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Investment Focus on Sina(CICC)

Investment Focus on Sina(CICC)

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    Sina 110301foc only-beginningmicroblog Sina 110301foc only-beginningmicroblog Document Transcript

    • Investment Focus March 1, 2011 Internet RESEARCHJIN YuSFC CE Ref: ALU931 BUYjinyu@cicc.com.cn Sina (SINA.US) Only the Beginning…Financial highlights(USD mn) 2008 2009 2010E 2011E 2012EGross Revenue 370 359 400 480 633 (+/- ) 50% -3% 12% 20% 32% Action:Gross Profit 219 200 233 274 371 (+/-) 45% -9% 16% 18% 35% We believe Sina is at the early stage of 3-5 years re-valuation thanksOperating Profit 75 37 92 109 157 to the massive popularity of micro-blog services. We set our new TP (+/- ) 46% -50% 148% 18% 43%Net Income 81 412 103 114 157 at US$104@ 1yr, 142@ 2yrs and 201@ 3yrs, by assigning 40x P/E (+/- ) 40% 411% -75% 10% 38%Fully Diluted EPS (US$) 1.23 6.26 1.57 1.73 2.38 to its next year’s earnings. Looking forward, we expect Sina’sPE (x) 66.7 13.1 52.0 47.3 34.3 investment story to come from how long/sustainable, instead of howNon-GAAP Earnings Gross Revenue-Non GAAP 370 354 381 461 614 much it can be revalued. (+/- ) 50% -4% 8% 21% 33% Net Profit 102.3 69.9 107.2 122.6 170.9 (+/- ) 52% -32% 53% 14% 39% Reasoning: Fully Diluted EPS (US$) 1.55 1.06 1.63 1.86 2.60 PE (x) 52.6 77.0 50.2 43.8 31.5 We agree with the market that Sina is the current leader in theEV/EBITDA 42.3 81.7 41.6 35.4 24.6 micro-blog market, yet we have non-consensus views as follows:ROA 11% 34% 6% 6% 0%ROE 14% 45% 8% 8% 0%Share information ► Micro-blog is not a short term phenomenon and Sina’s N-Share competitive advantage is sustainable.Bloomberg code sina us equity ► We find three types and six models for potential monetizationShare price USD81.67 and more innovative models to follow as the platform scales.Target price USD104Daily turnover (mn) 2.81 ► Micro-blog is not a single product, we expect them to play52wk high/low USD95.29/32 critical roles in Sina’s transition from a content driven companyMarket Cap (mn) 5,045 to one of the competitive internet platforms in China.Issue shares (mn) 62Free float 56 Valuation:Major shareholders(%) New-wave Investment Holding(9.08%) We introduced 2012 non GAAP EPS @ US$2.6, implying 39% YoYRecent price performance growth. We expect the earnings growth from 2013 to 2015 to% Last week 1m 3m YTD accelerate by 5-10% thanks to the contribution from micro-blog[SINA.US] +4.54 -1.67 +25.28 +18.67[HSCEI Index] +1.24 -1.15 -2.98 -1.48[NASDAQ Index] +0.94 +0.98 +10.18 +4.88 We don’t value micro-blogs separately as we view it as a part of52wk performance Sina’s integrated platform. SINA.com NASDAQ COMPOSITE We don’t suggest pair trading Sina with either Tencent or Sohu. We 250 230 rate BUY for both Sina and Tencent. 210 190 170 Risks: 150 130 Near term selling pressure due to less earnings upside in reporting 110 periods, though we regard any strong pullbacks, especially below 90 70 US$70, as buying opportunities. In the long term, investment risks 10-03 10-05 10-07 10-09 10-11 11-01 11-03 come from spam messages, over monetization and regulatory risks.Source: Bloomberg, company data, CICC Research Please read carefully the important disclosures at the end of this report
    • CICC Research: March 1, 2011ContentsA brief introduction to the micro-blog service market ............................................................................... 3Sina leads in China’s micro-blog service market ....................................................................................... 5Monetization analysis: Three types & six models monetization potential ............................................... 7 Type I: Direct monetization....................................................................................................................... 7 Type II: Cross selling................................................................................................................................ 8 Type III: Open API ...................................................................................................................................11Why micro-blogs are so popular in China, and will they be sustainable? ............................................. 13Why Sina leads the market and its sustainability..................................................................................... 15Micro-blog’s long term value to Sina......................................................................................................... 18Earnings forecast ........................................................................................................................................ 20Valuation and recommendation ................................................................................................................. 21 Re-valuation may be ahead of monetization .......................................................................................... 21 Three-year TPs based on scenario analysis .......................................................................................... 21 We don’t suggest pair trading: Sina vs. Tencent .................................................................................... 23 Long Sohu, short Sina may not work ..................................................................................................... 24Investment risks .......................................................................................................................................... 25FiguresFinancial highlights .....................................................................................................................................................1Share information........................................................................................................................................................1Recent price performance ..........................................................................................................................................152wk performance ......................................................................................................................................................1Figure 1: Monthly visitors on SNS and micro-blog websites (2010/03-11).................................................................3Figure 2: A real case study on Sina’s micro-blog........................................................................................................4Figure 3: Sina leads others in terms of number of active users and time length spent..............................................5Figure 4: Model 1, relevant display ads......................................................................................................................7Figure 5: Model 2, real time search ............................................................................................................................8Figure 6: Model 3, bundled sales................................................................................................................................9Figure 7: Model 4, cross selling with its own services ............................................................................................. 10Figure 8: Model 5, traffic sharing with 3rd party websites..........................................................................................11Figure 9: Model 6, open platform..............................................................................................................................11Figure 10: Model evolves with scaling platform....................................................................................................... 