.5tn) in 2019, representing an +18% annual
growth rate. However, the projected 2019 to 2024 market CAGR is +6.6%. It expects
the growth of existing home sales, new home sales, and rentals to decelerate. From 2014 to
2019, existing home sales, new home sales, and rentals grew at +20.8%, +17.5%, and +13.6%
CAGR, respectively. From 2019 to 2024, the CAGR is expected to be +12.4%, +2.3%, and
+12.5% respectively. New home sales, which currently make up the bulk of housing
transaction value, are expected to decelerate the most, while existing home sales and rentals
are expected to increase as part of the mix.
FIGURE 25
China new and existing home sales (RMB tn)
18
15.5
16
13.9
14 12.6
12 11
9.9
10
7.3 7.3
8 6.6 6.5 6.7
6
6 4.2
4
2
0
2015 2016 2017 2018 2019 2020
GTV of China new home sales (RMB tn) GTV of China existing home sales (RMB tn)
Source: BEKE Estimates (2020), NBS, Barclays Research
Contracted real estate sales volume by floor space in China has trended up significantly since
2014. As seen in Figure 26 the market has experienced seasonality and periodic regulatory
tightening through the general uptrend. Additionally, Covid-19 essentially froze much of the
real estate market in early 2020.
2 November 2021 33
FIGURE 26
China contracted real estate sales volume (mn sqm)
Source: NBS, Barclays Research
Housing price growth has decelerated considerably from its 2016-17 high, caused by several
rounds of government intervention through setting price limitations on new homes,
tightening mortgage supply to home owners with multiple properties, and higher down
payment requirements. The average house price increase in 50 cities in China has stabilized
at around 6% in 2021, vs. +25% during its 2016-2017 highs.
FIGURE 27
CRIC 50 cities residential average house price yoy
30%
25%
20%
15%
10%
5%
0%
Feb-21
Feb-20
Feb-19
Feb-18
Feb-17
Feb-16
May-21
May-20
May-19
May-18
May-17
May-16
May-15
Aug-21
Aug-20
Aug-19
Aug-18
Aug-17
Aug-16
Aug-15
Nov-20
Nov-19
Nov-18
Nov-17
Nov-16
Nov-15
Source: Bloomberg, Barclays Research
Financials
Revenue
BEKE's total net revenue grew +20.0% y/y in 2Q21. Looking ahead, we forecast revenue
growth of +7.2% y/y, +8.9% y/y, and +13.0% y/y in 2021E, 2022E, and 2023E to RMB 75.6bn,
RMB 82.3bn, and RMB 93.0bn, respectively. New home transaction services, the main driver
of revenue growth, are modelled to increase +13.2% y/y, +13.1% y/y, and +16.5% y/y in
2021E, 2022E, and 2023E. We forecast existing home transaction services revenue to
post relatively flat growth in the next three years.
2 November 2021 34
Gross margins
Cost of revenues are primarily attributable to commissions paid to internal and external real
estate agents. Gross margins are expected to be 21.4%, 23.1%, and 24.3% in 2021E, 2022E,
and 2023E. Between commission splits (paid to third party agents) and
internal compensation (paid to Lianjia agents), we expect commission split costs to almost
double between now and 2023. We expect internal compensation to remain flat. In 2020,
commission split and internal compensation accounted for 46% and 43% of total cost of
revenues, respectively.
Operating Expenses
Sales and Marketing
Sales and marketing expenses, which BEKE primarily attributes to advertising expenses,
compensation to sales and marketing personnel, and D&A related to S&M activities, was 5.3%
of net revenue in 2020. In 2021E, 2022E, and 2023E, S&M as a percent of revenue is expected
stay in the 5-7% range through the three year period.
General and administrative

In 2020, general and administrative expenses were 10.8% of net revenue. Looking ahead to
the next three years, we model G&A as a percent of revenue in the 9-12% range, remaining
relatively constant as a percent of revenue. BEKE’s G&A expenses are mainly employee
compensation in general corporate functions, rental expenses, office expenses, Lianjia
recruitment and training expenses, and other related expenses.
Research and development

BEKE, while not known as a particularly technology driven business, develops software, VR
technology, and other innovations to improve its real estate business. Research and
development expenses in 2020 were 3.5% of net revenue. In 2021E, 2022E, and 2023E, we
forecast R&D as a percent of revenue to remain in its historical range at 3.9%, 3.9%, and
3.8%, respectively.
Profitability
We forecast a decrease in BEKE’s 2021E profitability due to housing market headwinds. As a
result, we expect adj. OPM in 2021E to be 1.6%, vs. 8.4% in 2020. We expect 2022E and
2023E adj. OPM to recover at 7.4% and 9.7%, respectively. Adj. operating profit in 2021E,
2022E, and 2023E is therefore RMB1.2bn, RMB6.1bn, and RMB9.0bn, per our forecasts. We
estimate adj. net income to BEKE ordinary shareholders of RMB1.5bn, RMB5.0bn, and
RMB7.3bn in 2021E, 2022E, and 2023E, representing adj. net income margins of 1.9%, 6.1%,
and 7.8%.
2 November 2021 35
FIGURE 28
BEKE Financial Summary
BEKE Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB bn) 7.1 20.1 20.5 22.7 70.5 20.7 24.2 15.3 15.4 75.6 82.3 93.0
Revenue growth yoy

-- -- 70.9% 57.6% 53.2% 190.7% 20.0% -25.7% -31.9% 7.2% 8.9% 13.0%
(%)
Gross margin (%) 7.0% 32.5% 21.3% 23.9% 23.9% 23.3% 22.1% 19.5% 19.6% 21.4% 23.1% 24.3%
S&M % rev 8.1% 3.9% 5.0% 5.8% 5.3% 5.1% 5.1% 9.8% 7.8% 6.6% 5.2% 4.8%
G&A % rev 15.5% 9.7% 12.9% 8.3% 10.8% 10.2% 9.1% 18.3% 14.3% 12.3% 9.8% 9.1%
R&D % rev 6.3% 2.6% 3.8% 3.2% 3.5% 3.1% 3.2% 5.1% 5.1% 3.9% 3.9% 3.8%
Adj. EBIT (RMB bn) (1.5) 3.4 1.7 2.2 5.9 1.6 1.7 (1.5) (0.5) 1.2 6.1 9.0
Adj. EBIT margin (%) -20.8% 17.1% 8.5% 9.8% 8.4% 7.6% 6.9% -9.7% -3.5% 1.6% 7.4% 9.7%
non-GAAP net
(1.8) 1.1 1.2 2.0 2.8 1.5 1.6 (0.6) 0.1 1.5 5.0 7.3
income (RMB bn)
Management
Yongdong Peng – Chairman and CEO
Mr. Peng was appointed the chairman of the board in 2021 and has been the CEO of
Beike Zhaofang (Beijing) Technology since 2017. Prior to 2017, Mr. Peng was the vice general
manager of Beijing Lianjia, a position he assumed in 2010. Before working at BEKE, Mr. Peng
was a senior consultant of strategy at IBM and a senior manager at BEL. Mr. Peng earned his
bachelor’s degree in engineering from Zhejiang University and an IMBA from Tsinghua in
2006.
Tao Xu – CFO
Mr. Xu has been the CFO of Beike Zhaofang (Beijing) Technology since 2016. Prior to BEKE,
Mr. Xu was the CFO of SenseTime Technology, Didi Infinity Technology, and Dimension Data
Information Technology. From the beginning of Mr. Xu’s career in 1996 to 2011, Mr. Xu held
leadership positions in Sun Microsystems China, Lucent Technology, and Beijing Sohu. Mr.
Xu earned his undergraduate degree from Capital University of Economics and Business and
a master’s degree in international accounting from University of New South Wales.
Wangang Xu – COO
Mr Xu, prior to serving as COO, he served as co-COO since 2018. Before 2018, Mr. Xu was a
general manager and regional head of Chengdu Lianjia Real Estate Brokerage and a general
manager of Sichuan Yicheng Real Estate Brokerage. Mr. Xu earned his bachelor’s degree from
the University of Electronic Science and Technology of China in 1986.
2 November 2021 36
Valuation
We use our business model focused valuation methodology to derive our KE Holdings price
target. We value BEKE on an EV/nominal EBITDA basis. We assume that in the longer term,
1) BEKE’s existing home sales services will generate a ~25% nominal EBITDA margin, 2) new
home sales services generate a ~15% nominal EBITDA margin, and 3) emerging services
generate a ~30% nominal EBITDA margin.
Due to the highly profitable nature of BEKE’s emerging services segment (+80% contribution
margin), we are including this segment into our target EV and price target calculation,
although its impact on our base case price target is only $2/share.
Based on our FY23E revenue estimates from commissions and fees for existing home sales,
new home sales, and emerging services segments, incorporating our nominal EBITDA margin
estimates arrives at total nominal FY23E EBITDA of $3.1bn.
We apply EV/nominal EBITDA range of 10x, adding net cash of $6.8bn to derive a price target
of $32.
Price Target
Our price target of $29 is based on 10x EV/nominal EBITDA on our FY23E nominal EBITDA
estimate of $2.85bn, plus net cash.
Our $18 downside case valuation is based on 5x EV/nominal EBITDA on our FY23E nominal
EBITDA estimate plus net cash.
Our $41 upside case valuation is based on 15x EV/nominal EBITDA on our FY23E nominal
EBITDA estimate plus net cash.
Risks
1. Periodic government policy tightening in China results in lower than trend line home
transactions from time to time, resulting in highly volatile financial results.
2. Some local governments, eg, Huangzhou, have expressed interest in launching similarly
authenticated home listing sites.
3. The current property tightening cycle lasts longer than expected which would continue
to depress transaction volume
2 November 2021 37
BAIDU, INC. (BIDU) – OVERWEIGHT; PT $243

Baidu, Inc.(BIDU): Quarterly and Annual EPS (CNY)
BIDU
2020 2021 2022 Change y/y
Stock Rating
POSITIVE Q2 16.39A N/A 17.09A 123.28A N/A 19.43E 15.13E 4% 14%
USD 243.00 Q4 22.03A N/A 18.31E 12.24E N/A 20.93E 17.77E -17% 14%
Price (01-Nov-2021) Year 73.13A N/A 66.33E 53.14E N/A 77.01E 65.75E -9% 16%
USD 170.32 P/E 14.9 16.4 14.1
We are initiating of Baidu with an Overweight rating and price

target of $243
 Baidu is one of the most overlooked major Chinese Internet stocks, in our view. Investors
have been concerned about the market share loss of search in the overall online
advertising space, as the emergence of newer modalities such as streaming and short-
form video have displaced ad dollars. While the share loss is evident in Baidu’s results in
recent years, we believe that further losses will slow. Baidu has successfully extended its
advertising business to other properties such as managed pages, which contributes
about 40% of Baidu core ad revenue (ex iQiYi) in recent quarters.
 But most importantly, Baidu has invested heavily in cutting-edge hard tech in areas
including AI, autonomous driving, smart devices, and IoT operating systems. Baidu’s AI
developer and machine learning toolkit, Paddle Paddle, ranks #2 behind Google in China,
but we don’t expect Google to retain its leadership in China for long. Baidu’s AI chip,
Kunlun, already in its second generation, should help strengthen Baidu’s overall
competitive position in the cloud in China. Its autonomous driving system, Apollo, is
arguably the most advanced in China and has most real road test miles among all
Chinese players by far.
 We are also very intrigued by Baidu’s smart devices business. We view Baidu’s move to
enter the smart IoT space as a smart one as Baidu’s DuerOS enables the connectivity and
content distribution across all these devices already installed in consumers’ homes and
cars. Having this kind of infrastructure may prove particularly valuable down the road.
 Our price target of $243 is based on 10X FY23E nominal advertising EBITDA of $4.0bn
plus net cash, discounted value of its stake in iQiyi and investments, and its cloud
business which we value based on 4x FY23 revenue of $4.2bn. Smart devices ($5.1bn @
latest financing), AI chip (Kunlun, $2bn @ latest financing round), Apollo (autonomous
driving) and EV joint venture with Geely (JiDU) are considered free options.
2 November 2021 38
Investment Thesis
It’s not about search anymore, just Baidu it
We initiate coverage of Baidu with an Overweight rating and price target of

$243.
In the China Internet space, Baidu is one of few companies devoted to developing and
innovating the “hard” side of tech. Baidu’s peers tend to focus more on innovating their
business models or user acquisition tactics. While these “soft” innovations are important and
have led to success for many Chinese Internet companies, Baidu, with its DNA in core science
and tech, has focused on developing its capabilities in AI, autonomous driving, smart devices,
chips, and cloud.
Baidu’s ad revenue growth has been slowing in recent years, not because of competition in
search per se but because advertisers have found newer ways to spend their ad dollars, with
the rise of streaming and short-form video players including ByteDance, Kuaishou, and
Bilibili, among others. However, as we have seen, the growth of Google’s search revenue
(excluding Covid effects) has remained solid despite competing platforms, and is still
growing by around 20% normalized, according to Barclays’ estimate. There is naturally a
long tail effect for search and for search revenue, and when properly monetized, we think
the search ad market can still be a 20% grower for years to come in China, once the near-
term negative impact from streaming and short form video starts to dissipate.
To offset the challenges Baidu faces in search and ad markets, the company has been investing
heavily in next-gen tech areas, and we consider an inflection point may be near for the
company to harvest some early fruits of its labor over the last few years. For example, Baidu’s
revenue in cloud reached ~$500mn in its most recent 2Q21, growing ~70% y/y. The company
is also making inroads into Internet of Things (IoT) and home connectivity, with recent
launches of new smart devices, including a smart TV, smart speakers, and smart displays. The
market share of its voice-activated speaker (Baidu’s “Alexa” equivalent) is ranked number 1 in
China even though the company is not typically considered a consumer electronics
powerhouse. We are positive on Baidu’s initiative to build an ecosystem within consumer’s
connected homes, to enable the future layering of content, e.g., telehealth and tele-education,
onto this platform.
Baidu’s intelligent cars (not just EVs) initiative has been overlooked by investors, in our view.
The company has built world-leading autonomous driving technologies based on its Apollo
OS, and in-car connected infotainment systems based on its DuerOS. With 10 auto OEM
partnerships signed up to Baidu’s Apollo and DuerOS, Baidu may be well on its way to print a
“Baidu inside” logo on many EVs or smart cars traveling on Chinese roads. In addition, Baidu
recently formed a joint venture with Geely, the Chinese auto maker that purchased Volvo in
2010. With this joint venture, called JiDU, Baidu plans to manufacture its own smart cars and
company management guidance for first delivery is sometime in the next three years.
A key risk for Baidu, in our view, is its ability to rapidly commercialize some of its cutting edge
technologies. Baidu is not unique in this regard. Many tech companies or institutions with
brilliant scientists or engineers have failed to turn their innovations into great products or
successful businesses. Another risk is Baidu’s ability to scale some of its “asset heavy”
initiatives, such as device manufacturing or car manufacturing.
2 November 2021 39
Business Overview
Headquartered in Beijing, Baidu was founded by Robin Li in 2000 after he invented the
Rankdex link ranking algorithm. With deep roots in innovation, Baidu pioneered search
advertising in China. While its search business has matured, Baidu continues to invest heavily
in AI growth initiatives. Baidu reports two revenue segments: Baidu Core; and iQIYI, its
publicly listed video streaming subsidiary.
Baidu Core
Online marketing business
Baidu Core includes revenue generated through online marketing services, cloud services, and
other growth initiatives; we estimate these segments contributed 84%, 12%, and 4% of total
Baidu Core revenue in 2020, respectively.
FIGURE 29
BIDU Core Revenue (RMB mn)
30,000
25,000
20,000
15,000
10,000
5,000
0
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Core Advert. AI Cloud Smart Devices & Others
Online marketing services accounted for 84% of Baidu Core revenue, generating estimated
RMB 66.3bn, -5.4%y/y, in 2020. Through a bidding process, advertisers can bid on key words
and choose from a selection of Baidu’s apps and platforms, at what time, in which
geographies, etc. they would like their ads to appear. Along with the ads posted on Baidu’s
search, feed, and other first-party properties, advertisers can opt to place ads on a network of
third-party online properties called Baidu Union. Baidu Union members are paid a share of
the revenue generated by ads posted on their properties.
Mobile ecosystem
The effectiveness of Baidu’s advertising offerings is underpinned by its large user base and
dominant position in search in China. Despite the rise of super apps such as Wechat and
Meituan, Baidu still dominates the traditional search market, with a 70% market share in 2020,
according to Big Data Research, though its share in the overall online advertising market has
certainly diminished as newer ad modalities such as short form video and live streaming have
emerged for advertisers to reach their targeted audience.
2 November 2021 40
The nucleus of BIDU’s mobile ecosystem, Baidu App, was the company’s response to mobile
challengers. Baidu App is a search-plus-feed app that aggregates third-party and user
generated content. Leveraging Baidu’s experience in search, Baidu App curates the content
recommended to users. In 2020, Baidu App had an average DAU of 202mn, +3.6% y/y.
FIGURE 30
BIDU content ecosystem
* Proposal to acquire YY Live is still under review by authorities

2 November 2021 41
FIGURE 31 FIGURE 32
Baidu App - entry point to content ecosystems such as Baidu App DAU (mn)
Haokan
250
195 202
200
161
150
100
50
0
2018 2019 2020
Baidu App DAU (in mn)
Source: Baidu app, Barclays Research Source: Company Reports, Barclays Research
Baidu App’s user engagement depends on the quality and diversity of its content; attracting
third-party content is therefore critical to the success of BIDU’s online advertising business.
BIDU operates Managed Page, Smart Mini Programs, and Baijiahao (BJH) to facilitate the
acquisition of third-party content.
Managed Page offers businesses a hosted alternative to a traditional landing page. Users see
a more detailed and interactive search landing page that features services and products of
the Managed Page client. Managed Pages are hosted on Baidu Cloud, allowing clients to
outsource server functions. Baidu would be able to eventually upsell these clients with AI-
based tools and services.
2 November 2021 42
Figure 33
Managed page for Li Auto - users can interact with webpage directly without clicking the
search results
Source: Baidu App, Barclays Research
Smart Mini Programs allow developers to share applets through Baidu App, similar to WeChat
Mini Programs. BJH offers content publishers a distribution platform for articles, videos,
photos, etc. Managed Page was responsible for 40% of online marketing services revenue in
2Q21, up from 30% in 2Q20.
Aside from these three services, Baidu’s content portfolio is further deepened through its in-
house products, such as Baidu Wiki, Post, and Haokan.
2 November 2021 43
FIGURE 34
Haokan Video signals BIDU’s efforts to enter into the short-form video and live streaming
market
Source: Haokan Video, Barclays Research
2 November 2021 44
FIGURE 35
BIDU Tieba allows users to find other users sharing the same interests with them
Source: Baidu Tieba App, Barclays Research
FIGURE 36
BIDU Map
Source: BIDU Map App, Barclays Research
AI Solutions and Cloud Services

Cloud services revenue in 2020 was estimated at RMB 9.2bn, +44% y/y, increasing to ~12%
of total Baidu core revenue from ~8% in 2019.
2 November 2021 45
BIDU offers a full suite of IaaS, PaaS, and SaaS services. However, Baidu, as the fourth largest
player (8.4% market share, according to Gartner) is aware of the need to differentiate itself
from the front runners in the public cloud space. As a result, Baidu has shifted its focus to
IaaS storage and private cloud storage, particularly in the smart transportation and financial
services verticals.
BIDU’s AI Solutions include smart customer service (call centers), smart logistics, smart
quality assurance, and smart utility offerings. In the city of Quanzhou, BIDU automated the
city’s water treatment plant, utilizing sensors and AI to predict maintenance requirements and
resource usage requirements, to cite some examples. BIDU also offers industry-specific
solutions. Using PaaS and SaaS, BIDU can build upon the AI solution previously provided to
one company in order to provide an adaptable, customizable solution to another in the same
vertical.
The company aims to offer a one-stop turn-key solution to its enterprise clients. Baidu can
plan and implement a cloud IT infrastructure that begins with building the customer’s private
cloud, moving the customer’s entire business onto it, and leveraging AI to optimize operations.
For example, Geely has chosen BIDU to execute the company’s multi-year digitization plan.
Smart City Solutions

V2X (Vehicle to everything) technology integrates smart city infrastructure (cameras,
sensors) with AI and cloud services to improve traffic flow, transportation efficiency, and
safety. BIDU’s ACE (Autonomous driving, Connected road, Efficient mobility) transportation
solution has won contracts worth over RMB10m in twenty Chinese cities as of 2Q21.
According to management, V2X smart city solutions reduce traffic congestion time by 20-
30%. Other functions include performing 24/7 digital patrolling, detecting intoxicated
drivers, identifying illegal parking, and preventing excess pollution, etc.
FIGURE 37
V2X infrastructure
Source: Apollo Website, Barclays Research
In addition to smart city applications, BIDU’s V2X technology serves a critical role in the
company’s Apollo self-driving segment. Apollo’s autonomous driving technology not only
uses vehicle cameras and sensors for navigation, but also utilizes traffic cameras and other
installed infrastructure to feed the vehicle actionable information. This cooperative
technology when deployed at scale is significantly cheaper than relying solely on LiDAR, and
Baidu expects its unit economics to be a competitive advantage down the line.
2 November 2021 46
Intelligent driving
BIDU’s intelligent driving brand, Apollo, is among the most advanced autonomous driving
platforms in the world, according to the company. As of 2Q21, Baidu has accumulated 7.5m
L4 test miles, +152% y/y, five times as many test miles as its nearest competitor in China. In
addition, Apollo has been approved for 278 autonomous driving licenses in China, including
night-time and special weather conditions licenses.
In addition to autonomous driving, Apollo is partnered with tier 1 suppliers, automakers, and
other strategic partners to develop intelligent EVs and robotaxi fleet operations. Geely, one of
China’s leading auto manufacturers, has partnered with Apollo in a joint venture, Jidu Auto,
to develop an intelligent EV. The two parties have committed a combined RMB50bn with
BIDU as the majority shareholder.
Apollo does not currently contribute meaningfully to BIDU’s top line but is one of the
company’s key growth initiatives.
Robotaxi
China Insights Consultancy (CIC), projects TAM of China’s robotaxi ride hailing market in 2025
is $224bn. In 2Q21, BIDU’s robotaxi ride hailing service, Apollo Go, provided 47,000 public
rides, +200% qoq. By 2023, Apollo Go plans to have operations in 30 cities. In 2030, Apollo
Go hopes to have operations in 100 cities.
Apollo Moon, BIDU’s own autonomous robotaxi, is on its fifth iteration. Each iteration of
robotaxi has seen cost per mile decrease significantly. Most recently, the fifth iteration Apollo
Moon had a 60% lower CPM than its predecessor.
FIGURE 38
Apollo Moon robotaxi
Source: Nikkei Asia
First-hand robotaxi experience

BIDU allows users to hail robotaxis through Baidu Maps and Carrot Run. The area we tested
the service was in Beijing’s Haidian district, about 15km from downtown Beijing. Because the
testing zone from the city center, it became apparent to us that the robotaxi service is still in
its early stages.
2 November 2021 47
FIGURE 39 FIGURE 40
Available robotaxi stops on Carrot Run apps Calling for free rides on Carrot Run
Source: Carrot Run App Source: Carrot Run App
The only robotaxi model available in Haidian was the Lincoln MKZ. The Hongqi robotaxi had
not been deployed in this district but was available in Daxing. The MKZ arrived promptly and
was equipped with roof sensors, cameras, and other hardware necessary to enable self-
driving. Due to requirements set by the local Ministry of Transportation, there is still a person
sitting in the driver’s seat who can take control in the event of an emergency.
From our observations, the vehicle’s sensors could detect obstacles and vehicles over a wide
radius. The robotaxi was able to make turns, wait for traffic lights, switch lanes, and pull over
autonomously. Overall, the only noticeable difference between Apollo and a human driver
was that Apollo tended to stick to a slower and more constant speed.
2 November 2021 48
FIGURE 41
BIDU robotaxi has a human driver in place and info screen for riders to interact with
Xiaodu and DuerOS

Xiaodu has a leading market share in China for both smart displays (58%) and smart speakers
(35%). In 2020, the average time spent per day on each Xiaodu Smart Display was over three
hours.
Unlike China smartphone shipments which has declined every year since 2016, China’s smart
device market has been on a tear and is estimated to reach RMB 55.26 billion by 2025, per
IDC. As a result, we may see IoT devices take market share in the connected device space in
the future.
The non-hardware smart device market is expected to grow at a CAGR of 50% to 2025,
according to CIC reports, reaching a market size of RMB 720mn. Capitalizing on this growth,
Baidu also licensed its DuerOS operating system to third party smart device manufacturers
and car makers. In 2Q21, Xiaodu’s service revenues grew 5x to account for over 10% of its
revenue. In August 2021, Xiaodu closed its Series B at a $5.1bn valuation.
2 November 2021 49
FIGURE 42
Xiaodu Smart Screen and Speaker
Source: Product website
We expect more collaboration between Xiaodu and Baidu Health in the future. In 2020, BIDU
entered into a partnership with digital healthcare platform, More Health, to create a teledoctor
service delivered through Xiaodu smart speakers. Targeted at patients with chronic illnesses,
this service allows for higher interaction frequency with doctors. Smart speakers can also
provide medication reminders and monitor health with the help of external devices. Xiaodu
smart devices are installed with a voice activated emergency call function, as well as a virtual
first aid assistant. BIDU provided free online patient appointments through its Xiaodu smart
devices at the beginning of the Covid-19 outbreak.
AI Chips
As Chinese companies evolve and further develop big data apps, demand for AI chips should
increase in lockstep. In the same vein, emerging technologies, such as intelligent driving and
cloud computing, also require AI chips to perform. These factors, along with the government’s
explicit support for hard-tech industries, are significant tailwinds for BIDU’s chip business.
Currently, BIDU chips are limited in production and only used internally.
Kunlun, introduced in 2018, is a cloud-to-edge AI chip designed with Baidu’s demanding

computing requirements in mind. In March 2021, BIDU spun off its Kunlun chip unit and
raised funding at a $2bn valuation with Baidu still holding super majority stake. In addition
to Kunlun, Baidu’s Honghu chip powers DuerOS smart devices and vehicle infotainment
systems.
iQIYI
iQIYI is an online video streaming service featuring a collection of originally produced,
professionally produced, and user generated content. BIDU acquired iQIYI in 2012 as an
extension of its content ecosystem. In 2018, iQIYI listed on the NASDAQ. and as of October
2021, has a market capitalization of ~$6.5bn. BIDU owns 52.2% of iQIYI and reports its
financial results as an independent segment.
iQIYI operates a “freemium” model, generating revenue primarily through membership

services and online marketing services. In 2020, iQIYI generated RMB 29.7bn in revenue,
+2.5% y/y. iQIYI’s online marketing services and memberships accounted for 23% and 56%
of its revenue, respectively, with the rest coming mainly from its content distribution
business. iQIYI (along with Youku and Tencent Video) is one of the top three video streaming
players in China, with average mobile MAUs in 2020 of 480mn.
In order to access iQIYI’s full library, users must subscribe to the streaming service’s VIP
membership. There are two membership levels, Gold and S-Diamond. S-Diamond subscribers
are entitled to exclusive content. As of September 2021, a Gold VIP membership cost RMB19
per month.
2 November 2021 50
FIGURE 43
iQIYI revenue and operating loss (RMB mn)
35,000
28,994 29,707
30,000
24,989
25,000
20,000 17,378
15,000
10,000
5,000
0
-5,000 2017 2018 2019 2020
-3,953
-10,000 -6,041
-8,306 -9,258
-15,000
Total revenue Operating loss
Recent Proposed Acquisition of JOYY

Baidu entered an agreement to acquire JOYY in Nov. 2020. Management’s rationale for this
acquisition was to diversify Baidu’s business beyond search and online marketing revenue.
JOYY’s YY Live product brings a popular live streaming and short-form video platform to
Baidu’s ecosystem. YY Live provides a new source of content for Baidu, while benefiting from
Baidu’s large user base.
The acquisition has not yet been approved by the Chinese government.
2 November 2021 51
Financials
Revenue:
BIDU Core (excl. iQIYI) revenue grew -1.3% y/y in 2020 mainly due to the impact of COVID
on its advertising business. In 2021E, 2022E, and 2023E, we forecast revenue growth of
+20.1% y/y,
+16.1% y/y, and +13.5% y/y to RMB94.5bn, RMB109.7bn, and RMB124.5bn, respectively, as
the company’s advertising business recovers and it sees growth in its AI initiatives.
BIDU Core online marketing services revenue was RMB66.3bn in 2020, -5.4% y/y. Looking
forward, we expect online advertising revenue growth of +12.2% y/y, +8.0% y/y, and +5.0%
y/y in 2021E, 2022E, and 2023E, decelerating due to search advertising industry headwinds.
Gross margins:
Cost of revenues primarily consist of content costs, traffic acquisition costs, bandwidth costs,
and other related expenses. The company had gross margins of 63.9% in 2020. In 2021E,
2022E, and 2023E, we expect gross margins to decline slightly and remain ~61%. Therefore,
gross profit in 2021E, 2022E, and 2023E is expected to be RMB57.3bn, RMB66.4bn, and
RMB75.3bn.
Selling and general administrative:

BIDU selling and general administrative expenses, by our estimates, is expected to increase
slightly as a percentage of revenue. In 2020, SG&A as a percent of revenue was 16.4%, vs.
18.9%, 18.7%, and 18.7% in 2021E, 2022E, and 2023E, respectively. BIDU SG&A expenses
are made up of marketing expenses, compensation for sales and marketing personnel, and
professional service fees.
Research and development:

Naturally, as an innovation-driven company, research and development expenses as a percent
of revenue are a meaningful contributor to operating expenses. In 2020, R&D as a percent of
revenue was 21.4%. In our forecasts, we expect R&D as a percent of revenue to remain
relatively stable at 22.6%, 21.6%, and 21.6% in 2021E, 2022E, and 2023E, respectively, as
continued investments are made in cloud services, smart devices, smart devices, and BIDU’s
other growth initiatives.
Profitability:
Non-GAAP operating income was RMB26.4bn, 33.5% non-GAAP OPM, in 2020. We model
BIDU non-GAAP operating income to be RMB24.4bn, RMB29.0bn, and RMB32.7bn in 2021E,
2022E, and 2023E, representing non-GAAP OPM of 25.8%, 26.5%, and 26.3%, respectively.
We estimate BIDU non-GAAP net income in 2021E, 2022E, and 2023E to be RMB23.2bn,
RMB27.6bn, and RMB31.4bn. Non-GAAP net income margins are therefore ~25% for the
three forecasted years, down from 32.0% in 2020.
2 November 2021 52
FIGURE 44
Baidu Core Financial Summary
BIDU Core Financial

1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB mn) 15.3 18.9 21.4 23.1 78.7 20.5 24.0 24.2 25.7 94.5 109.7 124.5
Revenue growth yoy

-12.5% -3.1% 1.8% 6.4% -1.3% 34.2% 27.0% 13.3% 11.4% 20.1% 16.1% 13.5%
(%)
Gross margin (%) 53.6% 65.4% 68.5% 65.4% 63.9% 60.2% 61.4% 60.5% 60.5% 60.6% 60.5% 60.5%
SG&A % rev 16.8% 17.1% 15.7% 16.4% 16.4% 19.8% 18.8% 18.6% 18.4% 18.9% 18.7% 18.7%
R&D % rev 24.7% 22.1% 18.2% 21.7% 21.4% 21.6% 23.3% 23.2% 22.0% 22.6% 21.6% 21.6%
Adj. EBIT (RMB mn) 3.3 6.5 8.5 8.0 26.4 5.1 6.5 6.1 6.7 24.4 29.0 32.7
Adj. EBIT margin (%) 21.9% 34.2% 39.8% 34.7% 33.5% 24.7% 26.9% 25.2% 26.2% 25.8% 26.5% 26.3%
non-GAAP net income

