Tencent. China / Hong Kong Company Guide

Transcription

1 China / Hong Kong Company Guide Version 1 Bloomberg: 7 HK Equity Reuters: 7.HK Refer to important disclosures at the end of this report DBS Group Research. Equity 28 June 216 BUY (Reinstating coverage) Last Traded Price: HK$17.5 (HSI : 2,172) Price Target: HK$25 (2% upside) Potential Catalyst: Releasing more ad inventories in Weixin Moments Where we differ: Non-GAAP earnings forecasts are more bullish than consensus with differential likely from higher revenue assumption Analyst Susanna Chui susanna_chui@hk.dbsvickers.com Tsz Wang TAM CFA, tw_tam@hk.dbsvickers.com Price Relative HK$ Jun-12 Jun-13 Jun-14 Jun-15 Jun-16 (LHS) Relative HSI INDEX (RHS) Relative Index Forecasts and Valuation FY Dec (RMB m) 215A 216F 217F 218F Turnover 12, , , ,851 EBITDA 42,136 57,351 71,698 86,761 Pre-tax Profit 36,216 49,954 65,777 82,55 GAAP Net Profit 28,86 39,733 52,318 65,66 Non-GAAP Net Profit 32,41 44,255 55,933 68,614 GAAP Net Profit Gth (%) GAAP EPS (RMB) GAAP EPS (HK$) Non-GAAP EPS (HK$) Non-GAAP EPS (RMB) GAAP EPS Gth (%) Non-GAAP EPS Gth (%) GAAP Diluted EPS (HK$) DPS (HK$) BV Per Share (HK$) PE (X) Non-GAAP PE (X) P/Cash Flow (X) P/Free CF (X) EV/EBITDA (X) Net Div Yield (%) P/Book Value (X) Net Debt/Equity (X) CASH CASH CASH CASH ROAE (%) Earnings Rev (%): New New New Consensus Non-GAAP EPS (RMB) Other Broker Recs: B: 3 S: H: Source of all data: Company, DBSV, Thomson Reuters, HKEX More and more connected; still a BUY The largest social communication platform in China; the greatest potential to monetise We reinstate coverage on with a BUY. We like as the largest social communication platform in China, with highest monthly-active-users (MAU) of 762.4m on Weixin in 1Q16. s large sticky user base and traffic not only bring it up as the largest mobile game developer in China, but also embrace a much higher monetisation potential in ads. Mobile games, keep on fighting back has implemented a new mobile game strategy by converting popular PC games to mobile games. The company has successfully launched the Legend of MIR 2 ( 熱血傳奇 ) based on a PC game by Shanda, as well as CrossFire Mobile ( 穿越火線 ) and Naruto Mobile ( 火影忍者 ). It has occupied six positions YTD among the top 1 China mobile games on ios, more than 3-6 positions in 215. We expect to deliver mobile game revenue FY15-18F CAGR of 5%, with growing number of paying gamers and ARPU with more and more licensed PC-ish mid- to hard-core mobile games. Mobile ads, catch up on a further road China's mobile advertising revenue was 2.2x the size of mobile game in 215. And online advertising market has seen ads on social platforms taking share from search. Facebook's online ad revenue was 27% of Alphabet's in 215, versus s online ad revenue which is only 15% of Baidu's and Taobao + Tmall's. As such we see huge potential for to catch up in the online ad market. We expect to deliver online advertising revenue FY15-18F CAGR of 54%, with market share to increase from 8% in 215 to 15% in 218. Valuation: We reinstate coverage on with a BUY, and our target price of HK$25, based on 3x FY17F non-gaap diluted EPS. Key Risks to Our View: Slow monetisation on Weixin and Mobile QQ. At A Glance Issued Capital (m shrs) 9,48 Mkt. Cap (HK$m/US$m) 1,64,11 / 26,681 Major Shareholders Naspers Limited (%) 33.5 Ma Huateng (%) 9.1 JPMorgan Chase & Co. (%) 7. Zhang Zhidong (%) 6.2 Free Float (%) m Avg. Daily Val. (US$m) ICB Industry : Technology / Software & Computer Services ed-th/ sa- DL

2 Company overview 's revenue mix The largest social communication platform in China, with the greatest potential to monetise. Established in 1998, is the largest messaging and social network platform in China, with highest monthly-active-users (MAU, Weixin: 762.4m; Mobile QQ: 658.m in 1Q16) and monthly time spent per active user (Weixin: 1,682 minutes; Mobile QQ: 571 minutes in March 216). 1% 8% 6% 4% 2% 9.3% 4.6% 5.2% 5.2% 5.2% 4.1% 8.4% 11.% 14.7% 6.5% 8.5% 18.6% 8.8% 9.% 23.5% 9.1% 23.4% 22.6% 21.4% 2.2% 14.2% 2.7% 28.2% 3.9% 31.3% 42.5% 34.3% 24.2% 18.8% 15.5% 's social communication platform development Launch year Computing platform Social communication platform 2 PC QQ & Qzone 211 Mobile Weixin MAU and time spent of top apps in China (March 216) MAU of top apps on ios and Android (m) Total time spent (m minutes) Time spent / MAU (minutes) 1 Weixin (T) 762 1,282,495 1,682 2 Mobile QQ (T) , Mobile Taobao (A) 346 8, V ideo (T) , Baidu Search App (B) , Alipay (A) 272 8, Weibo (A) , iqiyi V ideo (B) , QQ Browser (T) , Kugou Music (Others) , Source: QuestMobile, Company, DBS Vickers leverages its sticky large user base to introduce other services such as PC games, Mobile games, Social networks (i.e. monthly subscription fee for VIP privileges in QQ Music, Video, Reading, and Anime & Manga). And its highest level of engagement in terms of time spent leads to online advertising revenue generation. PC games, Mobile games, Social networks, Media brand ads and Social performance ads accounted for 34.3%, 2.7%, 23.4%, 8.5%, and 8.4% of FY15 revenue respectively. % FY14 FY15 FY16F FY17F FY18F PC games (Value-added services) Mobile games (Value-added services) Social networks (Value-added services) Media brand ads (Online advertising) Social performance ads (Online advertising) Others China's mobile advertising revenue was 2.2x the size of mobile game in 215. And online advertising market has seen performance ads on social platforms taking share from search. Facebook (social performance ads)'s online ad revenue was 26.6% of Alphabet (general search ads)'s in 215, versus (social performance ads) s online ad revenue which is only 14.7% of Baidu (general search ads)'s and Taobao + Tmall (e-commerce search ads)'s. As such we see huge potential for to deepen its monetisation from games to ads. China's mobile advertising revenue was 2.2x the size of mobile game in 215 Rmb bn F 217F 218F China mobile games Source: iresearch, DBS Vickers China mobile advertising market Page 2