12Figure 11: Diversity of micro-blogger profiles .......................................................................................................... 14Figure 12: The scaling micro-blog platform ............................................................................................................. 16Figure 13: Micro-blog has become the second largest social sharing platform ...................................................... 16Figure 14: Information social sharing stats by service platforms............................................................................. 17Figure 15: Sina’s business model will include more community and platform features .......................................... 18Figure 16: Sina quickly addressing iOs markets ..................................................................................................... 19Figure 17: Tencent and Baidu get re-valued after Y2009 ........................................................................................ 22Figure 18: Earnings forecast under different scenarios........................................................................................... 22Figure 19: Sina outperformed Sohu despite high valuation .................................................................................... 24Figure 20: Historical and forecasted financial data—Quarterly ............................................................................... 26Figure 21: Major financial data and operating matrix .............................................................................................. 27Figure 22: Valuations of comparables ..................................................................................................................... 28Figure 23: Historical P/E and PEG bands ............................................................................................................... 28 Please read carefully the important disclosures at the end of this report 2
    • CICC Research: March 1, 2011A brief introduction to the micro-blog service marketMicro-blog services became popular in China at the end of 2009. As it matched very well with the needs of Chinese internetusers, it acquired users at an astonishing speed, to some extent, at the expense of SNS websites. According to DCCI research,the number of active micro-bloggers will reach 150mn in 2011. Given that Tencent had announced it has broken the 100mnmile stone at the beginning of the year, we expect Sina may have acquired more than 80+mn active users. Despite thepotential overlap among different platforms, it seems that the number of active micro-bloggers may well exceed the previousforecasts. We expect the micro-blog to become a scalable platform, which involves both media and community features.Though investors tend to exaggerate the influence of celebrities, our research shows that celebrity accounts are less thanone-thousandth of all registered accounts, even for Sina.Figure 1: Monthly visitors on SNS and micro-blog websites (2010/03-11) Microblog monthly visitors and penetration rate SNS website daily covered users for Mar-Nov in 2010 monthly visitors penetration rate Daily coverage MoM 130 125 40% 40 10% unit mn unit mn 9.2% 118 39 120 36.9% 7% 35% 38 110 38 37 110 106 103 31.5%34.0% 4% 30.5% 30.4% 30% 100 36 35 1% -0.3% 90 25% 34 0.1% -1.0% 23.7% -2% 81 34 -2.8% 33 -2.8% 33 -3.1% 80 20% 6919.3% 32 32 -5% 70 32 14.7% 15% -8.4% -8% 60 53 30 -11% 50 10% Mar Apr May Jun Jul Aug Sep Oct Nov Mar Apr May Jun Jul Aug Sep OctSource: iResearch, CICC Research Please read carefully the important disclosures at the end of this report 3
    • CICC Research: March 1, 2011Figure 2: A real case study on Sina’s micro-blog Interest Offline Applications Messages Friends Search groups activities Private messages Former CEO of Google China. Four million followers, follows 170, 2,004 micro-blog entries Bonus scheme to keep user active This message forwarded 2,868 times, 1,149 commentsSelf introduction, interests, background, etc.Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 4
    • CICC Research: March 1, 2011Sina leads in China’s micro-blog service marketWe view micro-blog as a kind of service platform which involves both media and community components. While the markettends to agree that Sina’s micro-blog is the definite leader in terms of media influence, thanks to its wide celebrity coverageand media expertise accumulated as the leading portal, investors have different views on whether Sina’s micro-blog leadsothers from a community perspective. Given Sohu and Netease’s micro-blog services lag far behind, investors usuallycompare Sina’s micro-blog with that of Tencent. Independent 3rd party and our own research show that Sina is also the leaderfrom the community perspective.► There are at least four dimensions to evaluating the competitiveness of a micro-blog platform. The number of registered accounts, the number of active users, the activeness of users and time length spent by users. For example, Tencent’s IM has over 1 billion registered accounts, but only half of them are active on a quarterly basis, and PCU is less than 10% of registrations despite Tencent’s un-paralleled cross-selling and service integration capability. Our channel check also shows some leading SNS’s active accounts are only 10-20% of registrations even on a quarterly basis. Given that, we think the last three dimensions are more important when we evaluate the competitive landscape, though the first dimension implies the growth potential if the service provider can activate the dormant accounts by adding new and attractive service features.► Tencent, reaching over 100 million accounts in the year beginning, may have surpassed Sina in terms of the number of registered accounts, but it lags far behind Sina in terms of number of active users and time length spent on the micro-blog service. According to iResearch, Sina took 56.5% market share on an active user basis and 86.6% market share on a browsing time basis in 2010’s micro-blog service market.Figure 3: Sina leads others in terms of number of active users and time length spent Market share on active user basis Market share on browsing time basis 2.5% 1.1% 1.1% 6.4% 2.2%13.2% Tencent Tencent 21.5% 9.1% Sina Sina Baidu Baidu Sohu Sohu Netease 56.5% Netease 86.6%Source: iResearch, CICC ResearchOur bottom up research shows that Sina’s micro-blog users are several times more active than those of Tencent. We did ourresearch on a number of top celebrities (30+), well known official media (social, financial and entertainment) and famousenterprises (ecommerce/banking…10+), who opened their official micro-blogs on both Sina and Tencent and have more than100,000 followers. We looked at the number of re-twits and comments for the latest 20 messages which appeared on bothplatforms. We have following findings: 1) Most of them have more followers on Tencent, usually 2-3 times that of Sina; (2)Most of them post more messages on Sina than on Tencent; (3) Most of them follow others much more on Sina than on Please read carefully the important disclosures at the end of this report 5
    • CICC Research: March 1, 2011Tencent; (4) Most of them post the same message first on Sina and they interact more with Sina followers; (5) The re-twitsand comments on the same message, such as social, economic and financial news, on Sina are 2-3 times higher than that onTencent, despite fewer followers. Even for entertainment news, which we expect Tencent users to be more active, the re-twitsand comments on Sina are still higher, though with narrowing gaps. Based on that, we can conclude at least two points: 1)Sina is the primary micro-blog platform for those multi account celebrities; 2) As most followers, who contribute re-twits andcomments, are grass roots, their activeness provides Sina’s micro-blog great chances to evolve into an interactive platformwith more community features, which is critical for it to maintain its long term competitiveness. Please read carefully the important disclosures at the end of this report 6