4.5 5.7 7.5 7.5 25.2 4.9 5.9 5.9 6.5 23.2 27.6 31.4
(RMB mn)
Management
Robin Li – Co-Founder, Chairman, and CEO
Mr. Li oversees Baidu’s overall strategy and business operations. Mr. Li has been chairman
since Baidu’s inception in 2000 and the CEO since 2004. Mr. Li served as Baidu’s president
from 2000 to 2003. Prior to founding Baidu, Mr. Li worked as an engineer for Infoseek, and
as a senior consultant for IDD Information Services. Mr. Li currently serves on the board of
New Oriental Education & Technology Group, Inc. (NYSE: EDU), Trip.com (Nasdaq: TCOM),
and iQiyi (Nasdaq: IQ).
Herman Yu – CSO
Mr. Yu became Baidu’s CFO in 2017, overseeing finance and purchasing functions. In 2021,
Mr. Yu was also appointed as CSO. Prior to joining Baidu, Mr. Yu was the CFO of Weibo Corp.,
a social media company (NASDAQ: WB) from 2015 to 2017. Mr. Yu also worked at SINA Corp.,
a leading portal from 2004 to 2015, beginning as VP of Finance and in 2006 became the chief
financial officer. Mr. Yu currently serves on the board of directors of ZTO Express Inc., an
express delivery company (NYSE: ZTO; SEHK:2057), and iQIYI (NASDAQ: IQ).
Luo Rong – CFO

Mr. Rong was appointed CFO of Baidu in November 2021. Prior to Baidu, Mr. Rong was CFO
of TAL Education Group since 2014. Before TAL, Mr. Rong was CFO of eLong and held roles
at Lenovo and Microsoft. Mr. Rong earned his bachelor’s degree from Peking University, his
master’s degree from Tsinghua University, and his Ph.D from Peking University.
Haifeng Wang – CTO

Dr. Wang has been Baidu’s CTO since 2019, overseeing its AI lab, systems & technology, and
cloud group. Dr. Wang joined Baidu in 2010 and was promoted to vice president in 2013. Dr.
Wang oversaw core search products from 2014 to 2017. Prior to Baidu, Dr. Wang was the
2 November 2021 53
chief research scientist at Toshiba’s R&D Center from 2002 to 2010. Dr. Wang is the president
of National Engineering Laboratory for Deep Learning Technology and Applications.
Valuation
Valuation methodology and price target
We use our business model focused valuation methodology when valuing Baidu. Baidu has
several valuable assets either overlooked or ignored by investors, in our view. Even when
applying a highly conservative multiple of 10x FY23 nominal advertising EBITDA of $4.0bn,
with mid- to high-single-digit revenue CAGR, plus net cash, iQIYI stake and its investment
portfolio (stakes in China Unicom, Kuaishou, etc) at a 15% discount, we estimate Baidu shares
worth $196. We also believe that its cloud business, while #4 in China after Alibaba, Huawei,
and Tencent cloud, has a meaningful valuation. Applying only 4x FY23E cloud revenue of
$4.2bn, 50% of the multiple investors typically assign to AWS, we value Baidu cloud at $47
per share, which brings our price target for BIDU to $243.
We highlight that no value is being given to Baidu’s autonomous driving business, a clear #1
player in China and arguably #2 in the world behind Google. We are also not giving any value
to its AI chip business Kunlun which was valued at $2bn at its last financing round earlier in
the year according to Reuters and Baidu owns a super majority of that business. Given the
lack of chip technology in China and a possible continued global chip shortage (if our AI
predictions are correct), this is yet another free option which may eventually become highly
valuable. Lastly, we did not give any value to Baidu’s DuerOS powered smart devices business,
which was valued at $5.1bn in its most recent financing round and Baidu owns 80% of this
business.
Our downside case is $158, based on 10x FY23 nominal advertising EBITDA plus cash and
discounted iQiyi stake only. In this scenario, we do not attribute any value to Baidu’s significant
investment portfolio, the majority of which is from publicly traded companies such as China
Unicom and Kuaishou. We also do not give any value to Baidu’s emerging but potentially highly
valuable newer businesses, including Cloud, Xiaodu (smart devices), Kunlun (AI chip), and
Apollo (autonomous driving).
Our upside case is $312, based on 15x FY23 nominal advertising EBITDA, net cash, discounted
iQIYI and equity holdings, plus the cloud, Kunlun chip and smart devices businesses. Even in
this upside scenario, we do not give any credit to the autonomous driving business and JiDU,
its smart car joint venture with a leading Chinese auto maker Geely. In a true blue sky scenario,
we can envisage Baidu’s shares exceeding $400 when those free options become very
valuable.
Risks:
1. The company may fail to commercialize many of its advanced technologies due to
changes in market demand or competitive landscape.
2. Technological advancements may render some of Baidu’s technologies less valuable. Even
newer technological innovations such as quantum computing or metaverse may make
the industry leapfrog in certain areas in which Baidu has made heavy investments.
3. The company’s technical and managerial resources may not be adequate to tackle
multiple new initiatives. As Baidu is tackling quite a few new ventures and many of which
are outside of what the company traditionally has done, technical and managerial
resources will likely be under constraint.
2 November 2021 54
JD.COM – OVERWEIGHT; PT $98

JD.com, Inc.(JD): Quarterly and Annual EPS (CNY)
JD
2020 2021 2022 Change y/y
Stock Rating
POSITIVE Q2 3.89A N/A 2.90A 2.90A N/A 0.17E 3.53E -25% -94%
USD 98.00 Q4 1.49A N/A 0.84E 1.15E N/A 1.55E 2.98E -44% 85%
Price (01-Nov-2021) Year 10.83A N/A 8.11E 8.61E N/A 6.42E 12.89E -25% -21%
USD 82.50 P/E 48.8 65.1 82.3
We initiate coverage of JD with an Overweight rating and

price target of $98
 Unlike many of its ecommerce peers both in China and globally, JD has built a dominant
ecommerce franchise off the 1P model with massive in-house logistics operations. While
its asset-heavy business model clearly has some of the drawbacks of pressuring margins
in the near term, and taking much longer to build than asset light comps, once built it
should provide JD with a nearly insurmountable moat and competitive core differentiation.
 A clear path for JD to leverage its infrastructure is to expand from its roots in 3C into other
product categories and JD has achieved impressive results in healthcare-related products
and grocery. We anticipate other categories will follow. Gradually but surely, JD is well on
its way to retaining its status of being the largest, if not the only, online superstore of any
scale in China. It could potentially become the Walmart plus Best Buy of China minus the
physical stores for the most part.
 A participant in the “New Retail” movement in China, JD has been expanding in parts of
the offline retail sector by both building something greenfield or investing in other existing
offline stores. We are supportive of this strategy, which has been adopted by Alibaba,
Amazon, and others. We consider JD’s convenient store chain and some of the other brick-
and-mortar footprint can not only provide its customers with seamless online and offline
commerce experience but also become a critical part of its massive logistics complex.
 One of our concerns is about JD’s capital market strategy. The company has spun off and
separately listed its logistics and healthcare business on the HKEX and is planning to do
the same for other divisions, such as JD Digits. We view this as not the most shareholder-
friendly capital market strategy as shareholders of different entities have conflicting
interest, and there is a risk that investors could challenge the company’s focus and
priorities down the road.
Our price target is $98 which is based on 20x JD’s FY23 nominal ecommerce EBITDA of $66bn
plus net cash of $25.6bn.
2 November 2021 55
Investment thesis
The biggest retailer in China getting

bigger
We are initiating coverage of JD with an Overweight rating and $98 price

target.
Unlike most ecommerce businesses in China and globally, JD has built a strong ecommerce
business off the 1st party (1P) model. It was built more like a virtual store (eg. Best Buy’s online
store) rather than a virtual mall (eg. Alibaba’s Tmall). In recent years, JD has gradually
expanded into 3rd party (3P) ecommerce business as well. Through this, JD has built a
differentiated logistics arm that delivers goods for JD and other third party sellers on its
platform.
Because of the first party nature of its business and its own logistics and delivery operations,
JD is trusted by Chinese consumers, and brands have opened flagship stores on the JD
platform. Eventually, we think JD could expand into other categories of consumer products
as it leverages its existing infrastructure, as it has already done so for medicine (JD Health)
and grocery (JD Grocery). In terms of product categories, electronics and home appliances,
used to account for nearly all of JD sales, now contribute about 61% of its net product sales
in 2020. Today, JD is the largest retailer in China (among all online and offline peers). Longer
term, we believe JD has the potential to remain the largest, if not the only, online department
store of scale in China.
To potentially unlock shareholder value, JD has spun off and publicly listed its logistics
operations and JD Health business on the Hong Kong stock exchange. While the market value
of these entities can be more easily incorporated into JD’s valuation, longer term issues could
arise as JD holds a majority stake of a number of its listed subsidiaries. There are likely
conflicting interests for different shareholder bases for JD and its various listed subsidiaries,
which could cause friction and distract management when setting corporate priorities and
agendas.
Another longer term risk for JD is that the volume of real estate transactions in China may be
peaking in the coming years, and so is population growth. With home appliance sales closely
tied to home transactions and population growth, growth may slow in the next few years,
forcing JD to seek growth elsewhere. Execution risks tend to be higher during a company’s
expansion into a new product category or geographic area.
Overview
JD is the second largest e-commerce player in China behind Alibaba. In contrast to BABA’s
marketplace model, JD operates a primarily 1P model. In addition, while BABA runs an
operationally asset-light business model, JD has its own integrated logistics infrastructure with
over 1,200 warehouses and carries billions of dollars of inventories. As of the company’s 1Q21
reporting period, JD re-segmented into three business lines: JD Retail, JD Logistics, and New
businesses.
JD Retail
Customers can order products through JD.com, one of JD’s mobile apps, or one of JD’s Mini
Programs available on WeChat and QQ. In 2020, 90% of orders were placed on one of JD’s
2 November 2021 56
standalone mobile apps. JD is widely known in China for its reliability and customer service,
making it the gold standard for purchasing higher-ticket items.
JD Retail has seen healthy growth with GMV of RMB 2,612.5bn, ~$400bn, (+25% y/y), RMB
2,085.4bn (+24% y/y), and RMB 1,676.9bn in 2020, 2019, and 2018, respectively. In 2020,
the platform had 471.9mn annual active customer accounts, +30.4% y/y.
FIGURE 45
JD revenue breakdown from 1Q19 to 2Q21
300,000
250,000
200,000
150,000
100,000
50,000
0
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Electronics and appliances (1P) General merchandise (1P)

Marketplace and marketing Logistics and other
Online retail
In the online retail segment, JD purchases products from suppliers and sells them directly to
customers. Originally focused on 3C products, as of 2020, electronics and home appliances
as a percent of total revenue declined to 53.8%. The company has, as of December 2020,
built its network to over 31,000 suppliers, none of which supplied over 10% of the products
(by value) purchased in the reporting year. In 2020, JD net product sales reached RMB
651.9bn, +27.6% y/y, making up 87.4% of total revenue.
2 November 2021 57
FIGURE 46
JD mobile app user interface - pivoting towards live streaming and time-limited discounts
similar to peers
Source: JD Mobile App, Barclays Research
Online marketplace
To leverage its ecommerce infrastructure including its logistics capabilities and customer
traffic, JD added an online marketplace in 2010. As of December 2019, JD had over 270,000
merchants with marketplace listings. Established brands can open Flagship Stores on JD’s
platform to provide convenience and guaranteed authenticity to customers purchasing their
products. JD charges merchants a take rate for products sold on its platform. Management
has noted intentions to expand the higher margin 3P marketplace faster than 1P retail. In
2020, marketplace and marketing revenue was RMB 53.5 billion, comprising 7.2% of total
revenue. Furthermore, the marketplace revenue carriers much higher margins than 1P
revenue.
JD Plus
JD operates a paid membership program, JD Plus, that offers exclusive promotions, free
shipping, preferential customer service, and other benefits. Similar to Amazon Prime, JD’s
membership program extends beyond ecommerce and includes access to content streaming
platforms and lifestyle services providers, such as Tencent Video. In 2Q21, the number of JD
Plus paying members grew +30% y/y to 26mn. In addition, the ARPU of a JD Plus member is
over 9x that of a regular non Plus customer, according to management.
JD Logistics
In May 2021, JD Logistics (JDL) listed on the Hong Kong Stock Exchange (HKEX) and currently
has a market capitalization of ~HKD 200bn (~US$25bn). JD.com holds a 63.4% stake in JDL
post-IPO. In 2020, JDL posted total revenue of RMB 73.4bn, +47.2% y/y. JDL’s net revenue is
included in JD’s financial results.
2 November 2021 58
FIGURE 47
JDL delivers most orders placed on JD’s platforms, as well as provides logistics services to third
parties outside of the JD platform. In 2020, JD accounted for 53.8% of JDL’s revenue, down
from 70.1% in 2018. To support its operations, JDL maintains a warehouse network, line-haul
transportation network, last-mile delivery network, bulky item delivery network, cold chain
network, and cross-border logistics network. Warehousing and distribution services
accounted for 50-70% of JDL’s revenue.
FIGURE 48
JDL’s offering is fully integrated within the shopping experience on JD.com
Source: Jd App, Barclays Research
According to the China Insights Consultancy, the top 10 logistics players only accounted for
9% of China’s logistics services market in 2020. Operating in such a fragmented market, JDL
has an opportunity to capitalize on its technologies and partnerships to expand its 2.7%
market share.
Contrary to many logistics service competitors that are regional or vertical focused, JDL offers
a full range of logistics services and operates China’s largest warehouse network by GFA.
2 November 2021 59
Including floor area managed for JD by third parties, JDL occupied over 23 million square
meters across more than 1,200 warehouses, as of 2Q21.
New businesses
New businesses generated RMB 34.5bn in revenue in 2020, 6.6% of JD’s total revenue.
Jingxi
To extend JD’s reach into price-conscious customer groups, JD established its social
ecommerce arm Jingxi. Similar to PDD, Jingxi offers gamified and socialized team-buying
online shopping experiences. As of October 2021, Jingxi focused on its operations in only 10
lower-tier Chinese cities where JD considers its logistics strength can provide greatest value
to consumers, and new customer additions from lower tier cities overall have accounted for
10-20% of JD’s total new customers, in recent periods.
FIGURE 49
Jingxi Offerings are heavily skewed towards low-priced products
Source: Jingxi App, Barclays Research
JD Property
JD Property services the real estate components of JD’s business, including the management
and development of JD’s logistics facilities. JD is the majority shareholder of JD Property with
an 84% stake.
Since 2019, JD Property has established multiple real estate funds with GIC, Mubadala,
Warburg Pincus, and other investment firms. In the process, JD Property has injected some
of its real estate holdings into these funds.
2 November 2021 60
JD Worldwide
JD Worldwide is JD’s cross-border ecommerce business. JD Worldwide was established six
years ago in a move to serve Chinese consumers’ increasing demand for international
products. Now, over 20,000 brands from 100 countries have products listed on JD Worldwide.
JD leverages its domestic logistics infrastructure, and its partnerships with international
logistics services providers, to import goods for Chinese consumers. JD Worldwide is one of
China’s leading cross-border ecommerce platforms.
Omni-channel initiatives
JD has taken multiple strategic steps to position itself competitively in the omni-channel retail
market. Because of the company’s already built and enormous supply chain infrastructure,
online to offline retail (“New Retail”) is a growth opportunity in which JD has a unique
competitive advantage, in our view.
JD has partnered with last-mile delivery platform Dada, in which JD holds a 46% stake, for
delivery of JD’s retail products. In addition, JD opened a brick-and-mortar supermarket chain,
7FRESH (similar to Alibaba’s Hema store chain). Aligned with JD’s new retail aspirations, a
7FRESH location serves as both a traditional offline store and a showroom for JD’s products.
Although management has noted its intention to build 7FRESH stores in all first and second
tier cities, JD’s offline presence is currently somewhat limited.
Dada Group
As of December 2020, JD owned ~46% of Dada Group’s outstanding shares. In March 2021,
JD announced a share purchase agreement under which JD would own ~51% of Dada
following the transaction. As of October 2021, the transaction has not been approved by
Chinese regulators. Dada currently trades at a market capitalization of $4.8bn and operates
two major business segments: Dada Now and JD-Daojia (JDDJ). Dada generated total revenue
of RMB 5.7bn in 2020, +85.2% y/y, of which Dada Now contributed 59.8% and JDDJ
contributed 40.2%. The company provides delivery services in all tier-one and tier-two cities.
2 November 2021 61
FIGURE 50
DADA offers various pick-up and delivery services to users
Source: DADA App, Barclays Research
Dada Now
Dada now offers both intra-city and last-mile delivery services. The intra-city delivery service
connects riders with local merchants, small businesses, and individuals who need a package
delivered quickly within their city. Orders for Dada’s last mile delivery services are usually
placed in batches, especially during peak shopping periods. If a delivery is within a three-
kilometer radius from the store where the goods are picked up, Dada can usually complete the
delivery within one hour. In 2020, JD contributed the majority of Dada’s last mile delivery
revenue.
JDDJ
JDDJ is an on-demand delivery retail app in which customers can order fresh food and
groceries to be delivered at the customer’s home within a relatively short time window. In
2020, JDDJ’s GMV was RMB 25.3bn. Dada has identified that China local on-demand grocery
GMV is expected to expand at a CAGR of 62% from 2020 to 2024. According to iResearch,
O2O grocery penetration rate currently sits at 2.3% and should reach 15% by 2024. As the
leading local on-demand grocery delivery platform in China, Dada hopes to expand its market
share and capture the growth of this promising segment of the market.
JD Health
JD Health (JDH) was listed on the HKEX in December 2020. JD.com retained a 67% stake in
JDH post-IPO. As of October 2021, the online pharmaceutical and tele-health company
currently trades at a market capitalization of HKD 235bn (~US$30bn).
JDH provides pharmaceuticals and healthcare services through its online platform. In its retail
pharmacy segment, JDH offers prescription and OTC drugs, and sells other medical products
to customers both through 1P sales and its online marketplace. JDH has partnered with major
2 November 2021 62
pharmaceutical companies to utilize JD’s cold chain capabilities and network of warehouses
or parts of its warehouses that have been specifically designed and fitted to handle medicine
and other healthcare-related products.
Beyond providing healthcare products, JDH offers services such as tele-health, early cancer
screening, and AI-enabled prescription vetting.
FIGURE 51 FIGURE 52
JD Health offers a wide range of services within a wide range Offerings range from phone call to live streaming
of departments consultation
Source: JD Health App, Barclays Research Source: JD Health App, Barclays Research
JD Health generated total revenue of RMB 19.4bn in 2020, of which product revenue
contributed 86.6% and service revenue contributed 13.4%. In 2020, JD Health reported a
negative net income of RMB (17.2)bn.
JD Digits
In 2017, JD Group spun off its equity interest in its financial services business to establish JD
Digits. After a series of transactions, one of which transferred JD’s cloud and AI assets to JD
Digits. JD owned a 42% stake in JD Digits as of December 2020.
Financials
Revenue
JD’s total revenue, driven mostly by its 1P product sales, grew to RMB253.8bn in 2Q21, +26.2%
y/y. We forecast JD’s total revenue to grow +26.6% y/y, +17.8% y/y, and +14.7% y/y to
RMB944.3bn, RMB1,112.4bn, and RMB1,275.4bn in 2021E, 2022E, and 2023E, respectively,
due to category expansion and the growth of its 3P marketplace. Most recently in 2Q21, net
product revenue was RMB219.7bn, comprising 87% of total revenue. In our forecasts, net
2 November 2021 63
product revenues will grow +23.8% y/y, +16.2% y/y, and +13.2% y/y in 2021E, 2022E, and
2023E to RMB807.3bn, RMB937.9bn, and RMB1,061.6bn, respectively, as JD continues to
leverage its logistics infrastructure to expand its product offerings.
Gross margins
Due to the nature of JD’s 1P business, the company’s cost of revenues primarily consists of
product purchases. In addition, cost of revenues include shipping charges, inventory write-
downs, traffic acquisition costs, and costs related to its third-party logistics business. Gross
margins in 2020 were 14.6%. In 2021E, 2022E, and 2023E, we expect gross margins to be
13.5%, 13.1%, and 13.3%, respectively.
Fulfillment Expenses
JD Group’s fulfillment expenses consist of costs incurred operating fulfillment facilities,
customer services costs, physical store overhead, personnel costs, third-party courier
expenses, warehouse and equipment leases, and other related expenses. Fulfillment costs in
2021E, 2022E, and 2023E are expected to see a slight reduction from 6.5% in 2020 to 6.1%,
5.8%, and 5.6%, respectively, due to increased significance of the 3P business.
Operating expenses
Marketing expenses at JD are made up of advertising costs, public relations costs, and
compensation for marketing and sales employees. In 2020, marketing expenses as a percent
of revenue was 3.6%. Moving forward, we estimate marketing expenses to stay relatively
stable at 4.0%, 3.8%, and 3.6% in 2021E, 2022E, and 2023E.
R&D expense as a percent of revenue was 2.2% in 2020. Looking ahead to 2021E, 2022E, and
2023E, we estimate R&D as a percent of revenue to be 1.9%, 2.1%, and 2.0%, respectively.
JD’s R&D expenses include payroll for R&D employees, as well as technology infrastructure
costs and other costs related to developing JD’s platform using AI, cloud services, and big
data.
JD’s general and administrative expenses are primarily made up of personnel and facilities
expenses for the company’s accounting, finance, legal, and other departments. In 2020, G&A
as a percent of revenue was 0.9%. In 2021E, 2022E, and 2023E, we expect G&A as a percent
of revenue to remain stable at 1.1%, 1.1%, and 1.0%.
Profitability
Due to softness in retail consumption and supply chain disruptions, we estimate lower
profitability in 2021E, followed by a gradual rebound in 2023E. In 2020, JD’s non-GAAP EBIT
margin was 2.1%. In 2021E, 2022E, and 2023E, we forecast non-GAAP EBIT margins of 1.2%,
1.1%, and 1.8%. We expect non-GAAP net income of RMB13.0bn, RMB10.3bn, and
RMB19.5bn in these three forecasted years vs. RMB16.8bn in 2020.
2 November 2021 64
FIGURE 53
JD Financial Summary
JD Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB bn) 146.2 201.1 174.2 224.3 745.8 203.2 253.8 213.9 273.4 944.3 1,112.4 1,275.4
Revenue growth yoy

20.7% 33.8% 29.2% 31.4% 29.3% 39.0% 26.2% 22.8% 21.9% 26.6% 17.8% 14.7%
(%)
Gross margin (%) 15.4% 14.2% 15.4% 13.9% 14.6% 14.3% 12.5% 14.0% 13.5% 13.5% 13.1% 13.3%
Fulfillment % rev 7.1% 5.9% 6.7% 6.6% 6.5% 6.8% 5.8% 6.0% 6.0% 6.1% 5.8% 5.6%
S&M % rev 3.1% 3.4% 3.1% 4.6% 3.6% 3.4% 4.2% 3.8% 4.5% 4.0% 3.8% 3.6%
R&D % rev 2.7% 1.8% 2.4% 2.0% 2.2% 2.2% 1.5% 2.2% 2.0% 1.9% 2.1% 2.0%
G&A % rev 1.0% 0.7% 0.9% 0.9% 0.9% 1.1% 1.0% 1.2% 1.1% 1.1% 1.1% 1.0%
Adj. EBIT (RMB bn) 3.3 5.6 5.3 1.2 15.3 3.5 2.5 3.6 1.7 11.3 12.2 23.0
Adj. EBIT margin (%) 2.2% 2.8% 3.0% 0.5% 2.1% 1.7% 1.0% 1.7% 0.6% 1.2% 1.1% 1.8%
non-GAAP net
3.0 5.9 5.6 2.4 16.8 4.0 4.6 3.0 1.3 13.0 10.3 19.5
income (RMB bn)
2 November 2021 65
Management
Richard Qiangdong Liu – Chairman and CEO, JD.com
In 2004, Mr. Liu founded JD.com and has been the chairman and chief executive officer since
JD.com’s inception. Mr. Liu has received numerous other awards for his achievements in the
ecommerce industry in China, such as “2011 Chinese Business Leader” and Fortune China’s
“2012 Chinese Businessman.”
Mr. Liu received a bachelor’s degree in sociology from Renmin University of China in Beijing
and an EMBA degree from China Europe International Business School.
Sandy Ran Xu – CFO, JD.com

Ms. Xu has served as CFO of JD.com since 2020. Ms. Xu joined the company in 2018 as vice
president of finance and was later promoted to senior vice president in 2020. Prior to joining
JD.com, Ms. Xu was an audit partner and spent 20 years with Pwc Zhong Tian LLP, Beijing
office and Pwc, San Jose Office, focusing on TMT industry and U.S. capital markets.
Lei Xu – President, JD.com

Mr. Xu is President of JD.com, and responsible for leading the day-to-day operation and
collaborative development of various business units of the company. Mr. Xu joined the
company in 2009 and assumed the role of CEO of JD Retail in 2018.
Valuation
We use our business model focused valuation methodology to derive our price target for JD.
We believe JD should be valued based on its core ecommerce business, plus cash. There are
two key assumptions we have used to calculate our target market cap: 1) in the longer term,
JD should generate 1-2% nominal EBITDA margin from its 1P ecommerce business; 2) in the
longer term, JD should generate ~25% nominal EBITDA margin from its 3P ecommerce
business.
At ~1.5% nominal EBITDA margin, JD’s 1P ecommerce segment should generate RMB 15.1bn
nominal EBITDA in FY23E.
Second, we apply our ~25% nominal EBITDA margin estimate on the FY23E revenue estimate
of RMB 104.4bn for JD’s marketplace and marketing segment, which only includes JD’s 3P
marketplace business, to get to a nominal EBITDA of RMB 26.1bn. In total, our FY23E nominal
EBITDA estimate is RMB 41.2bn for JD’s entire ecommerce business.
Using the latest share prices of JD Logistics and Dada Nexus, we calculate JD’s holding in these
companies at ~$15.7bn after applying a 15% holding discount, or $10 per share. JD also holds
$25.6bn of net cash on hand, or $16 per share, as of now.
Finally, we apply a target EV/EBITDA multiple of 20x on JD’s FY23 ecommerce nominal EBITDA
and add the value of its net cash, to derive a price target of $98.
Price target
Our price target is $98 which is based on 20x JD’s FY23 nominal ecommerce EBITDA plus net
cash.
Our upside case is $139, which is based on 25x JD’s FY23 nominal ecommerce EBITDA plus
its cash and discounted publicly listed equity holdings.
Our downside case is $57, which is based on 10x JD’s FY23 nominal ecommerce EBITDA plus
net cash.
2 November 2021 66
Risks
1. Competitors may start to build their own logistics infrastructure, eroding JD’s competitive
advantage. In particular, Alibaba and PDD may make far more significant investments in
logistics than they have in the past to narrow the gap between them and JD in terms of in-
house logistics capabilities
2. JD’s capital market strategy by separately listing majority owned subsidiaries may not be
the most shareholder friendly and some shareholders may express concerns over it.
3. JD senior management may be distracted by different priorities among its listed

subsidiaries of which JD remains a majority shareholder.
4. As JD expands into other product categories, it may be prone to be making strategic errors
or execution missteps during such expansion phases.
2 November 2021 67
MEITUAN (MPNGF) – UNDERWEIGHT; PT $32

Meituan Dianping(MPNGF): Quarterly and Annual EPS (CNY)
MPNGF
2020 2021 2022 Change y/y
Stock Rating
UNDERWEIGHT FY Dec Actual Old New Cons Old New Cons 2021 2022
Industry View Q1 0.01A N/A -0.76A -0.76A N/A -0.66E -0.58E N/A 13%
POSITIVE Q2 0.44A N/A -0.37A -0.37A N/A -0.38E -0.04E N/A -3%
Price Target Q3 0.46A N/A -0.87E -0.97E N/A -0.58E 0.01E N/A 33%
USD 32.00 Q4 -0.08A N/A -0.73E -0.72E N/A -0.51E 0.03E N/A 30%
Price (01-Nov-2021) Year 0.82A N/A -2.72E -2.67E N/A -2.13E -0.16E N/A 22%
USD 35.72 P/E N/A N/A N/A
-10.4% Consensus numbers are from Bloomberg received on 01-Nov-2021; 12:50 GMT
We are initiating coverage on Meituan with an Underweight

 Building off its dominant #1 position in food delivery (~70-80% share) and restaurant and
local services reviews (~70-80% share), Meituan aims to expand into other local services
sectors such as travel, bike sharing and grocery. The challenge, however, is that in most
Chinese internet sectors (except areas such as gaming) unless the company is clearly a
dominant market leader, it is diff icult to survive let alone succeed. The future of some of
these new emerging services Meituan is targeting is unclear at present.
 In terms of Meituan’s push into digitizing restaurants and other local services, our channel
checks suggest restaurants often don’t have the time and resources to properly
understand, appreciate and use Meituan’s SaaS off erings. Software has always been a
laggard in the China tech scene. Many large enterprises have been slow to embrace
software let alone SMEs.
 We are concerned about further improvement in monetization in food delivery with take
rate now around mid-teens, and the ability for many restaurants to pay more with their
already thin margins. On the expense side, the government has been pressuring Meituan
and its peers to pay delivery riders (~1.2mn riders daily for Meituan) more and is
evaluating potential requirements for Meituan to pay social security for these riders as
well. Overall, one key fundamental concern we have is that food delivery does not seem
to create incremental demand (# of meals one has per day remains the same) or cut costs
for the ecosystem as a whole.
 Our price target is $32 based on 25x EV/nominal EBITDA plus net cash.
Investment Thesis
Super app for local services, but near

term headwinds may persist
2 November 2021 68
We are initiating coverage of Meituan with an Underweight rating and price target of $32
Meituan is the dominant internet-enabled food delivery company in China, roughly 3x of the
size of the second operator which is Alibaba’s Ele.me. Meituan was founded in 2010, and in
2015 merged with Dianping, the then #1 restaurant review app in China, creating a gig
economy powerhouse specializing in restaurant reviews, dining in coupons and takeout
deliveries.
Over time, Meituan has also expanded into ecommerce, hotel bookings and ride hailing but
none of these businesses are as dominant in their respective fields as the food delivery and
restaurant reviews for Meituan. This is one of the key risks in Meituan’s operations in our view.
As legendary corporate manager Jack Welch once said, GE should be “number one or number
two in every business they were in, or else get out”. In the land of Internet, especially China
internet, being the #2 may not be enough. Our first concern on Meituan is that it may not be
as dominant in the few sectors it competes in, and this may hinder its success.
Another key concern we have is the limited upside in the take rate Meituan extracts from
restaurants. While Meituan publicly discloses that its take rate is about low to mid-teens, our
channel checks have revealed that some restaurants are regularly paying a take rate of around
20% to Meituan. These are mostly small businesses and the restaurant model itself is not
high margin. Taking 20% off the top line makes it diff icult if not impossible for many of these
restaurants to make any money. In addition, a recurring feedback we have heard from the
restaurants is that Meituan often strongly “encourages” them to give out coupons to
consumers to maintain the volume of orders on its platform, which further compresses these
restaurants’ profits. Without healthy and profitable restaurant partners, the longer term
sustainability of Meituan’s profit outlook would be negatively impacted.
On the rider side of the food delivery equation, the Chinese government has imposed a slew
of regulations on Meituan and its peers to protect riders by requiring or recommending
platforms to provide accidental insurance, social security insurance, better pay, and a less
stressful delivery schedule. Meituan management might have estimated that the cost
of social security for its riders would be equivalent to RMB0.20 to 0.50 per order.
However, as Meituan is currently making only 0.69 RMB per order, at the higher end of the
social security cost estimate, this would nearly wipe out most of its profits from food delivery.
The bottom line is that food delivery offers significant convenience for consumers, especially
amid the current pandemic. But it does not stimulate incremental demand for the market as
a whole (we all usually have three meals a day). So most of the economic benefits or
profits Meituan and its peers extract are at someone else's expense – be it the restaurants in
the form of foregone profits, or consumers in the form of higher prices. With heavy subsidies,
often helped by capital from the private and public capital markets, Meituan has built an
enormous consumer base and shaped consumer behavior. Now as the industry matures and
rationalizes, Meituan must prove to investors the true economic value its business model
brings.
Overview
Meituan has positioned itself as a one-stop super app for local services. All of Meituan’s
services can be found in Meituan App. The business is comprised of more than thirty service
categories, including food delivery, car-hailing, bike-sharing, hotel bookings, movie ticketing,
and other entertainment and lifestyle services. Meituan’s super app and its other standalone
apps for different services are also accessible through WeChat Mini Programs.
2 November 2021 69
58%, 19%, and 23% of total revenue in 2020 came from Food Delivery, In-store, Hotel and
Travel, and New Initiatives, respectively. Each segment generates revenue through
commissions, online marketing services (advertising), and other services. Meituan’s total
revenue in 2020 was RMB 114.8bn, +17.7% y/y.
As Meituan evolves, new services continue to be added to its ecosystem. These service
offerings then benefit from Meituan’s enormous scale and user base. In theory, with the
addition of more offerings, users become more reliant on Meituan for lifestyle services,
boosting user retention and stickiness, and creating more opportunities for monetization. In
2017, 80% of new transacting hotel booking customers were converted from the Food
Delivery and In-store categories, validating the cross selling potential. As of LTM 2Q21,
Meituan had 628.4m (+37.4% y/y) customers and 7.7m (+23.5% y/y) merchants. In the same
period, Meituan's average transaction per annual transacting user increased to 32.8, + 27.8%
y/y.
FIGURE 54
Meituan revenue split (RMB mn)
200,000
180,000
160,000
140,000
120,000
100,000
80,000
60,000
40,000
20,000
0
2019 2020 2021E
Food delivery In-store, hotel & travel New initiatives
Source: Company Reports, Barclays Research Estimates
Food delivery
Consumers use Meituan Delivery to order food and other daily necessities from nearby
restaurants, supermarkets, convenience stores, and pharmacies. The app automatically
locates a user's current address and makes recommendations for restaurants or stores based
on their location. In addition, Meituan Delivery customers periodically receive coupons from
both restaurants and Meituan.
2 November 2021 70
FIGURE 55
Meituan App allows users to access all its offerings in one place
Source: Meituan App, Barclays Research
2 November 2021 71
FIGURE 56
Meituan Food Delivery interface
The Food Delivery segment generates revenues through platform fees and sales
commissions, as well as advertisement (online marketing) charged to merchants, and
delivery fees charged to customers. In 2020, Food Delivery revenue consisted of 88% in
commissions, 11% in online marketing services, and 1% in other services and sales.
2 November 2021 72
FIGURE 57
Total active merchants on Meituan (mn)
Post-Covid acceleration in
seller onboarding
7.7
7.1
6.8
6.3 6.5
6.2 6.1
5.8 5.8 5.9 5.9
5.5
5.1
4.5
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Total active merchant on Meituan (mn)
We note that Food Delivery GTV in 2020 was RMB 488.9bn, +24.5% y/y, driven by an increase
in the number of food delivery transactions to 10.1bn, +16.3% y/y. The monetization rate of
Food Delivery was 13.6% in 2020, generating RMB 66.3bn, +20.8% y/y, in segment revenue.
Food delivery rider costs were the most significant cost to the food delivery business. In 2020,
food delivery rider costs were 73.5% of segment revenue.
FIGURE 58
Illustrative Food Order Money Flow (RMB)
Illustrative Food Order Money Flow (RMB)
Food price to customer ¥ 44.00

