CLSA AsiaUSA Forum takeaways: USA paving way for China


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CLSA AsiaUSA Forum takeaways: USA paving way for China

  1. 1. Global media CLSA AsiaUSA Forum takeawaysProduced by James Lee USA paving way for China We had three expert speakers in the Global Internet and Media space (1) 617 295 0120 presenting at our AsiaUSA forum. Ogilvy Asia Pacific painted a bright Wei Fang outlook for consumer consumptions in China and believes that (1) 617 295 0128 urbanization is key to generate wealth and thus ad spending. CIC data presented enthusiastically about the prospects of Chinese social media space and characterized Sina weibo as “the portal to the internet”. The Chinese social expert further stated that social is already important to advertisers and leading indicators for monetization look promising. Finally, Webtrends went through the monetization cycles of Facebook, providing a clear map for its Chinese counterparts. The US social expert 13 November 2011 stated that the inflection point for the Facebook monetization was when advertisers retargeted their fans (after a period of aggregating fans). GLOBAL Maintain our positive view of the Chinese advertising space, especially Media online. We agree with the urbanization thesis of Ogilvy, which affirmed our bullish call on Focus Media. In addition, we like the prospects of Sina weibo since it has already established deep relationships with its users and advertisers. The Facebook case study provided us confidence that the Chinese social platform will be able to monetize through a similar manner. Consumer expert says urbanization key to drive ad spending q Urbanization in tier 2+ markets drives wealth creation q Internet is influential on consumer purchasing decisions q Predicting strong advertising growth for new media q Multi-screen marketing is important Chinese social media expert says social is fabric of online society q Sina Weibo is the portal to the web in China q Social risks are manageable q Social is the voice for brands q Leading indicators for monetization look promising Facebook expert says USA leads the way for China q Social takes a similar monetization path as search: organic to paid q Facebook starts from fan aggregation (organic) to fan retargeting (paid) q Ad serving platform is critical to monetization q Top verticals for Facebook advertsing could be a proxy in China: entertainment, travel and ecommerce. The group of companies that comprise CLSA are affiliates of Credit Agricole Securities (USA) Inc. For important disclosure information please refer to page 10.
  2. 2. US paving way for China Global media Ogilvy: Positive consumer trends in China Chief Knowledge officer of Ogilvy Asia Pacific, Kunal Sinha, provided a positive outlook for consumer spending and offered the following key points to support his views. China urbanization will Urbanization in tier 2+ markets drives wealth creation drive wealth Mr. Sinha stated that wealth in China was distributed geographically where 60% of billionaires in china live outside of Beijing. Urbanization in tier 2+ markets is an important process as our speaker laid out the major transformations in these markets. For example, Chengdu has transformed itself into an important transportation and communications hub. The city has become a base for electronics and IT industries. The resulting employment opportunities improved the standard of living for the residents in Chengdu and attracted migrant workers into the market. Another example is Shenyang, where the city has turned into a model for alternative energy after many years of pollution from the development of heavy industry. This is consistent with our thesis where the Chinese advertising dollars will be more balanced over time from 60% in tier I markets that have only 9% of urban population.Figure 1 Figure 2China urbanization – Chengdu (population = 14m) China urbanization - Shenyang (population = 8.1m)Source: Ogilvy. Expect wealth increase to Internet is influential on consumer purchasing decisions support consumer online Ogilvy believes that an overall increase in china’s wealth will continue to spending support consumer spending, especially online. As a highlighted in figure 3, Chinese consumers are watching TV less than their US counterparts since the Internet has more interesting entertainment content. In addition, online influence is key to success of many brands in China. For example, 46% of all skincare and cosmetics purchases are determined by the Internet13 November 2011 2