    • CICC Research: March 1, 2011Monetization analysis: Three types & six models monetization potentialWe have found at least three types and six models for potential monetization. We expect the monetization models to belogically sound, aiming to serve the big markets (ecommerce: Rmb trillion, Display + Video + Search Ads: Rmb100bn,Online/mobile Game: Rmb 40bn) with strong growth potential. Meanwhile, we realize that with the expansion and evolutionof the platform, there may be more innovative monetization models.Type I: Direct monetizationModel 1: Relevant adsThis model is similar to that of Facebook ads (60+% of Facebook’s revenue). Compared to traditional portals, the communityfeature of micro-blogs helps Sina to know much more about the user profiles and online behaviors, which certainly helpsadvertisers to better address their potential customers.Figure 4: Model 1, relevant display ads A display adSource: Company data, CICC ResearchModel 2: Real-time searchReal time information has both useful and spam messages. That is a challenge. But it is also a truth that a friend’s or acelebrity’s suggestion is quite trustworthy. If the real time search can sort out those useful messages, it may bring greatmonetization potential. We expect the micro-blog will be a major host for real time information, and Sina will benefitwhether it develops its own search engine or cooperates with third party leading search engine providers. Please read carefully the important disclosures at the end of this report 7
    • CICC Research: March 1, 2011Figure 5: Model 2, real time search Keyword-based pay links, may be to iPad sellers, application developers, etc.Source: Company data, CICC ResearchType II: Cross sellingModel 3: Bundled salesCurrently, there are already 5,000 enterprises which have opened their official micro-blogs on Sina for online promotion, PRor recruitment purposes. Sina doesn’t charge any money for that and there is no indication that Sina will charge for theservice directly in the future. However, as an integrated solution provider for brand advertisers, we expect the opportunity forbundled sales to increase which will help the company to gain higher market share in the online brand advertising market. Please read carefully the important disclosures at the end of this report 8
    • CICC Research: March 1, 2011Figure 6: Model 3, bundled sales Indicates real name verified by China Merchants Bank Corporate Channel, for PR or recruitment Bundled sales: Thousands of verified enterprise accounts. They may not pay for micro-blogging directly, but they buy more ads from Sina (one-stop service)Source: Company data, CICC ResearchModel 4: Cross selling with Sina’s other servicesFrom a monetization perspective, we think the major difference between Sina and Twitter actually lies in: Sina has alreadybuilt several of businesses which can easily monetize but lack enough traffic and users, such as the traditional portal, onlinevideo, the webpage online games platform, and Sina’s shopping mall. And some of those business lines proved unsuccessfulin the past, but they may turn around if the company can cross sell those services with micro-blogs efficiently and effectively. Please read carefully the important disclosures at the end of this report 9
    • CICC Research: March 1, 2011Figure 7: Model 4, cross selling with its own services Sina Video: Hundreds of thousands of followers, hundreds of forwards and comments for each embedded video messageSource: Company data, CICC ResearchModel 5: Traffic sharing with 3rd party websitesOur channel check shows that Sina’s micro-blog is already a meaningful traffic provider to 3rd party independent websites,especially for online e-commerce and online video. We expect at least three methods of traffic sharing connected tomicro-blogs: 1) the official micro-blog opened by third party websites, such as the official micro-blog of Taobao shoppingmall. 2) As an early adopter of open ecosystems, we expect the popularity of “shared to Sina” to increase and the value of“return clicks” may have the potential to be monetized. 3) To allow third parties to establish e-commerce shopping malls, amodel similar to that of Facebook’s shopping mall. Please read carefully the important disclosures at the end of this report 10
    • CICC Research: March 1, 2011Figure 8: Model 5, traffic sharing with 3rd party websites Taobao.com Shopping Mall Micro connected e-commerce. Customer acquisition not just from micro-blog itself, but also from forwards and comments PromotionsSource: Company data, CICC ResearchType III: Open APIModel 6: Revenue sharing with APP developers or content providersThis model is similar to the open platform strategy of Facebook and Tencent. By open API, Sina welcomes thousands of thirdparty developers to develop apps for the platform. Currently, there are over 500 third party apps on the platform, coveringfunctionality client software to webpage games.Figure 9: Model 6, open platform Game application: Sina Wanwan has attracted >2mn users Open API: rd 3 party developers can submit apps onlineSource: Company data, CICC Research Please read carefully the important disclosures at the end of this report 11
    • CICC Research: March 1, 2011Monetization may continue to evolve as platform scales. We realize that the most beautiful part of a user centric platformis user stickiness and platform scalability. Despite the short operation period, it already demonstrates great potential to beintegrated with other emerging internet services, such as social buying/LBS, etc.Figure 10: Model evolves with scaling platform Sina Wei Tuan: collective buying platformSource: Company data, CICC Research Please read carefully the important disclosures at the end of this report 12
    • CICC Research: March 1, 2011Why are micro-blogs so popular in China, and will they be sustainable?Micro-blogs are very popular in China. The micro-blog in China is more popular than Twitter in the US. Sina achieved itsfirst 50 million registrations within one year, while Twitter spent three years to achieve that figure. The market has concernson the sustainability of micro-blog services, especially for western investors, as they believe the Facebook (SNS) model issuperior. Our research tells us that in the internet industry, the underlying fundamental for all services is “User is King” and itis meaningless to discuss models apart from its addressable market, and, very importantly, that Chinese society and Chineseinternet users are very different from western society/users.► Facebook was revolutionary in western society as it is not only an online social channel, but also changed peoples’ behavior in forming social relationships, to some extent, by overcoming sensitive privacy issues. However, in Chinese society, people are not that sensitive towards privacy and most online communication needs are already solved by Tencent. That’s why Facebook became popular even without any other services, while Chinese SNS websites face substantial challenges when the tides of casual games fade away.