Delivery fee to customer ¥ 5.00
AOV ¥ 49.00
To Restaurant
Order price ¥ 44.00
Technical commission (RMB3.15 within 3km +

¥ -5.00
RMB0.3 per km)
Agreement commission (Order price * 5.8%) ¥ -2.55

- Total commissions ¥ -7.55
Implied take rate 17.2%
Restaurant net revenue ¥ 36.45
To Courier
From delivery fee ¥ 5.00
From commissions ¥ 7.00
Courier income ¥ 12.00
To Meituan
AOV ¥ 49.00
- Restaurant net revenue ¥ -36.45
- Courier cost ¥ -12.00
Meituan contribution margin ¥ 0.55
vs. disclosed OPM per order ¥ 0.69
2 November 2021 73
FIGURE 59
Meituan food delivery GTV vs. take rate (RMB mn)
200,000.0 14.6%
180,000.0 14.4%
160,000.0 14.2%
Covid-19 trough
140,000.0 14.0%
120,000.0 13.8%
100,000.0 13.6%
80,000.0 13.4%
60,000.0 13.2%
40,000.0 13.0%
20,000.0 12.8%
- 12.6%
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Meituan food delivery GTV Food delivery take rate (right)
FIGURE 60
Take rates & AOVs across U.S, China markets
JustEats
FY2020 (USD) Meituan DoorDash GrubHub Uber Eats Delivery Hero
Takeaway
Average order value $7.4 $35.9 $38.5 $21.2 $11.0 $24.7
Take rate 13.6% 11.7% 20.8% 12.9% 22.9% 17.4%
Meituan as of 2020 had ~70% share of China’s food delivery market, compared to 61% in
2019. As Meituan’s share has increased, it’s important to note that its leadership over the
number two food delivery player, Ele.me (part of Alibaba), has also widened. As of 2020,
Ele.me held ~30% of China’s food delivery business.
FIGURE 61 FIGURE 62
Average numbers of times a user open Meituan app Meituan MAU vs. Ele.me MAU (in mn)
everyday
5.5 25
20
15
3.2
10
0
Feb-21
Feb-20
Jun-19
Jun-20
Aug-19
Oct-19
Aug-20
Oct-20
Apr-19
Apr-20
Apr-21
Dec-19
Dec-20
Meituan Ele.me Meituan Ele.me
Source: Trust Data, Barclays Research Source: Trust Data, Barclays Research
2 November 2021 74
In-store, Hotel and Travel

The In-store, Hotel and Travel segment earns transaction-based commission revenues and
online marketing services revenue. For example, travel merchants are charged a percentage
of transaction value for sales made on Meituan’s platform while hotels can place ads on
Meituan’s platform. In 2020, commissions contributed 48.0% while online marketing services
contributed 52% of segment revenue. In terms of GTV, of the three businesses (in-store,
hotel, and travel) that constitute the segment, travel was the smallest contributor to GTV. In-
store dining was the most significant driver of the segment.
In contrast to the Food Delivery segment, the In-store, Hotel and Travel segment had an
operating margin of 38.5% in 2020. While Food Delivery was Meituan’s largest revenue
stream, the In-store, Hotel and Travel segment was the most significant bottom line
contributor.
In-Store Dining
Dianping (acquired by Meituan in 2015 but still operating as a separate brand) has long
been known as the go-to restaurant review app for Chinese consumers. Today, Meituan food
delivery and Dianping reviews are integrated. In the US market, users must switch between
apps to access food delivery (eg. DoorDash, Uber Eats) and restaurant reviews (eg. Yelp).
Because US delivery apps are associated with the restaurants on their platform, reviews could
be perceived as somewhat biased. On the other hand, Dianping initially developed its
repository of reviews as a standalone entity. As a result of the merger, Chinese consumers
can now access food delivery services and unbiased quality reviews on Meituan app
seamlessly.
Consumers are able to discover new restaurants, book reservations, order food, and interact
with restaurants through the Meituan and Dianping apps. Dianping restaurant reviews
include details such as recommended dishes and whether there is free parking. Even prior to
the merger, Dianping had already accumulated a vast quantity of restaurant review data. It is
noteworthy that even back in April 2018, Dianping’s database already had 1.5bn reviews,
648m photos, and 5.3m videos for over 13.7m POIs. Dianping’s data moat continues to be
one of Meituan’s competitive advantages.
According to a 2020 iResearch survey, 63% of people used Meituan to search for local
restaurants. Behind Meituan / Dianping, 25% of people surveyed chose Koubei (operated by
BABA) as their go-to review source. In addition to reviews, customers who purchase dining
e-vouchers or pay restaurant bills through Meituan often receive discounts.
Hotel
According to Trustdata, in 2019, Meituan had a 50.9% market share of China’s hotel booking
market by order volume. Ctrip was second place with 25.2% of the market in terms of room
nights. Customers pre-purchase hotel reservations through Meituan, who then takes a
commission and sends the remaining transaction value to the hotel. In 2Q21, domestic hotel
nights booked on Meituan’s platform exceeded 140m, representing a 2-yr CAGR of 22% to
exclude the impact of COVID.
2 November 2021 75
FIGURE 63
Meituan Hotel
FIGURE 64
Pre-Covid market share by room nights
Fliggy Others
Qunar 5% 3%
7%
Tongcheng-Elong
9%
Meituan
49%
TCOM
27%
Source: Trust Data, Barclays Research
2 November 2021 76
Travel
In addition to hotels, Meituan sells tickets for excursions, attractions, package tours, etc. On
Dianping app, users can access review information and tourist guides. As of 2018, Dianping
app provided travel information on more than 213 countries and regions.
Other lifestyle service

Along with dining, hotel, and travel services, Meituan customers have access to lower
frequency, but higher ticket size value services, such as beauty, leisure, wedding planning,
and childcare services. Most purchases made in these categories are in the form of e-
vouchers or package deals.
New initiatives
In 2020, the New Initiatives segment had an operating loss of RMB 10.9bn, +61% y/y, due to
aggressive investments being made to enter into or quickly scale up new areas. Revenue from
New Initiatives is primarily generated through B2B food distribution services, micro-credit
lending, Meituan Instashopping, and ride hailing services.
FIGURE 65
Meituan Bike offers the company a high touch point with users
2 November 2021 77
FIGURE 66
New initiative segment operating margin
0%
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
-10%
-20%
-30%
-40%
-50%
-60%
-70%
-80%
-90%
B2B distribution services

Kuailv (Fast Donkey) is a B2B delivery service that directly connects produce and raw food
suppliers to restaurants. Similar to Meituan’s B2C platform, Kuailv offers promotional
discounts to new customers. The primary differences between Kuailv and Meituan’s B2C
service are the additions of minimum purchase quantities requirement and restaurant/food
manufacturer verification on Kuailv.
Micro-credit
Launched in 2015, Meituan’s micro-credit business provides loans to SMEs and individual
consumers. This business loan service is limited to registered Meituan merchants, including
restaurants, hotels, retail stores, etc. Loans are limited to 1-3x merchant revenue, with a
maximum of 1m RMB. It takes only a few minutes for businesses to apply for and a receive a
loan.
SaaS
As part of the company's cross sales to its existing restaurant customer base, Meituan offers
merchants software services ranging from marketing, customer data analytics, to POS, and
ERP.
Meituan Select
The company’s community group buying business, Meituan Select, offers next day pickup on
discounted goods. Scaling up Meituan Select is currently the company’s most significant
investment. As of 2020, Meituan Select covered more than 90% of cities in China. In
competition with Duoduo Grocery (from PDD), Meituan has routinely provided
large subsidies to customers who purchase groceries on their platforms. That said, since
earlier this year, regulators have been highly critical of the price slashing and heavy subsidies
as a user acquisition strategy adopted by these companies. Regulatory directives have
recently cooled the price war in this market. As a result, Meituan has revamped its growth
strategy and is starting to allocate more resources and capital towards building its supply
chain network. Meituan aims to remain as an asset-heavy company to leverage the
operational expertise it has built up and honed over the years.
2 November 2021 78
FIGURE 67
Meituan is investing heavily in Meituan Select with free delivery and coupons
Financials
Revenue
Meituan's total revenue grew +77.0% y/y in 2Q21 attributable to COVID impacts in 2Q20
providing a low base. Looking ahead to 2021E, 2022E, and 2023E, we expect revenue to grow
+56.9% y/y, +26.4% y/y, and +22.0% y/y to RMB180.1bn, RMB227.6bn, and RMB277.6bn as
Meituan retains its dominance in food delivery and expands its service offerings.
By segment, we estimate food delivery will grow +45.0% y/y, +20.6% y/y, and +14.4% y/y in
2021E, 2022E, and 2023E, respectively. We model Meituan’s most profitable segment, in-
store, hotel and travel, to increase +55.2% y/y, +25.0% y/y, and +39.6% y/y respectively.
Finally, we estimate new initiatives will grow +87.1%, +38.1%, and +24.1% in the same three
years.
Gross margins
Cost of revenues are primarily attributable to delivery rider costs, transaction incentives to
riders and vendors, payment processing costs, and related costs. Gross margin in 2020 was
29.7%. In the next three forecast years, we expect gross margins of 25.8%, 27.1%, and
27.2%, a slight decline from 2020 levels.
Operating Expenses
Selling and marketing
Meituan's selling and marketing expenses are mainly made up of advertising expenses and
transaction incentives provided to customers. In 2020, S&M as a percent of revenue was
18.2%. Moving forward, due the food delivery business’ increased scale and increased
transaction incentives to further new initiatives, such as its grocery business, S&M as a
percent of revenue is expected to increase to 23.9%, 22.7%, and 22.2% in 2021E, 2022E, and
2023E.
2 November 2021 79

Research and development expenses are mainly spent on compensation paid to Meituan’s
R&D personnel. As a percent of revenue, R&D in 2020 was 9.5%. In 2021E, 2022E, and 2023E,
R&D as a percent of revenue, in our estimates, is expected to be 9.2%, 8.2%, and 8.0%,
respectively, representing a gradual decline in the next three years.

G&A as a percent of revenue in 2020 was 4.9%. Looking ahead, we expect G&A expenses to
stay relatively stable at 4.7%, 4.4%, and 4.4% of revenue in 2021E, 2022E, and 2023E as
Meituan’s business expands. Meituan G&A expenses primarily consist of salaries, benefits,
share based compensation paid to employees.
Profitability
We do not forecast Meituan to achieve profitability in the three-year forecast period. The
company invests heavily in new initiatives, its main revenue driver, food delivery, has low
margins (4.2% segment OPM in 2020), and we do not foresee drastic changes in Meituan’s
revenue mix. We model adj. EBITDA margins of -5.4%, -1.9%, and -1.1%, implying adj.
EBITDA of –RMB 9.8bn, -RMB 4.4bn, and –RMB 3.1bn in 2021E, 2022E, and 2023E,
respectively. We estimate that Meituan’s non-IFRS net income will be –RMB 15.8bn, -RMB
12.9bn, and –RMB 13.7bn in 2021E, 2022E, and 2023E, representing non-IFRS net income
margins of -8.8%, -5.7%, and -4.9%.
FIGURE 68
Meituan Financial Summary
MPNGF Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB bn) 16.8 24.7 35.4 37.9 114.8 37.0 43.8 47.6 51.8 180.1 227.6 277.6
Revenue growth yoy

-12.6% 8.9% 28.8% 34.7% 17.7% 120.9% 77.0% 34.3% 36.5% 56.9% 26.4% 22.0%
(%)
Gross margin (%) 31.0% 34.7% 30.6% 24.9% 29.7% 19.5% 28.6% 27.0% 27.0% 25.8% 27.1% 27.2%
S&M % rev 19.1% 16.9% 16.5% 20.2% 18.2% 19.5% 24.8% 25.5% 25.0% 23.9% 22.7% 22.2%
R&D % rev 13.7% 9.6% 8.4% 8.6% 9.5% 9.4% 8.9% 10.0% 8.5% 9.2% 8.2% 8.0%
G&A % rev 6.4% 4.7% 4.0% 5.1% 4.9% 4.7% 4.7% 5.0% 4.5% 4.7% 4.4% 4.4%
Adj. EBITDA (RMB

0.0 2.6 2.7 (0.6) 4.7 (2.4) (1.2) (3.5) (2.6) (9.8) (4.3) (3.1)
bn)
Adj. EBITDA margin

0.2% 10.6% 7.6% -1.6% 4.1% -6.4% -2.8% -7.4% -5.1% -5.4% -1.9% -1.1%
(%)
non-IFRS net income

(0.2) 2.7 2.1 (1.4) 3.1 (3.9) (2.2) (5.2) (4.4) (15.8) (12.9) (13.7)
(RMB bn)
2 November 2021 80
Management
Wang Xing – Co-founder, CEO, and Chairman
Mr. Wang co-founded Meituan in 2010 and oversees the strategic direction and management
of the company. Prior to Meituan, Mr. Wang co-founded xiaonei.com, which was later sold
to China InterActive Corp and renamed Renren (NYSE: RENN). In addition to xiaonei.com, Mr.
Wang co-founded fanfou.com. Mr. Wang received his undergraduate engineering degree
from Tsinghua University in 2001 and his master’s in engineering from the University of
Delaware in 2005.
Chen Shaohui – CFO and SVP

Mr. Chen joined Meituan in 2014 and overseas the company’s finance, investments, and
capital markets activities. Before his appointment as CFO, Mr. Chen served as Meituan’s VP
of Corporate Development. Prior to Meituan, Mr. Chen was a director for Tencent
Investments. He has also held roles at WI Harper and A.T. Kearney. Mr. Chen received his
undergraduate degree from Peking University and his MBA from Harvard Business School.
Mu Rongjun – Co-founder, Executive Director, and SVP

Mr. Mu is responsible for the financial services and corporate affairs of Meituan. Prior to co-
founding Meituan, Mr. Mu was a software engineer and project manager at Baidu (NASDAQ:
BIDU) and also co-founded fanfou.com with Wang Xing. Mr. Mu earned his bachelor’s and
master’s degrees from Tsinghua University.
Valuation
We use our business model focused valuation methodology to derive our Meituan price
target. We value Meituan on an EV/nominal EBITDA basis. We assume that 1) long-term
nominal EBITDA margin of 15% for its food delivery business, and 2) long-term nominal
EBITDA margin of 45% for its in-store, hotel & travel segment.
Based on our FY23E food delivery revenue estimate of $21.2bn, and our FY23E in-store
revenue estimate of $9.2bn, when we incorporate our assumed long-term nominal margins,
we calculate total FY23E core business nominal EBITDA estimate of $7.3bn.
Using a target FY23 EV/EBITDA multiple range of 25x on our estimated total EBITDA of
$7.3bn, and adding net cash of $11.6bn, we reach a price target of $32.
Price target
Our price target is $32, based on 25x EV/nominal EBITDA plus net cash.
If the competitive and regulatory environment continues to worsen, our downside case is
$20, based on 15x EV/nominal EBITDA plus net cash.
Our upside case is $44, based on 35x EV/nominal EBITDA plus net cash.
Risks:
1. The company continues to grow its food take out GTV rapidly and the TAM for food
delivery is bigger than currently expected.
2. Meituan achieves success in digitizing local small businesses with its SaaS offerings,
paving the way for the company to become a SaaS provider to millions of SMEs in China.
3. Meituan is able to achieve dominant competitive positioning in some emerging

businesses it operates in such as ride hailing.
2 November 2021 81
4. Further monetization maybe difficult as restaurants already paying 15-20% take rate in a
thin margin business.
5. Rider compensation may need to rise particularly in light of latest “common prosperity”
push by government, creating margin pressure on the company.
2 November 2021 82
PINDUODUO, INC. (PDD) – EQUAL WEIGHT; PT $103

Pinduoduo Inc.(PDD): Quarterly and Annual EPS (CNY)
PDD
2020 2021 2022 Change y/y
Stock Rating
EQUAL WEIGHT FY Dec Actual Old New Cons Old New Cons 2021 2022
Industry View Q1 -2.73A N/A -1.52A -1.52A N/A -0.45E -0.34E 44% 70%
POSITIVE Q2 -0.06A N/A 2.89A 2.84A N/A 0.41E 2.22E 4917% -86%
Price Target Q3 0.39A N/A -0.25E -0.32E N/A 0.40E 1.02E N/A 260%
USD 103.00 Q4 -0.15A N/A 0.98E 1.26E N/A 1.29E 4.38E 753% 32%
Price (01-Nov-2021) Year -2.49A N/A 2.37E 0.09E N/A 1.65E 5.16E 195% -30%
We initiate coverage of PDD with an Equal Weight rating and

price target of $103
 PDD is the most innovative Chinese ecommerce company in recent years, in our view,
having amassed over 850mn active customers on its platform in just six years since the
company was founded. Using many customer acquisition and engagement tactics
borrowed from the gaming industry, the company has been able to acquire customers at
a cost far below the ecommerce industry norm.
 The company has positioned itself as the go-to platform for value-conscious buyers in
lower tier cities in China and has achieved remarkable success in doing so. Having nearly
saturated its target audience, PDD is now at a crucial juncture to move its offerings up-
market to target brands on one hand and potential customers in tier 1 and 2 cities on the
other, which would place PDD in a head-on competition against the very formidable
competitors, Alibaba and JD.
 With overall take rate at 3% or higher currently, making any further improvement in
monetization is another key challenge. We note that PDD generates revenues not so much
from sales commission but from keyword search ad placements and other forms of ads
such as recommendation feeds.
 Our price target of $103 is based on 20x FY23 nominal EBITDA of $6.9bn plus $8.77 cash
per share. We aim to closely monitor for more clarity and progress on the company’s
business transition.
2 November 2021 83
Investment Thesis
Buying things has always been fun; but

PDD has made it the most fun
We are initiating coverage of PDD with an Equal Weight rating and $103
price target.
PDD has reached the upper echelons of China’s ecommerce industry in a surprisingly short
amount of time, even by Chinese Internet standards. The company was founded merely six
years ago and listed on the Nasdaq only three years after that, reaching a market cap of
$200bn in early 2021. In less than 6 years, PDD has amassed over 850mn active ecommerce
customers on its platform, nearly neck and neck with Alibaba, the previously unchallenged
leader in the China’s ecommerce sector.
PDD’s value proposition is to be the platform for third-party sellers to sell quality products to
value-conscious consumers, mostly in the lower tier cities in China. PDD has acquired
customers in an innovative way: by using game-like features, activities or promotions to
acquire for as low as $1 per new customer, and to keep existing customers engaged on a daily
basis. In addition, the company has been heavily subsidizing goods sold on its platform, with
sales and marketing expenses almost equal to its revenues, or even higher as recently as of
1Q20.
With over 850mn active customers on its platform, PDD needs to transition, in our opinion, to
turn its operations into a profitable and sustainable business. Customer acquisitions will surely
slow if not stall when PDD reaches a saturation point in its target market. The question then
becomes how PDD retains its customers as subsidies roll off and the novelty of playing fun
little games fades. Fundamentally, PDD does not seem to have a meaningful cost advantage
or operational advantage over its competitors, namely Alibaba and JD, in our opinion.
Another key challenge for PDD is how it can further enhance its monetization. PDD generates
revenues mostly from advertising, and specifically from merchant rankings when consumers
search for products, or from priority placement when PDD uses its recommendation engine
to feed customers with product listings. Management has commented that its GMV includes
consumers’ intent to purchase and not just the completed transactions. In other words, PDD’s
transacted GMV is lower than the GMV disclosed by the company. The question is by how
much. And that would imply that the reported take rate (around 3%) is likely lower than the
actual take rate. When comparing the take rate across major players in the sector, gaining
further upside from here may be more challenging as PDD’s may already be reaching the
level that sellers on its platform are able and willing to pay, especially when considering the
prevailing take rate at some of its competitors.
In addition, counterfeit products have been a problem in China’s ecommerce sector for years.
But the leading players have been proactively removing counterfeit products from their
platforms in recent years. One only needs to type in a few popular searches on Taobao for
evidence that the company has made significant progress in addressing its counterfeit
problem. But this remains an issue on PDD’s platform, partly due to its relatively short
operating history. A simple search for Nike or Adidas shoes, or other popular consumer
brands on PDD reveals how widespread the problem still seems. We think this issue is
somewhat related to the market positioning of PDD – value for money, and its targeted
audience – value-conscious consumers in lower tier cities.
2 November 2021 84
We believe PDD has achieved great success as a leading innovator in China’s ecommerce
sector. It was not so long ago when no one believed another major competitor would emerge
given the dominance of Alibaba and JD. But the company is at a cross roads as its customer
acquisition drive is ending and it needs to turn its business into a sustainable and profitable
one. We will monitor its progress closely.
Business Overview
Founded in 2015, PDD has rapidly grown in prominence in the Chinese ecommerce space,
a n d h a s successfully captured a significant customer base using innovative social
shopping features and the popular team purchase model. In 2Q21, LTM active buyers
reached 849.9 m, while GMV grew from RMB 471.6bn in 2018 to RMB 1667.6bn ($260bn)
in 2020.
The majority of PDD’s revenue, or 80.6% as of FY2020, was attributable to online marketing
services. Transaction services and 1P merchandise sales each accounted for ~10% of total
revenue.
FIGURE 69
Revenue split (RMB mn)
30,000
25,000
20,000
15,000
10,000
5,000
0
2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Online marketing services Transaction services Merchandise sales
For its online marketing services, PDD allows merchants to pay for placements in search
results through bidding for keywords, like conventional search engine marketing. In addition,
PDD offers advertisements in banner, link, and logo form. Transaction services revenue
comes from fees collected from merchants as a percentage of transaction value. We
highlight that PDD only charges pass-through fees in order to cover third-party payment
processing fees (30 to 40 bps) and does not charge a traditional sales commissions or
platform service fees to its merchants. In fact, the no platform fee model (Taobao charges
sellers an annual platform fee of at least a few thousand RMB prior to Covid) has been a big
draw in attracting Taobao merchants onto PDD’s platform, according to our conversations
with PDD sellers. Merchandise sales are 1P sales that PDD selectively uses to address unmet
user demand. These first party sales mostly consist of consumer electronics, such as the
iPhone13.
P4P keyword ads inventories are auctioned on a cost per click basis. When a user searches
for a product, the results show advertised products among product results recommended by
PDD’s algorithm. Brands that purchase banner, link and logo ads also purchase these
2 November 2021 85
through a bidding system. PDD offers advertisers insights into what prices, times,
thumbnails, etc. can impact their sales through a marketing management platform. We
highlight that PDD strikes a critical balance between feeding consumers with paid product
placements (although consumers may not be aware) or the most relevant products based
on the consumer’s past purchases or browsing interest. Too many irrelevant paid product
placements will affect customer experience but too few may impact monetization. Not an
easy exercise but PDD’s army of software engineers constantly optimize its placement and
recommendation algorithm to achieve that delicate balance.
In FY 2020, PDD saw an overall monetization rate, including both marketing services and
transaction services, of 3.22%, up from 2.99% in 2019 and 2.78% in 2018. Driven by online
marketing services revenue, brands’ increasing willingness to spend illustrates the value or
ROI advertisers get from the platform. In 2020, online marketing services as a percent of
GMV was 2.44%.
Team purchase – social ecommerce

The cornerstone of PDD’s rapid growth is its team purchase (“groupbuy” is not preferred here
given its checkered history) model. PDD users can choose to purchase items as an individual
or with a team. To lock in a lower team price, PDD users can share team purchase invites with
their friends on WeChat via group or direct messages.
Team purchase, because of its powerful customer acquisition capabilities, facilitated the
exponential user growth of PDD, which in turn drew more merchants to the platform. In six
years, PDD has gained 8.6mn merchants in addition to its 849.9mn active buyers.
Many team purchase deals only require two customers to achieve the discounted price. Also,
because PDD users can now join team purchases with anyone, the number of individual
purchases (made by just one buyer) made on PDD is de minimis.
2 November 2021 86
FIGURE 70
PDD’s main app allows users to socialize their shopping experience
Source: PDD App, Barclays Research
2 November 2021 87
FIGURE 71
Users can see what their friends have purchased or join their team purchase via
Pinxiaoquan (PDD Moments)
FIGURE 72
Team purchase diagram
2 November 2021 88
Gamification of ecommerce
PDD offers mini games and discount rewards to increase session frequency and customer
engagement. It is a cost-effective way for PDD to attract and retain its buyer base.
Daily check-ins
Situated at the center of PDD app’s homepage, daily check-in gives users small rewards each
day if they sign into the app. After accumulating a set amount of these rewards, users can
withdraw cash coupons. By incentivizing users to sign into the app daily, PDD fosters user
habits and increases in-app traffic.
FIGURE 73
Earn cash rewards through daily check-ins
Membership program
Users spin a wheel to determine their monthly membership fee. The fee ranges from RMB5.9
to RMB29.9 per month. Paying members receive cash coupons, free orders, and exclusive
discounts.
Card program
Through writing reviews or making purchases, PDD rewards users with virtual discount cards,
which can be shared among friends. PDD issues these cards to improve user engagement
and social interactions on the platform.
Mini-games
Duo Duo Orchard: Users plant a virtual tree in Duo Duo Orchard and nurture its growth by
completing tasks on the PDD app. As users complete tasks, such as making purchases or
sharing product links, they earn virtual water droplets to accelerate the growth of their tree.
2 November 2021 89
Once a user’s virtual tree reaches maturity, PDD sends the user a box of fresh fruit sourced
from rural farmers.
FIGURE 74
Duoduo Orchards encourages daily check-ins by users
Social feed and short form video

The PDD app includes a social feed and a short-form video channel. Social feed users can see
and react to purchases made by their friends while the short-form video channel attempts to
capitalize on KOL-driven user engagement.
Duo Duo Grocery

Duo Duo Grocery is the company’s next-day grocery pickup platform. Orders are placed
through the PDD app or the Duo Duo Grocery WeChat Mini Program before 11pm.
Overnight, merchants ship the ordered groceries to a regional warehouse. The next day, the
groceries are delivered from the regional warehouse to a local pickup point for sorting and
pickup after 4pm.
Agriculture products currently contributes ~RMB 270bn, or ~15% of PDD’s GMV, which is
sizable. Therefore, management sees Duo Duo Grocery as a natural extension of the
company’s business. That being said, there are significant logistical obstacles to overcome
for its grocery business when compared to its main ecommerce business. As of FY 2020,
Duo Duo Grocery operated in over 300 cities. But we estimate its revenue is negligible in the
near term.
2 November 2021 90
Recent regulatory changes have ruled excessive subsidies (buying a full basket of vegetables
for as little as 1 RMB, for example) as illegal, which would impact PDD’s ability to quickly
scale the Duo Duo Grocery business without breaching the rules.
User base
In the past, most of PDD’s users were from lower tier cities, specifically, young adult women.
PDD’s low priced household goods naturally appealed to price conscious young families. PDD
used this largely untapped market to build its user base and has made efforts to expand into
higher tier cities. To further illustrate PDD’s growth, annual active buyers in 2020, 2019, and
2018 reached 788.4mn (+34.7% y/y), 585.2mn (+39.8% y/y), and 418.5mn, respectively.
In 2018, according to Questmobile, PDD MAU on WeChat Mini Program was 43m, compared
with 179m on the standalone PDD app. Currently, the PDD WeChat Mini Program has taken
a backseat to PDD’s standalone app, with over 90% of orders coming from the standalone
PDD app.
Discounts and promotional expenses

PDD regularly uses subsidy campaigns in popular categories, such as personal electronics, in
tandem with its efforts to fight for market share in higher-tier cities and higher-value product
categories. PDD’s sales and marketing expenses as a percent of revenue (excluding 1P sales)
for 2Q21, 1Q21, and 4Q20 were 45%, 59%, and 55%, respectively.
FIGURE 75
S&M expenses per annual active buyer (RMB)
60
55
50
45
40
35
30
25
20
1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
LTM S&M per LTM AAB
Source: Company data, Barclays Research
We note that the primary contributor to PDD’s sales and marketing expenses was coupon
and promotional expenses.
We recognize that oversized marketing expenses can be viewed negatively, and the company
is taking steps to address investor concerns. In 2Q21 PDD’s sales and marketing expenses
dropped significantly as a percent of total revenue, allowing the company to have one of its
first meaningfully profitable quarters. Consumer stickiness remains to be seen if promotional
expenses decline over time.
In 3Q21, PDD committed RMB10bn to subsidize purchases of the iPhone 13, a marketing
technique it has used in the past. Users place their names on a pre-sale list and receive a
discount. PDD listed the number of people who had already signed up, emphasizing the
limited number of subsidies they were giving out. Along with flash discounts and mini games,
2 November 2021 91
this is another example of how PDD uses promotions and FOMO tactics to engage
customers.
FIGURE 76
S&M as % of revenue for BABA, JD, PDD in the latest FY
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
PDD JD BABA PDD JD BABA
CY19 CY20
S&M
C2M
PDD’s team buying model enables it to gain insights into aggregate demand for certain
products. Thus, when there are gaps between manufacturing supply and consumer demand,
PDD can approach manufacturers, merchants, and logistics providers with opportunities to
respond to those gaps. Upstream suppliers can potentially leverage these insights to plan more
effectively, manufacture more suitable products, and cut costs.
FIGURE 77
C2M requires a deep understanding of consumer preference and know-how in supply
chain management
2 November 2021 92
Smart Agriculture initiatives

