In the spirit of collaboration, I am releasing part 3 of the executive summary (of our 560 page report comparing the big 5 in China and the big 5 in the US). Part 3 looks first at the internal direction of R&D for each company. US firms are focusing on language, data anlytics and robotics. In a dramatic contrast, Chinese firms are focusing on financial applications, blockchain and computing. Then it looks at the patterns of external M&A. US firms are focusing on consolidating monopoly positions as well as physical assets such as Motorola, Nokia. Why? Chinese firms are acquiring lifestyle companies. Third, we look at the excess cash flow for M&A for tech companies (and market cap to use stock) and the paucity of cash flow for banks. Are banks simply running out of cash flow to buy or build a viable future? Lastly, we do a detailed credit analysis of all companies. Interesting results. Baidu’s credit data are deteriorating at the fastest rate. To receive the full 560 report, send your email to paul@schulte-research.com. I personally hired several exceptionally talented students from UST and USC. Please support our students -- and pay them a superior wage. They are our future. I am available to go through the entire report in a 90 minute consultation.

1. 1
Paul Schulte, MA, MALD
paul@schulte-research.com
(+852) 9705 0777
Gavin Liu – Senior Analyst
Executive Summary
Who's Winning the Artificial Intelligence Race between PRC & US:
Alibaba, Tencent, Ping An, Baidu & Zhong An VERSUS
Alphabet, Amazon, Apple, Facebook & Microsoft

2. 2
SchulteResearch
Table of Contents
VII. Master Summary: Research and Development – Strategic Development 3
VIII. Master Summary: Cash Flow, M&A, Capex 8
IX. Master Summary: Credit Check 13

3. 3
SchulteResearch
VII. Master Summary: Research and Development – Strategic
Development
Winners: Alibaba – PAI 2.0
Google – Quantum Computing
Amazon – Robotics
Laggards: Baidu
Facebook

4. 4
SchulteResearch
Research Directions: US Firms
All companies have a similar vision of the future. AI, Big Data, and Language!
Source: Schulte Research
Companies Research Direction Unique Point
Facebook
1.Facebook AI Research (FAIR) – semantic analysis, sentient analysis, etc.
2.Natural Language Processing and Speech – translation services, word sense disambiguation, etc.
3.Applied Machine Learning – streamline content delivery, connect users w/ desired content
4.Data Science – human interaction analysis, market intelligence, etc.
5.Virtual Reality - augmented reality experiences
Virtual Reality
Microsoft
1.Artificial Intelligence
2.Computer Vision
3.Human-computer Interaction
4.Human Language Technologies
5.Search and Information Retrieval
Human-computer
interaction
Apple
1.Apple Car/ Autonomous Driving
2.Augmented Reality
3.HealthTech – Health functions within Apple watch
4.Chips – Hardware improvement
Chips
Amazon
1.Image/Face Recognition
2.Voice Recognition
3.ChatBot AI
4.Drone Delivery
5.Warehouse Robotics
Drone, Robotics
Google
1.Machine Translation System
2.Deep Learning Algorithms – detection of diabetic retinopathy
3.Quantum Computing
4.Big Data Analytics
5.Machine Intelligence/Perception
Quantum
Computing

5. 5
SchulteResearch
Research Directions: Chinese Firms
All companies have a similar vision of the future. Chinese firms show higher degree of diversification.
Source: Synergy Research, Schulte Research
Companies Research Direction Unique Point
Alibaba
1.Financial Securities Exchange Core
2.Customer Service AI
3.Intelligent Manufacturing – Cloud computing/big data analytics
4.Health Data Platform – Integration of patient data, image analysis, diagnosis
5.Commercial Vehicle Networks – logistics enhancement & optimization
Securities Exchange,
Intelligent Manufacturing
Tencent
1.Artificial Intelligence
2.Machine Learning – stock picking, HFT, portfolio management
3.Big Data – trend analysis
4.Cloud Computing
Portfolio Management
Ping An
1.Data Mining – social media user behavior, engagement rates
2.Computational Algorithms
3.Big Data Analytics – purchasing patterns, WMPs
WMPs
Zhong An
1.Financial Platforms/Cores – E-commerce platforms, insurance cores, finance cores
2.Data Analytics/ Risk Management Modelling
3.AI – Transaction decision-making
4.Blockchain – Digitalize off-chain assets, data storage, secure ID
5.AI – Customer service ChatBot
Blockchain
Baidu
1.Artificial Intelligence – image/speech recognition
2.High Performance Computing/Big Data Analytics
3.Natural Language Processing
4.Deep Learning
5.Augmented Reality
High performance
computing