► Micro-blogs are very much revolutionary to Chinese internet users. Despite the strong economic growth, China is still an emerging country, which is sometimes described as a transition society. The Chinese government/SOE/Authority is very powerful and gets deeply involved with many aspects of social, economic and cultural activities. Chinese people deal more often with the government/authorities in their daily lives. Given that, China’s internet users usually pay more attention to social reform/development. An interesting and relevant example is an idol of many young Chinese is Mr. Hanhan, an independent book writer, blogger and race driver who comments on social affairs publicly and actively, while Mark Zuckerberg seems to be the counterpart in the US. The difference gives Sina’s micro-blog a stronger media nature, and Chinese society does need social media besides the official media. Besides the gossip on celebrities, there are more mainstream topics discussed on Sina, which actually are triggers of micro-blog growth.We expect the popularity of micro-blogs will not only be sustained, but also increase. China will remain an emergingcountry and transition society for the foreseeable future, and we expect the micro-blog will become more popular andpowerful with more news or events circulated on the platform, unless it is interrupted by the authorities. We also believemicro-blogs are very different from blog services, whose popularity has fizzled. If we compare these with the traditionalmedia industry, we see micro-blogs as pieces of a daily newspaper which can be read daily, though with less comprehensiveinformation in it. Blogs are more like a weekly magazine or even a book, only checked weekly, monthly or even yearly,though they may have much higher quality content. The usage frequency and higher interactivity makes micro-blogs apowerful media and strong cross selling platform, while the blog service remains as a kind of content-driven product.Regulatory risks are controllable. Investors have concerns that micro-blog services could be shut down or disabled to a lessextent by the government. We expect the possibility for micro-blog services being shutdown to be very low. The history ofChina’s internet industry in the past decade tells us that no single service is really disabled due to regulatory reasons, thoughall of them, such as search, IM, portals and online video, are strictly regulated. We elaborate our arguments as follows:► With over 10 years of portal operation, Sina has abundant experience in complying with government guidance and skills in dealing with sensitive news and events which have helped it to win strong credit and recognition from regulators.► We expect the central government needs some tools to efficiently balance the power of local governments, which seem out of control on some issues such as property prices and brutal law enforcement. Internet media, including the micro-blog, should be welcomed for their efficiency of news circulation.► The diversity of micro-bloggers. Besides ordinary people and celebrities, we found most official media, province/city level police bureaus and some local governors have also opened micro-blogs to effectively communicate with the public, especially internet users. That may cause regulators to reconsider the social value of micro-blogs, though the authorities as a whole are keen on social stability and information control.► Last but not least, we believe regulators should well understand they can block Twitter and Facebook, but they can’t fully limit access to the development of technology, especially with the escalating international pressure to open Please read carefully the important disclosures at the end of this report 13
    • CICC Research: March 1, 2011 cyberspace. To have competitive local providers and keep users on local platforms, which have historically been proven to be controllable, is a much better choice.Figure 11: Diversity of micro-blogger profiles Government entities Local police bureau NPC members Official media such as Xinhua News Agency and People’s DailySource: Company data, CICC Research Please read carefully the important disclosures at the end of this report 14
    • CICC Research: March 1, 2011Why Sina leads the market and its sustainabilitySina’s deep understanding of online media helps it lead the micro-blog market: Sina has without doubt benefited fromcircumstances including but not limited to the government shut down of several independent micro-blog sites to become theleader of the micro-blog market, but we still need to ask why other leading internet players did not take the lead. This samequestion is just as applicable when Tencent led the SNS market, Baidu led the search market or Alibaba group led thee-commerce market. It must be something in the company’s core knowledge or its genetic make up that helps it to benefitfrom these accidents and come out on top of the sector. As discussed above, we expect micro-blog services in China toinvolve a stronger media nature, which is why Sina, as China’s leading online portal with its wealth of media expertise, werethe first to realize the value of micro-blogs and make the decisive strategic move to embrace them ahead of its peers.We expect Sina to maintain, if not strengthen, its leading advantage. Sina is China’s leading internet portal, but it did notexpand as successfully as other portals in the past. Actually, Tencent caught up quickly with Sina and Sohu, thanks to theirhigher investment in brand and content. Investors have concerns over Sina’s ability to maintain its current advantage, webelieve there is no such strong worry:► Micro-blog is a combination of media and community: It is not only a content driven broadcasting service, but also an interactive platform, which means the leaders usually enjoy first mover advantage and benefit from the network effects. Tencent, leveraging on its scale and deep understanding over its community members, may remain competitive, but it will be hard for them to challenge Sina’s leading position. Other platform operators, such as internet portals, search platforms and SNS may have even fewer chances to catch them.► In the name of Twitter, in the way of Facebook: Though we have become used to comparing Sina’s micro-blog with Twitter, actually Sina’s micro-blog platform is evolving much faster than Twitter’s, by adding much more media and community features. From a communication perspective, the micro-blog now efficiently supports one way broadcasting messages, one-to-multi (micro group) and two-way one-to-one (private message). Our channel check reveals that many MSN users are transferring their contacts to Sina’s micro-blog platform. From a media perspective, it has micro-blog daily news, micro-blog interviews and micro-blog live broadcasting. Sina’s micro-blog services also lead Twitter on improving user interactivity by facilitating more efficient re-tweets, comments and picture uploads.► Early adopter of open platforms: Sina seems to well understand the potential competitive pressures. The company is a pioneer in the Chinese internet industry by actively pursuing the open platform strategy. On one hand, users can share third party contents on Sina’s micro-blog through the “Share to Sina’s micro-blog” button; on the other hand, the company actively opened its API to third party vendors and now has >500 apps, which cover everything from improving functions, to client software and games. The open platform strategy greatly alleviates Sina’s disadvantage on product R&D, building a leading advantage in a short period of time. Looking forward, competitors don’t have to compete with just Sina’s micro-blog itself, but its entire micro-blog ecosystem. According to social sharing toolbar provider, Jiathis.com’s statistical analysis, the micro-blog service had the largest market share gain in terms of number of shared messages in 2010. And Sina’s micro-blog also became China’s second largest social sharing platform, behind Qzone.► Celebrities used to be Sina’s secret weapon, but no longer: It is the consensus view that celebrities are one of Sina’s core advantages. We agree that celebrities helped Sina a lot with gaining users at the initial stage, but we believe it is the scale and interactivity that is its real strength going forward. Our research shows that over 50% of top celebrity micro-bloggers (entertainment or financial stars) open their real name accounts across multiple platforms and publish the same messages across these different platforms. However, our research tells us >80% of celebrities who opened multiple accounts used Sina as their primary account: meaning, on Sina they followed more people, posted more messages and interacted more often with their followers. There are three reasons for this: Sina’s brand, its first mover advantage and its better interactivity. With millions of active followers, we expect that celebrities depend on Sina more than Sina leverages on them. We believe the opposite is true for Sina’s peers, which need make greater efforts to attract and keep celebrities active on their platforms. Please read carefully the important disclosures at the end of this report 15