3 Internet giants' online ad revenue in 215 Rmb bn Alphabet Facebook Baidu Taobao + Tmall s role In China s mobile game market Developer In-house mobile games Publisher Licensed third-party games Distributor Wechat/ Mobile QQ mainly for in house /licensed game distribution; MyApp ( 應用寶 ) also distributes non-licnesed third-party games Payment Tenpay China's mobile game development revenue share in 4Q15 The largest player in China s mobile game. is the largest player in China s online gaming industry, with 27.9% market share in the mobile game development market in 4Q15. The company also has advantages in securing popular licensed third-party games (high possibility of game success due to its good understanding of user behaviour) and strong mobile distribution platform. 's online game development Others 22% Top 1 - Others 3% 28% NetEase 2% Launch year Comput ing platform Social communication platform 23 PC QQ Game Platform 25 First self-developed online game, QQ Fantasy (QQ 幻想世界 ) 213 Mobile Mobile Game Centre on Mobile QQ and Weixin F irst mobile game, Tian Tian Ai Xiao Chu ( 天天愛消除 ) Source: Analysys, DBS Vickers 's PC and mobile game revenue mix 1% 9% 25.% 8% 37.6% 7% 52.7% 6.6% 65.4% 6% 5% 4% 74.98% 3% 62.36% 2% 47.3% 39.43% 34.63% 1% % FY14 FY15 FY16F FY17F FY18F PC games Mobile games Page 3

4 Catching up with Baidu and Taobao +Tmall in online ad market. Leveraging its leadership position in social communication platform, is catching up with Baidu and Taobao +Tmall, with 8.3% market share in China s online ad market in 215. China's online advertisement revenue share in 215 and linking to third-party services, such as e-commerce (JD ( 京東 ) and Meilishuo ( 美麗說 )), O2O services (58.com (58 同城 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), DiDi ( 滴滴出行 ), travel and ticketing), payment and other financial services. We believe more user base and user time spent will be aggregated. This should open up further monetisation opportunities in the future. 's next initiatives Others 34% 8% Source: iresearch, DBS Vickers Taobao + Tmall 26% Baidu 32% What will s next initiatives be? Weixin and Mobile QQ are adding multiple layers of high-engagement services Pay ment Other finance serv ices E-commerce O2O Media Cloud Tenpay Micro-loan through WeBank ( 微眾銀行 ), wealth management products through LiCaiTong ( 理財通 ), and insurance through ZhongAn Insurance ( 眾安保險 ) Investing in and partnering with third-party service prov iders such as J D ( 京東 ) and Meilishuo ( 美麗說 ) Investing in and partnering with third-party service providers such as 58.com (58 同城 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), DiDi ( 滴滴出行 ) Pictures ( 騰訊影業 ), V ideo( 騰訊視頻 ), Wepiao ( 微票兒 ) Investing in Huayi Brothers ( 華誼兄弟 ) (327.CH) Qcloud Page 4

5 Milestones 214 Feb- Strategic partnership with Dianping ( 大眾點評 ) Mar- Strategic partnership in ecommerce business with JD.com Mar- Strategic partnership with Netmarble Games, a game developer in Korea Apr - QQIM peak simultaneous online user accounts exceeded 2 million Jun- Strategic partnership with 58.com (58 同城 ) Aug - Founded a JV with Wanda Group and Baidu Sep-Strategic partnership with DXY ( 丁香園 ), an online healthcare platform in China Oct- Strategic partnership with We Doctor Group ( 掛號網 ), an online healthcare platform in China 215 Jan- Strategic partnership with Bitauto ( 易車 ) Sep-Established Penguin Pictures and Pictures Sep- Mobile payment user accounts bound with bank cards surpassed 2 million 213 Jan- Weixin & WeChat registered user accounts exceeded 3 million Aug - Launched game centres on Mobile QQ and Weixin Sep-Invested and formed strategic cooperation in search area with Sogou ( 搜狗 ) 212 Apr - Strategic investment in Kakao, a leading mobile messenger platform in Korea Jun- Strategic Investment in Epic Games, a PC/ mobile/ console game and game engine developer in the US, with Unreal Graphics Engine running half the games on Oculus Sep- Weixin & WeChart registered user accounts surpassed 2 million 21 Mar- QQIM peak simultaneous online user accounts exceeded 1 million 27 Jun- Established Charity Fund 25 May- Launched multi-media social networking service Qzone 23 Aug - Launched QQ Game Platform Nov - Launched web portal Aug - Launched mobile & telecommunication value-added services 1998 Nov - was founded 211 Jan- Launched mobile social communication service - Weixin Jan- Established Collaboration Fund, specialising in investments in third-party developers Feb- Invested in Riot Games, a game devleoper in the US, with major title League of Legends Mar- Launched video portal v.qq.com Jun- Launched open platform strategy Jul- Invested in Kingsoft and its subsidiary Kingsoft Internet Security Software 28 Jun- Became a constituent of Hong Kong's Hang Seng Index 26 Mar- Launched online payment platform Tenpay Jul- QQ.com became the most popular portal in China by PV (page view) and UV (unqiue visitor) 24 Jun- Listed on the main board of Hong Kong Stock Exchange 21 Jun- Launched Internet value-added services 1999 Feb- Launched instant messaging services - QQ Page 5