Agriculture in China, while shifting, is still characterized by millions of small farms. By
aggregating demand on the PDD platform, PDD can approach farmers with D2C
opportunities, cutting out distributors in the process. As it helps farmers achieve greater
economies of scale, developing a perishable goods delivery network, and bringing their
businesses online, PDD hopes to increase the operating efficiency of the agriculture industry
and digitize the entire value chain. This would allow customers to receive a wider selection of
fresher agriculture products at a lower cost and for farmers to earn more.
10bn Yuan Agriculture Initiative

During its 2Q21 earnings, PDD announced it would dedicate RMB10bn to modernize
agriculture in China. This is in response to the “Common Prosperity” theme which is currently
top of every China internet platform’s priority list. In the announcement, the company shared
its intention to improve food security and quality, while promoting digital inclusion and
sustainability. Aside from noting that the initiative will weigh on earnings in the short term,
management has provided limited details on the specifics of the initiative.
Merchant verification
During PDD’s onboarding process, merchants must first complete an identity verification
process. They then need to sign up to the platform’s policies and pay a deposit, the size of
which is dependent on the value of goods the merchant will sell. After this step, products go
through numerous screening models pre and post listing. In addition, PDD has anonymous
buyers who conduct sample purchases for the purpose of identifying counterfeits.
If a merchant is confirmed to be selling counterfeit products, they face a penalty of ten times
the value of all products sold on the platform (in theory). The marketplace algorithm
automatically freezes fraudulent merchant accounts. These are policies that merchants agree
to during the onboarding process. Buyers are also protected by a guaranteed refund program.
Despite PDD’s efforts to combat counterfeit, some of the top search results for both “Nike
shoes” and “men’s t shirts” can be clearly seen as counterfeit products.
As penetration among price-sensitive consumers plateaus, PDD hopes to move up-market in

order to increase ARPU. A key hurdle is that reputable brands are unwilling to be associated
with a counterfeit product marketplace. PDD could make greater efforts to remove
counterfeits but may risk alienating its price conscious buyer base.
Financials
Revenue
PDD’s revenue has grown rapidly since the company’s inception. In 2Q21, PDD experienced
revenue growth of +89.0% y/y. We model total revenue to grow +82.0% y/y in 2021E, +31.6%
y/y in 2022E, and +21.5% y/y in 2023E to RMB108.3bn, RMB142.5bn, and RMB173.1bn,
respectively. Our expectations for cooling revenue growth are predicated on PDD’s market
saturation and potential difficulty enhancing its monetization.
We forecast PDD to report online marketing services revenue of RMB78.0bn in 2021E,

RMB105.3bn in 2022E, and RMB131.6bn in 2023E, representing growth rates of +61.3% y/y,
+35.0% y/y, and +25.0% y/y, respectively, as merchants continue to purchase P4P advertising
services.
2 November 2021 93
Gross margins
Costs of revenues primarily consist of payment processing fees, merchandise sales expenses,
delivery and storage expenses, and other operational expenses. These expenses translate, by
our estimates, into gross margins of 59.0%, 58.0%, and 59.0% in 2021E, 2022E, and 2023E.
Operating expenses
Due to its customer acquisition strategy, promotional and coupon expenses make up the bulk
of PDD’s sales and marketing expenses. Sales and marketing expenses as a % of revenue
have consistently declined in the past few years. We expect the decline to stabilize over the
next three years at 51-53%. For 2021E, 2022E, and 2023E, we model S&M as % revenue at
52.4%, 52.1%, and 51.1%, respectively, as the company continues to rely on price
competitiveness to attract customers.
We forecast research and development expenses to decline slightly as a percent of revenues

in 2021E and 2022E. In 2021E, 2022E, and 2023E, we expect R&D as a % revenue of 9.4%,
8.7%, and 8.7%, respectively. R&D expenses mainly consist of compensation and benefits to
R&D employees, product development related cloud services, and other associated expenses.
General and administrative expenses mainly consist of payroll, employee benefits, SBC, and
related expenses. Thus, G&A expenses have been driven by increases in headcount. We model
G&A expenses as a % revenue at 1.7%, 1.6%, and 1.6% in 2021E, 2022E, and 2023E, down
from 2.5% in 2020.
Profitability
We forecast an improvement in PDD’s non-GAAP operating margins from -10% in 2020 to
0% in 2021E, -1% in 2022E, and 1% in 2023E primarily due to tapering of sales and marketing
expenses. Our operating income estimates for 2021E, 2022E, and 2023E are RMB-0.4bn,
RMB- 1.3bn, and RMB1.2bn, respectively. Similarly, we think non-GAAP net income margins
will improve from -5.0% in 2020 to 3.0% in 2021E, 1.7% in 2022E, and 3.4% in 2023E. Our
non-GAAP net income estimates are RMB3.3bn for 2021E, RMB2.4bn for 2022E, and
RMB5.8bn for 2023E. PDD’s path to profitability remains elusive to us as monetization rates
are not improving and S&M expenses remain high.
2 November 2021 94
FIGURE 78
Pinduoduo Financial Summary
PDD Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB bn) 6.5 12.2 14.2 26.5 59.5 22.2 23.0 26.5 36.6 108.3 142.5 173.1
Revenue growth yoy

43.9% 67.3% 89.1% 146.0% 97.4% 238.9% 89.0% 86.6% 37.8% 82.0% 31.6% 21.5%
(%)
Gross margin (%) 72.0% 78.2% 77.1% 56.6% 67.6% 51.5% 55.0% 58.0% 60.0% 59.0% 58.0% 59.0%
S&M % rev 111.6% 74.7% 70.9% 55.4% 69.2% 58.6% 45.1% 55.0% 51.5% 52.4% 52.1% 51.1%
G&A % rev 5.2% 3.2% 2.6% 1.5% 2.5% 1.6% 1.9% 2.0% 1.5% 1.7% 1.6% 1.6%
R&D % rev 22.5% 13.6% 12.7% 7.4% 11.6% 10.0% 10.1% 9.5% 8.5% 9.4% 8.7% 8.7%
Adj. EBIT (RMB bn) (3.6) (0.7) (0.3) (1.1) (5.8) (3.2) 3.2 (1.0) 0.7 (0.4) (1.3) 1.2
Adj. EBIT margin (%) -54.9% -5.9% -2.4% -4.2% -9.7% -14.3% 13.8% -3.9% 1.9% -0.3% -0.9% 0.7%
non-GAAP net
(3.2) (0.1) 0.5 (0.2) (3.0) (1.9) 4.1 (0.4) 1.4 3.3 2.4 5.8
income (RMB bn)
Management
Lei Chen – Chairman and CEO
Mr. Chen is a founding member of the company and was appointed Chairman in 2021, having
served as CEO since 2020. Mr. Chen was CTO from 2016 to 2020. Prior to joining the company,
Mr. Chen was the CTO of Xinyoudi Studio from 2011. Mr. Chen received his bachelor’s degree
in computer science from Tsinghua University and doctoral degree in computer science from
the University of Wisconsin-Madison.
Zhenwei Zheng – Senior Vice President of Product Development

Mr. Zheng is a founding member of the company and has been senior vice president of
product development since 2016. Prior to joining the company, Mr. Zheng was CEO of
Xinyoudi Studio from 2011. Prior to that, he held various positions at Baidu from 2008 to
2010. Mr. Zheng received his bachelor’s degree and master’s degree in computer science from
Zhejiang University.
Jing Ma – VP of Finance
Mr. Ma joined PDD as VP of Finance in 2020. Prior to PDD, Mr. Ma held various roles at Chanel,
including corporate director of Chanel China and CFO of Chanel Hong Kong and Chanel
Macau. Mr. Ma earned his bachelor’s degree from Shanghai University of Finance and
Economics, his MBA from Fudan University, and his EMBA from China European International
Business School.
2 November 2021 95
Valuation
We use our business model focused valuation methodology when valuing PDD. We are
valuing PDD based on the value of its core ecommerce business plus net cash.
We assign a ~25% target nominal EBITDA margin on our FY23E revenue estimate of $27.7bn,
deriving a FY23E EBITDA estimate of $6.9bn. Using a EV/nominal EBITDA multiple of 20x plus
$9 cash per share, we calculate a price target of $103.
Price target
Our price target of $103 is based on 20x FY23 nominal EBITDA plus cash per share.
Our downside case is $79, which is based on 15x FY23 nominal EBITDA plus cash per share.
Our upside case is $126, which is based on 25x FY23 nominal EBITDA plus cash per share.
Risks
1. The company may not be able to move up-market now that it has almost fully penetrated
lower tier city shoppers.
2. Once the gamification novelty wears off and purchase subsidies decline, some customers
may move on to other platforms or become less actively engaged.
3. One upside risk is that the company manages to move up-market rapidly and gain
meaningful traction among online shoppers in the tier 1 and 2 cities.
4. Another upside risk is that the company manages to continue to drive up its monetization
thus higher take rate from merchants due to lack of alternatives for these merchants.
2 November 2021 96
SEA LTD.: OVERWEIGHT; PT: $427

SEA Ltd.(SE): Quarterly and Annual EPS (USD)
SE
2020 2021 2022 Change y/y
Stock Rating
Industry View Q1 -0.52A N/A -0.62A -0.82A N/A -0.71E -0.36E -19% -15%
POSITIVE Q2 -0.68A N/A -0.61A -0.83A N/A -0.58E -0.58E 10% 5%
Price Target Q3 -0.69A N/A -0.71E -0.78E N/A -0.31E 0.01E -3% 56%
USD 427.00 Q4 -0.87A N/A -0.95E -0.69E N/A -0.23E 0.43E -9% 76%
Price (01-Nov-2021) Year -2.76A N/A -2.90E -2.67E N/A -1.84E -1.89E -5% 37%
We are initiating coverage of SEA with an Overweight rating

and price target of $427
 Originally backed by Tencent, SEA is the dominant ecommerce marketplace and online
game developer/publisher in Southeast Asia. It has adopted Tencent’s gaming business
model and Alibaba’s ecommerce playbook. We also view its mobile payment and fintech
business as having potential for significant value creation.
 The company has established itself as the #1 ecommerce player in several ASEAN
countries and Taiwan with roughly 50% of share in these countries, where the
ecommerce penetration rate is only about 6% currently. Its GMV has been roughly
doubling every year over the last two years. In search for the next growth area, the
company has entered into LATAM (mainly Brazil) and Eastern Europe (eg Poland). We
think SE is well positioned to become the Amazon, Tencent or Alibaba equivalent in global
emerging markets.
 Tied with its ecommerce business, mobile payment and fintech has also grown
significantly. Against the backdrop of a large unbanked/underbanked ASEAN population,
SE has the potential to become the leading digital bank for the region. The company
already has digital banking licenses in several ASEAN countries and has even purchased
a brick-and-mortar bank in Indonesia. Similar to its success in ecommerce, SE should be
able to replicate its mobile payment and fintech offerings when it enters LATAM and
Eastern Europe, as well as other emerging countries.
 Its first ever self-developed game Free Fire has been hugely successful, among the top
ranked and highest grossing games globally. Free Fire’s success validates the value of being
a game publisher that has built up considerable game design and operational expertise over
the years. As a result, we expect SE to continue to launch hit games in the future.
Our $427 price target is based on 15x FY23E digital entertainment and 45x FY23E
ecommerce nominal EBITDA plus net cash.
2 November 2021 97
Investment Thesis
Emerging markets are a vast

ocean...unchartered territory only for
brave souls
We are initiating coverage of SEA (SE) with an Overweight rating and $427 price target.
Generally speaking, there are two giant internet spheres in the world – the US and China,
spawned by the size of their economies, relatively uniform consumer behavior and single
language. Although investors and companies have recognized potential opportunities in the
rest of the world, obstacles such as language barriers, cultural differences, and relatively
smaller economies, have meant that few have succeeded until SE came along.
SE is a trail blazer as it replicates the China model overseas, particularly in Southeast Asia,
given its geographical proximity and cultural similarity. SE is Tencent-backed, but has not
limited itself to being just a gaming powerhouse. The company has also borrowed Alibaba’s
playbook to create a Tencent + Alibaba model in the region and beyond.
Today, SE’s revenues are roughly evenly split between its gaming and ecommerce businesses
at $1bn each in 2Q21. Its first ever self-developed mobile game Free Fire was one of the top
grossing games in the world. Leveraging its deep insight in game plays and gamer behavior,
just like Tencent, SE should be able to continue to develop some of the highest grossing
games in the world, in our opinion.
But what investors are really focused on is its ecommerce business. SE has attained a
dominant market positioning in almost every Southeast Asian country, where the ecommerce
penetration (~6%) is much lower compared to China (25-30%) or even lower than the US
(15%), so the growth potential is quite significant. In addition to ecommerce, SE has made a
concerted effort to expand its online payment offerings throughout the region.
Now that SE has seemingly gotten its formula right, it has set its sights beyond the horizons
of Southeast Asia. The company recently entered into Brazil in LatAm and Poland in Eastern
Europe. As SE has built up some strong capabilities and core competencies to “cookie cut” its
business plans for different countries or regions despite major differences, we think it’s likely
that SE could be successful in at least some if not most countries it decides to enter. There
are several mega cap internet companies in both the US and China. We believe SE may emerge
as one of few mega cap internet powerhouses for the rest of the world.
Overview
Founded by Forrest Li in 2009, Sea Limited (SE) began as an online game publishing platform.
Over the past decade, SE’s rapid growth has been driven by the success of its gaming segment
and strategic entry into Southeast Asia’s nascent online retail market. SE now operates three
primary business segments: digital entertainment (gaming), e-commerce, and financial
services, in Southeast Asia, Taiwan, and Latin America. Total revenue in 2020 was $4.4 billion
dollars, +101% y/y, of which 46%, 50%, and 1% (3% other services) was attributable to SE’s
gaming, e-commerce and financial services segments.
2 November 2021 98
FIGURE 79
SE revenue mix (1Q18-2Q21)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Digital entertainment E-commerce Digital financial services Other
Digital Entertainment (Garena)

Garena operates an online gaming platform where users purchase, download, and play
games. Garena publishes localized versions of games for developers, such as Tencent, in the
Southeast Asian market, and also develops games in-house. Since the release of Free Fire,
SE’s highly popular in-house developed mobile battle royale game, Garena’s user base and
revenues have grown dramatically. In 2Q21, the online gaming business had QAUs of 725m,
+45% y/y, and QPUs of 92.2m, +85% y/y. Garena’s mobile games operate a freemium model
which generates revenue through the sale of virtual in-game items.
FIGURE 80
SE digital entertainment QAUs and QPUs (in mn)
Axis Title
800 350%
700 300%
600
250%
500
200%
400
150%
300
100%
200
100 50%
0 0%
3Q17 4Q17 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
QPU (in m) QAU (in m) QAU y/y
Driven by increased mobile penetration, Southeast Asia’s gaming market is poised for
continued growth. According to Niko Partners, the Southeast Asia and Taiwan mobile game
market is expected to be $5.2bn in 2023, representing a CAGR of 21% between 2019 and
2023. SE has a significant mobile gaming presence in all of the top five countries worldwide
by mobile game download growth in 1Q21. To note, some of SE’s most significant gaming
markets, Indonesia, India, and Brazil saw y/y download growth of +26%, +28%, and +10%. In
the fast growing Southeast Asian gaming market, SE’s Garena was by far the dominant game
2 November 2021 99
publisher, generating more than 2x revenue on the Google Play store and Apple App Store
than its nearest competitor (Moonton).
FIGURE 81 FIGURE 82
Top 5 countries by absolute mobile game download growth Top 5 Southeast Asia game publishers by revenue (Google
(in m) w/ y/y % growth Play and App Store) in USD mn
2,500 350
29% 314
300
2,000
250
1,500 200
9%
143
1,000 150
26% 97
23% 89
100
30% 59
500
50
0 0
India Indonesia Mexico Brazil Philippines Garena Moonton Lilith Games Tencent Netmarble
1Q20 1Q21 2019 2020
Source: SensorTower, Barclays Research Source: SensorTower, Barclays Research
Free Fire
In 2020, SE’s top five games contributed 95.6% of digital entertainment revenue. We estimate
Free Fire generated at least one-third of digital entertainment revenue), not including
advertising and other ways of monetization. According to Apptopia, in LTM October 2021,
Free Fire contributed 73% of Garena’s total game app downloads (including Booyah Live). It
is clear that the digital entertainment segment, SE’s only positive operating profit contributor
in 2020, is highly dependent on the continued success of a handful of game titles, particularly
Free Fire.
FIGURE 83
Free Fire contributed 73% of app downloads among top-5 Garena apps
Booyah Live AoV

14% 9% COD Mobile
Speed Drifters 3%
1%
Free Fire
73%
Source: Apptopia, Barclays Research
Free Fire was first released in 2017, the same year as other successful battle royale titles such
as Fortnite and PlayerUnknown’s Battlegrounds (PUBG). While 2020 digital entertainment
revenue was highly concentrated in Free Fire, we believe the Free Fire franchise will continue
to generate strong revenue in the foreseeable future.
2 November 2021 100

Free Fire continues to expand its IP and make inroads into new markets. Management has
noted that Free Fire continues to have active user growth in its largest markets, such as India
and Indonesia. Free Fire is also experiencing initial user growth in North America and Europe,
both of which are high ARPU markets. Further, Free Fire has evolved beyond being a pure
battle royale. SE continues to add game modes, special events, and social elements to retain
and attract users. Free Fire Max, a version of Free Fire with the same gameplay but improved
graphics and increased computing demands, was released in September 2021, illustrating
the continued commitment SE has to the Free Fire franchise.
Beyond Free Fire, SE has published localized versions of notable titles including Arena of Valor
(Honor of Kings), Call of Duty Mobile, and FIFA Online. SE continues to invest in studios both
domestically and abroad. Most notably, in January 2020, Garena acquired Phoenix Labs, the
creator of popular RPG Dauntless. In addition, Garena retains a large team of in-house
developers. As of December 2020, Garena had over 750 in-house game developers across its
studios. As gaming is a content driven market, monitoring the performance of new releases
is paramount in determining whether Garena will see continued success beyond Free Fire.
Publishing
Before Free Fire, Garena was a pure games publishing business. Garena enters licensing
agreements with developers ranging from three to seven years and these contracts specify
the responsibilities of each party in distribution, marketing, as well as financial terms. As of
2017, SE typically retained 65-80% of gross billings from games published for developers.
Garena’s publishing arm localizes game content to provide users a more targeted, engaging
experience, thus increasing the game’s ability to sell in-game virtual goods. Examples of content
localization include the addition of Vietnamese soccer stars in Garena’s Vietnamese version of
FIFA Online 3. In addition to content, Garena adjusts pricing and payment options by geography.
Other operational factors, such as marketing and game hosting, are also customized and
localized for each region, benefited from Garena’s local expertise and infrastructure. As of 2017,
SE hosted published games on 12 data centers across Southeast Asia to provide users faster
connections, further improving game quality and player experience.
E-sports
According to Newzoo, e-sports viewership in Southeast Asia is expected to reach 42.5m by
the end of 2021. While there is plenty of opportunity in the e-sports space, we believe that
the greatest value in SE’s e-sports business is synergies between its e-sports and game
development businesses. Although e-sports have not existed long enough to draw conclusive
evidence, many of the top games with the longest shelf lives (e.g. League of Legends, 2009;
Counter Strike:GO, 2012; DOTA 2, 2012) have developed e-sports presences. Thus, the
successful buildout of a game title’s e-sports viewership could increase user engagement and
franchise longevity.
E-commerce
SE’s ecommerce arm, Shopee, has grown from generating $270m of revenue in 2018 to
$1.8bn in 2020, increasing from 32.7% to 40.6% of total revenue in the same period. Shopee
in LTM 2Q21 had GMV of $48.8bn, +100% y/y, on 4.2bn total gross orders, +138% y/y. SE’s
e-commerce business is primarily a 3P marketplace and generates most of its revenue by
charging value added services (VAS) fess (e.g. cross board logistics, advertising, online or
mobile payment) and commissions as a percentage of transaction value that varies by
market. In addition, SE operates a membership program which offers benefits such as free
shipping or additional discounts. Shopee’s market share, calculated using its GMV as a % of
its meaningful ecommerce markets (SEA, Taiwan) was 47% in 2020. Over time, through
scaling its ecommerce segment, SE’s monetization rate has improved from 0.8% in 1Q18 to
2 November 2021 101

6.0% in 2Q21. We see potential for continued monetization rate improvement as SE continues
to scale its Shopee segment.
SE is a champion for eSports in Southeast Asia, having founded the professional League of
Legends tournament, League of Legends SEA Tour, as well as having published the two most
popular e-sports titles in Southeast Asia, Arena of Valor and Free Fire. In fact, the highest
viewed e-sports event worldwide as of July 2021 was the Free Fire World Series 2021
Singapore, with over 5.4m viewers. SE’s titles dominate the e-sports space in Southeast Asia
and serve as a value multiplier for Garena’s already successful titles.
FIGURE 84
Shopee ecommerce TAM and penetration by market
SE Total
(LATAM +
Indonesia Taiwan Malaysia Vietnam Thailand Philippines Singapore Brazil LATAM SEA
SEA +
Taiwan)
Total retail market ($ bn) 390 137 155 175 191 77 29 391 1162 1017 2316
e-commerce market ($ bn) 32 12 6 7 9 4 4 33 105 62 179
e-commercepenetration (%) 8.2% 8.8% 3.9% 4.0% 4.7% 5.2% 13.8% 8.4% 9.0% 6.1% 7.7%
Source: eMarketer, e-Conomy report 2020, ITA, Government Statistics Bureaus, Euromonitor, Barclays Research
Monetization Rate
While Shopee’s take rate continues to improve, the majority of its ecommerce service revenue
can be viewed as “pass-through” in nature. For example, VAS, which mostly consists of cross-
border logistics services and handling fees are pass through, and recognized on a gross basis.
After excluding pass-through revenues, we estimate net take rate of 0.7-1.6%, significantly
lower than the reported 6.0% marketplace take rate, suggesting meaningful upside in take
rate since SE recently started to charge commissions for transactions.
Shopee separates its sellers into Marketplace and Mall merchants. Mall merchants are brands
or verified merchants that are held to a stricter set of policies (returns, shipping, product
authenticity). Mall merchants are monetized in all of SE’s markets. However, Marketplace
merchants are only monetized in a few select geographies, including Taiwan, Indonesia, and
Malaysia. According to management, Taiwan and Malaysia are the company’s only two
EBITDA positive markets. Over time, we expect SE to monetize more countries and improve
its net take rate.
In addition, Shopee’s advertising revenue as a % of GMV is much lower than ecommerce

platforms in more developed markets. As e-commerce evolves and merchants find success
on Shopee, we expect the gap in advertising as a % of GMV to narrow, further improving
Shopee’s net take rate.
2 November 2021 102

FIGURE 85
Shopee take rate breakdown by market
Commission rate
Service fee
Marketplace Mall Handling fee
(for promotions programs)
0.75-2%
Indonesia 1-5% 1.5% (mall) 1.4-4%
by seller status
Taiwan 2-4% 3-7% 1-2% 3-4%
1-2% 3-5%;
Malaysia 2% 3-4%
by seller status overseas 5-6%
Thailand na 3-5% 2% 3-5%
Philippines 1% 2-5% 2% 3-5%
Vietnam na 1-7% 2% 4-6%
Singapore na 3-5% 2% 2-5%
Brazil na 12% na 6%
FIGURE 86
Ecommerce segment take rate (1Q18-2Q21)
7.0%
6.0%
5.0%
4.0%
3.0%
2.0%
1.0%
0.0%
1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q21 2Q21
Service Fee
Service fees are opt-in promotional programs that sellers use to improve sales. The Free
Shipping Program allows sellers to create free or subsidized shipping product promotions.
After joining the program, Shopee places the seller’s listings in featured product sections,
attaches a free shipping tag to each promoted product listing, and subsidizes buyer-borne
shipping fees (seller shipping fees remain the same).
The Shopee Cashback program, similar to the Free Shipping Program, is opted into by sellers
to improve sales. After a seller joins the program, buyers who purchase the seller’s promoted
products receive 10% cashback in Shopee Coins. These coins can later be used by the buyer
to offset the cost of future purchases. Again, similar to the Free Shipping Program, Shopee
gives Cashback promotion listings preferential placement and a promotional tag. Customers
2 November 2021 103

are incentivized to buy from sellers who provide free shipping and cashback, thus driving
sales for participating Shopee sellers.
Tailwinds in SE’s key e-commerce markets

SE’s key markets of Southeast Asia (Indonesia, Malaysia, Vietnam, Philippines, Thailand,
Singapore), Taiwan, and Latin America (primarily Brazil), have seen significant growth in
income and internet penetration. These ecommerce tailwinds have helped Shopee establish
dominance in these fragmented markets. We are positive on SE’s e-commerce segment due
to further growth in Southeast Asia and its expansion into LATAM.
Southeast Asia
Southeast Asia’s total internet users increased from 260mn in 2016 to 400mn (70% internet
population) in 2020 according to a Google, Temasek, and Bain report (e-Conomy SEA 2020).
Of these internet users in Southeast Asia, 79% are now online consumers. Although e-
commerce adoption in Southeast Asia is high among internet users, e-commerce penetration
as a percentage of total retail sales is only 5% (6% by our estimates), according to a Facebook
and Bain report (Southeast Asia, The Home for Digital Transformation 2021). Compared to
China, which has 30% e-commerce penetration, the Southeast Asia e-commerce market still
has significant headroom. As the Southeast Asian population sees increased internet access,
their propensity to spend online should also to increase. Along with increased internet
penetration, average spending per Southeast Asian digital consumer is projected by Bain to
grow from $238 in 2020 to $671 in 2026, representing a 19% annual growth rate. As a result,
the region’s ecommerce GMV, which was $62bn in 2020, is expected to grow at a CAGR of
+23% to $172bn by 2025. With Southeast Asia SE’s primary market, Shopee stands to benefit
from these demographic trends.
Southeast Asia’s ecommerce market is relatively fragmented. In countries such as Vietnam,

Malaysia, and Indonesia, Shopee dominates, but faces competition from companies such as
Alibaba’s Lazada. While Lazada was previously the market leader in Southeast Asia, SE took
advantage of Lazada’s executional issues to take ecommerce market share. In addition,
Lazada originally operated with an intention to operate an integrated logistics infrastructure.
SE leveraged its more flexible asset-light model to expand rapidly. When COVID came along
in 2020, ecommerce adoption accelerated in Southeast Asia (+65% y/y ecommerce GMV in
2020), and SE found a unique opportunity to build its ecommerce dominance in the region.
2 November 2021 104

FIGURE 87
MAUs (in m) of Shopee ahead of Lazada across 6 primary SEA markets
16
14
12
10
0
Indonesia Vietnam Thailand Phillipines Malaysia Singapore
Shopee Lazada Tokopedia
Indonesia’s ecommerce market in 2020 was $32bn, +54% y/y. By 2025, the ecommerce
market is projected by Google, Bain, Temasek to reach $83bn (CAGR of 21%). As the total
retail market in Indonesia was ~$390bn in 2020, ecommerce penetration in the country was
8%. Indonesia accounted for ~40% of Shopee ecommerce orders. As Indonesia is also the
region’s most populous country, this significance in Shopee’s revenue mix comes as no
surprise. According to Momentum Works, Shopee leads the ecommerce market in Indonesia
with 37% market share, slightly ahead of locally-based Tokopeida (35% share). Notably, 28%
of the Indonesian population is between the ages of 10 and 24. Moving forward, this younger
skewed population provides a fertile ground for increased mobile adoption and therefore e-
commerce adoption.
FIGURE 88
Indonesia ecommerce market share by GMV (%)
Other
10%
Bukalapek
7%
Shopee
37%
Tokopedia
35%
Lazada
11%
Source: Momentum Works, Barclays Research
Taiwan
Taiwan has significant e-commerce operations and is the most developed economy SE operates
in. Internet penetration is 92.6% and Taiwan’s ecommerce market, while growing, isn’t
experiencing the same structural tailwinds currently driving Southeast Asia’s ecommerce
market. In 2020, Taiwan’s ecommerce market was $12.1bn but the total retail market was
$137bn, implying an ecommerce penetration rate of only 8.8%. Compared to 25-30%
2 November 2021 105

penetration in China and 15% in the U.S., Taiwan’s e-commerce market still has meaningful
runway. Due to Taiwan’s more developed economy, ecommerce competition is more
disciplined, and players are mostly publicly traded companies. By webpage views per month,
Shopee was the most popular ecommerce site in Taiwan with 52.5m page views per month in
2020. Behind Shopee, PChome, Momo, and Ruten had 32.4m, 31.2m, and 30.2m page views
per month.
FIGURE 89
Top-4 Taiwan e-commerce players by pageviews (in mn)
60
50
40
30
20
10
0
Shopee Taiwan PChome Momo Ruten
Source: International Trade Administration, Barclays Research
Latin America
Ecommerce growth in Latin America (LATAM) soared during the pandemic. According to
eMarketer, in 2020, even pre-Covid, LATAM retail ecommerce sales grew 63% y/y,
demonstrating the strong secular uptrend for its consumers. In 2020, total LATAM retail
revenue was $1,162bn, of which 9% was e-commerce revenue. Considering that internet
penetration is only 68% in LATAM and the Caribbean, 9% is relatively high, compared to
Southeast Asia. The higher rate of ecommerce adoption may be due to the market education
by incumbent ecommerce players in recent years. Over the next 5 years, eMarketer expects
LATAM’s ecommerce market to grow at a 13% CAGR, giving an e-commerce TAM of
$192.3bn in 2025. It expects 46% of ecommerce sales to be completed on a mobile device,
up from 12.8% in 2015, much lower than the mcommerce share in Southeast Asia and
Taiwan of over 70%. We see this mcommerce gap closing between LATAM and SE’s other
markets. As Shopee is a mobile first platform, Latin America is an appropriate next frontier
and the next high growth market with younger demographics.
2 November 2021 106

FIGURE 90
Latin America ecommerce sales as a % of total retail sales (2015-25E)
1,800 16%
1,500
12%
1,200
900 8%
600
4%
300
0 0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
LATAM e-commerce sales LATAM Total Retail sales e-commerce penetration (%)
Source: eMarketer, Barclays Research
Brazil in 2020 had retail ecommerce sales of $32.8bn, out of a $391bn total retail TAM,
implying an 8.4% e-commerce penetration rate. Shopee has developed a well-honed process
to enter new markets and has seen some traction in Brazil, its first entry to LATAM in 2019.
SE attracts sellers with logistics subsidies and targets its app and marketing efforts to the local
population. According to Apptopia, the Shopee app in Brazil had 22.7mn MAUs in May 2021,
up from 4.24mn in January 2020. Compared to Mercado Libre, the top ecommerce player in
Brazil by sales (34% market share), in 2020 Shopee’s app had 2.5x its app’s active users.
Looking ahead, SE believes its understanding of the market, due to the success of Free Fire in
Brazil, will be a competitive advantage vs overseas competitors, such as AliExpress and Wish.
Against Latin American ecommerce incumbents, many of which are search-based, Shopee
hopes its mobile-first, recommendation-based approach will allow it to capture
disproportionate growth in the region.
FIGURE 91
Brazil MAUs of Shopee vs. Mercado Libre vs. Magazine Luiza (in mn)
25
20
15
10
0
Jan-20 Mar-20 May-20 Jul-20 Sep-20 Nov-20 Jan-21 Mar-21 May-21
Shopee Brazil Mercado Livre Magazine Luiza
2 November 2021 107

FIGURE 92
Brazil ecommerce sales as a % of total retail sales (2015-2025E)
500 16%
400
12%
300
8%
200
4%
100
0 0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Brazil e-commerce sales Brazil Total Retail sales e-commerce penetration (%)
Source: eMarketer, Barclays Research
Shopee – Social Commerce

Shopee’s app is well positioned for the future of ecommerce, in our view. In a similar fashion
to PDD, Shopee introduced features to socialize and gamify the shopping experience. Shopee
Coins are earned when making purchases, playing mini-games, inviting friends, and
otherwise engaging with the platform. Shopee Live and Shopee Feed are social shopping
features that allow users to watch ecommerce live streams and scroll through a multimedia
feed of product listings. These features increase user engagement and take advantage of the
social commerce trend (social commerce as % of ecommerce sales 11.7% in 2020) we have
seen emerge in China.
On a similar note, apps such as Kuaishou and PDD, which are recommendation-based, have
taken share from search-based ecommerce platforms in China. Recently, we’ve seen Chinese
incumbents, such as Alibaba, react by incorporating recommendation feeds into their
ecommerce apps. Shopee as a recommendation-based platform is evidently a trend-setter.
Southeast Asia, for the most part, has skipped PC adoption, similar to China and some
emerging countries. As a result, Shopee’s mobile-first approach was key to its success in
Southeast Asia. We see mobile commerce likely growing as a % of ecommerce in SE’s key
markets, particularly LATAM, which benefits Shopee and its mobile-first strategy.
2 November 2021 108