    • CICC Research: March 1, 2011Figure 12: The scaling micro-blog platform Broadcasting, group messages, and private messages Friends Real name of account owner verified One-way follower Two-way friendsSource: Company data, CICC ResearchFigure 13: Micro-blog has become the second largest social sharing platformSocial media shareinformation growth rate in2010 Social media market share in 2010 Microblog Tools media Bookmark media SNS media 33.0% 48.0% 6.0% 13.0%Source: Jiathis, CICC Research Please read carefully the important disclosures at the end of this report 16
    • CICC Research: March 1, 2011Figure 14: Information social sharing stats by service platforms Q-zone Sina microblog Baidu favourite Renren Kaixin Sohu microblog Google buzz Tao Jianghu MSN Douban Tencent microblog Tencent friends Netease microblog Sohu white society 2.3% 2.1% 3.0% 2.1% 3.2% 3.2% 3.2% 32.1% 3.3% 3.9% 5.8% 21.1% 6.3% 8.4%Source: Jiathis, CICC Research Please read carefully the important disclosures at the end of this report 17
    • CICC Research: March 1, 2011Micro-blog’s long term value to SinaPortals are a content and brand driven businesses, not user driven platforms. That makes the portal business hard toconsolidate so it can enjoy the benefit of the network effect. Prior to the launch of its micro-blog service, Sina was facingchallenges from competing portals with deep pockets as well as the continuous threat of new internet services. We expect thesuccessful launch of their micro-blog platform may have greatly changed Sina’s competitive position in the Chinese internetsector.► Beneficiary of the strong growth of China’s mobile internet. One typical feature of mobile internet is fragmentation in terms of time usage. Micro-blogs are well positioned to be a killer mobile application, and currently 40% of micro-blog users log in through their mobile devices, despite the penetration of 3G and smart device users being <10% of mobile users.► Beneficiary of new internet service models. Sina has been criticized for missing opportunities in the new service market. Besides strategic reasons, we realize the lack of a user-centric platform highlights Sina’s disadvantages. Taking Tencent as an example, though the company has not a very successful game developer up to now, it has not affected the company becoming China’s largest online game operator, leveraging on its community and multi user-centric platforms. If Sina successfully evolves its micro-blog platform, we expect it will benefit from the development of online video and e-commerce through traffic sharing or advertising models, even if the company doesn’t become a successful ecommerce or online video operator. And it may provide Sina with one more chance to edge into the online game market, especially the webpage game market. Our research tells us that Sina has already launched “Sina wei tuan” (social buying)”, “Sina online payment” and “Sina wanwan-webpage game platform”.► Successful micro-blog launch a morale boost for Sina’s employees. We believe it is people and execution which determine whether a company can successfully transfer from a product driven to a platform company. Our channel check shows Sina’s R&D capability improved significantly last year. Currently, the amount of apps sold at Apple’s app store developed by Sina is close to that of Tencent, which is the indisputable leader of the client software sector.Figure 15: Sina’s business model will include more community and platform features Content Driven model MVAS (25% of 3Q10 revenue) Advertising (75% of 3Q10 revenue) News channel Financial channel Sports channel wireless Fee based Revenue Traffic Based Revenue Portal, WAP portal UC client, Sina Space Platform driven model IVAS MVAS (25% of 3Q10 revenue) Advertising (75% of 3Q10 revenue) New initiatives Webpage and casual games News channel Online video Online shopping mall Financial channel Search Mobile App store Sports channel E-commerce wireless Fee based Revenue Traffic Based Revenue Portal, WAP portal UC client, Sina Space, Micro BlogSource: CICC Research Please read carefully the important disclosures at the end of this report 18
    • CICC Research: March 1, 2011Figure 16: Sina quickly addressing iOs markets QQ QQ Tencent Tencent QQ QQ QQ mobile Tencent news QQ Q-zone QQ LLK Chinese QQlive Chinese Weixin microblog friends Browser Assisytant token chess poker ApplicationTencent Iphone √ √ √ √ √ √ √ √ √ √ √ √ Ipad √ √ √ √ Sina Sina Sina Sina portal Sina blog Sina video Sina USA. Sina auto Sina Books microblog news reading Application Sina Iphone √ √ √ √ √ √ √ √ √ Ipad √ √ √ √ √ Netease Netease Netease Netease Netease Netease Netease Netease news Youdao dict mobile email microblog blog lottery pulic class iMoney ladies ApplicationNetease Iphone √ √ √ √ √ √ Ipad √ √ √ √ Sohu Sohu Sohu video White Dapeng microblog entertainment news society talkshow Application Sohu Iphone √ √ √ √ √ Ipad √Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 19
    • CICC Research: March 1, 2011Earnings forecastOur 2011 non GAAP EPS forecast remain unchanged at US$1.86 and introduce our 2012 financials. We believe revenue willgrow 32% in 2012, (advertising to grow 38%, MVAS to grow 15%), net profits will rise 39%. Non-GAAP EPS forecast for2012 is US$2.6. (Please refer to figure 20-21 for financials)We expect the management to continue to focus on increasing the micro-blog scalability by introducing more functions andcontents as well as making the platform more efficient. And we expect the management will be careful regarding theplatform’s monetization in order not to hurt its user experience.Despite the above, with the continued expansion of the platform, we expect some of the monetization models to becommercialized as early as 2H11. We expect the contribution from micro-blog will be more meaningful from 2012 onwards.With the contribution, we expect the growth of Sina’s advertising related business to increase to 35-40% in 2012 and 2013.Besides direct monetization, the strong cross selling capability will help Sina gain more market share in the traditional portaladvertising markets (such as financials, auto and ITs), enhance its competitive edges in e-commerce and online video, as wellas addressing the long tail market. Please read carefully the important disclosures at the end of this report 20