6 Mobile games, keep on fighting back China s mobile game growth continues. According to iresearch, China's online game market will deliver a 14.2% CAGR over F, of which mobile games are the key drivers (27.7% CAGR over F). China's mobile game market % F 217F 218F China mobile games Source: iresearch, DBS Vickers F CAGR: 27.7% Growth The largest player in China s mobile game. is the largest player in China s mobile game industry, with 27.9% market share in the mobile game development market in 4Q15, followed by NetEase, with 2.4% market share. The company also has advantages in securing popular licensed third-party games (high possibility of game success due to its good understanding of user behaviour) and strong mobile distribution platform. China's mobile game development revenue share 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 24.8% 21.7% 38.9% 3.7% 2.4% 32.6% 27.9% 4Q14 3.% 4Q15 NetEase Top 1 - Others Others Source: Analysys, DBS Vickers Mobile gamers will demand for higher and higher quality. Demographic dividend in China s mobile game market is diminishing. Mobile gamers have reached a considerable scale, with 3G/4G user adoption from 33.8% in 212 to 61.7% in 215. We see accelerating demand for mid- to hard-core mobile games. NetEase has successfully converted its popular PC games to mid- to hard-core mobile games. NetEase's (NTES.US) Fantasy Westward Journey ( 夢幻西遊 ) and Westward Journey Online ( 大話西遊 ) are highly successful examples. NetEase s market share increased from 5.5% in 1Q15 in 2.4% in 4Q15. Reacting to NetEase s success, has also implemented a new mobile game strategy. The company has cooperated with third-party game developers with strong IP to convert popular PC games into mid- to hardcore mobile games. It has successfully launched the Legend of MIR 2 ( 熱血傳奇 ) based on a PC game by Shanda (GAME.US), as well as CrossFire Mobile ( 穿越火線 : 槍戰王者 ) and Naruto Mobile ( 火影忍者 ), ranking among top 1 mobile games in China on the ios platform for ten, five and five months respectively. has regained its market standing, from occupying 3-6 positions in 215 to six positions in the first five months of 216 among the top 1 mobile games in China on the ios platform. In 2Q16, new licensed mobile games such as ZhengTu ( 征途手機版 ) have also seen favorable feedback. There will be more mobile games based on PC titles to be launched, including Legacy TLBB 3D ( 新天龍八部手機版 ) by Changyou (CYOU.US), DnF Mobile ( 地下城與勇士 ) and Stone Age ( 石器時代 ). Page 6

7 Top 1 mobile games in China on ios platform by gross revenue Units Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Supercell NetEase Others Source: App Annie, DBS Vickers 's mobile game revenue FY14 FY15 FY16F FY17F FY18F Quarterly ARPU mid-point (Rmb) yoy 53.6% 8.4% 26.1% 14.9% Quarterly paying gamers (m) yoy 23.8% 76.9% 12.3% 7.4% A v erage Weixin+WeChat MAU (m) Quarterly paying 5.5% 4.9% 6.8% 6.9% 7.% gamers/ Weixin+WeChat MAU Mobile game 11,2 21,3 4,856 57,865 71,348 rev enue (Rmb m) yoy 9.2% 91.8% 41.6% 23.3% Top 1 mobile games in China on ios platform by gross revenue (May 216) Mobile game Publisher Number of months of ranking among top1 Fantasy Westward Journey ( 夢幻西遊 ) NetEase ( 網易 ), Garena Online 15 AskTa o ( 問道 ) G-bits ( 吉比特 ) 1 Hero Moba ( 王者榮耀 ) ( 騰訊 ) 7 Westward Journey Online NetEase ( 網易 ) ( 大話西遊 ) 9 Zhengtu ( 征途手機版 ) ( 騰訊 ) 1 Naruto Mobile ( 火影忍者 ) ( 騰訊 ) 5 Clash Royale Supercell 3 The Legend of Mir 2 ( 熱血傳奇 ) ( 騰訊 ) 1 CrossFire ( 穿越火線 : 槍戰王者 ) ( 騰訊 ) 5 We Fly ( 全民飛機大戰 ) ( 騰訊 ) 21 Source: App Annie, DBS Vickers We expect to deliver mobile game revenue CAGR of 49.6%, with growing number of paying gamers and ARPU with more and more licensed PC-ish mid- to hard-core mobile games. Page 7

8 s mobile games on Mobile QQ/Weixin Game Title Commercial Launch Developer Genre WeFire 全民突擊 1Q15 In-house Action Tian Tian Dou San Guo 天天鬥三國 1Q15 Licensed Strategy Quan Min Chuang Tian Xia 全民闖天下 1Q15 Licensed RPG Dragon Blaze 龍界啟示錄 1Q15 Licensed RPG Quan Min PaoPao Da Zhan 全民泡泡大戰 1Q15 Licensed Puzzle Da Nao San Guo 大鬧三國 1Q15 In-house Card Quan Min Zhu Gong 全民主公 1Q15 Licensed Card MX 勇者大冒險 1Q15 Licensed ATM Gong Bao Lao Nai Nai 2 宮爆老奶奶 2 2Q15 Licensed A ction Wequiz 腦力達人 2Q15 Licensed Puzzle Chao Bao San Guo 潮爆三國 2Q15 Licensed Card Everlasting Chronicles 天天傳奇 2Q15 In-house Card DNW 魔龍與勇士 2Q15 Licensed Action Miracle Nikki 奇跡暖暖 2Q15 Licensed Strategy Laughter of the Three Kingdoms 三國笑傳 2Q15 Licensed RPG Battle of Nine Dragons 九龍戰 3Q15 In-house Action The Legend of MIR 2 熱血傳奇 3Q15 Licensed RPG King of Fighters 98 online 拳皇 98 終極之戰 OL 3Q15 Licensed Card Chinese Chess 天天像棋 3Q15 In-house Board & card The Heros Kill 英雄殺 3Q15 In-house Board & card Huan Le Up 歡樂升級 3Q15 In-house Board & card Independent Defense 獨立防線 3Q15 In-house Action WeMOBA 全民超神 3Q15 In-house Strategy Honor of Kings 王者榮耀 3Q15 In-house Strategy The V oice of China 中國好聲音 - 全民偶像 3Q15 In-house Action Legend of Galaxy 星河戰神 3Q15 In-house Action WeShoot 全民槍王 3Q15 In-house Action Six Dragon Hegemony 3D 六龍爭霸 3D 4Q15 Licensed Strategy TBall 騰訊桌球 4Q15 In-house Board & card Dragon & Knight 馴龍戰機 3D 4Q15 Licensed Action CrossFire Mobile 穿越火線 : 槍戰王者 4Q15 Licensed Action Kingdom Warriors 全民無雙 4Q15 Licensed Action QQ Bridge 天天橋牌 1Q16 In-house Board & Card Naruto Mobile 火影忍者 1Q16 Licensed Action Timi Run Everyday 3D 天天酷跑 3D 1Q16 In-house Action GO 騰訊圍棋 1Q16 In-house Board & Card Black Fairy Tale for Adults 天魔幻想 1Q16 In-house Card B&S Mobile 戰鬥吧劍靈 1Q16 Licensed RPG Dragon Ball Z Mobile 龍珠激鬥 1Q16 Licensed RPG Legend of the Swordman Mobile 劍俠情緣手游 2Q16 Licensed Tower Defense Carrot Fantasy 3 保衛蘿蔔 3 2Q16 Licensed RPG Huan Le Pin San Zhang 歡樂拼三張 2Q16 In-house Board & Card ZhengTu 征途手機版 2Q16 Licensed RPG Infinity Blade Saga 無盡之劍 - 命運 2Q16 Licensed ARPG Tian Tian Jun Qi 天天軍棋 2Q16 In-house Board & Card Ensemble Star 偶像夢幻祭 2Q16 Licensed Strategy Page 8