FIGURE 93
Shopee Prizes - Gamified ecommerce experience
Source: Shopee App
2 November 2021 109

FIGURE 94
Shopee Live offers a socialized shopping experience
Source: Shopee App
2 November 2021 110

FIGURE 95 FIGURE 96
Shopee Feed recommendation page Users can find coupons within Shopee Feed
Source: Shopee App Source: Shopee App
SeaMoney
SE’s digital financial services business contributed only 1% of total revenue in 2020. While de
minimis in revenue contribution, SE’s market opportunity in the digital banking space is
significant. In 2020, SeaMoney had a mobile wallet TPV of $7.8bn and generated revenue
primarily by charging commissions to third party merchants and earning interest on loans
extended to customers. ShopeePay was integrated with Shopee in 2019 and has since seen
huge growth in TPV. We note that e-payments are not considered a profit center, and we
expect SE to leverage its scale in the e-payments business to cross-sell credit, wealth
management, and insurance products.
Southeast Asia’s (excl. Singapore) mobile banking market opportunity is attributable to the
~70% of Southeast Asia’s 650m underbanked population, according to the CSIS. In Indonesia,
the Philippines, and Vietnam, the percentage of adults with bank accounts was only 39%,
34%, and 31%, respectively, further illustrating the market opportunity in the region. Relative
to the 70% internet penetration rate, mobile banking adoption is lagging. Therefore, it comes
as no surprise that BCG estimates 58% of Southeast Asia’s unbanked population will have e-
wallets by 2025 (Southeast Asian Consumers Are Driving a Digital Payment Revolution 2020).
2 November 2021 111

FIGURE 97
Percentage of Adult Bank Account Ownership (2017)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Source: World Bank Global Findex, Barclays Research
Southeast Asia digital payment GTV is expected to grow between 2020 and 2025 at a 15%
CAGR from $620bn to $1200bn according to Google, Temasek, Bain. On higher margin
mobile banking products, lending loan book value, investment AUM, and insurance
APE/GWP are projected to grow at a low-30s CAGR to 2025.
FIGURE 98 FIGURE 99
Southeast Asia digital payment GTV to reach $1200bn in 2025 Rapid growth in SEA digital financial services market
(in USD bn)
1400 100 92.0
1,200
84.0
1200
80
1000 15% CAGR
60
800
620
600 40 35.0
23.0 21.0
400 15.0
20
7.6
200 2.0
0
0 Remittance Insurance Lending Loan Investment
Digital Payment GTV flows APE/GWP Book AUM
2020 2025 2020 2025
Source: Google, Temasek, Bain report, Barclays Research Source: Google, Temasek, Bain report, Barclays Research
The main hurdle for e-wallet adoption in Southeast Asia is merchant acceptance. As of 2019,
only 28% of retailers in Indonesia, Malaysia, Thailand, and Vietnam indicated that they accept
e- wallet payments, per the BCG survey. This low acceptance rate is likely due to a lack of e-
wallet education as 63% of merchants responded that they did not understand the e-wallet
payment process. Once this pain point is addressed, merchant acceptance, and therefore
consumer adoption, should improve. In the same study, 74% of merchants surveyed said
they would accept e-wallet payments if complexity and high fees were both lowered.
SE is well positioned in the Southeast Asia mobile banking market in our view. Similar to BABA
and WeChat, SE’s scale provides it with a large user base of potential consumers to onboard.
In July 2020, 45% of Shopee orders in Indonesia were transacted through ShopeePay.
According to aNeurosensum survey, ShopeePay has the highest e-wallet user penetration in
2 November 2021 112

Indonesia at 68%. Competitors OVO, DANA, GoPay, and LinkAja had 62%, 54%, 53%, and
23% user penetration, respectively. ShopeePay was established in 2018, vs. 2016 and 2017
for GoPay and OVO. SE’s ability to capture users and overtake earlier entrants was likely due
to its use of promotions and discounts, in tandem with its scale. As of December 2020, SE
obtained e-wallet licenses in ID, VT, TH, PH, and MY. The company also obtained government
approvals to issue loans in ID, TH, PH, and MY. In addition, SE acquired a majority interest in
Bank BKE of Indonesia, and has received a digital bank license in Singapore. It is still very early
days in SE’s efforts in mobile payment, digital banking and fintech but we see a clear market
opportunity.
Financials
Revenue
SE’s total revenue has grown at blistering pace over the past few years. In 2020, it generated
$4.4bn of revenue, +101.1% y/y . In 2021E, 2022E and 2023E, we forecast SE’s revenue to
grow +142.8% y/y, +66.7% y/y, and +57.8% y/y to $10.6bn, $17.7bn, and $27.9bn
respectively as its ecommerce dominance expands.
While we believe Free Fire will continue to create value, Shopee, in our view, will be the driver
of growth in the next three years. We estimate ecommerce and other services revenue
growing +170.1% y/y, +100.0% y/y, and +80.0% y/y in 2021E, 2022E, and 2023E,
respectively. In contrast, we forecast the digital entertainment segment to grow +128.9% y/y,
+30.0% y/y, and +25.0% y/y in 2021E, 2022E, and 2023E.
Gross margins
We expect SE’s gross margins to improve in 2021E due to further monetization of its e-
commerce business and as it recovers from COVID impacts. Then, in 2022E and 2023E we
forecast slight reductions in gross margins from 2021E levels, though still higher than 2020
levels, as the lower-margin e-commerce segment experiences disproportionate growth. As a
result, we model 2021E, 2022E, and 2023E gross margins to be 39.8%, 38.1%, and 35.8%.
SE’s cost of revenues primarily consist of gaming channel costs, logistics service costs,
transaction fees, and other related costs.
Operating Expenses
Sales and marketing
SE has relied heavily on sales promotions and subsidies to build its user and merchant bases.
In 2020, sales and marketing expenses as a percent of revenue was 41.8%. In 2021E, 2022E,
and 2023E, we forecast S&M as a percent of revenue to be 39.8%, 33.3%, and 26.3%
respectively, declining as SE begins exiting the user base development phase and starts
shifting its focus towards monetization.

SE’s general and administrative expenses primarily consist of facilities expenses, D&A,
impairment losses, compensation for personnel in general corporate functions, and other
related expenses. In 2020, G&A as a percent of revenue was 15.0%. Moving forward, we
expect G&A to decline as a percent of revenue as SE’s business continues to scale. In 2021E,
2022E, and 2023E, we model G&A as a percent of revenue to be 11.1%, 7.9%, and 5.4%.

Research and development costs are primarily attributable to salaries, benefits, and other
compensation paid to R&D employees. In 2020, R&D as a percent of revenue was 8.1%.
Looking ahead to 2021E, 2022E, and 2023E, R&D as a percent of revenue is expected to be
7.3%, 6.1%, and 5.6%, respectively.
2 November 2021 113

Profitability
We model a gradual improvement in SE’s margins despite investments made for expansion.
SE had adj. EBITDA margins of 2.4% in 2020. In 2021E, 2022E, and 2023E, we estimate adj.
EBITDA margins of 0.7%, 4.4%, and 7.7%, representing adj. EBTIDA of $74.4m, $775.1m, and
$2.1bn. Non-GAAP net income in the same three years is expected to be $-1.5bn, $-1.0bn,
and $341.0mn.
FIGURE 100
SE Financial Summary
SE Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (USD mn) 714.9 882.0 1,212.2 1,566.6 4,375.7 1,763.6 2,280.5 3,051.5 3,527.0 10,622.7 17,706.2 27,940.0
Revenue growth yoy

103.2% 102.2% 98.7% 101.6% 101.1% 146.7% 158.6% 151.7% 125.1% 142.8% 66.7% 57.8%
(%)
Gross margin (%) 28.9% 22.8% 33.6% 34.1% 30.8% 36.6% 40.8% 41.9% 39.0% 39.8% 38.1% 35.8%
S&M % rev 43.1% 43.8% 38.9% 42.5% 41.8% 38.5% 40.4% 40.0% 40.0% 39.8% 33.3% 26.3%
G&A % rev 17.8% 16.4% 16.2% 12.1% 15.0% 14.1% 10.7% 11.0% 10.0% 11.1% 7.9% 7.9%
R&D % rev 9.0% 8.5% 8.6% 7.0% 8.1% 8.0% 7.6% 7.0% 7.0% 7.3% 6.1% 6.1%
Adj. EBITDA (USD

(69.9) 7.7 120.4 48.7 107.0 88.1 (24.1) 73.3 (62.9) 74.4 775.1 2,141.0
mn)
Adj. EBITDA margin

-9.8% 0.9% 9.9% 3.1% 2.4% 5.0% -1.1% 2.4% -1.8% 0.7% 4.4% 7.7%
(%)
non-GAAP net
(240.2) (317.1) (340.8) (429.7) (1,327.8) (320.6) (321.0) (376.7) (512.9) (1,531.2) (1,024.9) 341.0
income (USD mn)
Management
Forrest Li – Co-Founder, Chairman, and Group CEO
Mr. Li has served as SE’s chairman and group CEO since the company’s inception in 2009.
Prior to founding SE, Mr. Li earned a bachelor’s in Engineering from Shanghai Jiaotong
University. He later earned an M.B.A. from Stanford GSB. Mr. Li is currently a board member
of the Singapore National Economic Development Board. In addition, he serves as a non-
executive director for Shangri-La Asia Limited.
Tony Hou – CFO

Mr. Hou joined SE in 2020 and has served as the group CFO since 2013. Prior to his
appointment as CFO, Mr. Hou was the financial controller for Sea Limited. Before 2010, Mr.
Hou was an audit senior manager at Ernst and Young for 10 years. Mr. Hou earned his
undergraduate degree in accounting from Fudan University and his M.B.A. from University of
Chicago’s Booth School of Business.
Gang Ye – Co-Founder and COO

Mr. Ye co-founded Sea Limited with Forrest Li and has served on the company’s board since
2010. Prior to becoming COO in 2017, Mr. Ye was the group’s CTO between 2010 and 2016.
2 November 2021 114

In addition, Mr. Hou held positions at Wilmar International and the Economic Development
Board of Singapore. Mr. Hou earned his bachelor of science degree in computer science and
economics from Carnegie Mellon University.
Valuation
We use our business model focused valuation methodology when valuing SE. We value SE on
an EV/nominal EBITDA basis. We assume that in the longer run, 1) digital entertainment
nominal EBITDA margin is 40%, 2) ecommerce nominal EBITDA margin is 25%.
Based on our FY23E revenue estimates for SE’s digital entertainment and ecommerce
segments, and our nominal EBITDA margin assumptions, we calculate the total FY23E
nominal EBITDA of $7.3bn. Applying 15x the digital entertainment segment and 45x the
ecommerce segment nominal EBITDA, adding net cash of $4.3bn, we reach a price target of
$427.
Price Target
Our $427 price target is based on 15x FY23E digital entertainment and 45x FY23E ecommerce
nominal EBITDA plus net cash.
Our $325 downside case is based on 10x FY23E digital entertainment and 35x FY23E
Our $529 upside case is based on 20x FY23E digital entertainment and 55x FY23E
Risks
1. Differences in culture, language, regulations create significant operational challenges for
SEA to operate in all these countries and operational missteps are possible.
2. There are strong local players (eg in Brazil) may fight back aggressively, raising the hurdle
for SEA to achieve share.
3. Ecommerce adoption may slow in ASEAN or LatAm despite the fact the penetration rate
is lower compared to other regions such as China or the US.
4. The company may fail to build strong local country teams rapidly when it enters new
markets as it lacks contact networks or operational history in those countries.
2 November 2021 115

TENCENT HOLDINGS (TCEHY) – OVERWEIGHT; PT $84

Tencent Holdings Ltd.(TCEHY): Quarterly and Annual EPS (CNY)
TCEHY
2020 2021 2022 Change y/y
Stock Rating
POSITIVE Q2 3.13A N/A 3.51A 3.57A N/A 3.81E 3.89E 12% 9%
Price Target Q3 3.32A N/A 3.47E 3.35E N/A 4.08E 4.16E 5% 18%
USD 84.00 Q4 3.42A N/A 3.44E 3.38E N/A 4.16E 4.28E 0.58% 21%
Price (01-Nov-2021) Year 12.69A N/A 13.83E 14.07E N/A 15.72E 17.02E 9% 14%
USD 61.93 P/E 31.2 28.6 25.2
We are initiating coverage of Tencent with an

Overweight rating and $84 price target
 Tencent is the most influential internet company in China as the company is deeply
intertwined with every single fiber of the nation's digital fabric with its
extensive investment portfolio. Over the last decade, Tencent's experienced and savvy
senior management built a digital empire by acquiring significant equity stakes in
China's leading digital companies with holdings, often as much as ~20%, in listed
companies (JD, Meituan, Kuaishou, PDD, NIO, DIDI, FUTU, among others), plus in
numerous private ones.
 The company’s reach has extended beyond the national border. Tencent has purchased
either 100%, majority, or close to majority stakes in global leading gaming franchises such
as Supercell (developer of Clash of Clans), Riot Games (developer of League of Legends),
and Epic Games (developer of Fortnite). It has also made significant minority investments
(as much as 20% stake) in other international leading players such as SEA and Snap.
 The value of Tencent’s investments in just publicly listed companies has hovered above
$200bn in recent quarters. And, in terms of Tencent’s own business, it is the number 1
online gaming company in the world, and its WeChat app has been used by every internet
and smartphone user in China, minimum age permitting. We believe any investor keen
to invest in China or in internet globally should own Tencent.
 Our base case EV/nominal EBITDA multiple is 15x for VAS (mostly gaming), 20x for
online advertising, and 25x for fintech and business services, bringing total EV to
$634.7bn. Adding the discounted (by 15%) value of equity holdings of listed
investees and net cash, we arrive at our price target of $84.
2 November 2021 116

Investment Thesis
Tencent is embedded in every fiber of

China's digital fabric.
We are initiating coverage of Tencent with an Overweight rating and
$84 price target.
Tencent is the world's largest online gaming company. But more importantly in our mind, is
its impressive portfolio of companies curated over the last 10 years that has reached nearly
every inch of China's digital economy. The company is a significant shareholder and often the
single largest shareholder of a number of leading Chinese internet and tech companies in
their respective sub-sectors. For example, Tencent owns 20% of Meituan (food delivery and
restaurant review), 17% of JD (ecommerce), 16% of PDD (ecommerce), 21% of
Kuaishou (short form video and live streaming), 23% of FUTU (online stock trading), 10% of
NIO (electrical vehicle) and 6% of DIDI (ride hailing). Not only are these companies leaders in
their respective fields, they are major internet and tech players in their own right with market
caps of some of these companies reaching over $200bn individually. Even excluding WeChat,
which user data indicates is used by almost every internet and smartphone user in China and
many Chinese users outside of China (Wechat MAU of 1.2bn globally vs. 1bn total Chinese
netizen), Tencent has in many ways intertwined itself with every single fiber of the digital
fabric of China.
And Tencent did not stop at Chinese borders. It has been the most successful Chinese internet
company to expand outside of China. It has invested and sometimes outright purchased
leading internet players internationally: Supercell in Finland; Riot Games, Epic Games and
Snap in the U.S. and SEA in Singapore, to name a few. The value of Tencent’s stakes in publicly
traded companies is regularly reported by management every quarter and recent figures have
been over $200bn. The value of its stakes in non-publicly traded companies can be significant
as well. This is quite unique to Tencent, with no other major tech and internet company
globally possessing such a far-reaching and diverse investment portfolio, packed with
dominant players in their respective fields.
As we see it, the biggest risk in the Tencent story is regulatory, which should not be a surprise
to seasoned investors. But this is not just about regulations on certain internet sectors such
as gaming or on certain elements of China's overall digital economy such as data privacy, we
are equally concerned about potential regulatory moves that may be specifically against
Tencent or companies like it. Like all mega-cap internet companies, there is always a risk
when they are viewed as too powerful and encroaching on the power of the state. We don’t
think that is the case here at all but are mindful of the risks no matter how remote.
We believe Tencent is a core holding for any investor seeking exposure to China, as we believe
the company represents the entire digital economy in China, while holding some highly
valuable non-China assets too. While not a controlling shareholder in most cases, Tencent’s
ability to create potential synergistic benefits across its portfolio of affiliated companies gives
the group a significant competitive advantage, in our view.
Business Overview
Revenue segmentation
Tencent divides its revenue into value-added services, online advertising, fintech and business
services, and other services, which contributed 55%, 17%, 27%, and 1% of total revenue,
respectively in 2020. Within value-added services, Tencent generates revenue from its games
2 November 2021 117

(31% of total revenue) and its social networks (21% of total revenue). Online advertising
revenue is further divided by different property types on which the advertisement is placed –
media advertising (3% of total revenue) and social advertising (14% of total revenue).
FIGURE 101
Tencent % revenue mix (2016-2020)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2016 2017 2018 2019 2020
FBS Online Advertising VAS: Games VAS: Social Networks Other
Source: Company Data
Value added services (VAS)

Online games VAS revenue is predominantly generated by sales of in-game virtual goods.
Social networks VAS revenue is earned through channels such as digital content service
subscriptions (e.g., Tencent Video, QQ Music) and sales of virtual items (e.g., WeChat sticker
packs, QQ avatar skins), as well as revenues from game distributions from Tencent app
store. VAS revenues attributable to online games and social networks grew at 36% and 27%,
respectively, in 2020. The number of value added service subscribers has more than doubled
since 2016, demonstrating the increased willingness of Chinese consumers to pay for
subscriptions.
FIGURE 102
Tencent video and music paid subscribers (in m) 1Q19-4Q20
140
120
100
80
60
40
20
0
1Q2019 2Q2019 3Q2019 4Q2019 1Q2020 2Q2020 3Q2020 4Q2020
Online video subscriptions Online music subscriptions
2 November 2021 118

Online advertising
Tencent owns multiple assets with very large, highly engaged user bases that offer significant
ad placement opportunity. Of total time spent on mobile apps in China, 36% of it is spent on
a Tencent operated app, according to QuestMobile.
Social Advertising revenue (the majority of Tencent’s ad revenues), which represents the
revenue earned from WeChat Moments, Mini Programs, and other Tencent social networks,
grew 29% y/y in 2020. Media advertising revenue, earned from ads placed on Tencent Video,
news, QQ music, etc., saw a slight year-over-year decline in 2020.
Fintech and business services (FBS)

Fintech
WeChat Pay managed an average of over 1bn commercial payment transactions per day from
4Q19 to 2Q21. From each transaction, Tencent collects a transaction fee based on
predetermined take rates. The blended take rate on digital payment transactions sits between
20bps to 30bps while the nominal take rate by WeChat Pay on mobile transactions is 60bps.
That said, Tencent has introduced preferential take rates for SME merchants and does not
collect a take rate for face-to-face transactions. Low take rates from offline, face to face, and
SME transactions bring down the blended rate. Near term, the blended take rate is expected
to remain stable, according to management.
Offline transactions have been the main volume driver in recent years. As Tencent continues
to introduce more offline merchants (e.g. gas stations) who usually have larger ticket sales
onto its platform, Wechat Pay transaction volume as well as average ticket size have grown
steadily and the growth is likely to continue.
Aside from WeChat Pay, Tencent’s fintech product portfolio includes a wealth management
platform (LiCaiTong), an insurance service (WeSure), and an online lending platform
(WeiLiDai). Under the tightened regulations over the last two years in consumer lending and
wealth management industry, growth in this area is likely to slow or even decline in the near
term.
Business services
Tencent is the number 3 player in the cloud services space in China (after Ali Cloud and
Huawei Cloud). The majority of Tencent’s cloud services revenue comes from IaaS, but
further growth in the segment is being driven by Tencent’s PaaS and SaaS offerings
– primarily security PaaS, according to management. In SaaS, Tencent sees growth
opportunities in offerings such as Tencent Meetings, Tencent Docs, WeCom (enterprise
grade WeChat), and its software services marketplace.
Fintech and Business Services reported RMB128.1bn of revenue in 2020, contributed 27% of
the total revenue while growing at 26% y/y. This growth was mainly due to an increase in
digital payment transactions volumes on WeChat Pay.
Tencent product overview

WeChat
WeChat is an all-encompassing social app with over 1.25bn MAUs as of 2Q21 (Weixin, called
in China, and its international version Wechat combined). Over the years, WeChat has evolved
far beyond its original chat function. With Mini Programs, Official Accounts, Moments, and
other features, WeChat is deeply embedded in the digital lives of its users.
2 November 2021 119

WeChat Discover
Other than free messaging and voice / video calling, WeChat has many other features in its
ecosystem. Almost all of WeChat’s additional features, including Moments, short-form video,
live streaming, and Mini Programs, can be found in the Discover tab.
FIGURE 103
WeChat’s Discover Page allows users to access a majority of Tencent’s offerings in one
place
Source: WeChat App
Moments
WeChat users can share text, pictures, videos, and articles in Moments (a Facebook
equivalent). Upon opening Moments, users are shown a feed of their friends’ recent updates
and posts. Users can react to their friends’ updates by leaving comments, stickers, or emojis.
Brands post ads on users’ Moments feeds. Users can choose to “like” or close the ads. Unlike
other social platforms which typically show one ad every few posts, Moments users are only
shown a few ads per day (5 to 6 on average currently). In addition, Moments posts and
interactions can only be viewed by a selected subgroup of authors’ friends, fostering a more
intimate social environment, and authors can choose to block some of their WeChat friends
(e.g. their bosses) from viewing Moments postings.
2 November 2021 120

FIGURE 104
WeChat Moments provides one of the most important ads inventory for Tencent
Source: WeChat App, Barclays Research
Video Account
Similar to TikTok or other short-form video platforms, users scroll through the video feed
created by celebrities, KOLs, vloggers, and friends, recommended by algorithms. Compared
to other platforms, Video Account puts more emphasis on interactions between friends, and
often highlights “what friends have seen,” or “what friends liked” within Video Account
channels. In the near-to-intermediate term, Tencent is expected to continue to increase its
investments in Video Account through increased revenue sharing with video content
creators.
Live Streaming Channel

Users can search for, or browse, different categories of live streaming content. Tencent’s live
streaming channel is similar to its peers as it monetizes primarily through selling virtual gifts
to viewers. Viewers tip their favorite streamers using these virtual gifts.
Additionally, as ecommerce live streaming becomes a rapidly growing online shopping

format in China, Tencent has also dabbled in it by allowing streamers to post links to featured
products in their virtual stores.
2 November 2021 121

FIGURE 105
WeChat has dabbled in live-streaming ecommerce via allowing product links
Source: Wechat App, Barclays Research
Mini Programs
Mini Programs are in-app programs that users can access without leaving WeChat. Users can
access Mini Programs through Discover or the WeChat search bar. Mini Programs do not
require installation but are often indistinguishable from standalone apps. Effectively, Wechat
becomes the launch pad for other apps without the user ever needs to install those apps on
their phone. For example, when users open the JD Mini Program, the features and layout are
the same as its standalone counterpart. As of June 2020, Mini Programs had 830mn MAUs.
There are currently over 3mn total Mini Programs.
Tencent has also started allowing ads shown in users’ WeChat Moments to be directly linked
to the advertiser’s official Mini Program, which is intended to increase conversion rates as
users can now search, browse, and complete purchases within WeChat. Lastly, Mini
programs also allow for future ad inventory expansion opportunities, according to
management.
2 November 2021 122

FIGURE 106
Mini program offers a user experience that is on par with its standalone counterparts
Source: Wechat App, Barclays Research
WeChat Pay
Transactions completed through WeChat’s featured links, Mini Programs, Official Accounts,
and loyalty cards are processed by WeChat Pay. WeChat Pay can also be used to transact with
offline merchants, pay bills, send money to friends, etc. WeChat Pay is one of the top
players in China’s mobile payment space in China according to iResearch. Today, Wechat Pay
is nearly universally accepted by offline merchants - Starbucks, restaurants, convenient
stores, hotels, hair salons. The official take rate for Wechat Pay is 60 bps but we estimate the
blended take rate currently stands around 20-30 bps. Given the enormous transaction value
going through Wechat Pay, monetization from Wechat Pay contributes the bulk of
Tencent's Fintech and Business Services revenue.
2 November 2021 123

FIGURE 107
Market shares of AliPay and WeChat Pay
60% 55% 55%

53%
50%
39% 39% 38%
40%
30%
20%
10%
0%
2018 2019 2020Q2
Alipay WeChat Pay
Source: iResearch, Barclays Research
FIGURE 108
WeChat Pay offers access to other financial services such as wealth management
Source: WeChat App, Barclays Research
QQ
With 591mn mobile MAUs as of 2Q21, QQ is an alternative instant messaging app with similar
functionality to WeChat. As QQ is popular among younger users in China, fun visual features,
such as augmented reality and enhanced camera capabilities have been added to the
application. QQ users can also invite their friends to join multi-player games through QQ
chats and switch between QQ and WeChat seamlessly.
2 November 2021 124

Digital Content
Tencent’s enormous scale allows distribution of any content to its massive user base.
Tencent leads in on-demand video, music, sports, eSports, gaming, novels, and comics.
Tencent had 229mn value-added service subscriptions in 2Q21, up from 110mn in 2016. The
biggest contributors of subscribers are Tencent Video and Tencent Music.
Tencent Games
Tencent operates the most influential online game platform in the world, offering more than
140 games globally. As of December 2020, Tencent owned 100% of League of Legends
creator Riot Games and 70% of Clash of Clans creator Supercell. In addition, Tencent
has significant non-controlling stakes in companies such as Fortnite creator Epic Games
(~40%). Gaming-related revenue contributed 31% of total revenue as of 1H21.
Mobile online games

Honor of Kings
Tencent’s top game by active users, Honor of Kings, is a multiplayer online battle arena
(MOBA) game in which two teams of five battle each other. Each player chooses a character
with unique powers, takes control of the character, and works with their teammates to
destroy the opposing team’s base. If players are eliminated by an opposing player, they must
wait to respawn back in their own base. As the game progresses, one team will overwhelm
the other and destroy the losing team’s base.
FIGURE 109
Honor of Kings 5 vs. 5 MOBA gameplay
Source: Honor of Kings, Barclays Research
2 November 2021 125

FIGURE 110
Purchasing virtual currency with RMB to buy in-game items
Source: Honor of Kings Barclays Research
The game is monetized through in-game transactions. Players first purchase virtual currency
with RMB. Using that virtual currency, players purchase virtual goods, such as new characters
and character skins, in the in-game store. According to SensorTower, Honor of Kings
generated ~USD2.5bn in player spending in 2020.
FIGURE 111
Honor of Kings and Peacekeeper Elite monthly gross revenue (RMB mn)
300
250
200
150
100
50
Honor of Kings PUBG China
Source: SensorTower, Barclays Research
Peacekeeper Elite
In Peacekeeper Elite, teams of up to four players parachute onto a large map with ninety-nine
other players. The objective of this shooting game is to be the final team standing. Players
start the game with no weapons or equipment. Over the course of a match, players find
weapons and eliminate each other until only one team remains. Unlike Honor of Kings, players
do not respawn upon elimination. In addition, while in HoK the artwork is cartoonish and
characters use magic abilities, Peacekeeper Elite takes a more realistic angle. Peacekeeper
Elite is the localized title of PUBG Mobile.
2 November 2021 126

Peacekeeper Elite’s monetization model is similar to Honor of Kings’. Virtual goods on

Peacekeeper Elite include costumes, weapons, and vehicles. Purchasing virtual goods on
Peacekeeper Elite does not give players a competitive advantage. Together, Peacekeeper Elite
and PUBG Mobile grossed ~$2.7bn in player spending in 2020.
FIGURE 112
Virtual goods store in Peacekeeper Elite
Source: Peacekeeper Elite, Barclays Research
Tencent Music Entertainment Group

Currently listed on the NYSE, Tencent Music Entertainment Group (TME) is a non-wholly
owned subsidiary of Tencent. TME had mobile MAUs of 623mn and 66.2mn paying users in
2Q21. Operating four of the top five mobile music apps in China by MAU, TME earns revenue
primarily through subscriptions, ads, and live streaming related sales.
The most popular content on QQ Music is exclusive to VIP members. VIP subscriptions can
be paid monthly (18 RMB), quarterly (45 RMB), or annually (168 RMB). We note that due to
promotions and cross-platform subscription packages which Tencent offers, the actual VIP
subscription revenue for TME is ~RMB 11 per month. QQ Music also provides package
memberships to other Tencent-affiliated services, such as Tencent Video, Zhihu, Weibo, and
Bilibili.
2 November 2021 127

FIGURE 113
Freemium model with paid subscription to access VIP content
Source: QQ Music Group
Tencent Video
One of top three long-form video platforms (the other two being Alibaba-owned Youku and
Baidu-owned iQiyi) in China. Video subscriptions in 1H21 grew 9% y/y to reach 125mn.
Tencent Video produces original content, while maintaining a large library of third-party
content. In addition to subscription revenue, Tencent Video is also a meaningful contributor
to Tencent’s online advertising revenue.
Most movies and TV shows on Tencent Video are only accessible to VIP members. Non-
paying users are limited to watching short video clips and dated content. Both VIP and Super
VIP subscription can be purchased in monthly, quarterly, and annual payments. The major
differences between VIP and Super VIP are that: 1) VIP is mobile-only; and 2) Some
newly released movies, TV series, and Tencent originals are exclusive to Super VIP members,
though all video platforms have recently scaled back their super VIP programs amid
regulatory scrutiny.
2 November 2021 128

FIGURE 114
Tencent Video interface - with the community feature embedded to increase user
engagement
Source: Tencent Video App
Acquisitions and Investments
The fair value of Tencent’s listed investees was RMB1.4tn (over US$200bn) as of 2Q21. The
company has made notable investments in EVs, ecommerce, gaming, online real estate, and
other tech and internet sectors in China and globally.
2 November 2021 129

FIGURE 115
Notable holdings and subsidiaries in Tencent’s portfolio
2 November 2021 130

Financials
Revenue
Tencent has reported consistently strong y/y revenue growth in the recent past. In 2020,
Tencent reported revenue of RMB482.1bn, +27.8% y/y. Looking forward to 2021E, 2022E,
and 2023E, we expect revenue growth of +19.7% y/y, +14.4% y/y, and +16.4% y/y,
respectively. In absolute terms, we model Tencent revenue to be RMB576.8bn in 2021E,
RMB659.9bn in 2022E, and RMB767.9bn in 2023E.
VAS revenue, the largest contributor to total revenue, grew at +32.1% y/y in 2020. In the next
three years, we forecast VAS revenue growth of +8.6% in 2021E, +1.2% in 2022E, and +8.9%
y/y in 2023E. Offsetting the deceleration in VAS revenue, we believe FBS revenue will
experience robust growth rates of +41.6%, +32.6%, and +25.0 y/y in 2021E, 2022E, and
2023E, respectively. Our estimates for online advertising revenue have the segment’s growth
remaining stable at a healthy ~20% y/y through 2023E.
Gross margins
We expect gross margins to remain largely unchanged. In 2021E, 2022E, and 2023E, we
estimate gross margins of 45.1%, 44.5%, and 44.1%. Therefore, we expect gross profit to be
RMB259.9bn in 2021E, RMB293.7bn in 2022E, and RMB338.6bn in 2023E. Tencent’s cost of
revenues includes content costs, payment processing bank charges, cloud solution
deployment costs, traffic acquisition costs, and other associated costs.
Other gains
Tencent’s operating income is impacted heavily by its RMB1.4tn-plus of stakes in listed
investees. Other gains are primarily income attributable to disposal gains and fair value gains
of investee companies. In 2020, Tencent reported other gains of RMB57.1bn. In our model,
we estimate other gains of RMB~80.0bn in 2021E and 2022E. In 2023E, we model other gains
of RMB100bn.
Operating Expenses
Selling and marketing expenses primarily consist of marketing spend to support long-term
initiatives. We estimate S&M expenses as a percent of revenue to remain relatively stable at
7.2% in 2021E, 7.0% in 2022E, and 7.0% in 2023E. In 2020, S&M as a percent of revenue
increased slightly vs. 2019 due to increased marketing spend for games, short form video,
remote work software, remote healthcare services, and other strategic initiatives.
General and administrative expenses are mostly made up of research and development costs
and staff costs. We estimate that G&A expenses will increase nominally as a percent of
revenue. In 2021E, 2022E, and 2023E, we expect G&A to account for 15-16% of revenue as
the company continues to invest in developing new initiatives.
Profitability
In 2019 and 2020, Tencent reported non-IFRS operating margins of 30.4% and 31.0%,
representing non-IFRS operating income of RMB114.6bn and RMB149.4bn, respectively. We
model 2021E, 2022E, and 2023E non-IFRS operating margins to be 28.6% (RMB164.7bn),
27.6% (RMB182.0bn), and 29.9% (RMB229.3bn), respectively. We forecast non-IFRS net
income of RMB134.4bn, RMB153.1bn, and RMB197.9bn in 2021E, 2022E, and 2023E,
implying net margins of 23.3%, 23.2%, and 25.8%.
2 November 2021 131