6. 6
SchulteResearch
Major Acquisitions: US Firms
US firms invest heavily in acquiring smaller firms that do not necessarily operate in their industry.
Source: Synergy Research, Schulte Research
Company Acquisition Amount (US$) Year Description Comment
Facebook
WhatsApp 19bn 2014 Messaging
Consolidation of social
network industry
Oculus 2bn 2014 VR
Instagram 1.01bn 2012 Social Network
LiveRail 500mn 2014 Video ad.
Microsoft
LinkedIn 26.2bn 2016 Social Network
Failed hardware attempt
on Nokia. LinkedIn is the
new bet on professional
network.
Nokia 8bn 2013 Phone
Skype 8.5bn 2011 Messaging
Mojang 2.5bn 2014 Game developer
Yammer 1.2bn 2012 Corp communication
Apple
Beats Electronics 3bn 2014 Headphone
Lifestyle + Health
HopStop.com 1bn 2013 Transit guide
Lattice 200mn 2017 AI
Gliimpse 200mn 2016 Health
Amazon
Whole Foods Market 13.7bn 2017 Supermarket
O2O bet on Whole Foods
Twitch 970mn 2014 Game streaming
Souq.com 580mn 2017 E-commerce
Elemental Technologies 500mn 2015 Mobile video
Annapurna Labs 37mn 2015 Chip maker
Google
Motorola Mobility 12.5bn 2012 Phone
Another failed case of
acquiring phone company
Waze 1.3bn 2013 Map
Apigee 625mn 2016 API platform
DeepMind 500mn 2014 AI

7. 7
SchulteResearch
Major Acquisitions: Chinese Firms
All companies have a similar vision of the future. Chinese firms show higher degree of diversification.
Source: Synergy Research, Schulte Research
Companies Acquisition Amount (US$) Year Description Comment
Alibaba
UCWeb 4.7bn 2014 Mobile browser
Contents + data
Youku 3.5bn 2015 Chinese Youtube
AGTech Holdings 2.39bn 2016 Lottery
SCMP 262mn 2015 Media
Wandoujija 200mn 2016 Android app store
Tencent
Supercell 8.6bn 2016 Game developer
Consolidation of
game industry
China Music Corp 2.7bn 2016 Music
Riot Games 400mn 2011 Game developer
Miniclip SA na 2015 Game developer
Sanook na 2016 Thai web portal
Baidu
91 Boyuan Wireless 1.9bn 2013 Android app store
Diverse
Beijing Huanxiang Zongheng Chinese
Literature
31.3mn 2013 Online publisher
TrustGo 30mn 2013 Mobile security
Ping An Autohome 1.6bn 2016 Auto website Auto insurance

8. 8
SchulteResearch
VIII. Master Summary: Cash Flow, M&A, Capex
Winners: Apple + Google better invent a flying car for how much they are
spending
Losers: Baidu, Facebook (not diversifying fast enough)

9. 9
SchulteResearch
Market Cap:
Tech companies are a gathering force in market cap. They dominate capital markets now. Banks can’t
hold a candle to tech spending
0
100
200
300
400
500
600
700
800
900
Apple Alphabet Microsoft Facebook Amazon Alibaba Tencent Wells
Fargo
CCB HSBC Ping An Goldman
Sachs
Baidu Deutsche
Bank
Market Cap (US$bn)
Source: Schulte Research Estimates, Bloomberg

10. 10
SchulteResearch
Retained Earnings:
Alphabet and Apple are sitting on mountains of cash. Much of it as untaxed offshore cash.
105
96
27
22
20
16
12
5
3
0
20
40
60
80
100
120
Alphabet Apple Ping An Facebook Tencent Alibaba Baidu Amazon Microsoft
Retained Earnings (US$bn)
Un-sustainable cash pile
Finally profitable Stock buybacks
Source: Schulte Research Estimates, Bloomberg

11. 11
SchulteResearch
Free Cash Flow:
Cash flows from operations – investment in operating capital (mostly fixed assets)
Tech companies blow away banks in cash flow (‘different’ numbers but you get the
point!)
0
10
20
30
40
50
60
Apple Ping An Microsoft Alphabet Citi (pre-tax
profit)
Facebook Amazon Alibaba Tencent HSBC (pre-
tax profit)
Baidu
Free Cash Flow (US$bn) (2016)
Source: Bloomberg, Citi Annual Report, HSBC Annual Report