9 s mobile games on Mobile QQ/Weixin Pipeline: Game Title Commercial Launch Developer Genre Stone Age 石器時代 TBC Licensed RPG DnF Mobile 地下城與勇士 TBC Licensed TBC Puzzle and Dragon 智龍迷城 TBC Licensed RPG Contra Mobile 魂鬥羅 TBC Licensed TPS Legacy TLBB 3D 新天龍八部手機版 TBC Licensed RPG Supercell acquistion; buying global expansion potential. (7.HK) announced that the company will lead the consortium to acquire 84.3% stake in Supercell, a leading Finnish mobile game developer, at USD8.6bn. will contribute USD3.-4.bn to the consortium for the transaction. Supercell's FY15 net profit/ EUR m Rmb m Supercell's FY15 net profit 693 5,17 's FY15 net profit 28,86 Supercell's FY15 net profit/ 18% Given remaining Supercell s operation independence, will treat the investment in the consortium as a financial asset, and will not consolidate or equity-account for this investment. But will enjoy revenue sharing of Supercell s mobile game in China as the company has entered into arrangements with Supercell regarding Supercell s game distribution in China. And Supercell has always been occupying 1-2 positions (four major titles, Clash of Clans, Boom Beach, Hay Day and Clash Royale) from 215 to date among the top 1 China mobile games on ios. Supercell also does well in the global market, without localisation for specific markets. We believe will not only leverage Supercell's strong gaming pipeline, but also its global expansion potential. Supercell has always been occupying 1-2 positions among the top 1 China mobile games on ios Units Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May-16 Supercell NetEase Others Source: App Annie, DBS Vickers Supercell also does well in the global market Units Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 May-16 Supercell NetEase Others Source: App Annie, DBS Vickers Page 9

10 Wading into Virtual reality (VR). Virtual reality (VR) and augmented reality (AR) have the potential to become the next big computing platform, following smartphones, as users demand for more immersive user experiences. Instead of just playing games, users want to feel like they are in the games. Virtual reality versus Augmented reality Virtual reality Virtual reality immerses a user in an imagined or replicated world (like videogames, or movies) or simulates presence in the real world (like watching a sporting event live). The major hardware players in VR are Oculus, Sony PlayStation VR, HTC Vive, and Samsung Gear VR. Source: DBS Vickers Augmented reality Augmented reality overlays digital imagery onto the real world. The major hardware players include Microsoft HoloLens, Google Glass, and Magic Leap. Three type of VR head-mounted-devices (HMDs), based on their computing power Smartphone based HMDs Game console- and PCbased HMDs Integrated HMDs Source: DBS Vickers They will work with smartphones, which are slipped into the HMDs. The HMDs rely on the motion sensors in smartphones. They have basic built-in computing power to work with game consoles and PCs complex sensory system. They are an independent computing device, with a complete set of components. Lenovo released its first Android-based gaming console, ministation, with s software development kit (SDK), in November 215. In March, Skyworth (81.CH) said that it will release its Discrete HMDs this year, again with s SDK, running on ministation. Providing the developer platforms for hardware vendors, we believe the company will be more focused on VR content and ecosystem. is the largest shareholder of EPIC Games, which owns Unreal Graphics Engine running half the games on Oculus. Page 1

11 Mobile ads, catch up on a further road China's mobile advertising market is larger and fastergrowing than mobile game. China's mobile advertising revenue was 2.2x the size of mobile game in 215. And iresearch expects China's mobile advertising market to deliver a 53.6% CAGR over F versus mobile games s 27.7%, as advertisers allocate more media budgets to mobile advertising and social network ads. China's mobile advertising revenue was 2.2x the size of mobile game in 215 BAT dominates online advertisement market. Baidu, Taobao +Tmall and (collectively known as BAT) dominate the online advertisement market, with 31.7%, 25.7% and 8.3% market shares respectively in 215. It is because users are increasingly concentrated on these companies, creating a winner takes all dynamic. Nine of the top 1 apps in China in terms of MAU belong to them. These established platforms can monetise their substantial user bases through online ads. China's online advertising revenue share Rmb bn F 217F 218F China mobile games China mobile advertising market 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 5.4% 43.1% 4.7% 38.4% 34.3% 4.5% 4.6% 5.4% 8.3% 4.2% 17.1% 22.9% 25.8% 24.3% 25.7% 28.3% 29.5% 28.9% 31.9% 31.7% Baidu Taobao Others Source: iresearch, DBS Vickers China's mobile advertising market Rmb bn F CAGR 53.6% F 217F 218F China mobile advertising Growth (%) Source: iresearch, DBS Vickers 2% 18% 16% 14% 12% 1% 8% 6% 4% 2% % Source: iresearch, DBS Vickers MAU and time spent on top apps in China (March 216) MAU of top apps on ios and Android (m) Total time spent (m minutes) Time spent / MAU (minutes) 1 Weixin (T) 762 1,282,495 1,682 2 Mobile QQ (T) , Mobile Taobao (A) 346 8, V ideo (T) , Baidu Search App (B) , Alipay (A) 272 8, Weibo (A) , iqiyi V ideo (B) , QQ Browser (T) , Kugou Music (Others) , Source: QuestMobile, Company, DBS Vickers Page 11