    • CICC Research: March 1, 2011Valuation and recommendationWe expect the share price is still in the early stages of a 3-5 years revaluation. We set our TP at US$104@1 yr, 142@ 2yrsand 201@ 3 yrs, by assigning 40x P/E to its next year earnings. We use single P/E multiple and expect the revaluation to beahead of micro-blog’s monetization. We don’t value the micro-blog separately as we believe it is a part of Sina’s integratedplatform (like IM is to Tencent). We believe any effort to value the micro-blog alone may underestimate its cross-sellingvalue, for both the internet services and mobile internet services.Re-valuation may be ahead of monetization► Changing market conditions: Though our research on Baidu and Tencent tells us that their revaluations did not happen before they found suitable monetization models, we realize there is a big difference in the capital market between 2010~2012 and 2004~2006. In 2004~2006, the old economy performed very well and investors who got hurt in the IT bubble remained cautious on the industry. We have to acknowledge that there is a golden period to invest internet in stocks, which combines both high growth and low PE. The financial crisis changed the market and the company fundamentals substantially. In 2010 onwards, we expect there will be massive liquidity in the market, as the recovery of the “old economy” remains less encouraging, and the valuation premium of internet companies are expected to expand (please check our 3Q10 report: US liquidity, China Internet). In fact, Baidu and Tencent were both substantially revalued in 2010.► The visibility of cross selling is higher than that of Twitter: The visibility of Baidu’s monetization seems higher to investors than that of Tencent thanks to Google, which helped Baidu enjoys valuation premiums in the past. Tencent monetized its users mainly through cross-selling, which meant investors consistently doubted Tencent’s monetization outlook before they delivered. Tencent proved cross-selling is a very successful model. Facebook and Twitter faced the same challenge in the US, but investors now give strong credits for cross-selling. Furthermore, we expect the visibility of Sina’s micro-blog is better as it already has many monetized services (portal, e-commerce, webpage game platforms, etc.) which are all hungry for traffic and user support.► We expect Sina’s valuation premium to remain for the next 2-3 years unless there is a big change in market liquidity or the micro-blog platform shows a sign of weakness, such as a slow down in customer acquisition or ineffective monetization efforts.Three-year TPs based on scenario analysis► Base case: The development of the platform is well on track, with the number of micro-blog users growing to 150mn at end-2010 and 240mn by end-2012. The monetization trend is positive, but the contribution is still small (5-10% additional contribution to advertising growth in 2012). Under this scenario we expect Sina to achieve 40% CAGR from 2012~2015 and may enjoy 3~4 years revaluation, which means its P/E multiple will not narrow, instead remaining consistent going forwards. And we don’t expect investors to discount Sina’s growth.With 1.0x PEG, we expect the consistent multiple to be around 40 x forward P/E.► Bull case: The platform may have up to 300mn users in 2012 with monetization on the upside, which means it not only makes money from its advertising model (direct monetization + cross selling), but also successfully monetizes through a revenue sharing model (open API), which helps the earnings growth CAGR of 2012~2015 easily surpass 40%. That growth acceleration may boost the P/E multiple well above 40x with higher than expected earnings.► Bear case: The popularity of micro-blogs fade. The monetization of Sina returns to the traditional portal model. With 25~30% year on year growth and fewer new initiatives, the company will face de-valuation pressure, trading back to 25~30x forward P/E. Please read carefully the important disclosures at the end of this report 21
    • CICC Research: March 1, 2011Figure 17: Tencent and Baidu get re-valued after Y2009 2Q05 3Q05 4Q05 1Q06 2Q06 3Q06 4Q06 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10E 1Q11E 250 300% 2005.06 QQ 2006.03 2006.10 QQ 2007.01 QQ 2007.11 QQ 2008.06 QQ pet online Soso online; video online; label online; pinyin type schoolmate online; online 250% 2005.09 2006.12 QQ combined 200 Qqlive, doctor with Q-zone; Tencent online; Paipai, 200% Tenpay online; 150 150% 100% 100 Tencent microblog 50% online; 50 2010.07 0% Group 2010.11 purchase Tencent vs online; 360; 0 -50% 05-03 05-06 05-09 05-12 06-03 06-06 06-09 06-12 07-03 07-06 07-09 07-12 08-03 08-06 08-09 08-12 09-03 09-06 09-09 09-12 10-03 10-06 10-09 10-12 11-03 Px Last 15X 22X 30X 40X net profit YoY growth rate 1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11E 150 180% 2007.01 Achieve 2007.09 Baidu 2008.01 Baidu 2008.08 Badidu 2009.03 National 2009.08 Baidu agreement with EMI game platform entertainment CPA ad. platform channel agencies open "Box online; computing" 160% music; channel online; online; upgrade plan; 125 platform; 2007.03 Baidu 2007.10 Baidu 2008.06 Baidu e- 2008.09 Baifubao 2009.06 Baidu 140% Japanese SE onlie; advanced in e- commerce platform online; began to shut 2009.10 Baidu commerce; starts business; down part of paid ad.housekeeper, 100 2007.04 Baidu blind 2008.10 Baidu listing system; net union 120% online; 2007.11Baidu Youa online; promotion online; statistics online; 100% 2009.12 Totally 75 transfer to Phoenix mew 80% system 2010.01 Baidu 50 60% build up independent online video company; 40% 2010.10 Baidu 25 type, Baidu 2010.04 Baidu experience and 20% map openned Baidu rakuten API; online; 0 0% 06-12 07-03 07-06 07-09 07-12 08-03 08-06 08-09 08-12 09-03 09-06 09-09 09-12 10-03 10-06 10-09 10-12 11-03 Px Last 20X 40X 60X net profit YoY growth rateSource: Company data, CICC ResearchFigure 18: Earnings forecast under different scenarios Scenario analysis non GAAP EPS (US$) CAGR (2012-2015) PE multiple PEG Price Target for NTM 2011 1.86 2012 2.60 104.0 Base case 2013 3.55 40% 40 1.0 142.0 2014 5.03 201.2 2015 7.00 280.0 2011 2.00 2012 2.70 129.6 Bull case 2013 3.78 48% 48 1.0 181.4 2014 5.48 263.1 2015 8.22 394.6 2011 1.63 2012 2.09 53.4 Bear case 2013 2.75 32% 26 0.8 70.5 2014 3.72 95.2 2015 4.83 123.7Source: CICC Research Please read carefully the important disclosures at the end of this report 22
    • CICC Research: March 1, 2011We don’t suggest pair trading: Sina vs. TencentWe buy both Tencent and Sina. We expect Sina to lead in the micro-blog market, while Tencent will benefit from its openplatform strategy in the next two years. And together they will push forward the development of open ecosystems and benefitfrom the more sustained secular growth.We never think it is a feasible strategy to build pair-trades simply based on valuations or on the simple judgment of a singleservice. This is especially true in the internet industry, where we expect 50%, if not higher, investment stories built on seculargrowth, which is driven by the general trend: offline to online, low penetration to high penetration, PC to mobile, onlinegaming to e-commerce. The leading companies can actually growth together with differing competitive strengths and growthfocuses.We expect Sina will lead the micro-blog sector, which will likely transform Sina from a content driven portal to a platformcompany. Together with other money making businesses, there is a chance Sina will join other online giants - Baidu, AlibabaGroup and Tencent.Tencent is currently, and we expect it will remain, the largest internet community in China, leading others with multiple andintegrated platforms, including SNS, IM, client software, and so on. The company successfully monetized its users/trafficmostly from its online entertainment services (membership, avatar & online gaming). As the online gaming business is verymuch product driven, investors have been concerned with the company’s growth visibility and sustainability, which havebeen the major factors limiting the company’s PE multiples. Though Tencent is the largest and most profitable internetcompany in China, we think the value of Tencent’s platform/community is yet to be fully utilized. We feel positive towardsTencent’s open platform strategy, which will upgrade Tencent’s model from platform-centric to ecosystem-centric (moresimilar to that of Facebook). This strategy will better position Tencent to benefit from the secular growth of China’s internetindustry. Before the strategy, Tencent was the competitor of most internet companies, after the strategy, Tencent will continueto compete with other leading internet platforms, but it will not be a competitor, but a facilitator to most SMEs (content andservice providers). As the ecosystem expands, so does Tencent’s chance of maintaining their leading position in the mobileinternet and making breakthroughs in the search and e-commerce sectors. Together with the solid near term growth driven byIVAS, we expect there is a potential revaluation ahead for Tencent. Please read carefully the important disclosures at the end of this report 23