12. 12
SchulteResearch
Investment Cash Flow
(net spending in PP&E, Capex, M&A)
US$300bn in “conduct costs” for banks is that much more that can’t be used for
investment. Plus, current R/D spending is woefully under invested.
Source: Bloomberg
0
5
10
15
20
25
30
35
40
45
50
Microsoft Apple Alphabet Lloyds
(fines)
RBS (fines) Deutsche
(fines)
Facebook Alibaba Tencent BNP (fines) Amazon Baidu
Investment Cash Flow (US$bn) (2016)

13. 13
SchulteResearch
IX. Master Summary: Credit Check
ALL ARE SAFE
Greatest Improvement: Alibaba/Amazon
Greatest Deterioration: Baidu
Greatest Balance Sheet Destruction Through Stock Buybacks: Microsoft/Apple

14. 14
SchulteResearch
Chinese Companies Liquidity (1.2 * Working Capital / Total Assets)
0
0.1
0.2
0.3
0.4
0.5
0.6
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Alibaba Liquidity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Baidu Liquidity
0
0.05
0.1
0.15
0.2
0.25
0.3
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Tencent Liquidity
5 year deterioration
Source: Bloomberg
*Dotted line represents NASDAQ average

15. 15
SchulteResearch
US Companies Liquidity (1.2 * Working Capital / Total Assets)
0
0.05
0.1
0.15
0.2
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Amazon Liquidity
0
0.1
0.2
0.3
0.4
0.5
0.6
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Microsoft Liquidity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Facebook Liquidity
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
0.18
0.2
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Apple Liquidity
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Google Liquidity
Source: Bloomberg
*Dotted line represents NASDAQ average

16. 16
SchulteResearch
Chinese Companies Capital Structure (1.4 * Retained Earnings / Total Assets)
-0.5
-0.4
-0.3
-0.2
-0.1
0
0.1
0.2
0.3
0.4
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Alibaba Capital Structure
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Tencent Capital Structure
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Baidu Capital Structure
Source: Bloomberg
*Dotted line represents NASDAQ average

17. 17
SchulteResearch
US Companies Capital Structure (1.4 * Retained Earnings / Total Assets)
0
0.01
0.02
0.03
0.04
0.05
0.06
0.07
0.08
0.09
0.1
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Amazon Capital Structure
0
0.02
0.04
0.06
0.08
0.1
0.12
0.14
0.16
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Microsoft Capital Structure
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Facebook Capital Structure
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Apple Capital Structure
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
1
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Google Capital Structure
Stock buybacks
Stock buybacks
Source: Bloomberg
*Dotted line represents NASDAQ average

18. 18
SchulteResearch
Chinese Companies Profitability (3.3 * EBIT / Total Asset)
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Alibaba Profitability
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Tencent Profitability
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
0.8
0.9
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Baidu Profitability
5 year deterioration
Source: Bloomberg
*Dotted line represents NASDAQ average

19. 19
SchulteResearch
US Companies Profitability (3.3 * EBIT / Total Asset)
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Amazon Profitability
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Microsoft Profitability
0
0.1
0.2
0.3
0.4
0.5
0.6
0.7
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Facebook Profitability
0
0.2
0.4
0.6
0.8
1
1.2
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Apple Profitability
0
0.05
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45
0.5
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Google Profitability
Source: Bloomberg
*Dotted line represents NASDAQ average

20. 20
SchulteResearch
Chinese Companies Debt Structure (0.6 * Market Cap / Total Liabilities)
0
2
4
6
8
10
12
FY 2014 FY 2015 FY 2016
Alibaba Debt Structure
0
1
2
3
4
5
6
7
8
9
10
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Tencent Debt Structure
0
1
2
3
4
5
6
7
8
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Baidu Debt Structure
Deterioration
Source: Bloomberg
*Dotted line represents NASDAQ average

21. 21
SchulteResearch
US Companies Debt Structure (0.6 * Market Cap / Total Liabilities)
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Amazon Debt Structure
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Microsoft Debt Structure
0
5
10
15
20
25
30
35
40
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Facebook Debt Structure
0
1
2
3
4
5
6
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Apple Debt Structure
0
2
4
6
8
10
12
14
FY 2012 FY 2013 FY 2014 FY 2015 FY 2016
Google Debt Structure
Source: Bloomberg
*Dotted line represents NASDAQ average

22. Analyst Certification
The analyst(s) named in this report certifies that (i) all views expressed in this report accurately reflect the personal views of the analyst(s) with
regard to any and all of the subject securities and companies mentioned in this report and (ii) no part of the compensation of the analyst(s) was, is,
or will be, directly or indirectly, related to the specific recommendation or views expressed by that analyst herein.
Required Disclosures
The analyst named in this report (or their associates) does not have a financial interest in the corporation(s) mentioned in this report. Additional
information will be made available upon request.
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