  3. 3. US paving way for China Global media and 34% for fashion and accessories. With that in mind, the media agency expects China’s online spending will grow 44% YoY in 2012.Figure 3 Figure 4Average time spent watching TV (Hour/Day) Estimated total internet ad spend YoY growth in 2012 6 (Hour) 50% 5 40% 4 3 30% 2 1 20% 0 10% Malaysia Indonesia US Phillipines India China 0% China USASource: Ogilvy: Local and global Local and global advertisers market differently advertisers use different When it comes to online advertising, western and Chinese companies typically strategies have different takes. For example, western companies are focused on building the brand so they focus more on telling the story and portraying the lifestyle supporting that brand image. On the other hand, Chinese brands are using the web as a direct response channel, focusing on promotional programs to drive sales. Overtime, we will see the Chinese companies focus on branding as a way to improve its brand image and foreign advertisers move to direct response to tailor advertising messages to demographic and geographic preferences.Figure 5 Figure 6Chinese brands focus on selling Western brands focus on image & educationSource: Ogilvy It is important to capture Multi-screen marketing is important attention outside the Ogilvy also stressed that targeting consumers in multiple screens is important home to capture attention outside the home. As highlighted in figures 7 to 9, outdoor advertising comes in various forms and sizes and we believe it is an important medium to reach targeted audience.13 November 2011 3
  4. 4. US paving way for China Global mediaFigure 7 Figure 8 Figure 9Screen in taxis Screens on commercial building Focus media’s screen in office buildingsSource: Ogilvy, Focus Media13 November 2011 4
  5. 5. US paving way for China Global media CIC: Promises of Chinese social media Sam Flemming, CEO of Chinese social intelligence firm CIC data provided a strong case why social media is “it” in China. In addition, he offered an insider look into the Chinese Netizens’ user behavior and why social is important to advertisers. Most importantly CIC believes that leading indicators for monetization seems to be consistent with those at Facebook. Chinese internet users Sina Weibo is the portal to the web in China use weibo as the social CIC said micro-blogging is the Chinese Internet users’ preferred way to go portal social. As highlighted in figure 10, Chinese netizens use micro-blogging as “national’s water cooler” where people receive and forward interesting information on a real-time basis. The most popular micro-blogging platform by far is Sina Weibo. Mr. Flemming described Sina’s social platform as “the social portal” and “the fabric of the Chinese internet society”. We find it interesting that there was no mention of Sina’s competitors throughout CIC’s presentation. We believe it speaks volumes of Sina’s dominance in the social media space.Figure 10Weibo becomes the social portal in ChinaSource: CIC Chinese internet Social risks are manageable companies are skilled at During the session, the audience’s first question was about the regulatory risk content filtering of user generated content in China. CIC responded by saying that publishers in China are extremely good at filtering their own content since it is the most important survival skill for running a media business. At the same time, Mr. Flemming said the people did not give the Chinese enough credit for being “social savvy”. He mentioned that sometimes the government would let Chinese citizens vent through social media to prevent social unrest. We agree with CIC’s view and believe that social media will likely be self-regulated. Brands already use weibo Social is the voice for brands to communicate with CIC data argued that social marketing would become extremely important to consumers advertisers in China, characterizing weibo as “the voice for brands.” Mr. Flemming laid out several best practices for weibo, including customer service (Dell Computer, Figure 11), reputation management, market research (Ikea, Figure 12) and lead generation (360buy). Dell Computer was highly praised13 November 2011 5
  6. 6. US paving way for China Global media by CIC Data for using weibo to respond to customer questions and complaints.Figure 11 Figure 12DELL uses weibo as a channel for customer service IKEA uses weibo to do market researchSource: CIC Sina weibo’s leading Leading indicators for monetization look promising indicators look promising CIC Data believes that leading indicators for Sina weibo’s monetization look promising, including increased fan count, fan quality and engagement. As highlighted in Figure 13, CIC did a study of 13 top luxury brands in Sina weibo and found that the fan base grew impressively at 66.6% in 2Q11 and 42.9% in 3Q11. In addition, the fan quality on Sina Weibo is high based on a different study where fans with fewer than 10 followers (less active) are less than 15% of the total base. Finally, CIC found that weibo fans are very engaging. As highlighted in figure 15, the comment rate for weibo fans of three luxury companies showed a consistent improvement during a recent test by CIC. These metrics are very similar to Facebook’s metrics a few years so we believe Sina is on the right track for monetization.Figure 13 Figure 14Luxury cosmetic group fan base growth on Sina weibo 3Q11 Sina weibo brand’s fans quality (by No. of fans) 40,000 30,000 below 10 15% 200+ 20,000 31% 10-50 24% 10,000 100-200 50-100 15% 0 15% 1Q11 2Q11 3Q11Source: CIC. Note: luxury cosmetic group consists of 13 brands, fans number is group average.13 November 2011 6