12 Huge potential of s social performance ads. Online advertising market has seen performance ads on social platforms taking share from search. Facebook (social performance ads)'s online ad revenue was 26.6% of Alphabet (general search ads)'s in 215, versus (social performance ads) s online ad revenue which is only 14.7% of Baidu (general search ads)'s and Taobao + Tmall (e-commerce search ads)'s. As such we see huge potential for to catch up in the online ad market. Internet giants' online ad revenue in 215 RMB bn Alphabet Facebook Baidu Taobao + Tmall s social communication platform has the highest MAU (Weixin: 762.4m; Mobile QQ: 658.m in 1Q16) and monthly time spent per active user (Weixin: 1,682 minutes; Mobile QQ: 571 minutes in March 216). is uniquely positioned to leverage its large and highly-engaged user base to monetise the mobile Internet. Just like Facebook (FB.US), is extending its ad targeting capability by understanding user behaviour and analysing data, so that the company can deliver more relevant social performance ads in Weixin Moments. MAU of Weixin/ WeChat and Mobile QQ m Q14 2Q14 3Q14 4Q14 Weixin/ WeChat 1Q15 2Q15 3Q15 4Q15 Mobile QQ 1Q16 Video ads are another high-potential segment. Videos are another time-spending mobile Internet activity. We see a favourable adoption trend of video ads. iresearch expects China s online advertisement market to deliver a 32.3% CAGR over F. China's online video ad market Rmb bn F CAGR 32.3% F 217F 218F China online video ads Growth (%) 6% 5% 4% 3% 2% 1% % Source: iresearch, DBS Vickers Page 12

13 Video has the highest MAU (293.9m in March 216) and total monthly time spent (73,879 minutes in March 216), followed by iqiyi, Youku Letv and Sohu TV. And its market share in the online ad market has grown from 14.1% in 1Q15 to 2.2% in 4Q15. This was mainly driven by high-quality content, such as exclusive content of NBA, Warner Bros., HBO and The Voice of China. China online video ad market share 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 45.1% 39.5% 19.6% 14.1% 19.% 2.2% 21.2% 21.3% 1Q15 4Q15 Youku Video iqiyi Others Source: Analysys, DBS Vickers We like because the company does not only monetise video ads attached to long-form videos, which face fierce competition on content acquisition, but also sees huge potential in auto-play video ads to be launched on its social network platform, just like those in Facebook. We expect to deliver online advertising revenue CAGR of 53.5%, with growth in China's online advertising market and s market share to increase from 8.3% in 215 to 15.% in 218. 's online advertising revenue China's online advertising market (Rmb m) 's online advertising revenue (Rmb m) 's market share FY14 FY15 FY16F FY17F FY18F 153,97 29,37 28,8 35,81 418,67 8,38 17,468 28,616 44,364 63,22 5.4% 8.3% 1.1% 12.6% 15.% s growing contribution from online advertising revenue 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 9.3% 4.6% 5.2% 5.2% 5.2% 1.5% 17.% 19.7% 23.7% 27.7% 8.2% 78.4% 75.1% 71.1% 67.% FY14 FY15 FY16F FY17F FY18F Value-added services Online advertising Others Page 13

14 s online ad offerings Media Brand Ads News (Cost Per Click, CPC) + Video (Cost Per Thousand Impressions, CPM) Banner In-feed Video pre-roll Embed image ads in apps to direct traffic to advertisers website Integrate ads relevant to content feed to achieve higher click-throughs Play video commercials before users selected programme Social Performance Ads Weixin Official Account (Cost Per Click, CPC), Weixin Moment (Cost Per Thousand Impressions, CPM) and Mobile QQ (CPM) Text & Image Post text and image ads in Mobile QQ, Weixin Official Accounts and Weixin Moment to connect and engage with target users ecoupon Show electronic coupons at the bottom of news articles in Weixin Official Accounts Page 14

15 What will s next initiatives be? Adding payment and other financial services as well as linking to third-party services. Weixin and Mobile QQ are adding payment and other financial services as well as linking to third-party service providers, such as e-commerce (JD ( 京東 ) and Meilishuo ( 美麗說 )), O2O services (58.com (58 同城 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), DiDi ( 滴滴出行 ), travel and ticketing). We believe more user base and user time spent will be aggregated. This will open up further monetisation opportunities in the future. Adding payment and other financial services as well as linking to third-party services. 's next initiatives Pay ment Other finance serv ices E-commerce O2O Media Cloud Tenpay Micro-loan through WeBank ( 微眾銀行 ), wealth management products through LiCaiTong ( 理財通 ), and insurance through ZhongAn Insurance ( 眾安保險 ) Investing in and partnering with third-party service prov iders such as JD ( 京東 ) and Meilishuo ( 美麗說 ) Investing in and partnering with third-party service providers such as 58.com (58 同城 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), DiDi ( 滴滴出行 ) Pictures ( 騰訊影業 ), V ideo( 騰訊視頻 ), Wepiao ( 微票兒 ) Investing in Huayi Brothers ( 華誼兄弟 ) (327.CH) Qcloud Page 15

16 Internet finance, another potential source of meaningful revenue China's third-party mobile payment market share A potential area which could serve as another meaningful revenue source is Internet finance. is catching up in mobile payment, and is now one of two oligopoly players, leveraging Weixin s large user base and higest level of engagement in terms of time spent. And it has expanded its footprint to other financial services, such as micro-loans through WeBank ( 微眾銀行 ), wealth management products through LiCaiTong ( 理財通 ), and insurance through ZhongAn Insurance ( 眾安保險 ). Tenpay catching up in mobile payment, across multiple activities in s ecosystem. Mobile payment is one of the basic elements of Internet finance. According to iresearch, China's third-party mobile payment market will deliver a 41.% CAGR over F. 1% 9% 8% 7% 6% 5% 4% 3% 2% 1% % 3.2% 3.9% 8.6% 1.6% 2.4% 2.6% 82.3% 68.4% Alipay Tenpay Lakala Others China's third-party mobile payment market Rmb bn 3, 25, 2, 15, 1, 5, F 217F 218F Source: iresearch, DBS Vickers F CAGR 41.% China third-party mobile payment market 45% 4% 35% 3% 25% 2% 15% 1% 5% % Alipay ( 支付寶 ) and Tenpay ( 財付通 ) are two oligopoly players in the third-party mobile payment market. Backed by Taobao + Tmall, the largest e-commerce marketplace in China, Alipay is the largest player with 68.4% market share in third-party mobile payment in 215. s Tenpay grew its market share from 1.6% in 214 to 2.6% in 215. The company leverages Weixin s large user base (MAU: 762.4m in 1Q16) and highest level of engagement in terms of time spent (monthly time spent per active user: 1,682 minutes in March 216). Driven by the popularity of Red Packet and C2C money transfer, there are now more than 3m users linking their bank cards to Weixin and Mobile QQ. We expect continuous growth in both the number of users as well as the level of activity, by deepening payment application scenarios, such as mobile games, e- commerce (JD ( 京東 ) and Meilishuo ( 美麗說 )), O2O services (58.com (58 同城 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), DiDi ( 滴滴出行 ), travel and ticketing), and financial services. Source: iresearch, DBS Vickers WeBank is not a traditional bank, but a platform connecting users with banks. Established in 214, s WeBank ( 微眾銀行 ) is the first private Internet bank in China, targeting individuals and micro enterprises. WeBank is not a traditional bank, but a platform connecting users with banks. provides a large user base, additional data analysis and low-cost online distribution channel, while banks provide low-cost funding. In May 215, WeBank launched its first product, WeiLiDai ( 微粒貸 ), providing consumer loans to a white list, selected Weixin and Mobile QQ users based on their risk profile. The maximum loan amount is Rmb2,-2,. On the funding end, it is using a capital-light model, partnering with a number of banks to provide loans on a joint basis. As of May 216, the loan balance was >Rmb4bn, with borrower number of >5.m and average loan amount of ~Rmb8,. WeChat has expressed that it may provide 3-5 financial products, each with over 1m or even 1m users. Page 16