    • CICC Research: March 1, 2011Long Sohu, short Sina may not workThe logic of building this pair trade seems to be that the two stocks share similar business structures and Sohu’s valuation ismuch cheaper than that of Sina. We believe that the only way the pair trade will work is if the micro-blog services are shutdown by the government, which in our view is very unlikely. Our arguments are:► Sina may gain market share from Sohu in the traditional portal advertising market. Without micro-blog, the competitive landscape may remain largely stable for the next few years. However, if we agree that micro-blog is strongly media in nature and has cross selling capabilities, it will highly likely accelerate the restructuring of the portal’s competitive landscape.► The online video business is pretty much content driven and user stickiness is much lower than that of platform driven services. Sohu was an early mover on the online video business and established competitive advantages over Sina and Tencent. However, we expect the online video services are somewhat similar to that of the online gaming business. Platform companies, such as Tencent, Sina and Baidu, have a great chance of catching up when they put efforts on this front. In summary, the competitive landscape of online video is far from stable and those first movers’ advantages are not secure.► Sina’s share price outperformed Sohu in the past, with consistently higher multiples.Figure 19: Sina outperformed Sohu despite high valuation Sina Sohu Sina vs Sohu PE premium 350 3.50 Sina promoted microblog Sina promoted Sina group Sina microblog users in Sep 2009 purchase platform in Jul, amount surpassed 50mn 2010 in Nov, 2010 300 3.00 250 2.50 200 2.00 Average Sina/Sohu PE 1.90 150 1.50 100 1.00 50 0.50 Sohu seprated Sogou as Sohu online video market Copyright protrction union independent company in share achieved 13.4% in sued Youku in Sep, 2009 Oct, 2010 4Q10 0 0.00 09-07 09-09 09-10 10-01 10-04 10-07 10-10 11-01Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 24
    • CICC Research: March 1, 2011Investment risksNear term earnings pressure. A massive platform like micro-blog certainly demands strong investment in advance, whichmay lead to a mis-match between investment and monetization. There may be selling pressure due to less earnings upside inthe reporting period, though we regard any strong pull back—especially below US$70—as a good chance to buy.Spam messages: Given its fantastic distribution efficiency, there are many different interest group trying to leverage themicro-blog platform, spam message publishers are one of them. We believe improving user experience will be a long-termissue for Sina, and will continue to challenge its R&D capability, which is to some extent inferior to that of major competitors,Tencent and Baidu.Over or early monetization: The market’s high expectations may lead Sina’s management to feel more pressure to figureout monetization models. As the market is still very competitive on traffic and user acquisition, the one who monetizes theirusers/traffic first must be very careful to not damage its user experience. Especially as major competitors, Tencent, Sohu,Netease and Baidu, will face much less pressure to monetize their micro-blog services.Regulatory risks: Though we don’t worry about the regulatory risks in the same way as the market does, we agree thatmicro-blogs are very different from traditional portals, as they involve millions of UGM (user generated messages) per day,which exposes the platform to higher regulatory risks. Please read carefully the important disclosures at the end of this report 25
    • CICC Research: March 1, 2011Figure 20: Historical and forecasted financial data—QuarterlyIncome Statement (USD mn) 2009 1Q10 2Q10 3Q10 4Q10E 2010E 1Q11E 2Q11E 3Q10E 4Q11E 2011E 2012EGross Revenue 359 85 99 108 107 400 99 119 131 130 480 633Non-GAAP gross revenue 354 80 95 104 103 381 95 115 126 125 461 614Advertising 228 54 73 81 82 290 69 93 103 102 367 506Non-advertising 131 31 26 27 26 110 30 26 28 28 113 127 MVAS Services 119 25 20 21 20 85 24 20 22 22 87 100 Others 11 6 6 7 6 25 7 7 7 7 26 27Cost of revenue (158) (37) (41) (44) (45) (167) (45) (53) (53) (55) (205) (262)Gross profit 200 48 58 65 62 233 55 66 78 75 274 371Sales and marketing (85) (17) (20) (21) (22) (80) (19) (23) (26) (25) (94) (123)Product development (34) (8) (8) (9) (10) (34) (8) (10) (11) (12) (41) (54)General and administrative (40) (6) (4) (6) (7) (23) (6) (7) (8) (8) (29) (37)Amortization of intangible assets (4) (3) (0) (0) (0) (3) (0) (0) (0) (0) (1) (1)Income (loss) from operations 37 15 26 29 23 92 21 26 33 29 109 157Other income,net 8 2 2 5 2 10 2 2 2 2 9 10Profit Before Tax 421 16 28 33 25 103 23 28 36 31 118 167Provision for Taxation (8) (2) (2) (2) (3) (10) (3) (4) (5) (4) (16) (25)Equity income in Affiliates - 10 (0) 0 1 11 3 3 3 3 12 15Net Income/Loss 411.9 24.3 25.2 31.3 22.7 103.5 22.4 27.2 33.7 30.2 113.6 156.5Fully diluted EPS(USD) 6.26 0.37 0.38 0.48 0.34 1.57 0.34 0.41 0.51 0.46 1.73 2.38Non-GAAP EPS(USD) 1.06 0.34 0.42 0.50 0.36 1.63 0.36 0.45 0.55 0.50 1.86 2.60Growth Analysis Revenue-YoY -3.0% 15.2% 10.1% 12.3% 9.4% 11.6% 16.8% 20.0% 21.1% 21.0% 19.9% 538.0% Revenue-QoQ -13.4% 17.0% 8.9% -0.8% -7.6% 20.2% 9.9% -0.8% Net Profit-YoY 410.8% 149.0% 89.0% 87.5% -93.9% -74.9% -7.6% 8.0% 7.7% 33.3% 9.8% 597.7% Net Profit-QoQ -93.5% 3.8% 24.2% -27.6% -1.0% 21.3% 23.9% -10.4%Margins AnalysisGross margin 55.9% 56.6% 58.4% 59.6% 57.9% 58.2% 55.1% 55.7% 59.5% 57.9% 57.2% 58.6%Total expenses /Revenue (%) 44.3% 36.4% 31.9% 33.0% 36.0% 34.3% 33.8% 33.8% 33.8% 35.0% 34.1% 33.7% Sales and marketing (%) 23.7% 20.1% 19.7% 19.5% 20.5% 19.9% 19.5% 19.5% 19.5% 19.5% 19.5% 19.4% Product development (%) 9.4% 9.0% 8.0% 8.0% 9.0% 8.5% 8.5% 8.5% 8.5% 9.0% 8.6% 8.5% General and administrative (%) 11.2% 7.3% 4.2% 5.5% 6.5% 5.8% 5.8% 5.8% 5.8% 6.5% 6.0% 5.8%Operating margin 10.4% 17.2% 26.2% 26.4% 21.6% 23.1% 21.0% 21.6% 25.4% 22.7% 22.8% 24.7%Net margin 114.9% 28.6% 25.4% 28.9% 21.1% 25.9% 22.6% 22.8% 25.7% 23.2% 23.7% 24.7%Effective tax rate 2.0% 11.7% 8.6% 6.7% 13.0% 9.5% 13.5% 13.5% 13.5% 13.5% 13.5% 15.0%Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 26