  7. 7. US paving way for China Global media Figure 15 Comment rate for 3 luxury groups 30 25 20 15 10 5 0 Jan Feb Mar Apr May Jun Jul Aug Sep Source: CIC. Notes: comment rate defined as average comments per tweet. Comment rate in the chart is the average of 3 luxury cosmetic groups (L’Oreal Group, Estee Lauder Group, LVMH Group), Jan-Sep 201113 November 2011 7
  8. 8. US paving way for China Global media Webtrends: Facebook provides roadmap Our Facebook guru Justin Kistner from Webtrends gave an enthusiastic presentation about advertising on social media. Webtrends is a leading social and analytics firm and works with many advertisers on Facebook marketing. We thought that monetization on Facebook paves a clear pave for social platforms in China, especially Sina Weibo. Facebook went through Social takes a similar monetization path as search the free-to-paid path in Our expert noticed that monetization for social is similar to that of search, monetization going from organic to paid. When Google just stated, advertisers were using organic search results to drive traffic to their websites by optimizing their URLs according to the search engine’s quality scores. In other words, it’s important to create relevant web pages to match relevant search results. When AdWord (keyword bidding platform) was introduced, we saw a meaningful adoption because advertisers have already used organic search so paying for keywords to drive additional traffic was a natural progression. In other words, it’s important to create a relevant ad linking to a relevant web page. Mr. Kistner is seeing a similar evolution for social (highlighted in Figure 16), with advertisers initially setting up their own profiles to listen to and communicate with Facebook users. These tools are organic (free) and designed to aggregate fans (people who hit the like button). Once the fan base reaches a critical mass, monetization starts to take off according to our expert. Advertisers are using paid campaigns to retarget people that have an affinity to the brand. As highlighted in Figure 17, Facebook has continued to gain market share ahead of other competitors. We feel the Chinese social media platforms like Sina weibo is following a similar path and is currently at the “fan aggregation” stage.Figure 16 Figure 17Facebook monetization from organic to paid Facebook gains market share on display vs. competitionSource: Webtrends We believe an easy-to- Ad serving platform is critical to monetization use ad-buying system is According to Mr. Kistner, the click-through rate for Facebook ads is 7x higher the key to succeed when targeting a fan (compare to non-fans). Webtrends stats show that on average, a Facebook user only follows 9 brands and therefore targeting these followers are important to improve ROI. For example, 36% of consumers buy more after becoming a fan. That said, it makes more sense to spend ads on existing customers than acquiring new ones. The principle of 80/20 rules applies here and therefore advertisers get a higher ROI on marketing dollars from fan retargeting than fan acquisitions. As a result, we believe a strong ad serving platform is critical to support the advertiser demand for conversions. We feel that building a good ad serving platform requires three things: a strong targeting technology, an easy-to-use ad-buying interface;13 November 2011 8
  9. 9. US paving way for China Global media and an effective analytics system that allows advertisers to measure results. Google and Facebook took about 2 to 3 years to develop such a platform, we believe it will take time for Chinese social media companies to develop and refine that capability. The most social industries Top verticals for Facebook could be a proxy in China in US could be a proxy for When looking at Facebook advertising in the US, industries that are more China sociable (eg, more talked and shared by users) advertise more on Facebook. As highlighted in Figure 18, these industries include entertainment, travel, ecommerce and retail. Sectors that are less sociable include healthcare and financial services. We believe the industries that are early adopters of social in the USA are a good indicator for China. Figure 18 Sociability index Source: Webtrends13 November 2011 9