17 WeBank's shareholding structure LiCaiTong Others 3% 3% Liye Group 2% Baiyeyuan 2% LiCaiTong is a wealth management product distribution platform. Established in 213, s LiCaiTong ( 理財通 ) is a wealth management platform, connecting MAU of 762.4m on Weixin to large financial institutions wealth management products, such as money market funds, fixed income funds, index funds and investment-linked insurance. As of January 216, Licaitong had more than 3m users. LiCaiTong is working with partners to broaden the wealth management product portfolio on its platform. Data analysis can better evaluate risks, set prices, and innovate insurance products. Ping An, and Ant Financial established ZhongAn Insurance ( 眾安保險 ), China s first online insurance company, in 213. ZhongAn insurance is not only an online insurance platform, but has also changed the existing structure of insurance products via data analysis. For example, it can track users consumption behaviour on Taobao + Tmall, and offer return shipping insurance. Another example is that it can track users daily behaviour via wearable devices. If users take care of themselves, they would probably be healthier and incur lower healthcare costs. Hence, they will enjoy lower premiums for health insurance. Healthy users pay less, while other people neglecting their health pay more. Data analysis can better evaluate risks, set prices, and innovate insurance products. Page 17

18 ZhongAn's shareholding structure China's O2O (online-to-offline) market Others 6% Ant Financial 16% 12% PingAn Insurance 12% Rmb bn E CAGR: 23.2% F 217F 218F 45% 4% 35% 3% 25% 2% 15% 1% 5% % China O2O market Growth Asset-light approach to exploit e-commerce and O2O O2O (online-to-offline) to potentially change e-commerce landscape. According to iresearch, China's e-commerce market will deliver a 25.4% CAGR over F. O2O (online-to-offline) is growing beyond goods and expanding into services. iresearch expects China's O2O market to deliver a 23.2% CAGR over F, representing 8.3% of the e-commerce market in 218. We believe there will be great upside potential, as the service industry accounted for 5.5% of China's total GDP in 215, according to National Bureau of Statistics of China. China's e-commerce market Source: iresearch, DBS Vickers O2O service platforms are burning cash to grab users. Currently, O2O service platforms are at the stage of adopting subsidy strategy to grab user base. After accumulating a substantial user base and establishing a consumption history, they can then create value by analysing consumption data and recommending targeted services, and turn profitable, we believe. We like s asset-light approach in e-commerce and O2O development. The company enriches its e-commerce, O2O ecosystem by making strategic investments in and partnering with third-party service providers, such as JD ( 京東 ), Meilishuo ( 美麗說 ), Dianping ( 大眾點評 ), Meituan ( 美團 ), DiDi ( 滴滴出行 ), and ele.me ( 餓了麼 ), without incuring heavy investments and losses at listco level. Rmb bn E CAGR: 25.4% 8, 7, 6, 5, 4, 3, 2, 1, F 217F 218F China e-commerce market Growth Source: iresearch, DBS Vickers 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % enriches its O2O ecosystem by investing in and partnering with third-party service providers Examples Frequency of utilisation Third-party service providers Daily serv ices F ood deliv ery and taxi Dianping ( 大眾點評 ), Meituan ( 美團 ), ele.me ( 餓了麼 ), and DiDi ( 滴滴出行 ) Periodic Informational serv ices serv ices Domestic Real-estate and helpers and auto agency beauty High Mid Low 58.com (58 同城 ) Leju ( 樂居 ) and Bitauto ( 易車 ) Page 18

19 China's groupbuy market share in terms of GMV in 215 Nuomi 18% Others 4% Source: Analysys, DBS Vickers Meituan- Dianping 78% Pan-entertainment strategy adding layers of monetisation China to develop media industry. China will develop its media industry to bolster soft power and build its influence, given Korea s success in elevating itself in the consciousness of Asia and the world. BAT can leverage their dominance in social network, e- commerce and online video platforms. We expect large Internet giants to leverage their large user bases and close proximity to users daily lives, given their dominance in social network, e-commerce, online video platforms, and data analytics. They invest in upstream content, and even start inhouse production. We believe advertisements, box office split (such as online ticketing) and also portfolios of highquality intellectual property (IP) will offer monetisation potential ahead. will enjoy great synergies between its gaming business and its content investment. We believe will not just invest on video content, but also literature ( Literature) and music (QQ Music). We see great synergies between its gaming business and its content investment, by adding layers of monetisation across different genres. BAT's film industry landscape iqiyi Pictures ( 愛奇藝影業 ) A li Pictures ( 阿里影業 ) Pictures ( 騰訊影業 ) Crowd funding BaiF ayouxi ( 百發有戲 ) YuLeBao ( 娛樂寶 ) XingYingLianMeng ( 星影聯盟 ) Production Cooperation with Huace Media ( 華策影視 ) Investing in Huayi Brothers ( 華誼兄弟 ) (327.CH) Investing in Huayi Brothers ( 華誼兄弟 ) (327.CH) Investing in Enlight Media ( 光線傳媒 ) (3251.CH) Intergrating IP resources such as games and literature Distribution iqiyi ( 愛奇藝 ) Youku Tudou ( 優酷土豆 ) (YOKU.US) V ideo ( 騰訊視頻 ) Inv esting in Wasu Media ( 華數傳媒 ) (156.CH) Ticketing Baidu Map ( 百度地圖 ) Meituan ( 美團 ) DianPing ( 大眾點評 ) Nuomi ( 糯米 ) Maoy an Mov ie ( 貓眼電影 ) Weixin Mov ie ( 微信電影 ) Inv esting in SMI Holdings ( 星美 Taobao Movie ( 淘寶電影 ) QQ Movie (QQ 電影 ) 控股 ) (198.HK) Marketing iqiyi ( 愛奇藝 ) Sina Weibo ( 新浪微博 ) Weixin/ WeChat Moment ( 微信朋友圈 ) Youku Tudou ( 優酷土豆 ) V ideo ( 騰訊視頻 ) Page 19