FIGURE 116
Tencent Financial Summary
Tencent Financial
1Q20 2Q20 3Q20 4Q20 2020 1Q21 2Q21 3Q21E 4Q21E 2021E 2022E 2023E
Summary
Revenue (RMB bn) 108.1 114.9 125.4 133.7 482.1 135.3 138.3 148.2 155.0 576.8 659.9 767.9
Revenue growth yoy

26.4% 29.3% 29.0% 26.4% 27.8% 25.2% 20.3% 18.2% 16.0% 19.7% 14.4% 16.4%
(%)
Gross margin (%) 48.9% 46.3% 45.2% 44.0% 46.0% 46.3% 45.4% 45.1% 43.7% 45.1% 44.5% 44.1%
Other gains, net (RMB

4.0 8.6 11.6 32.9 57.1 19.5 20.8 20.0 20.0 80.3 80.0 100.0
bn)
S&M % rev 6.5% 6.8% 7.1% 7.5% 7.0% 6.3% 7.2% 7.5% 7.5% 7.2% 7.0% 7.0%
G&A % rev 13.1% 14.4% 13.7% 14.8% 14.0% 14.0% 16.4% 16.0% 16.0% 15.6% 15.6% 15.3%
non-IFRS EBIT (RMB

35.6 37.6 38.1 38.1 149.4 42.8 42.8 39.8 39.4 164.7 182.0 229.3
bn)
non-IFRS EBIT margin

32.9% 32.8% 30.4% 28.5% 31.0% 31.6% 31.0% 26.9% 25.4% 28.6% 27.6% 29.9%
(%)
non-IFRS net income

27.1 30.2 32.3 33.2 122.7 33.1 34.0 33.7 33.5 134.4 153.1 197.9
(RMB bn)
Management
Huateng Ma (Pony Ma) – Co-Founder, Chairman, CEO
Mr. Ma co-founded Tencent in 1998 and has been leading the strategic development, overall
direction, and management of Tencent. Before that, Mr. Ma led research and development
for the internet paging system at China Motion Telecom Development Limited, a
telecommunications services and products provider in China.
Mr. Ma received his Bachelor of Science degree specializing in Computer and Applied
Engineering from Shenzhen University.
Chi Ping Lau (Martin Lau) – Executive Director, President

Mr. Lau joined the company in 2005 as Chief Strategy and Investment Officer and was
responsible for corporate strategies, investments, merger and acquisitions and investor
relations. In 2006, Mr. Lau was promoted to President of the company to manage the day-
to-day operations. Prior to Tencent, Mr. Lau was an executive director at Goldman Sachs
(Asia) L.L.C.’s investment banking division and the Chief Operating Officer of its Telecom,
Media and Technology Group.
Mr. Lau received a Bachelor of Science degree in Electrical Engineering from the University of
Michigan, a Master of Science degree in Electrical Engineering from Stanford University and
an MBA degree from Kellogg Graduate School of Management, Northwestern University.
John Lo – CFO and SVP

Mr. Lo was appointed CFO in 2012. Before becoming CFO, Mr. Lo has served as Tencent’s
Deputy CFO and Financial Controller. Prior to Tencent, Mr. Lo was a Senior Manager at PWC.
2 November 2021 132

Mr. Lo earned his bachelor’s degree from Curtin University and received his EMBA from the
Kellogg School of Management.
James Mitchell – CSO and Senior Executive VP

Mr. Mitchell joined Tencent in 2011 and overseas strategic planning, M&A, investment
activities, and investor relations. Prior to joining Tencent, Mr. Mitchell was a managing
director in Goldman Sachs’ research division, covering the communications, media, and
entertainment sectors. Mr. Mitchell earned his bachelor’s degree from Oxford University.
Chenye Xu (Daniel Xu) – Co-Founder, CIO

Mr. Xu co-founded Tencent in 1998, and has been serving as Chief Information Officer. He
oversees strategic planning and development of Tencent’s website properties and
communities and customer relations. Mr. Xu received a Bachelor of Science degree in
Computer Science from Shenzhen University and a Master of Science degree in Computer
Science from Nanjing University.
Valuation
We use our business model focused valuation methodology when valuing Tencent. We
estimate that Tencent generates $50.6bn, $22.6bn and $48.1bn in segment revenues from
VAS, online advertising and fintech & business services, respectively, in FY23. We further
estimate that the nominal EBITDA margins for VAS, online advertising and fintech & business
services are 40%, 20% and 20%, respectively. As a result, we have calculated the nominal
EBITDA in FY23 from these segments is $20.3bn, $4.5bn and $9.6bn, respectively.
Considering the merits of each segment and Tencent's competitive positioning in each
segment, our base case EV to nominal EBITDA multiple is 15x for VAS, 20x for online
advertising, and 25x for fintech and business services, bringing us the total EV of Tencent to
$634.7bn. Adding the discounted (by 15%) value of equity holdings of listed investees and
its net cash, the price target is $84.
In our upside case, we use 20x VAS, 25x online advertising and 30x fintech and business
services nominal EBITDAs for FY23. Adjusting for the discounted equity investment holdings
and net cash, we derive an upside case of $101.
In our downside case, we use 10x VAS, 15x online advertising, and 15x fintech and business
services nominal EBITDAs for FY23. Adjusting for the discounted equity investment holdings
and net cash, we derive a downside case of $61.
Risks
1. Regulatory changes may negatively impact the current Tencent PE / VC like corporate
strategy
2. More gaming related regulations may negatively impact revenue and earnings given the
company’s significant exposure to gaming.
3. Additional anti-monopoly regulations may weaken Tencent’s competitive positioning in

certain businesses.
2 November 2021 133

INDUSTRY OVERVIEW
ecommerce
Room for growth at only +25-30%% penetration
The Total Addressable Market
It’s clear that the ecommerce industry has become a cornerstone of the Chinese economy.
China’s online retail market was valued at RMB 11.8tn ($1.85tn) in 2020, according to NBS
data, 2.3x larger than the U.S. online market. During 2016 to 2020, online retail sales as a
percentage of total retail sales in China increased from 15% to 30%.
A driving force behind the growth in China's ecommerce industry has been the substantial
growth of both urban and rural incomes. Rural and urban disposable income per capita
increased 92.6% and 62.6%, respectively, from 2013 to 2020 (NBS). This has led to rural and
urban consumption expenditure per capita growth of 107.0% and 49.9%, respectively, during
the same period.
FIGURE 117
Rural and urban disposable income per capita (RMB)
50,000
45,000
40,000 62.6%
35,000
30,000
25,000
20,000
92.6%
15,000
10,000
5,000
0
Rural Disposable Income Urban Disposable Income
2013 2020
In addition to wealth creation, internet penetration has also extended further, beyond higher-
tier Chinese cities. In urban areas, internet penetration grew from 69% in 2016 to 80% in
2020. In rural areas, internet penetration grew from 33% to 56% in the same period. In
particular, mobile penetration among Chinese netizens is now the highest level on record, at
99.7% as of December 2020 vs. 95% three years ago. Naturally, ecommerce grew as
consumers spent more on the Internet using PC or mobile phones.
Within the total ecommerce market, mobile ecommerce has trended upward as a percentage
of Chinese online retail sales. In 2016, retail mobile ecommerce sales were 72% of online retail
sales. By 2020, it had reached 83%.
The growth in China’s ecommerce market should continue to be driven by these secular
trends, although not at its historical torrid pace. eMarketer estimates the 2020-25 CAGR for
online China ecommerce sales of 11.8%.
2 November 2021 134

Near-Term Outlook
The choppy macro environment is causing near-term headwinds for the ecommerce
industry.
Total China retail sales saw a healthy bounce from March 2020 Covid-19 lows and
the nationwide lockdown in China. In 1H21, Chinese retailers generated RMB 14.2tn in sales,
compared to RMB 12.0tn during the same period in 2020, +18.3% y/y, per NBS. This number
has even exceeded the recent high of RMB 12.9tn in retail sales recorded in 1H 2019,
indicating that the China retail industry has returned to its pre-Covid cycle.
That said, the overall growth rate for total retail sales has decelerated considerably, to +8%
y/y in Jul. 2021, +2% y/y in August, and +4% y/y in September, from double-digit growth in
1H21. We see a number of reasons for this, including a high base caused by the release of
pent-up demand in July/August 2020, a challenging macro environment driven by regulatory
uncertainty, increased raw material costs, energy shortages, and volatility in key industries
such as real estate. Additionally, during the past several quarters, China has adopted a “zero
tolerance” strategy to handle any Covid-19 outbreak, resulting in intermittent lockdowns.
Although this has prevented widespread outbreaks, these lockdowns may have a
disproportionately negative economic impact in the short run. Overall retail sales growth will
likely remain muted should macro headwinds persist.
In line with the overall China retail market, online retail sales of physical goods have
rebounded following the Covid-19 disruption. China retail online physical goods sales were
RMB 10.5tn in LTM September 2021, +13% y/y, and RMB 9.8tn ($1.6tn)in 2020, +14.5% y/y.
However, the recovery has also decelerated meaningfully in July and August 2021, which only
grew +4% and 8% y/y, while September’s number came in at a healthier rate of +11%. All
were significantly lower than the annual growth rate of +21.4% in 2019 and +28.1% in 2018.
The online penetration rate of physical goods sales in China tells the same story as its growth
decelerated in 2021. From 2015 to 2020, online penetration tripled from ~10% to a high of
~30%, partially aided by a pull-forward effect caused by Covid-19 lockdowns. This number
has stayed in the low-20s in 2021.
FIGURE 118
Online physical goods sales as % of China total retail sales
Online Physical Goods Sales/Total Retail Sales

35%
30%
25%
20%
15%
10%
5%
10/1/2015
10/1/2016
10/1/2017
10/1/2018
10/1/2019
10/1/2020
1/1/2016
4/1/2016
7/1/2016
1/1/2017
4/1/2017
7/1/2017
1/1/2018
4/1/2018
7/1/2018
1/1/2019
4/1/2019
7/1/2019
1/1/2020
4/1/2020
7/1/2020
1/1/2021
4/1/2021
7/1/2021
2 November 2021 135

Competitive Landscape
Until recently, BABA and JD dominated the market landscape at first and second place,
respectively. However, from 2016 to 2020, PDD emerged from relative obscurity to third
place, increasing its retail ecommerce market share from just 0.5% to a meaningful 14%
(according to our calculation based on NBS data). Particularly in 2020, PDD’s skew toward
household essentials and groceries positioned it well to capture GMV, especially during
Covid-19 lockdowns as people turned to online shopping for essential goods.
PDD’s market share gain has mostly been at the expense of BABA, which has seen its China
retail ecommerce market share decrease from 67.5% in 2016 to 57% in 2020. JD, an up-
market operator relative to PDD, maintained a steady ~22% market share during the same
period.
FIGURE 119
China Ecommerce market share in terms of GMV
Others
7%
PDD
14%
BABA
57%
JD
22%
Source: NBS, Company Reports, Barclays Research
Given different reporting standards for annual GMVs used by BABA, JD, and PDD, market
share estimates may not be entirely comparable. We adjust for: 1) BABA not including
unpaid/unplaced orders when calculating GMV, which are included by PDD and JD in their
calculations. 2) All three platforms exclude the impact of returned orders. Adjusting for the
different definitions of GMV, we calculate BABA has a slightly higher market share while JD
and PDD's are slightly lower, and their combined total market share should be slightly lower
than ~93%.
Recent Developments in Ecommerce

We highlight three sub-trends within ecommerce: live streaming, cross-border, and online-
to-offline retailing.
Live streaming
According to CNNIC, live-streaming users in China have nearly doubled from 344mn in 2016
to 617mn in 2020, with a CAGR of 16%, and its user penetration rate among all Chinese
internet users grew from 47% to 62% in the same period. Ecommerce live streaming has
been the key driver behind the segment’s growth as of late, representing 63% of live-
streaming users as of December 2020.
Indeed, ecommerce live streaming’s growing significance is illustrated by its growing market
share within the China ecommerce market. According to iResearch, ecommerce live
streaming GMV increased from RMB 16.8bn to RMB 416.8bn from 2017 to 2019. In the
broader ecommerce context, ecommerce live streaming GMV was only 0.3% of the total
2 November 2021 136

ecommerce market in 2017, but has grown rapidly to 4.2% in 2019, 15x in two years.
iResearch estimates ecommerce live streaming GMV will continue to grow at an annual pace
of 58% to 2025.
FIGURE 120
Live Streaming ecommerce market size and penetration among retail ecommerce (RMB
mn)
30,000 30%
25,000 25%
20,000 20%
15,000 15%
10,000 10%
5,000 5%
0 0%
2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025
Retail E-Commerce
Live Streaming E-Commerce
Live Streaming as a % of Retail E-Commerce
The top live-streaming ecommerce platforms are Taobao Live, Kuaishou, and Douyin. Their
respective shares of the ecommerce live streaming market are 37%, 35%, and 28%,
according to our calculation based on data released by these companies.
Cross-border Ecommerce
Chinese consumer tastes have evolved significantly over the past ten years. As per capita
disposable income increases, Chinese consumers now seek quality products sourced from
international brands. However, some of these brands have insufficient resources to build out
their own distribution or retail outlets in China, creating a gap between rising consumer
demand and a lack of supply.
Chinese cross-border ecommerce platforms address this need. According to iResearch, the
cross-border ecommerce market has grown from RMB 22bn in 2015 to RMB 205bn in 2020,
representing an annual growth rate of 56.2%. Looking ahead, iResearch estimates the CAGR
in the next four years to be 31.8%, reaching a market size of RMB 619bn in 2025. The major
cross-border ecommerce platforms are T-mall International (BABA), Kaola.com (acquired by
BABA from Netease in 2019), JD Worldwide (JD), and Xiaohongshu.
2 November 2021 137

FIGURE 121
China cross-border retail ecommerce market size
700 180%
600 160%
140%
500
120%
400 100%
300 80%
60%
200
40%
100 20%
0 0%
2015 2016 2017 2018 2019 2020 2021e 2022e 2023e 2024e 2025e
China International Retail E-commerce (RMB bn) y/y growth
According to iResearch, of these four platforms, the first three account for 68.7% of the
cross-border ecommerce market in China. Based on a Kantar Survey, T-mall international was
chosen 40% of the time as the default option for import retail ecommerce, making it the most
popular option. With Chinese consumers unable to travel overseas for shopping sprees amid
ongoing covid restrictions, cross-border ecommerce is likely to remain one of the more robust
segments of the Chinese ecommerce market.
Seamless Online & Offline Retail (“New Retail”)

While ecommerce has a higher penetration in China than some larger economies (e.g., 20-
30% in China vs. 15% in the U.S.), brick-and-mortar stores still represent the majority of the
total retail market (+70%). Recognizing this large untapped market, top ecommerce players
in China have been investing heavily in the O2O (Offline to Online) space, as
they consider this the next growth frontier. In fact, industry participants have coined the term
“New Retail” to describe the seamless online and offline retail offerings. For example, BABA
has acquired and invested in existing offline retail outlets (Sun Art, Sunning) and built
greenfield offline arms such as Hema. JD similarly has invested in existing offline retailers
(Yonghui Supermarket and Jiangsu Five Star) and built its own Seven Fresh chain (Hema
equivalent).
2 November 2021 138

FIGURE 122
New retail market size (RMB bn)
2,000
1,800
1,800
1,600
35% CAGR
1,400
1,200
1,000
1,000
2017-2020E 125% CAGR
800
600
387
400
200 110
39
0
2017 2018 2019 2020e 2022e
New Retail Market Size (in RMB bn)
Source: CITIC Fund, Barclays Research
These offline businesses not only help ecommerce players gain wallet share among their
existing customers by selling to them both online and offline, but also serve as important
touch-points for ecommerce platforms to reach a wider user base of customers who prefer
to shop offline than online. These offline stores can also be an integral part of ecommerce
players’ logistics networks, for pickups as well as for returns.
Similar to many trends in China, mobile users have enabled the O2O movement. Chinese
consumers now pay for goods online using Alipay or WeChat pay, adding to the convenience
and adoption of O2O.
2 November 2021 139

GAMING
Impacted The Most by Recent Regulations; But Not Game

Over by Any Means
In 2020, China’s gaming industry recorded a total revenue of RMB 278.7bn ($44.6bn), +21%
y/y. This represents a healthy bounce from +8% y/y in 2019 and +5% y/y in 2018, and can
be attributed to tailwinds from Covid-19, which boosted the total user base and time spent
on gaming apps. In 2021, as the result of China’s “zero tolerance” Covid-19 policy, the
virus became largely contained domestically while offline activities returned. Online gaming
revenue has also returned to its pre-Covid single-digit growth rate, which became the
industry’s base case growth target after the National Press and Publication Administration
(NPPA) normalized numbers of games approved each year in 2018. In 1H21, the gaming
industry generated RMB 150.5bn in total revenue, +8% y/y.
FIGURE 123
China gaming market size (RMB bn)
China Gaming Market Size (RMB bn)

300 40%
35%
250
30%
200
25%
150 20%
15%
100
10%
50
5%
0 0%
2014 2015 2016 2017 2018 2019 2020
China Gaming Market Sales y/y growth (right)
Source: GPC, Barclays Research
Online gaming users reached a high of 665 mn in 2020, +4% y/y. The low single-digit growth
rate was in line with the growth trajectory of the past five years. Within the space, we highlight
that mobile gaming users have nearly doubled from 357mn in 2014 to 654mn in 2020,
according to GPC, and mobile gaming penetration rate among total gaming users climbed
from 69% in 2014 to 98% in 2020.
2 November 2021 140

FIGURE 124
Mobile gaming penetration is ~98% as of 2020
800 100%
700
98%
600
96%
500
400 94%
300
92%
200
90%
100
0 88%
2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Mobile Game Players Other Game Players

Mobile Game Players Penetration Rate
Source: Frost & Sullivan
As a result, in 1H21, the mobile gaming sector generated RMB 114.8bn in revenue, +9.7%
y/y, while capturing ~76% of the total gaming market. PC games have contracted in five of
the past six years, stabilizing at ~20% market share. Web-based games were the biggest
losers of the last decade, losing almost all of their user base to mobile games and now only
account for ~2% of the total market.
Notably, in 2H21, contrary to other consumer-facing sectors, such as ecommerce and air
travel, which have experienced meaningful slowdown in their growth due to macro and
regulatory headwinds, growth in mobile gaming continued. In 3Q21, mobile gaming
generated RMB 55.5bn in revenue, +9.1% y/y.
Near-Term Outlook
Overall, China’s gaming market should continue to expand, though at a slower rate than the
past five years, due mainly to a relatively high base in terms of total gaming users, considering
a ~47% penetration rate among all Chinese citizens as of 2020. According to Frost & Sullivan,
total gaming revenue will increase at a CAGR of 10% to RMB 504.5bn in 2025, driven by the
strength in mobile gaming, which it expects to grow at 13%, +380bps vs. console games, and
significantly faster than PC games, which will likely remain flat to slightly down. This estimate
is in line with the single-digit growth rate seen in the 2018-19 period, during which the NPPA
tightened its game approval standards after having had two years of lenient approval policies.
By the end of 2025, mobile gaming is estimated by Frost & Sullivan to reach ~86% of the total
gaming market with a user base of ~750mn.
2 November 2021 141

FIGURE 125
China gaming market forecast
Gaming market size (RMB bn)

600 100%
90%
500
80%
70%
400
60%
300 50%
40%
200
30%
20%
100
10%
0 0%
2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 2025E
Mobile PC Console Mobile Game %
Source: Frost & Sullivan, Barclays Research
Competitive Landscape - Tencent Is Still Leading in Games

Tencent remains the biggest player within a fragmented space. Its dominance has not been
challenged so far with its market share rising from ~33% in 2015 to ~40% in 1H21. Netease
is a distant second with almost 14% share, while other gaming companies such as Bilibili and
Perfect World holding around 1% of the market each. We note that several private gaming
companies such as Lilith Games and miHoYo Games have seen very strong growth in the
past two years and have probably about 2-3% of the market if included in the list (which
currently only includes publicly traded gaming companies ).
FIGURE 126
China gaming market share
Other
29%
Tencent
42%
CMGE
1%
Sohu
1%
G-bits BiliBili
2% 1%
Perfect World
Sanqi Interactive Netease
2%
Entertainment 14%
4%
2 November 2021 142

Recent Developments in Gaming

Internationalization Offers the Next Leg of Growth for Chinese Gaming Publishers.
In 2020, Chinese gaming companies raked in $15.5 bn in revenue in overseas’ markets. This
represents a +33% jump from $11.6 bn in the previous year, partly due to tailwinds from
Covid-19, and this marked the third year in a row that growth accelerated. During 1H21,
overseas revenues grew +12%, surpassing domestic gaming revenue growth of ~8%. We
highlight that in 3Q21, overseas revenues jumped +24% y/y and +13% q/q on very tough
comps, according to GPC signalling that internationalization has become a meaningful and
validated growth frontier for gaming companies to pursue.
FIGURE 127
International sales by Chinese gaming publishers ($bn)
International Sales By Chinese Gaming Publishers ($ bn)

18 80%
16 70%
14 60%
12
50%
10
40%
8
30%
6
4 20%
2 10%
0 0%
2014 2015 2016 2017 2018 2019 2020
China Gaming Companies Overseas Revenue y/y growth (right)
Source: GPC, Barclays Research
Taking a closer look, according to Appannie, 6 out of 10 top grossing mobile games
worldwide were produced by Chinese companies, with the Genshin Impact game (owned by
miHoYoraking) raking in over $2bn in gross sales in just under a year of operation.
Geographically, the U.S. is by far the largest overseas’ market for Chinese mobile games,
contributing ~31% to Chinese gaming companies’ international revenue as of 1H21. Japan, a
close second, contributed ~20%, ahead of South Korea’s ~9% and Germany’s ~5%.
As Chinese regulators continue to support domestic publishers embracing international

expansion, overseas sales growth should remain strong. For example, Tencent has shared
plans to further expand its IP franchises globally through its subsidiaries such as Riot (maker
of League of Legends) and Supercell (maker of Clash of Clans). Additionally, Tencent plans
to increase capital investments in international small- to mid-sized gaming studios
with promising game titles, and helps them expand scale by capitalizing on Tencent’s game
development and operational expertise. Internationalization is here to stay, in our view.
2 November 2021 143

ONLINE ADVERTISING
Growth Slowing with New Media Taking Share from Old

The China online advertising industry grew from RMB 288.5bn in 2016 to RMB 766.6bn
($122.7bn) in 2020, a CAGR of 27.7%, according to iResearch. It has become the biggest ad
channel among all media forms –magazines, newspapers, radio, TV, and digital platforms,
among others. Online ads now account for ~90% of the total media ads market in China, up
from ~68% in 2016. Overall, online ads accounted for ~83% of the total advertising market
in China in 2020. Although the Covid-19 pandemic meaningfully impacted the industry in
2020 as growth decelerated from +30% y/y in the last four years to +18.6% y/y in 2020, the
growth trend remains intact.
FIGURE 128
China online ads market size (RMB bn)
China Online Ads Market Size (RMB bn)

900 35%
767
800 30%
700 646
25%
600 497
500 20%
376
400 289 15%
300
10%
200
100 5%
0 0%
2016 2017 2018 2019 2020
Online Ads Market Size (RMB bn) yoy growth (right)
Similar to other industries such as gaming, the mobile ad segment has considerably
outgrown its PC peer in the last five years. Increasing at over 40% y/y each year from 2016
to 2019, Mobile ads now represent ~87% of the entire Chinese online advertising industry,
up from ~61% in 2016.
2 November 2021 144

FIGURE 129
China mobile ads market size (RMB bn), and mobile penetration rate
800 100%
700 90%
673 80%
600 542
70%
500 60%
400 366 50%
300 255 40%
175 30%
200
20%
100 10%
0 0%
2016 2017 2018 2019 2020
Mobile Ads Market Size (RMB bn) Mobile Penetration (right)
Market shares among different online ad forms have also changed meaningfully in the past
five years. The biggest loser is search engine ads, which saw its market share fall from ~27%
in 2016 to ~10% in 2020. In contrast, ecommerce ads and in-feed ads held ~40% and ~33%
of the total market in 2020, up from ~28% and ~13% in 2016, respectively.
Near-Term Outlook
The overall online ads market should continue to expand. However, the gap between mobile
and non-mobile ads will likely widen. While the non-mobile ads market is struggling to crawl
out of the Covid-19 ditch and is growing at a low single-digit rate, the mobile ad market is
comfortably glancing at a high-teens growth for the next three years, per iResearch.
User behavior changes in China's two netizen groups stand out as the key driver for online
ads growth. 1) Generation Z (27% of the total netizen base), who are younger, wealthier (45%
labelled as mid-high spender) and more active (average daily use is 5 hr+), are spending more
on products based on content and have become less price-sensitive. 2) Netizens in lower-tier
cities (~28% of netizens), who have more disposable time and previously relied on
their robust offline information network (mainly family members and acquaintances), are
moving their social life online, which tends to induce spending.
Sub-trends among different ad forms

Breaking down by different ad forms, in-feed ads, which primarily consist of ads on social
networks such as WeChat and short-form video platforms such as Kuaishou and Douyin,
should remain the fastest growing among peers, and are expected by iResearch to take ~42%
of the total market share by 2023, exceeding ecommerce ads (performance or branding ads
on ecommerce platforms). In particular, short-form video ads are the main growth driver, and
will likely continue to grow at mid-double-digits over the next few years.
The growth of ecommerce ad spending is driven by expansion of the user base and
ecommerce sales penetration, both of which have decelerated due to a large base and the
industry’s high level of maturity. As a result, iResearch estimates that ecommerce ads will
grow at high-teens to low-20s in the next three years, gradually entering a phase of slower
yet steadier expansion.
Once accounting for ~30% of the total market, search engine ads have been the biggest loser
in the past four years, now ~10% of the market. Going forward, as users become more
accustomed to searching for information within content platforms such as Douyin and
2 November 2021 145

Xiaohongshu, search engine ads will lose more market share, accounting for ~6% of the
market by 2023, per iResearch. We note that potential regulatory change in allowing search
engine to crawl information on social sites such as Douyin and Wechat may change that.
FIGURE 130
Historical and estimated market shares by different ad types
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
2016 2017 2018 2019 2020 2021E 2022E 2023E
Search Engine Ads Ecommerce Ads Video Ads In-feed Ads Others
Regulations – a Rapidly Changing Landscape

In early 2021, central and local governments in China introduced a slew of regulatory
changes and significantly stepped up enforcement in a wide range of sectors such as gaming,
live streaming, data processing, and food delivery. The swift and dramatic changes in the
regulatory environment has certainly sent shockwaves through the Chinese tech and
internet industry and capital markets around the world. Below we discuss the most important
new regulations in different sub-sectors.
Anti-monopoly regulation
February 7, 2021
The State Administration for Market Regulation (SAMR) issued the “Guidelines for the
Implementation of Anti-Monopoly Rules in the Platform-Based Economies4,” which signalled
a new round of anti-monopoly review by the SAMR.
Under the guidelines, much of the emphasis has been put on the definition of monopolistic
behaviors. Several key elements have stood out for us.
Monopolistic behaviors based on algorithmic programs are clearly labelled as illegal
Subsidies which result in prices substantially below market prices are only allowed during a
reasonable time period in which the goal is to 1) attract new users, 2) introduce new products,
or 3) cross sell other services on the platform. Excessive subsidies campaigns which were
widely used by Internet platform companies are banned
Price discrimination based on user profile, which was once widespread in industries such as
hotel booking and e-commerce, is deemed unlawful
Any action that results in discriminatory treatment toward sellers and merchants who did not
participate in the platform’s promotional or exclusive partnerships is strictly prohibited
4 Anti-monopoly guidelines issued for internet platforms (China Business Law Journal, 5/3/21)
2 November 2021 146

Placing restrictions on payment methods and excessive data collection are considered
unlawful
Since July 2021

A slew of regulatory penalties5 around corporate merger and acquisitions has been issued by
the State Administration for Market Regulation. The majority of the ~30 cases were caused
by companies’ failures to comply with the filing requirement with regulators before an
acquisition was made. As these transactions did not result in creating a monopolistic entity
in their respective industry, only a fine of RMB 500k was issued for each incident.
That said, Alibaba’s practice of asking for exclusive contracts with merchants in the past and
Tencent’s acquisition of China Music Group in 2016, which resulted in the post-acquisition
entity having over ~80% market share of the China online music industry, were both met with
serious retribution. Alibaba was ordered to pay a RMB 18.2 bn fine while Tencent Music was
ordered to relinquish its exclusive copyright agreements with record labels, a key advantage
the company once had over competitors.
Going forward, we assume strict anti-monopoly enforcement will continue, putting pressure
on mega platforms as some common industry-wide business practices of the past are in
violation of the most recent rules, and companies could be prosecuted for any violations
under the new regulatory regime.
Gaming
November 2019
The NPPA released the first iteration of the anti-addiction regulation6 for online games for
children below 18 years , wherein it limited daily play time and virtual-item purchases. The
key restrictions are listed below.
Restrictions on all users:

1. For a new user, gaming companies can offer a one-time one-hour trial period without
asking for the user's real name and ID number but the trial period cannot exceed 15 days
2. Real names and ID numbers are mandatory for users who wish to sign up for an account
for online games
Restrictions on users under the age of 18:

3. Allowance to access games for 1.5hr/day during weekdays, 3hrs/day on weekends and
public holidays
4. Can only access games between 8:00am and 10:00pm
5. Limitation on virtual item purchases
 No purchases allowed for users under the age of 8
 Age 8-16: set a cap for RMB 50 per order and RMB 200 per month
 Age 16-18: set a cap for RMB 100 per order and RMB 400 per month
August 2021
The second iteration of rules7 was released by the NPPA , the strictest version to date with the
majority of the restrictions being placed on users under the age of 18. The new rules
significantly reduce the maximum online game play time for gamers under the age of 18 from
5 China slaps antitrust fines on companies including Alibaba, Tencent (CGTN, 7/7/21)
6 Notice by the General Administration of Press and Publication of Preventing Minors from Indulging in Online Games
(lawinfochina, 10/25/19)
7 Three hours a week: Play time's over for China's young video gamers (Reuters, 8/31/21)
2 November 2021 147

13.5 hrs per week to 3 hrs per week, and eliminate the trial-period while keeping the limits on
online purchases unchanged.
Restrictions on all users:

1. More stringent requirements placed on verification of identities and personal information
2. Prohibit gaming companies from offering trial periods for unverified new users
Restrictions on users under the age of 18:

3. Allowed to access games only on Friday, Saturday, Sunday, and public holidays (down
from 7 days a week)
4. Can only access games between 8:00pm and 9:00pm
September 8, 2021
The NPPA, The Publicity Department of the Central Committee, The Ministry of Culture and
Tourism of the PRC, and The Cyberspace Administration of China, summoned major online
game developers/ operators8 including Tencent and Netease to reiterate the importance for
the companies to fully comply with the most recent regulations :
1. Limiting play time for underage users to 3 hours per week
2. Banning account sharing and underground account selling which allows underage users
to circumvent play time restrictions
3. Increasing scrutiny over content within online games
4. Implementing anti-monopoly rules within the online gaming space
5. Curbing purchases of virtual items by gamers
6. Curbing celebrity endorsements for games
September 14, 2021