  10. 10. US paving way for China Global mediaFigure 19Global Media comp sheetSegment Global Emerging MarketsCompany GOOG YHOO LNKD AMZN EBAY EXPE PCLN BIDU SINA SOHU FMCN* CTRP Tencent** Alibaba** YNDX MAIL.ruPrice 608.35 16.27 79.01 217.39 31.76 27.98 533.31 137.76 79.16 59.11 23.36 34.27 161.20 9.34 25.54 32.94Shares (F/D) 327.4 1,308.0 97.1 461.0 1,309.3 277.0 48.0 349.6 65.8 39.1 140.4 152.4 1,861.9 5,140.6 325.3 208.3Market Cap 199,198 21,281 7,672 100,217 41,583 7,750 25,599 48,161 5,211 2,311 3,280 5,223 300,138 48,013 8,308 6,861Net Debt (39,094) (3,255) (104) (6,326) (1,469) 90 (1,005) (1,570) (784) (734) (558) (631) (19,990) (10,998) (563) (118)Enterprise Value 160,104 18,026 7,568 93,891 40,114 7,840 24,594 46,591 4,427 1,577 2,722 4,592 280,148 37,015 7,745 6,743Net Cash per Share 94.32 2.49 1.07 13.72 1.12 (0.32) 20.94 4.49 11.91 15.39 3.97 4.14 10.74 2.14 1.73 0.57EstimatesRevenue 10CL 22,004 4,588 243 34,204 9,156 3,348 3,085 1,199 384 613 580 437 23,372 6,637 440 325Revenue 11CL 29,549 4,388 507 48,771 11,584 3,904 4,331 2,231 465 846 706 551 34,944 7,974 665 482Revenue 12CL 36,364 4,927 769 64,848 13,653 4,340 5,422 3,478 578 1,060 829 697 45,184 9,173 938 618Growth 10-11 34% -4% 109% 43% 27% 17% 40% 86% 21% 38% 22% 26% 50% 20% 51% 48%Growth 10-12 29% 4% 68% 38% 22% 14% 33% 70% 23% 32% 20% 26% 39% 18% 46% 38%GAAP EPS 10CL 26.31 0.91 0.07 2.53 1.36 1.46 10.35 1.53 1.73 3.62 1.21 1.06 5.17 0.35 0.44 0.48GAAP EPS 11CL 32.19 0.84 0.02 1.20 1.84 1.72 20.60 2.95 0.95 4.62 1.74 1.13 7.03 0.45 0.60 0.81GAAP EPS 12CL 39.18 0.84 0.32 2.06 1.90 1.98 27.04 4.52 1.47 5.60 2.21 1.44 8.84 0.51 0.84 1.11Growth 10-11 22% -8% 114% -53% 35% 18% 99% 93% -45% 27% 44% 7% 36% 30% 36% 69%Growth 10-12 22% -4% -100% -10% 18% 16% 62% 72% -8% 24% 35% 17% 31% 22% 38% 52%Operating Margin2010 40% 17% 8% 4% 29% 25% 28% 49% 24% 38% 34% 37% 50% 28% 39% 30%2011CL 37% 18% 0% 2% 27% 22% 33% 53% 7% 34% 38% 33% 43% 29% 36% 41%2012CL 37% 17% 6% 2% 27% 22% 35% 64% 13% 32% 43% 35% 43% 29% 36% 45%EV/Sales 2010 7.3 3.9 31.1 2.7 4.4 2.3 8.0 38.9 11.5 2.6 4.7 10.5 12.0 5.6 17.6 20.7EV/Sales 2011 5.4 4.1 14.9 1.9 3.5 2.0 5.7 20.9 9.5 1.9 3.9 8.3 8.0 4.6 11.6 14.0EV/Sales 2012 4.4 3.7 9.8 1.4 2.9 1.8 4.5 13.4 7.7 1.5 3.3 6.6 6.2 4.0 8.3 10.9P/E 2010 23.1 17.9 nm 85.9 23.4 19.2 51.5 90.0 45.8 16.3 19.3 32.3 31.2 27.0 58.0 68.6P/E 2011 18.9 19.4 nm 181.2 17.3 16.3 25.9 46.7 83.3 12.8 13.4 30.3 22.9 20.8 42.6 40.7P/E 2012 15.5 19.4 246.9 105.5 16.7 14.1 19.7 30.5 53.9 10.6 10.6 23.8 18.2 18.2 30.4 29.7Cash-adj.P/E 2010 19.5 15.1 nm 80.5 22.5 19.4 49.5 87.1 38.9 12.1 16.0 28.4 29.1 20.8 54.1 67.4Cash-adj.P/E 2011 16.0 16.4 nm 169.7 16.7 16.5 24.9 45.2 70.8 9.5 11.1 26.7 21.4 16.0 39.7 40.0Cash-adj.P/E 2012 13.1 16.4 243.6 98.9 16.1 14.3 18.9 29.5 45.7 7.8 8.8 20.9 17.0 14.1 28.3 29.2Note: Except for GOOG, YHOO, FMCN, all estimates are First Call consensus. *EPS for FMCN are on a pro forma basis. **in HK dollar. Priced as ofNovember 11, 2011.13 November 2011 10
  11. 11. US paving way for China Global media Analyst certification The analyst(s) of this report hereby certify that the views expressed in this research report accurately reflect my/our own personal views about the securities and/or the issuers and that no part of my/our compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report. Important disclosures CLSA (which for the purpose of this disclosure includes subsidiaries of CLSA B.V. and Credit Agricole Securities Asia B.V., Tokyo Branch)/Credit Agricole Securities (USA) Inc ("Credit Agricole Securities (USA)")s policy is to only publish research that is impartial, independent, clear, fair, and not misleading. Analysts may not receive compensation from the companies they cover. Regulations or market practice of some jurisdictions/markets prescribe certain disclosures to be made for certain actual, potential or perceived conflicts of interests relating to a research report as below. This research disclosure should be read in conjunction with the research disclaimer as set out at and the applicable regulation of the concerned market where the analyst is stationed and hence subject to. This research disclosure is for your information only and does not constitute any recommendation, representation or warranty. Absence of a discloseable position should not be taken as endorsement on the validity or quality of the research report or recommendation. Neither analysts nor their household members/associates may have a financial interest in, or be an officer, director or advisory board member of companies covered by the analyst unless disclosed