20 China's online video ad and box office market Rmb bn F 217F 218F China online video ads market China box office Source: iresearch, DBS Vickers Qcloud focuses on gaming, videos, and mobile apps, while AliCloud enjoys economies of scale from merchant clients. AliCloud takes a leading position in China public cloud market, enjoying economies of scale from merchant clients on Taobao + Tmall s e-commerce platform, as well as expanding to Internet companies, traditional sectors and also municipal and provincial authorities. Qcloud undertakes a differentiation strategy, currently focusing on gaming, videos, and mobile apps, with its leadership position in gaming, video and social network platform. Qcloud offers its gaming clients customised cloud services covering games entire lifecycle, from development to release to maintenance. Through WeBank initiatives, has taken steps towards financial cloud services. And s recent B2B connectivity (number of Weixin Official Accounts: ~2m), will allow Qcloud to build relationships with corporates in cloud services. s Qcloud undertakes a differentiation strategy The government's growing interest in promoting use of cloud computing. Demographic dividend reaching peak, the government is encouraging the use of cloud computing to improve production efficiency and service quality. According to IDC's forecast, China's public cloud market will deliver a 27.9% CAGR over F. China's public cloud market Rmb bn IaaS PaaS SaaS Source: IDC, DBS Vickers Page 2

21 Financial forecast We forecast revenue to grow by 4.8%/29.4%/21.6% for FY16F/FY17F/FY18F respectively mainly because 1) is successful in its new mobile game strategy, cooperating with leading game developers with strong IP to convert popular PC games to mobile games, and 2) The company is placing more social performance ad inventories, and even launching auto-play video ads like those in Facebook, in Mobile Qzone and Weixin Moments. GPM will gradually decrease to 58.2%/56.8%/56.6% in FY16F/FY17F/FY18F, due to higher mix of licensed games by third-party develeopers. Net profit will rise 37.9%/31.7%/25.5% in FY16F/FY17F/FY18F. Non-GAAP net profit will increase 36.5%/26.4%/22.7%, with FY15E-18E CAGR of 28.4%. Key assumptions Rmb m FY14 FY15 FY16F FY17F FY18F Revenue V alue-added services 63,31 8,669 18, , ,685 PC game 33,556 35,287 35,76 35,27 35,41 Mobile game 11,2 21,3 4,856 57,865 71,348 Social networks 18,554 24,82 32,786 4,19 45,936 Online advertising 8,38 17,468 28,616 44,364 63,22 Media brand ads 5,13 8,784 12,673 16,842 2,783 Social performance ad 3,25 8,684 15,944 27,522 42,437 Others 7,314 4,726 7,485 9,77 11,946 Total 78,932 12, , , ,851 Growth V alue-added services 27% 35% 23% 15% PC game 5% -1% 1% % Mobile game 9% 92% 42% 23% Social networks 3% 36% 23% 14% Online advertising 11% 64% 55% 43% Media brand ads 72% 44% 33% 23% Social performance ads 171% 84% 73% 54% Others -35% 58% 3% 23% Total 3% 41% 29% 22% Page 21

22 Valuation & recommendation As per our estimates, is currently trading at 25x FY17F non-gaap diluted EPS. The company has been trading between 23x and 39x its forward PE for the past three years. And it has been trading between.7x and 1.5x Baidu s forward PE. Baidu is trading at 2x FY17F PER. PE band chart As is catching up Baidu and Taobao + Tmall on a further road of mobile ads, we believe deserves to be trading at relatively high premium to Baidu. We reinstate coverage on with a BUY recommendation, and a target price of HK$25, based on 3x FY17F non-gaap diluted EPS, which is its historical average and also justified by FY15-18F non-gaap diluted EPS CAGR of 28.4%. PB band chart x x SD: 33.1x Avg: 29.8x SD: 9.6x Avg: 8.7x SD: 26.5x SD: 7.7x 2 5. Jul-13 Jul-14 Jul-15 Jul-16 Jul-13 Jul-14 Jul-15 Jul-16 Source: Thomson Reuters, DBS Vickers Source: Thomson Reuters, DBS Vickers Page 22

23 Peers valuation Mkt PE PE Yield Yield P/Bk P/Bk ROE ROE Currency Price Cap 16F 17F 16F 17F 16F 17F 16F 17F Company Name Code Local$ US$m x x % % x x % % Holdings* 7 HK HKD , HK-listed peers Kingsoft 3888 HK HKD , Netdragon Websoft 777 HK HKD ,519 n.a Cogobuy Group 4 HK HKD , Hc International 228 HK HKD n.a. n.a Igg 799 HK HKD Ourgame Intl.Holdings 6899 HK HKD Boyaa Interactive Intl. 434 HK HKD n.a. n.a. n.a. n.a Linekong Interactive 8267 HK HKD Forgame Holdings 484 HK HKD Average US-listed peers Baidu 'A' ADR BIDU US USD , Qihoo 36 Tech.Cl.A ADR QIHU US USD , Momo ADR MOMO US USD , YY ADR YY US USD ,855 n.a. n.a Cheetah Mobile Cl.A ADR CMCM US USD , Sina SINA US USD , Idreamsky Technology 'A' ADR DSKY US USD n.a. n.a. n.a. n.a. n.a. n.a. n.a. Netease ADR5 NTES US USD , Changyou Com ADR CYOU US USD , V impelcom ADR V IP US USD , J umei Intl.Holding Cl.A ADR JMEI US USD Soufun Hdg.Cl.A ADR SFUN US USD ,326 n.a (27.3) 3.2 E-House (China) Holdings ADR EJ US USD n.a. n.a Leju Holdings ADR LEJ U US USD Autohome Cl.A ADR ATHM US USD , Bitauto Holdings ADR BITA US USD , Ctrip.Com Intl.ADR CTRP US USD ,516 n.a (.) 9.1 Tuniu Adr Class A TOUR US USD ,261 n.a. n.a (69.9) (142.7) Average Global peers Alphabet 'A' GOOGL US USD , Amazon.Com AMZN US USD , Facebook Class A FB US USD , Average Source: Thomson Reuters, *DBS Vickers Page 23