Only 13 days after the new rules on online gaming went into effect, local regulators in Beijing
issued an administrative penalty 9 to an online gaming operator who continued to offer
services to users under 18 years old outside the allowed time window. Although the company
was only fined RMB 100k as a monetary penalty, the swift enforcement of new rules signals
the government's commitment to making the online gaming industry compliant with the
latest regulations.
New games review and approval process have been tentatively suspended
Historically speaking, the rate at which new online games were approved for publication by
the National Press and Publication Administration (NPPA) signals the overall
momentum/healthiness of the China online gaming industry. In 2018, the NPPA suspended
the approval of new games from April 2018 to November 2018 due to an agency-wide
restructuring. As a result, the share prices of Tencent, Netease, and Perfect World were down
by 28%, 22%, and 27% during this period, respectively vs the HSI's -11%.
We are seeing a similar reluctance by the NPPA to approve new online games under the new
regulatory regime. The NPPA has not issued its monthly release (to announce newly
approved games) for September or October. This delay suggests possible suspension of new
game review and approval process until further notice, and it will most likely negatively
impact gaming companies’ launch timetable and revenues in the coming quarters.
8 Chinese government summons gaming firms, says it will crack down on ride-hailing (Reuters, 9/8/21)
9 Beijing Company Fined for Illegally Providing Online Game Services to Minors (Pandaily, 9/15/21)
2 November 2021 148

Live streaming
August 30, 2021
Multi-Channel Networks (MCNs), which act like talent agencies for online streamers, played
a key role in the success of the live-streaming industry in the past decade, during which
regulatory interferences were minimal. This has changed. The Ministry of Culture and
Tourism of the PRC released the “Regulatory Guidelines on MCNs 10 ” to rein in excessive
tipping behaviors which are often promoted by MCNs.
Under the guidelines, MCNs are:

1. required to obtain licenses for commercial operations
2. required to have stricter content review processes
3. prohibited from tipping and ranking their own streamers, both widely used industry
practices in the past
4. required to have at least one dedicated representative for every 100 streamers,
encouraging industry consolidation as capital requirement for running a MCN will
increase.
5. Recent regulatory changes would curb aggressive promotions by MCNs on live-streaming

platforms in the near term, which in turn would hamper platforms’ user activities and
spending / tipping.
April 23, 2021

The Cyberspace Administration of China introduced the “Guidelines on Live Streaming
Marketing11.”
August 18, 2021

The Ministry of Commerce of the PRC issued a preliminary version12 of its e-commerce live-
streaming rules, which when finalized will be the most comprehensive industry standard to
date. We see this is as a big step toward standardization of the industry, benefiting bigger
platforms with stricter rules.
The Specification states that:
1. streamers need to be verified and cannot be under the age of 16
2. product information shared by streamers has to be accurate
3. live-streaming virtual room operators will be held accountable for selling counterfeit
products
4. live-streaming platforms are required to patrol live virtual rooms
5. past live-streaming sessions are required to be recorded and the record needs to be
retained for at least three years
New rules clearly target the biggest problems existing today within the e-commerce live-
streaming industry, namely: 1) sale of counterfeit goods; 2) lack of after-sale customer
service; and 3) difficulty for consumers to seek compensation or regulators to enforce
compliance due to lack of evidence.
10 New measures introduced to regulate MCN industry (Global Times, 9/2/21)

11 Measures for the Administration of Live Streaming Marketing (for Trial Implementation) (lawinfochina, 4/16/21)
12 China now wants to tell influencers how to speak and dress when live-streaming (cnn, 8/19/21)
2 November 2021 149

Delivery platforms and local services

July 26, 2021
A group of seven regulators released ten rules to protect delivery riders’ labor rights13.
These include:
1. prohibit delivery platforms from setting unreasonable delivery time targets for riders. Past
targets set by using key performance indicators (KPI) such as “on time rate," "number of
orders delivered,” and "satisfaction rate" need to be revamped
2. dispatching algorithms have to be adjusted to balance riders’ workload and customer

experience/satisfaction
3. encourage delivery platforms to develop smart personal safety devices, build rider resting
areas, and enroll riders in social insurance programs. (We note that riders are encouraged
to be insured regardless of whether they work for delivery platforms directly or
through third-party staffing companies.)
4. food safety needs to be ensured
5. unionization is highly encouraged
Since July 2021

Local governments and trade unions have followed suit and published their own guidelines.
Guangdong has set a target14 to unionize 500k delivery riders and ride-sharing drivers by
2022. Beijing announced that it will include riders and ride-sharing drivers in the minimum
wage protection program15.
September 2021
The All-China Federation of Trade Unions proposed that all riders should be unionized to
protect their rights16.
Data and privacy

Starting in July 2021, prompted by DIDI's rushed IPO in the U.S., regulators quickly released
three major pieces of legislation covering data security, personal data protection, and
Internet-related software/hardware provider review standards, which were designed to
protect core national security data, among others. Details are as follows:
July 10, 2021

“Internet Security Review Law17”
1. a company needs to submit for security review if it possesses more than 1 million users'
data and intends to file for an IPO in an overseas market
2. key risks considered in the review include:
3. the security and reliability of an internet service and how it handles disruptions caused by
external instabilities such as politics and diplomacy
4. potential impacts toward key internet infrastructures
13 Chinese market regulator improves protection of food delivery workers (Xinhua, 7/26/21)
14 Translated from the Chinese press “Guangdong Political Federation of Trade Unions promotes establishment of
new business groups” (9/16/21)
15 China moves to protect food delivery drivers from digital exploitation… (SCMP, 7/26/21)
16 ACFTU in Beijing issues guidelines for unionizing gig workers: What comes next (China Labour Bulletin, 9/28/21)
17 China widens clampdown on overseas listings with pre-IPO review of firms with large user data (Reuters, 7/10/21)
2 November 2021 150

5. the likelihood of a data breach which may cause a dissemination of core national security
data to overseas parties
6. the misuse, abuse of users’ data by foreign governments after an overseas IPO
7. this law has jurisdiction over both internet software and hardware providers
September 1, 2021
The Data Security Law18, which was released in June 2021, went into effect.
1. Introduced a data rating system that categorizes certain data sets as core national security
data
2. Identified different institutions that are responsible for the collection, protection, and
oversight of data on a provincial and national level
November 1, 2021
The Personal Information Protection Law 19 , passed in August 2021, went into effect on
November 1, 2021.
1. Data can only be collected and used for initial intended purposes, for which collectors
need to ask permission
2. The amount of data collected should be to the smallest extent possible; any excessive
data collection is prohibited by law
3. Data collectors need to ask for permission before distributing data to third parties
4. Data cannot be used as a base for price discrimination
5. Require online platforms who operate with large pools of user data to form independent
outside oversight committees
18 China Finalizes Data Security Law to Strengthen Regulation on Data Protection (JDSupra, 21/6/21)
19 China passes new personal data privacy law, to take effect Nov. 1 (Reuters, 8/20/21)
2 November 2021 151

China Technology Industry View: POSITIVE
Alibaba Group Holding Ltd. (BABA) Stock Rating: OVERWEIGHT
Income statement (CNYmn) 2021A 2022E 2023E 2024E CAGR Price (01-Nov-2021) USD 170.17
Revenue 717,289 899,320 1,072,737 1,266,136 20.9% Price Target USD 275.00
Gross profit 307,308 340,899 421,458 488,718 16.7% Why Overweight? Dominant player in a secular
EBITDA (adj) 196,842 182,662 233,206 273,485 11.6% growth market with a deeply discounted valuation;
EBIT (adj) N/A N/A N/A N/A N/A Cloud biz and Ant stake free options. Our price target
Pre-tax income (adj) N/A N/A N/A N/A N/A is $275, based on 15x FY23E nominal core commerce
EBITA plus its cash and discounted investments.
Net income (adj) 178,954 155,069 192,680 227,647 8.4%
EPS (adj) (CNY) 65.12 56.11 69.09 80.90 7.5%
Diluted shares (mn) 2,748 2,764 2,789 2,814 0.8% Upside case USD 346.00
DPS (CNY) 0.00 0.00 0.00 0.00 N/A Our upside case is $346, based on 15x FY23E nominal
core commerce EBITA plus net cash and equity
investment plus cloud value and Ant stake.
Margin and return data Average
EBITDA (adj) margin (%) 27.4 20.3 21.7 21.6 22.8
Downside case USD 156.00
EBIT (adj) margin (%) N/A N/A N/A N/A N/A
Our downside case is $156, based on 10x FY23E core
Pre-tax (adj) margin (%) N/A N/A N/A N/A N/A
commerce EBITA.
Net (adj) margin (%) 24.9 17.2 18.0 18.0 19.5
ROIC (%) 14.0 10.1 10.8 11.8 11.7
Upside/Downside scenarios
ROA (%) 8.9 6.4 6.7 7.2 7.3
ROE (%) 16.0 11.4 12.0 13.0 13.1
Balance sheet and cash flow (CNYmn) CAGR

Tangible fixed assets 147,412 168,500 201,497 240,012 17.6%
Intangible fixed assets 70,833 68,799 68,615 68,623 -1.1%
Cash and equivalents 321,262 316,588 351,182 415,374 8.9%
Total assets 1,690,218 1,856,398 2,112,346 2,424,221 12.8%
Short and long-term debt 149,153 150,612 150,612 150,612 0.3%
Other long-term liabilities 30,754 34,322 40,939 48,760 16.6%
Total liabilities 606,584 650,044 740,194 847,893 11.8%
Net debt/(funds) -185,546 -182,989 -217,583 -281,775 N/A
Shareholders' equity 937,470 1,043,694 1,179,306 1,348,153 12.9%
Change in working capital 61,911 14,278 37,056 44,090 -10.7%
Cash flow from operations 231,786 146,046 202,318 240,197 1.2%
Capital expenditure N/A N/A N/A N/A N/A
Free cash flow N/A N/A N/A N/A N/A
Valuation and leverage metrics Average

P/E (adj) (x) 16.7 19.4 15.8 13.5 16.3
EV/sales (x) 4.0 3.2 2.6 2.2 3.0
EV/EBITDA (adj) (x) 14.5 15.7 12.1 10.1 13.1
FCF yield (%) N/A N/A N/A N/A N/A
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/EBITDA (adj) (x) -0.9 -1.0 -0.9 -1.0 -1.0
Source: Company data, Bloomberg, Barclays Research

Note: FY End Mar
2 November 2021 152

Baidu, Inc. (BIDU) Stock Rating: OVERWEIGHT
Revenue 78,684 94,488 109,708 124,495 16.5% Price Target USD 243.00
Gross profit 50,316 57,301 66,373 75,319 14.4% Why Overweight? All the newer and exciting “hard”
EBITDA (adj) 31,656 30,450 35,680 39,826 8.0% tech overlooked by investors; little value given to
EBITA (adj) N/A N/A N/A N/A N/A business in areas favored by govt.. Our price target of
EBIT (adj) 26,366 24,365 29,044 32,710 7.5% $243 is based on 10X FY23E nominal advertising
EBITDA of $4.0bn plus net cash, discounted value of
Net income (adj) 25,194 23,180 27,646 31,423 7.6%
its stake in iQiyi and investment holdings, and its
Pre-tax income (adj) N/A N/A N/A N/A N/A
cloud business which we value based on 4x FY23
EPS (adj) (CNY) 73.13 66.33 77.01 85.16 5.2%
revenue of $4.2bn.
Diluted shares (mn) 345 349 359 369 2.3%
DPS (CNY) 0.00 0.00 0.00 0.00 N/A
Upside case USD 312.00
Our upside case is $312, based on 15x FY23 nominal
Margin and return data Average advertising EBITDA, net cash, discounted iQIYI and
EBITDA (adj) margin (%) 40.2 32.2 32.5 32.0 34.2 equity holdings, plus the cloud, Kunlun chip and
EBIT (adj) margin (%) 33.5 25.8 26.5 26.3 28.0 smart devices businesses.
Net (adj) margin (%) 32.0 24.5 25.2 25.2 26.7 Downside case USD 158.00
ROIC (%) 10.9 11.2 5.7 6.1 8.5 Our downside case is $158, based on 10x FY23
ROA (%) 8.0 8.6 4.4 4.6 6.4 nominal advertising EBITDA plus cash and discounted
ROE (%) 14.5 14.7 7.3 7.7 11.1 iQiyi stake .
Balance sheet and cash flow (CNYmn) CAGR Upside/Downside scenarios

Intangible fixed assets 2,022 2,232 2,599 2,974 13.7%
Total assets 332,708 402,980 431,404 462,328 11.6%
Other long-term liabilities 59 83 93 95 17.3%
Net debt/(funds) 24,553 33,154 24,516 13,578 -17.9%
Shareholders' equity 182,696 237,155 255,961 277,304 14.9%
Change in working capital 2,421 -3,354 5,976 5,822 34.0%
Capital expenditure -4,843 -8,153 -9,620 -10,924 N/A
Free cash flow 24,767 19,509 19,425 21,786 -4.2%

P/E (adj) (x) 14.9 16.4 14.1 12.8 14.6
EV/sales (x) 5.3 4.5 3.8 3.3 4.2
EV/EBITDA (adj) (x) 13.3 14.1 11.8 10.3 12.3
FCF yield (%) 5.9 4.6 4.6 5.3 5.1
P/BV (x) 2.1 1.6 1.5 1.4 1.7
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/EBITDA (adj) (x) 0.8 1.1 0.7 0.3 0.7

Note: FY End Dec
2 November 2021 153

JD.com, Inc. (JD) Stock Rating: OVERWEIGHT
Revenue 745,802 944,289 1,112,416 1,275,417 19.6% Price Target USD 98.00
Gross profit 109,108 127,708 145,883 169,815 15.9% Why Overweight? On its path to become biggest
EBITDA (adj) 20,681 16,884 18,243 29,640 12.7% retailer in China, leveraging its hard built logistics
EBIT (adj) 15,337 11,322 12,243 23,040 14.5% infrastructure. Our price target is $98 which is based
Pre-tax income (adj) N/A N/A N/A N/A N/A on 20x JD’s FY23 nominal ecommerce EBITDA plus
net cash.
Net income (adj) 16,828 12,968 10,277 19,550 5.1%
EPS (adj) (CNY) 10.83 8.11 6.42 12.16 4.0%
Diluted shares (mn) 1,555 1,598 1,602 1,608 1.1% Upside case USD 139.00
DPS (CNY) 0.00 0.00 0.00 0.00 N/A Our upside case is $139, which is based on 25x JD’s
FY23 nominal ecommerce EBITDA plus its cash and
discounted publicly listed equity holdings.
EBIT (adj) margin (%) 2.1 1.2 1.1 1.8 1.5
Our downside case is $57, which is based on 10x JD’s
FY23 nominal ecommerce EBITDA plus net cash.
Net (adj) margin (%) 2.3 1.4 0.9 1.5 1.5
ROIC (%) 24.7 2.4 1.3 4.9 8.3
ROA (%) 11.7 1.1 0.6 2.0 3.9
ROE (%) 26.3 2.6 1.4 5.2 8.9

Cash and equivalents 86,085 92,227 78,911 75,937 -4.1%
Total assets 422,288 496,452 542,523 596,588 12.2%
Short and long-term debt 15,791 13,412 13,412 13,412 -5.3%
Other long-term liabilities 332 2,407 2,407 2,407 93.6%
Net debt/(funds) -73,554 -79,815 -66,500 -63,526 N/A
Change in working capital 19,761 13,047 17,733 17,343 -4.3%
Cash flow from operations 47,410 26,679 12,243 23,040 -21.4%
Free cash flow 39,177 22,116 7,323 17,396 -23.7%

P/E (adj) (x) 48.8 65.1 82.3 43.4 59.9
EV/sales (x) 1.0 0.8 0.7 0.6 0.8
EV/EBITDA (adj) (x) 37.4 45.4 42.8 26.4 38.0
FCF yield (%) 5.1 2.9 0.9 2.2 2.8
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Note: FY End Dec
2 November 2021 154

Ke Holdings Inc. (BEKE) Stock Rating: OVERWEIGHT
Gross profit 16,860 16,144 18,997 22,596 10.3% Why Overweight? Dominant in its sector; the MLS in
EBITDA (adj) 7,738 3,655 8,558 11,969 15.6% China with a high margin biz model and an open
EBIT (adj) 5,935 1,198 6,117 9,016 15.0% online platform; current real estate tightening cycle in
Pre-tax income (adj) N/A N/A N/A N/A N/A later stages. Our price target of $29 is based on 10x
EV/nominal EBITDA on our FY23E nominal EBITDA
Net income (adj) 2,792 1,453 5,006 7,270 37.6%
estimate of $2.9bn, plus net cash.
EPS (adj) (CNY) 1.68 2.19 5.14 7.02 61.0%
Diluted shares (mn) 756 1,197 1,200 1,202 16.7%
DPS (CNY) 0.00 0.00 0.00 0.00 N/A
Our $41 upside case is based on 15x
EV/nominal EBITDA on our FY23E nominal EBITDA
estimate plus net cash.
EBIT (adj) margin (%) 8.4 1.6 7.4 9.7 6.8
Our $18 downside case based on
Net (adj) margin (%) 4.0 1.9 6.1 7.8 4.9 5x EV/nominal EBITDA on our FY23E nominal EBITDA
ROIC (%) 1.1 0.2 4.1 6.0 2.9 estimate plus net cash.
ROA (%) 0.7 0.1 2.6 3.9 1.8
ROE (%) 1.1 0.2 4.1 6.0 2.9 Upside/Downside scenarios

Total assets 104,296 98,318 120,584 131,585 8.1%
Short and long-term debt 1,528 585 585 585 -27.4%
Net debt/(funds) -40,967 -35,249 -39,498 -48,043 N/A
Change in working capital 2,124 -1,166 186 230 -52.4%

P/E (adj) (x) 74.8 57.3 24.5 17.9 43.6
EV/sales (x) 1.6 1.5 1.4 1.1 1.4
EV/EBITDA (adj) (x) 14.2 31.7 13.0 8.6 16.9
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Note: FY End Dec
2 November 2021 155

Meituan Dianping (MPNGF) Stock Rating: UNDERWEIGHT
Gross profit 34,050 46,529 61,763 75,500 30.4% Why Underweight? Super star (and super app) in
EBITDA (adj) 4,738 -9,779 -4,346 -3,071 N/A local services and #1 in operational excellence. Food
EBIT (adj) N/A N/A N/A N/A N/A delivery monetization maybe peaking and upward
Pre-tax income (adj) N/A N/A N/A N/A N/A pressure on expenses due govt regulation; Valuation
appears rich. Our price target is $32, based on 25x
Net income (adj) 3,121 -15,779 -12,935 -13,740 N/A
EV/nominal EBITDA plus net cash.
EPS (adj) (CNY) 0.82 -2.72 -2.13 -2.25 N/A
Diluted shares (mn) 6,004 5,819 6,076 6,116 0.6%
DPS (CNY) 0.00 0.00 0.00 0.00 N/A
Our upside case is $44, based on 35x
EBITDA (adj) margin (%) 4.1 -5.4 -1.9 -1.1 -1.1
If the competitive and regulatory environment
continues to worsen, our downside case is $20, based
Net (adj) margin (%) 2.7 -8.8 -5.7 -4.9 -4.2 on 15x EV/nominal EBITDA plus net cash.
ROIC (%) 4.2 -12.9 -12.3 -14.0 -8.8
ROA (%) 2.8 -8.9 -7.9 -8.5 -5.6 Upside/Downside scenarios
ROE (%) 4.8 -16.9 -16.2 -18.5 -11.7

Total assets 166,575 233,934 249,710 261,176 16.2%
Net debt/(funds) 4,225 -3,039 8,544 22,132 73.7%
Change in working capital 3,754 4,815 5,480 4,881 9.2%
Cash flow from operations 8,475 -7,706 -4,346 -3,071 N/A

P/E (adj) (x) N/A N/A N/A N/A N/A
EV/sales (x) 12.2 7.7 6.2 5.1 7.8
EV/EBITDA (adj) (x) 294.7 -142.0 -322.2 -460.4 -157.5
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/EBITDA (adj) (x) 0.9 0.3 -2.0 -7.2 -2.0

Note: FY End Dec
2 November 2021 156

Pinduoduo Inc. (PDD) Stock Rating: EQUAL WEIGHT
Gross profit 40,213 63,891 82,640 102,131 36.4% Why Equal Weight? A true innovator but in transition
EBITDA (adj) N/A N/A N/A N/A N/A to move up-market as customer acquisitions in lower
EBIT (adj) -5,767 -356 -1,256 1,186 N/A tier cities slow; faces a tougher battle as giants have
Pre-tax income (adj) N/A N/A N/A N/A N/A awakened; further monetization difficult.Our price
target of $103 is based on 20x FY23 nominal EBITDA
Net income (adj) -2,965 3,287 2,422 5,824 N/A
plus cash per share.
EPS (adj) (CNY) -2.49 2.37 1.65 3.90 N/A
DPS (CNY) 0.00 0.00 0.00 0.00 N/A
Our upside case is $126, which is based on 25X FY23
nominal EBITDA plus cash per share.
EBITDA (adj) margin (%) N/A N/A N/A N/A N/A
EBIT (adj) margin (%) -9.7 -0.3 -0.9 0.7 -2.6
Our downside case is $79, which is based on 15x
FY23 nominal EBITDA plus cash per share.
Net (adj) margin (%) -5.0 3.0 1.7 3.4 0.8
ROIC (%) -9.6 -3.2 -4.7 -0.9 -4.6
ROA (%) -4.5 -1.2 -1.6 -0.3 -1.9
ROE (%) -11.9 -3.7 -5.5 -1.0 -5.5

Tangible fixed assets 203 335 429 524 37.2%
Total assets 158,909 203,219 241,993 285,155 21.5%
Other long-term liabilities 3 2 2 2 -7.8%
Net debt/(funds) -7,988 -15,120 -20,040 -27,793 N/A
Cash flow from operations 28,197 3,280 -1,256 1,186 -65.2%

EV/sales (x) 14.7 8.0 6.0 4.9 8.4
EV/EBITDA (adj) (x) N/A N/A N/A N/A N/A
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0
Net debt/EBITDA (adj) (x) N/A N/A N/A N/A N/A

Note: FY End Dec
2 November 2021 157

SEA Ltd. (SE) Stock Rating: OVERWEIGHT
Income statement ($mn) 2020A 2021E 2022E 2023E CAGR Price (01-Nov-2021) USD 354.04
Gross profit 1,349 4,231 6,754 9,997 95.0% Why Overweight? A rare internet powerhouse for
EBITDA (adj) 107 74 775 2,141 171.5% emerging market by combining Tencent and Alibaba
EBIT (adj) N/A N/A N/A N/A N/A models. Started off in ASEAN now entering LatAm
Pre-tax income (adj) N/A N/A N/A N/A N/A and Eastern Europe with proven formula. Our $427
price target is based on 15x FY23E digital
Net income (adj) -1,328 -1,531 -1,025 341 N/A
entertainment EV/nominal EBITDA and 45x FY23E
EPS (adj) ($) -2.76 -2.90 -1.84 0.55 N/A
ecommerce EV/nominal EBITDA plus net cash.
Diluted shares (mn) 479 527 559 591 7.3%
DPS ($) 0.00 0.00 0.00 0.00 N/A
Our $529 upside case is based on 20x FY23E digital
entertainment EV/nominal EBITDA and 55x FY23E
EBITDA (adj) margin (%) 2.4 0.7 4.4 7.7 3.8 ecommerce EV/nominal EBITDA plus net cash.
Pre-tax (adj) margin (%) N/A N/A N/A N/A N/A Downside case USD 325.00
Net (adj) margin (%) -30.3 -14.4 -5.8 1.2 -12.3 Our $325 downside case is based on 10x FY23E
ROIC (%) -31.0 -54.2 -41.2 -8.1 -33.6 digital entertainment EV/nominal EBITDA and 35x
ROA (%) -15.5 -13.4 -7.3 -1.3 -9.4 FY23E ecommerce EV/nominal EBITDA plus net cash.
ROE (%) -47.8 -83.2 -60.6 -10.5 -50.5
Balance sheet and cash flow ($mn) CAGR
Tangible fixed assets 386 784 1,295 2,069 75.0%
Intangible fixed assets 40 45 51 57 12.5%
Cash and equivalents 6,167 4,286 4,299 4,836 -7.8%
Total assets 10,456 14,910 22,688 35,503 50.3%
Other long-term liabilities N/A N/A N/A N/A N/A
Net debt/(funds) -4,326 -3,004 -3,016 -3,553 N/A
Cash flow from operations 556 551 775 2,141 56.8%

EV/sales (x) 45.2 18.8 11.3 7.1 20.6
EV/EBITDA (adj) (x) 1,850.0 2,679.5 257.0 92.8 1,219.8
Dividend yield (%) 0.0 0.0 0.0 0.0 0.0

Note: FY End Dec
2 November 2021 158

Tencent Holdings Ltd. (TCEHY) Stock Rating: OVERWEIGHT
Gross profit 221,532 259,936 293,685 338,644 15.2% Why Overweight? Vast investment portfolio holding
EBITDA (adj) 183,314 199,459 216,037 263,275 12.8% significant stakes in many category leaders, value
EBIT (adj) 149,404 164,745 182,037 229,275 15.3% totaling >$200bn. Our base case EV to
Pre-tax income (adj) N/A N/A N/A N/A N/A nominal EBITDA multiple is 15x for VAS, 20x for
online advertising, and 25x for fintech and business
Net income (adj) 122,742 134,378 153,109 197,947 17.3%
services, Adding the discounted (by 15%) value of
EPS (adj) (CNY) 12.69 13.83 15.72 20.30 17.0%
equity holdings of listed investees and its net cash,
our price target is $84.
DPS (CNY) 1.32 N/A N/A N/A N/A
We use 20x VAS nominal EBITDA, 25x online
EBITDA (adj) margin (%) 38.0 34.6 32.7 34.3 34.9 advertising nominal EBITDA and 30x fintech and
EBIT (adj) margin (%) 31.0 28.6 27.6 29.9 29.2 business services EBITDA for FY23. Adjusting for the
Pre-tax (adj) margin (%) N/A N/A N/A N/A N/A discounted equity investment holdings and net cash,
Net (adj) margin (%) 25.5 23.3 23.2 25.8 24.4 we derive an upside case of $101.
ROIC (%) 22.3 18.2 15.0 14.3 17.5
ROA (%) 12.0 10.7 9.5 9.5 10.4 Downside case USD 61.00
ROE (%) 22.7 18.5 15.2 14.5 17.7 We use 10x VAS nominal EBITDA, 15x online
advertising nominal EBITDA, and 15x fintech and
Balance sheet and cash flow (CNYmn) CAGR business services EBITDA for FY23. Adjusting for the
Tangible fixed assets 59,843 69,585 80,292 93,916 16.2% discounted equity investment holdings and net cash,
Intangible fixed assets 159,437 171,904 191,904 211,904 9.9% we derive a downside case of $61.
Total assets 1,333,425 1,704,016 2,056,384 2,460,809 22.7% Upside/Downside scenarios
Other long-term liabilities 9,254 9,718 11,026 12,867 11.6%
Net debt/(funds) -138,556 -149,478 -166,024 -228,617 N/A
Shareholders' equity 703,984 986,794 1,279,036 1,609,714 31.7%

P/E (adj) (x) 31.2 28.6 25.2 19.5 26.1
EV/sales (x) 7.7 6.4 5.6 4.7 6.1
EV/EBITDA (adj) (x) 20.3 18.6 17.1 13.8 17.4
Dividend yield (%) 0.3 N/A N/A N/A 0.3

Note: FY End Dec
2 November 2021 159

Valuation Methodology and Risks

China Technology
Alibaba Group Holding Ltd. (BABA)

Valuation Methodology: Our price target is $275, based on 15x FY23E nominal core commerce EBITA plus its cash and discounted investments.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) Regulatory changes may negatively impact
the company's competitiveness. 2) Competitors continue to take away market share particularly among BABA's core merchants, the brands. 3)
Should the company make more significant investments, the decline in profit margins may be viewed negatively by some investors in the near
term.
Baidu, Inc. (BIDU)
Valuation Methodology: Our price target of $243 is based on 10x FY23E nominal advertising EBITDA of $4.0bn plus net cash, value of its stakes
in iQiyi and other investment holdings at a 15% discount, and its cloud business at 4x FY23E cloud revenue of $4.2bn.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) The company may fail to commercialize
many of its technologies. 2) Technological advancements may render some of Baidu's technologies less valuable. 3) The company's technical
and managerial resources may not be adequate to tackle multiple new initiatives. As Baidu is tackling quite a few new ventures and many of
which are outside of what the company traditionally has done, technical and managerial resources will likely be under constraint.
JD.com, Inc. (JD)
Valuation Methodology: Our price target is $98 which is based on 20x JD's FY23 nominal ecommerce EBITDA of $66bn plus net cash of
$25.6bn.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1.) Competitors may start to build their own
logistics infrastructure, eroding JD's competitive advantage 2.) JD's capital market strategy by separately listing majority owned subsidiaries may
not be the most shareholder friendly. 3) JD senior management may be distracted by different priorities among its listed subsidiaries of which JD
remains a majority shareholder. 4) As JD expands into other product categories, it may be prone to be making strategic errors or execution
missteps during such expansion phases.
Ke Holdings Inc. (BEKE)
Valuation Methodology: Our price target of $29 is based on 10x EV/nominal EBITDA on our FY23E nominal EBITDA estimate of $2.85bn, plus
net cash.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) Periodic government policy tightening in
China results in below trend line home transactions from time to time, resulting in highly volatile financial results. 2) Some local governments
have expressed interest in launching similar home listing site.3) If the current property tightening cycle lasts longer than expected, it would
continue to depress the coompany's transaction volumes.
Meituan Dianping (MPNGF)
Valuation Methodology: Our price target is $32, based on 25x EV/nominal EBITDA plus net cash.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) The company continues to grow its food
take out GTV rapidly and the TAM for food delivery is bigger than currently expected. 2) Meituan achieves success in digitizing local small
businesses with its SaaS offerings, paving the way for the company to become a SaaS provider to millions of SMEs in China. 3) Meituan is able to
achieve dominant competitive positioning in some emerging businesses it operates in such as ride hailing.
Pinduoduo Inc. (PDD)
Valuation Methodology: Our price target of $103 is based on 20x FY23 nominal EBITDA of $6.9bn plus $8.77 cash per share.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) The company may not be able to move up
market now that it has almost fully penetrated lower tier city shoppers. 2.) Once the gamification novelty wears off and purchase subsidies
decline, some customers may move on to other platforms or become less actively engaged. 3) One upside risk is that the company manages to
move up-market rapidly and gain meaningful traction among online shoppers in the tier 1 and 2 cities. 4) Another upside risk is that the
company manages to continue to drive up its monetization thus higher take rate from merchants due to lack of alternatives for these merchants.
SEA Ltd. (SE)
Valuation Methodology: Our $427 price target is based on 15x FY23E digital entertainment EV/nominal EBITDA and 45x FY23E ecommerce
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1.) Differences in culture, language,
regulations creates significant operational challenges for SEA to operate in all these countries and operational missteps are possible. 2.) There are
strong local players (eg in Brazil) may fight back aggressively, raising the hurdle for SEA to achieve share. 3) Ecommerce adoption may slow in
ASEAN or LatAm despite the fact the penetration rate is lower compared to other regions such as China or the US.4) The company may fail to
build strong local country teams rapidly when it enters new markets as it may lack contact networks or operational history in those countries.
Tencent Holdings Ltd. (TCEHY)
Valuation Methodology: Our base case EV to nominal EBITDA multiple is 15x for VAS, 20x for online advertising, and 25x for fintech and
business services, Adding the discounted (by 15%) value of equity holdings of listed investees and its net cash, our price target is $84.
Risks which May Impede the Achievement of the Barclays Research Valuation and Price Target: 1) Regulatory changes may negatively impact
the current Tencent PE / VC like corporate strategy. 2) More gaming related regulations may negatively impact revenue and earnings given the
2 November 2021 160

Valuation Methodology and Risks

company's significant exposure to gaming. 3) Additional anti-monopoly regulations may weaken Tencent's competitive positioning in certain
businesses.
Source: Barclays Research.
2 November 2021 161