herein. Unless specified otherwise, CLSA/Credit Agricole Securities (USA)s did not receive investment banking/non-investment banking income from, and did not manage/co- manage public offering for, the listed company during the past 12 months, and it does not expect to receive investment banking relationship from the listed company within the coming three months. Unless mentioned otherwise, CLSA/Credit Agricole Securities (USA) does not own discloseable position, and does not make market, in the securities. The analysts included herein hereby certify that the views expressed in this research report accurately reflect their own personal views about the securities and/or the issuers and that unless disclosure otherwise, no part of their compensation was, is, or will be directly or indirectly related to the specific recommendation or views contained in this research report or revenue from investment banking revenues. The analyst/s also states/s and confirm/s that he has/have not been placed under any undue influence, intervention or pressure by any person/s in compiling this research report. In addition, the analysts included herein attest that they were not in possession of any material, non-public information regarding the subject company at the time of publication of the report. Save from the disclosure below (if any), the analyst(s) is/are not aware of any material conflict of interest. Key to CLSA/Credit Agricole Securities (USA) investment rankings: BUY = Expected to outperform the local market by >10%; O-PF = Expected to13 November 2011 11
  12. 12. US paving way for China Global media outperform the local market by 0-10%; U-PF = Expected to underperform the local market by 0-10%; SELL = Expected to underperform the local market by >10%. Performance is defined as 12-month total return (including dividends) for the stock relative to the 12-month forecasted return for the local market where the stock is traded. For example, in the case of US stock, the recommendation is relative to the expected return for S&P of 11.3%. Exceptions may be made depending upon prevailing market condition. Overall rating distribution for CLSA/Credit Agricole Securities Equity Universe: Buy / Outperform - CLSA: 69%; Credit Agricole Securities (USA): 66%, Underperform / Sell - CLSA: 31%; Credit Agricole Securities (USA): 34%, Restricted - CLSA: 0%; Credit Agricole Securities (USA): 0%. Data as of 30 June 2011. INVESTMENT BANKING CLIENTS as a % of rating category: Buy / Outperform - CLSA: 95%; Credit Agricole Securities (USA): 74%, Underperform / Sell - CLSA: 5%; Credit Agricole Securities (USA): 36%, Restricted - CLSA: 0%; Credit Agricole Securities (USA): 0%. Data for 12- month period ending 30 June 2011. Prior to 25 November 2008, Credit Agricole Securities (USA) Inc used an absolute system (based on anticipated returns over a 12-month period): Buy: above 20%; Add: 10%-20%; Neutral: +/-10%; Reduce: negative 10-20%; Sell, below 20% (including dividends). FOR A HISTORY of the recommendations and price targets for companies mentioned in this report, as well as company specific disclosures, please write to: (a) Credit Agricole Securities (USA), Compliance Department, 1301 Avenue of the Americas, 15th Floor, New York, New York 10019-6022; and/or (b) CLSA, Group Compliance, 18/F, One Pacific Place, 88 Queensway, Hong Kong. © 2011 CLSA Asia-Pacific Markets ("CLSA") and/or Credit Agricole Securities (USA) Inc (“CAS”) This publication/communication is subject to and incorporates the terms and conditions of use set out on the website. Neither the publication/ communication nor any portion hereof may be reprinted, sold or redistributed without the written consent of CLSA and/or CAS, a broker-dealer registered with the Securities and Exchange Commission of US and an affiliate of CLSA. CLSA and/or CAS has/have produced this publication/communication for private circulation to professional, institutional and/or wholesale clients only. The information, opinions and estimates herein are not directed at, or intended for distribution to or use by, any person or entity in any jurisdiction where doing so would be contrary to law or regulation or which would subject CLSA and/or CAS to any additional registration or licensing requirement within such jurisdiction. The information and statistical data herein have been obtained from sources we believe to be reliable. Such information has not been independently verified and we make no representation or warranty as to its accuracy, completeness or correctness. Any opinions or estimates herein reflect the judgment of CLSA and/or CAS at the date of this publication/communication and are subject to change at any time without13 November 2011 12
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