    • CICC Research: March 1, 2011Figure 21: Major financial data and operating matrixIncome Statement (USD mn) 2008 2009 2010E 2011E 2012E Growth & Margins (%) 2008 2009 2010E 2011E 2012EGross Revenue 370 359 400 480 633 Growth AnalysisNon-GAAP gross revenue 370 354 381 461 614 Gross Revenue 50.2% -3.0% 11.6% 19.9% 32.0%Advertising 258 228 290 367 506 Advertising 53.0% -11.8% 27.2% 26.4% 38.0%Non-advertising 111 131 110 113 127 Non-advertising 43.9% 17.6% -15.7% 2.6% 12.7% MVAS Services 103 119 85 87 100 MVAS Services 46.6% 15.5% -28.6% 2.2% 15.0% Others 8 11 25 26 27 Margin AnalysisCost of revenue (150) (158) (167) (205) (262) Gross Margin % 59.3% 55.9% 58.2% 57.2% 58.6%Gross profit 219 200 233 274 371 Selling expense(% of Revenue) 21.6% 23.7% 19.9% 19.5% 19.4%Sales and marketing (80) (85) (80) (94) (123) Product development (% of Revenue) 8.2% 9.4% 8.5% 8.6% 8.5%Product development (30) (34) (34) (41) (54) G&A (%) 9.0% 11.2% 5.8% 6.0% 5.8%General and administrative (33) (40) (23) (29) (37)Amortization of intangible assets (1) (4) (3) (1) (1) Operating Margin % 20.2% 10.4% 23.1% 22.8% 24.7%Income (loss) from operations 75 37 92 109 157 EBITDA Margin (%) 24.9% 15.9% 27.9% 27.4% 29.8%Other income,net 21 8 10 9 10 EBIT Margin (%) 20.2% 10.4% 23.1% 22.8% 24.7%Profit Before Tax 95 46 103 118 167 Effective tax rate 14.7% 2.0% 9.5% 13.5% 15.0%Provision for Taxation (14) (8) (10) (16) (25)Equity income in Affiliates - - 11 12 15 Net Margin % 21.8% 114.9% 25.9% 23.7% 24.7%Net Income/Loss 81 37 103 114 157Fully diluted EPS(USD) 1.23 6.26 1.57 1.73 2.38Non-GAAP EPS(USD) 1.55 1.06 1.63 1.86 2.60Balance Sheet (USD mn) 2008 2009 2010E 2011E 2012E Ratios 2008 2009 2010E 2011E 2012ECash&cash equivalents 383 746 826 901 1,001 ROE % 14.4% 44.6% 8.1% 8.2% 0.0%ST investments 221 75 75 75 75 ROA % 10.9% 33.8% 6.2% 6.4% 0.0%Accounts & Notes Receivable 79 75 86 103 136Current Assets 692 919 1,010 1,102 1,235 Net Cash/Equity 61.4% 61.1% 62.4% 62.8% 63.0%Net Fixed Assets 34 23 35 48 61 Liability/Asset 24.1% 24.2% 23.1% 21.7% 20.2%Intangible Assets and Goodwill 95 88 92 101 112Non-current Assets 130 695 712 733 758 Current ratio 7.3 7.3 7.7 8.3 9.1Total Assets 822 1,614 1,721 1,835 1,992Accounts Payable 1 2 8 10 12Accrued Liabilities 76 109 109 109 109Current Liabilities 95 125 131 133 136Convertible Debt 99 99 99 99 99Non-currnet Liabilities 103 266 266 266 266Total Shareholders Equity 625 1,222 1,323 1,435 1,589Total Liabilities and Equity 822 1,613 1,720 1,834 1,991Cash Flow Statement (USD mn) 2008 2009 2010E 2011E 2012ENet Income 81 412 103 114 157Depreciation & Amortization 18 20 19 22 32Changes in Working Capital 2 (1) (5) (15) (30)Cash From Operations 114 98 118 120 159Capex (19) (5) (36) (43) (57)Cash from Investing Activities (24) 112 (36) (43) (57)Cash from Financing Activities 12 155 - - -Effect of Foreign Exchange 9 (2) (2) (2) (2)Net Changes in Cash 112 363 80 75 100Source: Company data, CICC Research Please read carefully the important disclosures at the end of this report 27
    • CICC Research: March 1, 2011 Figure 22: Valuations of comparables Stock Reporting Share Price Market Cap P/E Non-GAAP P/E P/BCompany Rating Currency Currency (2011-03-01) ( USD mn) 09A 10E 11E 09A 10E 11E 09A 10E 11EChina InternetPortals Tencent HKD CNY 206.0 48,813 BUY 65.3 41.8 31.1 61.5 39.4 29.4 27.4 16.9 11.0 Sina USD USD 81.7 5,045 BUY 13.1 52.0 47.3 77.0 50.2 43.8 4.4 4.1 3.7 Sohu USD USD 81.6 3,113 21.1 22.6 17.4 22.9 20.0 16.3 5.0 4.0 3.1 Netease USD USD 46.7 6,042 22.2 19.1 15.5 22.3 18.5 15.0 5.5 4.2 3.3Search Engine Baidu USD CNY 121.2 42,676 BUY 194.7 79.3 48.6 184.0 77.2 47.0 60.8 33.2 19.4E-Commerce Alibaba HKD CNY 14.5 9,459 HOLD 63.5 44.0 32.3 53.2 35.4 26.4 6.9 5.2 3.9Online Travel Service Ctrip USD CNY 38.8 5,733 Accumulate 61.4 37.5 31.1 51.3 31.6 25.1 14.1 10.1 7.5MVAS Kong Zhong USD USD 7.2 254 20.0 28.8 23.6 19.5 13.5 13.3 1.5 N.A N.A A8 Digital HKD CNY 2.6 155 9.9 10.9 8.1 9.9 10.9 8.1 2.2 1.5 1.1Online Gaming Shanda USD USD 42.1 2,841 12.1 25.4 22.0 12.5 23.4 21.2 1.7 1.6 1.4 Giant USD USD 7.6 1,728 13.6 15.1 13.3 14.1 14.7 12.7 2.0 1.9 1.7 Perfect World USD CNY 21.2 1,073 7.0 8.4 7.1 7.5 8.0 6.8 3.1 2.3 1.8 changyou USD CNY 37.4 1,930 13.0 11.6 9.4 13.0 11.2 9.3 17.5 6.4 3.7 SNDA GAME USD CNY 6.1 1,739 8.0 9.4 9.8 8.0 9.0 8.4 4.3 3.1 2.3 Kingsoft HKD CNY 4.2 608 10.1 12.6 10.41 10.1 11.5 9.3 2.5 1.9 2.0 Net Dragon HKD CNY 4.1 282 22.0 51.6 21.90 21.9 58.4 6.5 1.3 1.3 1.1Vertical portal 51job USD USD 59.7 1,682 101.1 50.4 35.9 101.1 46.1 34.1 N.A 7.3 6.1Median 16.8 28.8 21.9 20.7 20.0 13.3 4.3 4.0 3.2Overseas InternetPortals Yahoo USD USD 16.4 21,377 38.1 18.6 21.3 42.1 23.2 21.0 1.8 1.8 1.6Search Engine Google USD USD 613.4 197,660 29.7 24.0 19.8 30.1 21.2 17.8 5.4 4.2 3.5E Commerce Amazon.com USD USD 173.3 78,154 83.3 69.3 54.0 81.4 51.0 41.1 14.6 11.6 10.0 EBAY INC USD USD 33.5 43,502 18.1 25.4 21.3 26.2 19.9 17.3 3.2 2.9 2.5 Global Sources USD USD 11.5 386 N.A N.A N.A 31.1 19.8 14.9 N.A N.A N.AGaming Activision USD USD 11.1 13,147 123.6 19.6 18.3 17.9 14.4 13.5 1.3 1.3 1.2 Electronic Arts USD USD 18.8 6,285 -5.5 -11.8 -30.0 -8.0 44.2 28.3 1.9 2.3 2.5Online Travel Service Expedia USD USD 19.9 5,443 19.1 13.0 11.2 16.6 11.6 10.0 2.1 2.1 1.8Median 35.0 24.0 21.3 32.7 24.2 19.9 2.1 2.6 2.5 Source: Bloomberg, Company data, CICC Research Figure 23: Historical P/E and PEG bands P/E PEG Px Last 15X 20X 30X 40X Px Last 0.7X 1X 1.3X 1.6X 100 100 80 80 60 60 40 40 20 20 0 0 00-04 01-10 03-04 04-10 06-04 07-10 09-04 10-10 00-04 01-08 02-12 04-04 05-08 06-12 08-04 09-08 10-12 Source: Bloomberg, Company data, CICC Research Please read carefully the important disclosures at the end of this report 28
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    • Beijing Shanghai Hong KongChina International Capital China International Capital China International CapitalCorporation Limited Corporation Limited – Shanghai Branch Corporation (Hong Kong) Limited28th Floor, China World Office 2 32nd Floor, Azia Center 29th Floor, One International Finance Centre1 Jianguomenwai Avenue 1233 Lujiazui Ring Road 1 Harbour View StreetBeijing 100004, P.R. China Shanghai 200120, P.R. China Central, Hong KongTel: (86-10) 6505-1166 Tel: (86-21) 5879-6226 Tel: (852) 2872-2000Fax: (86-10) 6505-1156 Fax: (86-21) 5888-8976 Fax: (852) 2872-2100Singapore United KingdomChina International Capital China International CapitalCorporation (Singapore) Pte. Limited Corporation (UK) Limited#39-04, 6 Battery Road Level 25, 125 Old Broad StreetSingapore 049909 London EC2N 1AR, United KingdomTel: (65) 6572-1999 Tel: (44-20) 7367-5718Fax: (65) 6327-1278 Fax: (44-20) 7367-5719Beijing Jianguomenwai Avenue Branch Shanghai Middle Huaihai Road Branch Shenzhen Fuhuayilu Branch1st Floor, Capital Tower 398 Middle Huaihai Road Rooms 107 & 201, Annex Building6A Jianguomenwai Avenue Shanghai 200020, P.R.China Shenzhen Duty Free Commercial TowerBeijing 100022, P. R. China Tel: (86-21) 6386-1195 6 Fuhua 1st RoadTel: (86-10) 8567-9238 Fax: (86-21) 6386-1180 Futian District, Shenzhen 518048, P.R. ChinaFax: (86-10) 8567-9235 Tel: (86-755) 8832-2388 Fax: (86-755) 8254-8243Hangzhou Jiaogong Road Branch Nanjing Zhongshan Road (North) Branch Guangzhou Tianhe Road Branch1st Floor, Euro American Center 2nd Floor, Greenland Plaza, 40th Floor, Teemtower18 Jiaogong Road 1 Zhongshan Road (North) 208 Tianhe RoadHangzhou 310012, P.R. China Nanjing 210008, P.R. China Guangzhou 510620, P.R. ChinaTel: (86-571) 8849-8000 Tel: (86-25) 8316-8988 Tel: (86-20) 8396-3968Fax: (86-571) 8735-7743 Fax: (86-25) 8316-8397 Fax: (86-20) 8516-8198Chengdu Binjiang Road (East) Branch Xiamen Lianyue Road Branch Qingdao Middle Hongkong Road Branch1st & 16th Floors, Shangri-La Center 4th Floor, Office Building Paragon Center 11th Floor, Shangri-La Center9B Binjiang Road (East) 1 Lianyue Road 9 Hongkong Road (M)Chengdu 610021, P.R. China Siming District, Xiamen 361012, P.R. China South District, Qingdao 266071, P.R. ChinaTel: (86-28) 8612-8188 Tel: (86-592) 515-7000 Tel: (86-532) 6670-6789Fax: (86-28) 8444-7010 Fax: (86-592) 511-5527 Fax: (86-532) 6887-7018Wuhan Jiefang Road Branch Chongqing Honghu Road (West) Branch4th Floor, New World Centre Tower 1st & 10th Floors, Ourui Lanjue Center634 Jiefang Road 9 Honghu Road (W)Qiaokou District, Wuhan 430032, P.R. China New North District, Chongqing 401120, P.R. ChinaTel: (86-27) 8334-3099 Tel: (86-23) 6307-7088Fax: (86-27) 8359-0535 Fax: (86-23) 6739-6636