ANALYST(S) CERTIFICATION(S):
I, Jiong Shao, CFA, hereby certify (1) that the views expressed in this research report accurately reflect my personal views about any or all of the
subject securities or issuers referred to in this research report and (2) no part of my compensation was, is or will be directly or indirectly related to
the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES:
Barclays Research is produced by the Investment Bank of Barclays Bank PLC and its affiliates (collectively and each individually, "Barclays"). All
authors contributing to this research report are Research Analysts unless otherwise indicated. The publication date at the top of the report reflects
the local time where the report was produced and may differ from the release date provided in GMT.
Availability of Disclosures:
Where any companies are the subject of this research report, for current important disclosures regarding those companies please refer to
https://publicresearch.barclays.com or alternatively send a written request to: Barclays Research Compliance, 745 Seventh Avenue, 13th Floor,
New York, NY 10019 or call +1-212-526-1072.
The analysts responsible for preparing this research report have received compensation based upon various factors including the firm's total
revenues, a portion of which is generated by investment banking activities, the profitability and revenues of the Markets business and the potential
interest of the firm's investing clients in research with respect to the asset class covered by the analyst.
Analysts regularly conduct site visits to view the material operations of covered companies, but Barclays policy prohibits them from accepting
payment or reimbursement by any covered company of their travel expenses for such visits.
Barclays Research Department produces various types of research including, but not limited to, fundamental analysis, equity-linked analysis,
quantitative analysis, and trade ideas. Recommendations contained in one type of Barclays Research may differ from those contained in other types
of Barclays Research, whether as a result of differing time horizons, methodologies, or otherwise.
In order to access Barclays Statement regarding Research Dissemination Policies and Procedures, please refer to
https://publicresearch.barcap.com/S/RD.htm. In order to access Barclays Research Conflict Management Policy Statement, please refer to:
https://publicresearch.barcap.com/S/CM.htm.
Primary Stocks (Ticker, Date, Price)
Alibaba Group Holding Ltd. (BABA, 01-Nov-2021, USD 170.17), Overweight/Positive, CD/CE/J/K/M/N
Baidu, Inc. (BIDU, 01-Nov-2021, USD 170.32), Overweight/Positive, CD/CE/J
JD.com, Inc. (JD, 01-Nov-2021, USD 82.50), Overweight/Positive, CD/CE/J/K/M
Ke Holdings Inc. (BEKE, 01-Nov-2021, USD 19.66), Overweight/Positive, J
Meituan Dianping (MPNGF, 01-Nov-2021, USD 35.72), Underweight/Positive, CD/J
Pinduoduo Inc. (PDD, 01-Nov-2021, USD 93.48), Equal Weight/Positive, CD/J
SEA Ltd. (SE, 01-Nov-2021, USD 354.04), Overweight/Positive, CD/J
Tencent Holdings Ltd. (TCEHY, 01-Nov-2021, USD 61.93), Overweight/Positive, CD/J/K/N
Unless otherwise indicated, prices are sourced from Bloomberg and reflect the closing price in the relevant trading market, which may not be the
last available price at the time of publication.
Disclosure Legend:
A: Barclays Bank PLC and/or an affiliate has been lead manager or co-lead manager of a publicly disclosed offer of securities of the issuer in the
previous 12 months.
B: An employee or non-executive director of Barclays PLC is a director of this issuer.
CD: Barclays Bank PLC and/or an affiliate is a market-maker in debt securities issued by this issuer.
CE: Barclays Bank PLC and/or an affiliate is a market-maker in equity securities issued by this issuer.
D: Barclays Bank PLC and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months.
E: Barclays Bank PLC and/or an affiliate expects to receive or intends to seek compensation for investment banking services from this issuer within
the next 3 months.
FA: Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of a class of equity securities of this issuer, as calculated in accordance with
US regulations.
FB: Barclays Bank PLC and/or an affiliate beneficially owns a long position of more than 0.5% of a class of equity securities of this issuer, as
calculated in accordance with EU regulations.
FC: Barclays Bank PLC and/or an affiliate beneficially owns a short position of more than 0.5% of a class of equity securities of this issuer, as
calculated in accordance with EU regulations.
FD: Barclays Bank PLC and/or an affiliate beneficially owns 1% or more of a class of equity securities of this issuer, as calculated in accordance with
South Korean regulations.
2 November 2021 162

GD: One of the Research Analysts on the fundamental credit coverage team (and/or a member of his or her household) has a long position in the
common equity securities of this issuer.
GE: One of the Research Analysts on the fundamental equity coverage team (and/or a member of his or her household) has a long position in the
common equity securities of this issuer.
H: This issuer beneficially owns more than 5% of any class of common equity securities of Barclays PLC.
I: Barclays Bank PLC and/or an affiliate is party to an agreement with this issuer for the provision of financial services to Barclays Bank PLC and/or
an affiliate.
J: Barclays Bank PLC and/or an affiliate is a liquidity provider and/or trades regularly in the securities of this issuer and/or in any related derivatives.
K: Barclays Bank PLC and/or an affiliate has received non-investment banking related compensation (including compensation for brokerage
services, if applicable) from this issuer within the past 12 months.
L: This issuer is, or during the past 12 months has been, an investment banking client of Barclays Bank PLC and/or an affiliate.
M: This issuer is, or during the past 12 months has been, a non-investment banking client (securities related services) of Barclays Bank PLC and/or
an affiliate.
N: This issuer is, or during the past 12 months has been, a non-investment banking client (non-securities related services) of Barclays Bank PLC
and/or an affiliate.
O: Not in use.
P: A partner, director or officer of Barclays Capital Canada Inc. has, during the preceding 12 months, provided services to the subject company for
remuneration, other than normal course investment advisory or trade execution services.
Q: Barclays Bank PLC and/or an affiliate is a Corporate Broker to this issuer.
R: Barclays Capital Canada Inc. and/or an affiliate has received compensation for investment banking services from this issuer in the past 12 months.
S: This issuer is a Corporate Broker to Barclays PLC.
T: Barclays Bank PLC and/or an affiliate is providing equity advisory services to this issuer.
U: The equity securities of this Canadian issuer include subordinate voting restricted shares.
V: The equity securities of this Canadian issuer include non-voting restricted shares.
Risk Disclosure(s)
Master limited partnerships (MLPs) are pass-through entities structured as publicly listed partnerships. For tax purposes, distributions to MLP unit
holders may be treated as a return of principal. Investors should consult their own tax advisors before investing in MLP units.
Disclosure(s) regarding Information Sources
Copyright © (2021) Sustainalytics. Sustainalytics retains ownership and all intellectual property rights in its proprietary information and data that
may be included in this report. Any Sustainalytics’ information and data included herein may not be copied or redistributed, is intended for
informational purposes only, does not constitute investment advice and is not warranted to be complete, timely and accurate. Sustainalytics’
information and data is subject to conditions available at https://www.sustainalytics.com/legal-disclaimers/
Bloomberg® is a trademark and service mark of Bloomberg Finance L.P. and its affiliates (collectively “Bloomberg”) and the Bloomberg Indices are
trademarks of Bloomberg. Bloomberg or Bloomberg’s licensors own all proprietary rights in the Bloomberg Indices. Bloomberg does not approve
or endorse this material, or guarantee the accuracy or completeness of any information herein, or make any warranty, express or implied, as to the
results to be obtained therefrom and, to the maximum extent allowed by law, Bloomberg shall have no liability or responsibility for injury or damages
arising in connection therewith.
Guide to the Barclays Fundamental Equity Research Rating System:
Our coverage analysts use a relative rating system in which they rate stocks as Overweight, Equal Weight or Underweight (see definitions below)
relative to other companies covered by the analyst or a team of analysts that are deemed to be in the same industry (the "industry coverage
universe").
In addition to the stock rating, we provide industry views which rate the outlook for the industry coverage universe as Positive, Neutral or Negative
(see definitions below). A rating system using terms such as buy, hold and sell is not the equivalent of our rating system. Investors should carefully
read the entire research report including the definitions of all ratings and not infer its contents from ratings alone.
Stock Rating
Overweight - The stock is expected to outperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Equal Weight - The stock is expected to perform in line with the unweighted expected total return of the industry coverage universe over a 12-
month investment horizon.
Underweight - The stock is expected to underperform the unweighted expected total return of the industry coverage universe over a 12-month
investment horizon.
Rating Suspended - The rating and target price have been suspended temporarily due to market events that made coverage impracticable or to
comply with applicable regulations and/or firm policies in certain circumstances including where the Investment Bank of Barclays Bank PLC is
acting in an advisory capacity in a merger or strategic transaction involving the company.
2 November 2021 163

Industry View
Positive - industry coverage universe fundamentals/valuations are improving.
Neutral - industry coverage universe fundamentals/valuations are steady, neither improving nor deteriorating.
Negative - industry coverage universe fundamentals/valuations are deteriorating.
Below is the list of companies that constitute the "industry coverage universe":
China Technology
Alibaba Group Holding Ltd. (BABA) Baidu, Inc. (BIDU) JD.com, Inc. (JD)
Ke Holdings Inc. (BEKE) Meituan Dianping (MPNGF) Pinduoduo Inc. (PDD)
SEA Ltd. (SE) Tencent Holdings Ltd. (TCEHY)
Distribution of Ratings:
Barclays Equity Research has 1781 companies under coverage.
50% have been assigned an Overweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Buy rating; 52% of
companies with this rating are investment banking clients of the Firm; 72% of the issuers with this rating have received financial services from the
Firm.
34% have been assigned an Equal Weight rating which, for purposes of mandatory regulatory disclosures, is classified as a Hold rating; 45% of
Firm.
13% have been assigned an Underweight rating which, for purposes of mandatory regulatory disclosures, is classified as a Sell rating; 36% of
Firm.
Guide to the Barclays Research Price Target:
Each analyst has a single price target on the stocks that they cover. The price target represents that analyst's expectation of where the stock will
trade in the next 12 months. Upside/downside scenarios, where provided, represent potential upside/potential downside to each analyst's price
target over the same 12-month period.
Top Picks:
Barclays Equity Research's "Top Picks" represent the single best alpha-generating investment idea within each industry (as defined by the relevant
"industry coverage universe"), taken from among the Overweight-rated stocks within that industry. While analysts may highlight other Overweight-
rated stocks in their published research in addition to their Top Pick, there can only be one "Top Pick" for each industry. To view the current list of
Top Picks, go to the Top Picks page on Barclays Live (https://live.barcap.com/go/keyword/TopPicks).
To see a list of companies that comprise a particular industry coverage universe, please go to https://publicresearch.barclays.com.
Types of investment recommendations produced by Barclays Equity Research:
In addition to any ratings assigned under Barclays’ formal rating systems, this publication may contain investment recommendations in the form
of trade ideas, thematic screens, scorecards or portfolio recommendations that have been produced by analysts within Equity Research. Any such
investment recommendations shall remain open until they are subsequently amended, rebalanced or closed in a future research report.
Barclays may also re-distribute equity research reports produced by third-party research providers that contain recommendations that differ from
and/or conflict with those published by Barclays’ Equity Research Department.
Disclosure of other investment recommendations produced by Barclays Equity Research:
Barclays Equity Research may have published other investment recommendations in respect of the same securities/instruments recommended in
this research report during the preceding 12 months. To view all investment recommendations published by Barclays Equity Research in the
preceding 12 months please refer to https://live.barcap.com/go/research/Recommendations.
Legal entities involved in producing Barclays Research:
Barclays Bank PLC (Barclays, UK)
Barclays Capital Inc. (BCI, US)
Barclays Bank Ireland PLC, Frankfurt Branch (BBI, Frankfurt)
Barclays Bank Ireland PLC, Paris Branch (BBI, Paris)
Barclays Bank Ireland PLC, Milan Branch (BBI, Milan)
Barclays Securities Japan Limited (BSJL, Japan)
Barclays Bank PLC, Hong Kong Branch (Barclays Bank, Hong Kong)
Barclays Capital Canada Inc. (BCCI, Canada)
Barclays Bank Mexico, S.A. (BBMX, Mexico)
Barclays Capital Casa de Bolsa, S.A. de C.V. (BCCB, Mexico)
2 November 2021 164

Barclays Securities (India) Private Limited (BSIPL, India)
Barclays Bank PLC, India Branch (Barclays Bank, India)
Barclays Bank PLC, Singapore Branch (Barclays Bank, Singapore)
Barclays Bank PLC, DIFC Branch (Barclays Bank, DIFC)
2 November 2021 165

DISCLAIMER:
This publication has been produced by Barclays Research Department in the Investment Bank of Barclays Bank PLC and/or one or more of its
affiliates (collectively and each individually, "Barclays").
It has been prepared for institutional investors and not for retail investors. It has been distributed by one or more Barclays affiliated legal entities
listed below or by an independent and non-affiliated third-party entity (as may be communicated to you by such third-party entity in its
communications with you). It is provided for information purposes only, and Barclays makes no express or implied warranties, and expressly
disclaims all warranties of merchantability or fitness for a particular purpose or use with respect to any data included in this publication. To the
extent that this publication states on the front page that it is intended for institutional investors and is not subject to all of the independence and
disclosure standards applicable to debt research reports prepared for retail investors under U.S. FINRA Rule 2242, it is an “institutional debt research
report” and distribution to retail investors is strictly prohibited. Barclays also distributes such institutional debt research reports to various issuers,
media, regulatory and academic organisations for their own internal informational news gathering, regulatory or academic purposes and not for
the purpose of making investment decisions regarding any debt securities. Media organisations are prohibited from re-publishing any opinion or
recommendation concerning a debt issuer or debt security contained in any Barclays institutional debt research report. Any such recipients that
do not want to continue receiving Barclays institutional debt research reports should contact debtresearch@barclays.com. Clients that are
subscribed to receive equity research reports, will not receive certain cross asset research reports co-authored by equity and FICC research analysts
that are distributed as “institutional debt research reports” unless they have agreed to accept such reports. Eligible clients may get access to such
cross asset reports by contacting debtresearch@barclays.com. Barclays will not treat unauthorized recipients of this report as its clients and accepts
no liability for use by them of the contents which may not be suitable for their personal use. Prices shown are indicative and Barclays is not offering
to buy or sell or soliciting offers to buy or sell any financial instrument.
Without limiting any of the foregoing and to the extent permitted by law, in no event shall Barclays, nor any affiliate, nor any of their respective
officers, directors, partners, or employees have any liability for (a) any special, punitive, indirect, or consequential damages; or (b) any lost profits,
lost revenue, loss of anticipated savings or loss of opportunity or other financial loss, even if notified of the possibility of such damages, arising
from any use of this publication or its contents.
Other than disclosures relating to Barclays, the information contained in this publication has been obtained from sources that Barclays Research
believes to be reliable, but Barclays does not represent or warrant that it is accurate or complete. Barclays is not responsible for, and makes no
warranties whatsoever as to, the information or opinions contained in any written, electronic, audio or video presentations of third parties that are
accessible via a direct hyperlink in this publication or via a hyperlink to a third-party web site (‘Third-Party Content’). Any such Third-Party Content
has not been adopted or endorsed by Barclays, does not represent the views or opinions of Barclays, and is not incorporated by reference into this
publication. Third-Party Content is provided for information purposes only and Barclays has not independently verified its accuracy or
completeness.
The views in this publication are solely and exclusively those of the authoring analyst(s) and are subject to change, and Barclays Research has no
obligation to update its opinions or the information in this publication. Unless otherwise disclosed herein, the analysts who authored this report
have not received any compensation from the subject companies in the past 12 months. If this publication contains recommendations, they are
general recommendations that were prepared independently of any other interests, including those of Barclays and/or its affiliates, and/or the
subject companies. This publication does not contain personal investment recommendations or investment advice or take into account the
individual financial circumstances or investment objectives of the clients who receive it. Barclays is not a fiduciary to any recipient of this publication.
The securities and other investments discussed herein may not be suitable for all investors and may not be available for purchase in all jurisdictions.
The United States imposed sanctions on certain Chinese companies (https://home.treasury.gov/policy-issues/financial-sanctions/sanctions-
programs-and-country-information/chinese-military-companies-sanctions), which may restrict U.S. persons from purchasing securities issued by
those companies. Investors must independently evaluate the merits and risks of the investments discussed herein, including any sanctions
restrictions that may apply, consult any independent advisors they believe necessary, and exercise independent judgment with regard to any
investment decision. The value of and income from any investment may fluctuate from day to day as a result of changes in relevant economic
markets (including changes in market liquidity). The information herein is not intended to predict actual results, which may differ substantially
from those reflected. Past performance is not necessarily indicative of future results. The information provided does not constitute a financial
benchmark and should not be used as a submission or contribution of input data for the purposes of determining a financial benchmark.
Third Party Distribution: Any views expressed in this communication are solely those of Barclays and have not been adopted or endorsed by any
third party distributor.
United Kingdom: This document is being distributed (1) only by or with the approval of an authorised person (Barclays Bank PLC) or (2) to, and is
directed at (a) persons in the United Kingdom having professional experience in matters relating to investments and who fall within the definition
of "investment professionals" in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the "Order"); or
(b) high net worth companies, unincorporated associations and partnerships and trustees of high value trusts as described in Article 49(2) of the
Order; or (c) other persons to whom it may otherwise lawfully be communicated (all such persons being "Relevant Persons"). Any investment or
investment activity to which this communication relates is only available to and will only be engaged in with Relevant Persons. Any other persons
who receive this communication should not rely on or act upon it. Barclays Bank PLC is authorised by the Prudential Regulation Authority and
regulated by the Financial Conduct Authority and the Prudential Regulation Authority and is a member of the London Stock Exchange.
European Economic Area (“EEA”): This material is being distributed to any “Authorised User” located in a Restricted EEA Country by Barclays Bank
Ireland PLC. The Restricted EEA Countries are Austria, Bulgaria, Estonia, Finland, Hungary, Iceland, Liechtenstein, Lithuania, Luxembourg, Malta,
Portugal, Romania, Slovakia and Slovenia. For any other “Authorised User” located in a country of the European Economic Area, this material is
being distributed by Barclays Bank PLC. Barclays Bank Ireland PLC is a bank authorised by the Central Bank of Ireland whose registered office is at
1 Molesworth Street, Dublin 2, Ireland. Barclays Bank PLC is not registered in France with the Autorité des marchés financiers or the Autorité de
contrôle prudentiel. Authorised User means each individual associated with the Client who is notified by the Client to Barclays and authorised to
use the Research Services. The Restricted EEA Countries will be amended if required.
Americas: The Investment Bank of Barclays Bank PLC undertakes U.S. securities business in the name of its wholly owned subsidiary Barclays
Capital Inc., a FINRA and SIPC member. Barclays Capital Inc., a U.S. registered broker/dealer, is distributing this material in the United States and,
in connection therewith accepts responsibility for its contents. Any U.S. person wishing to effect a transaction in any security discussed herein
should do so only by contacting a representative of Barclays Capital Inc. in the U.S. at 745 Seventh Avenue, New York, New York 10019.
Non-U.S. persons should contact and execute transactions through a Barclays Bank PLC branch or affiliate in their home jurisdiction unless local
regulations permit otherwise.
This material is distributed in Canada by Barclays Capital Canada Inc., a registered investment dealer, a Dealer Member of IIROC (www.iiroc.ca),
and a Member of the Canadian Investor Protection Fund (CIPF).
This material is distributed in Mexico by Barclays Bank Mexico, S.A. and/or Barclays Capital Casa de Bolsa, S.A. de C.V. This material is distributed
in the Cayman Islands and in the Bahamas by Barclays Capital Inc., which it is not licensed or registered to conduct and does not conduct business
in, from or within those jurisdictions and has not filed this material with any regulatory body in those jurisdictions.
Japan: This material is being distributed to institutional investors in Japan by Barclays Securities Japan Limited. Barclays Securities Japan Limited is
a joint-stock company incorporated in Japan with registered office of 6-10-1 Roppongi, Minato-ku, Tokyo 106-6131, Japan. It is a subsidiary of
Barclays Bank PLC and a registered financial instruments firm regulated by the Financial Services Agency of Japan. Registered Number: Kanto
Zaimukyokucho (kinsho) No. 143.
Asia Pacific (excluding Japan): Barclays Bank PLC, Hong Kong Branch is distributing this material in Hong Kong as an authorised institution
regulated by the Hong Kong Monetary Authority. Registered Office: 41/F, Cheung Kong Center, 2 Queen's Road Central, Hong Kong.
All Indian securities-related research and other equity research produced by Barclays’ Investment Bank are distributed in India by Barclays Securities
(India) Private Limited (BSIPL). BSIPL is a company incorporated under the Companies Act, 1956 having CIN U67120MH2006PTC161063. BSIPL is
registered and regulated by the Securities and Exchange Board of India (SEBI) as a Research Analyst: INH000001519; Portfolio Manager
INP000002585; Stock Broker INZ000269539 (member of NSE and BSE); Depository Participant with the National Securities & Depositories Limited
(NSDL): DP ID: IN-DP-NSDL-299-2008; Investment Adviser: INA000000391. BSIPL is also registered as a Mutual Fund Advisor having AMFI ARN
No. 53308.The registered office of BSIPL is at 208, Ceejay House, Shivsagar Estate, Dr. A. Besant Road, Worli, Mumbai – 400 018, India. Telephone
No: +91 22 67196363. Fax number: +91 22 67196399. Any other reports produced by Barclays’ Investment Bank are distributed in India by Barclays
Bank PLC, India Branch, an associate of BSIPL in India that is registered with Reserve Bank of India (RBI) as a Banking Company under the provisions
of The Banking Regulation Act, 1949 (Regn No BOM43) and registered with SEBI as Merchant Banker (Regn No INM000002129) and also as Banker
to the Issue (Regn No INBI00000950). Barclays Investments and Loans (India) Limited, registered with RBI as Non Banking Financial Company
(Regn No RBI CoR-07-00258), and Barclays Wealth Trustees (India) Private Limited, registered with Registrar of Companies (CIN
U93000MH2008PTC188438), are associates of BSIPL in India that are not authorised to distribute any reports produced by Barclays’ Investment
Bank.
This material is distributed in Singapore by the Singapore Branch of Barclays Bank PLC, a bank licensed in Singapore by the Monetary Authority of
Singapore. For matters in connection with this material, recipients in Singapore may contact the Singapore branch of Barclays Bank PLC, whose
registered address is 10 Marina Boulevard, #23-01 Marina Bay Financial Centre Tower 2, Singapore 018983.
This material, where distributed to persons in Australia, is produced or provided by Barclays Bank PLC.
This communication is directed at persons who are a “Wholesale Client” as defined by the Australian Corporations Act 2001.
Please note that the Australian Securities and Investments Commission (ASIC) has provided certain exemptions to Barclays Bank PLC (BBPLC)
under paragraph 911A(2)(l) of the Corporations Act 2001 from the requirement to hold an Australian financial services licence (AFSL) in respect
of financial services provided to Australian Wholesale Clients, on the basis that BBPLC is authorised by the Prudential Regulation Authority of the
United Kingdom (PRA) and regulated by the Financial Conduct Authority (FCA) of the United Kingdom and the PRA under United Kingdom laws.
The United Kingdom has laws which differ from Australian laws. To the extent that this communication involves the provision of financial services
by BBPLC to Australian Wholesale Clients, BBPLC relies on the relevant exemption from the requirement to hold an AFSL. Accordingly, BBPLC does
not hold an AFSL.
This communication may be distributed to you by either: (i) Barclays Bank PLC directly or (ii) Barrenjoey Markets Pty Limited (ACN 636 976 059,
“Barrenjoey”), the holder of Australian Financial Services Licence (AFSL) 521800, a non-affiliated third party distributor, where clearly identified to
you by Barrenjoey. Barrenjoey is not an agent of Barclays Bank PLC.
This material, where distributed in New Zealand, is produced or provided by Barclays Bank PLC. Barclays Bank PLC is not registered, filed with or
approved by any New Zealand regulatory authority. This material is not provided under or in accordance with the Financial Markets Conduct Act
of 2013 (“FMCA”), and is not a disclosure document or “financial advice” under the FMCA. This material is distributed to you by either: (i) Barclays
Bank PLC directly or (ii) Barrenjoey Markets Pty Limited (“Barrenjoey”), a non-affiliated third party distributor, where clearly identified to you by
Barrenjoey. Barrenjoey is not an agent of Barclays Bank PLC. This material may only be distributed to “wholesale investors” that meet the
“investment business”, “investment activity”, “large”, or “government agency” criteria specified in Schedule 1 of the FMCA.
Middle East: Nothing herein should be considered investment advice as defined in the Israeli Regulation of Investment Advisory, Investment
Marketing and Portfolio Management Law, 1995 (“Advisory Law”). This document is being made to eligible clients (as defined under the Advisory
Law) only. Barclays Israeli branch previously held an investment marketing license with the Israel Securities Authority but it cancelled such license
on 30/11/2014 as it solely provides its services to eligible clients pursuant to available exemptions under the Advisory Law, therefore a license with
the Israel Securities Authority is not required. Accordingly, Barclays does not maintain an insurance coverage pursuant to the Advisory Law.
This material is distributed in the United Arab Emirates (including the Dubai International Financial Centre) and Qatar by Barclays Bank PLC. Barclays
Bank PLC in the Dubai International Financial Centre (Registered No. 0060) is regulated by the Dubai Financial Services Authority (DFSA). Principal
place of business in the Dubai International Financial Centre: The Gate Village, Building 4, Level 4, PO Box 506504, Dubai, United Arab Emirates.
Barclays Bank PLC-DIFC Branch, may only undertake the financial services activities that fall within the scope of its existing DFSA licence. Related
financial products or services are only available to Professional Clients, as defined by the Dubai Financial Services Authority. Barclays Bank PLC in
the UAE is regulated by the Central Bank of the UAE and is licensed to conduct business activities as a branch of a commercial bank incorporated
outside the UAE in Dubai (Licence No.: 13/1844/2008, Registered Office: Building No. 6, Burj Dubai Business Hub, Sheikh Zayed Road, Dubai City)
and Abu Dhabi (Licence No.: 13/952/2008, Registered Office: Al Jazira Towers, Hamdan Street, PO Box 2734, Abu Dhabi). This material does not
constitute or form part of any offer to issue or sell, or any solicitation of any offer to subscribe for or purchase, any securities or investment products
in the UAE (including the Dubai International Financial Centre) and accordingly should not be construed as such. Furthermore, this information is
being made available on the basis that the recipient acknowledges and understands that the entities and securities to which it may relate have not
been approved, licensed by or registered with the UAE Central Bank, the Dubai Financial Services Authority or any other relevant licensing authority
or governmental agency in the UAE. The content of this report has not been approved by or filed with the UAE Central Bank or Dubai Financial
Services Authority. Barclays Bank PLC in the Qatar Financial Centre (Registered No. 00018) is authorised by the Qatar Financial Centre Regulatory
Authority (QFCRA). Barclays Bank PLC-QFC Branch may only undertake the regulated activities that fall within the scope of its existing QFCRA
licence. Principal place of business in Qatar: Qatar Financial Centre, Office 1002, 10th Floor, QFC Tower, Diplomatic Area, West Bay, PO Box 15891,
Doha, Qatar. Related financial products or services are only available to Business Customers as defined by the Qatar Financial Centre Regulatory
Authority.
Russia: This material is not intended for investors who are not Qualified Investors according to the laws of the Russian Federation as it might
contain information about or description of the features of financial instruments not admitted for public offering and/or circulation in the Russian
Federation and thus not eligible for non-Qualified Investors. If you are not a Qualified Investor according to the laws of the Russian Federation,
please dispose of any copy of this material in your possession.
IRS Circular 230 Prepared Materials Disclaimer: Barclays does not provide tax advice and nothing contained herein should be construed to be tax
advice. Please be advised that any discussion of U.S. tax matters contained herein (including any attachments) (i) is not intended or written to be
used, and cannot be used, by you for the purpose of avoiding U.S. tax-related penalties; and (ii) was written to support the promotion or marketing
of the transactions or other matters addressed herein. Accordingly, you should seek advice based on your particular circumstances from an
independent tax advisor.
© Copyright Barclays Bank PLC (2021). All rights reserved. No part of this publication may be reproduced or redistributed in any manner without
the prior written permission of Barclays. Barclays Bank PLC is registered in England No. 1026167. Registered office 1 Churchill Place, London, E14
5HP. Additional information regarding this publication will be furnished upon request.
BARCRES-63852b76

巴克莱169页重磅报告 抄底中国科技行业！ 巴克莱 2021.11.2 169页

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

巴克莱169页重磅报告 抄底中国科技行业！ 巴克莱 2021.11.2 169页

Uploaded by

Copyright:

Available Formats

CORE

PDD (EW) – incredible innovator in transition to move up-market

China Technology NR Pos

GRAPPLING WITH VALUATION – A NEW, BUSINESS MODEL FOCUSED

ALIBABA GROUP HOLDING (BABA) –TOP PICK; PT $275 ...................... 7

KE HOLDINGS (BEKE) – OVERWEIGHT; PT $29 .......................................24

BAIDU, INC. (BIDU) – OVERWEIGHT; PT $243 .........................................38

JD.COM – OVERWEIGHT; PT $98 ................................................................55

MEITUAN (MPNGF) – UNDERWEIGHT; PT $32 .......................................68

PINDUODUO, INC. (PDD) – EQUAL WEIGHT; PT $103 ..........................83

SEA LTD.: OVERWEIGHT; PT: $427 .............................................................97

TENCENT HOLDINGS (TCEHY) – OVERWEIGHT; PT $84 ................... 116

INDUSTRY OVERVIEW ................................................................................. 134

GAMING .......................................................................................................... 140

ONLINE ADVERTISING ................................................................................ 144

CHINA TECHNOLOGY – TOO BIG OR TOO IMPORTANT TO BE IGNORED

1 What ‘Common Prosperity’ Means and Why Xi Wants It (Bloomberg, 9/3/21)

In the near-term, we acknowledge weaker consumption trends in 3Q in China as certain

GRAPPLING WITH VALUATION – A NEW, BUSINESS MODEL FOCUSED APPROACH

We introduce a business model focused valuation methodology. It uses nominal margins or

ALIBABA GROUP HOLDING (BABA) –TOP PICK; PT $275

We are initiating coverage of BABA with an Overweight

The grand entrance into the Middle

Core commerce – China

8,000 40% 900 25%

Source: Taobao Deals App, Barclays Research:

10,000 9,076 9,240

GMV per AAB -China retail (RMB)

Source: Company Reports, Barclays Research

Offline retail (The "New Retail" model)

Source: Hema App, Barclays Research

Monetization model within China Commerce Retail

SOP Take Rate Service Fee Rate

Tmall Flagship Store N/A 50,000-100,000 50,000-100,000

Franchise Store N/A 100,000-150,000 100,000-150,000

Hypermarket N/A 150,000 150,000

Jd.com Local Brand N/A 30,000-100,000 30,000-100,000

International Brand N/A 100,000-500,000 100,000-500,000

Jingxi (Jd) Individual Seller 1,000 N/A 1,000

SME 4,000-30,000 N/A 4,000-30,000

Larger Brand 4,000-20,000 N/A 4,000-20,000

Jd International SME 10,000-40,000 (USD) N/A 10,000-40,000 (USD)

Larger Brand 5,000-15,000 (USD) N/A 5,000-15,000 (USD)

Pinduoduo GMV 50,000-100,000 3,000 5,000-100,000 8,000-103,000

GMV 100,000-500,000 6,000 5,000-100,000 11,000-106,000

GMV >500,000 11,000 5,000-100,000 16,000-110,000

Source: Company Websites, Barclays Research

Wholesale commerce – China

monetized via a membership program and value-added services. Sellers on 1688.com

Retail commerce – cross-border and global

Lazada – Acquired by BABA in 2016, Lazada is a major ecommerce marketplace in Southeast

AliExpress – is an international retail marketplace that enables consumers outside of China to

Wholesale commerce – cross-border and global

Source: Tmall Global App

In addition to providing order fulfilment services to merchants in the Alibaba ecosystem,

Local consumer services

Source: Ele.me App, Barclays Research

Source: Gartner, Barclays Research

Digital media and entertainment

Ant Group – Alipay is the crown jewel

Source: Alipay App

Ant Group’s credit, wealth management, and insurance products

Source: Alipay App, Barclays Research:

巴克莱169页重磅报告抄底中国科技行业！巴克莱 2021.11.2 169页

巴克莱169页重磅报告抄底中国科技行业！巴克莱 2021.11.2 169页