24 CRITICAL DATA POINTS TO WATCH Earnings Drivers: Mobile gamer and ARPU growth. is implementing a new mobile game strategy, cooperating with third-party game developers with strong IP to convert popular PC games into mid- to hard-core mobile games. has regained its market standing, from occupying 3-6 positions in 215 to six in the first five months of 216 among the top 1 mobile games in China on the ios platform. Mobile game quarterly paying gamers/weixin's MAU have grown from 4.4% in 215 to 6.7% in 1Q16. We believe the number of paying gamers will grow faster than Weixin's and Mobile QQ's MAU. We believe more and more licensed PC-ish mid- to hard-core mobile games will drive up ARPU. We expect to deliver mobile game revenue FY15-18F CAGR of 49.6%. Online ad share gain, with more ad inventories in Weixin Moments and launch of auto-play video ads China's mobile advertising revenue was 2.2x the size of mobile game in 215. And online advertising market has seen ads on social platforms taking share from search. Facebook's online ad revenue was 27% of Alphabet's in 215, versus s online ad revenue which is only 15% of Baidu's and Taobao + Tmall's. As such we see huge potential for to catch up in the online ad market. Weixin and WeChat MAU (m) A 215A 216F 217F 218F 's mobile game quarterly paying gamers (m) A 215A 216F 217F 218F 's mobile game quarterly ARPU mid-point (Rmb) s social communication platform has the highest MAU (Weixin: 762.4m; Mobile QQ: 658.m in 1Q16) and monthly time spent per active user (Weixin: 1,682 minutes; Mobile QQ: 571 minutes in March 216). is uniquely positioned to leverage its large and highly-engaged user base to monetise the mobile Internet. Just like Facebook, is extending its ad targeting capability by understanding user behaviour and analysing data, so that the company can deliver more relevant social performance ads in Weixin Moments. Video ads are another high-potential segment. does not only monetise on video ads attached to long-form videos in Video, but also sees huge potential on auto-play video ads to be launched on its social network platform, just like those on Facebook , 4, 35, 3, 25, 2, 15, 1, 5, A 215A 216F 217F 218F China's online advertising market (Rmb bn) 418,67 35,81 28,8 29,37 153,97 214A 215A 216F 217F 218F We expect to deliver online advertising revenue FY15-18F CAGR of 53.5%, with market share to increase from 8.3% in 215 to 15.% in 218. 's share in China's online advertising market (%) A 215A 216F 217F 218F Source: iresearch, Company, DBS Vickers Page 24

25 Balance Sheet: Strong balance sheet. As of March 216, had a strong net cash position of Rmb27.4bn (Rmb71.9bn debt and Rmb99.3bn cash). This is attributed to its low capex of about Rmb8bn versus about Rmb45bn operating cash inflows in FY15. Share Price Drivers: Mobile gamer and ARPU growth. is implementing a new mobile game strategy, converting popular PC games into mobile games. has regained its market standing, from occupying 3-6 positions in 215 to six in the first five months of 216 among the top 1 mobile games in China on the ios platform. And we believe more licensed mid- to hard-core games will drive up ARPU. More ad inventories in Weixin Moments. Just like Facebook (FB.US), is extending its ad targeting capability by analysing data, so that the company can deliver more relevant social performance ads in Weixin Moments. Launch of auto-play video ads. does not only monetise on video ads attached to long-form videos in Video, but also sees huge potential in auto-play video ads on its social network platform, just like those in Facebook. Leverage & Asset Turnover (x) A 215A 216F 217F 218F Gross Debt to Equity (LHS) Asset Turnover (RHS) Capital Expenditure RMBm 14,. 12,. 1,. 8,. 6,. 4,. 2,.. 214A 215A 216F 217F 218F Capital Expenditure (-) 3.% 25.% 2.% ROE Key Risks: Next social communication platform may not be successful. s success in transiting its large and sticky user base from QQ & Qzone in PC era to Weixin in mobile era, may not guarantee the success in next computing platform. New games may not be successful. is implementing a new mobile game strategy, converting popular PC games into mobile games. These mobile games may not emulate the success of popular PC games. User experience may slow ad monetisation. We like s focus on providing long-term user experience rather than nearterm revenue generation. But ad monetisation may be slower than expected, after balancing user experience. Company Background: Established in 1998, is the largest messaging and social network platform in China, with the highest monthly-activeusers (MAU, Weixin: 762.4m in 1Q16). mainly monetises via PC games, Mobile games, Social networks (i.e. monthly subscription fee for VIP privileges in QQ Music, Video, Reading, and Anime & Manga), Media brand ads and Social performance ads, which accounted for 34.3%, 2.7%, 23.4%, 8.5%, and 8.4% of FY15 revenue respectively. Pony Ma ( 馬化騰 ), Chief Executive Officer, is one of the core founders. 15.% 1.% 5.%.% Forward PE Band x SD: 33.1x 32 3 Avg: 29.8x SD: 26.5x Jul-13 Jul-14 Jul-15 Jul-16 x A 215A 216F 217F 218F -1SD: 7.7x PB Band +1SD: 9.6x Avg: 8.7x 5. Jul-13 Jul-14 Jul-15 Jul-16 Page 25

26 Key Assumptions FY Dec 214A 215A 216F 217F 218F Weixin and WeChat MAU (m) 's mobile game quarterly paying gamers (m) 's mobile game quarterly ARPU mid-point (Rmb) China's online advertising market (Rmb bn) 's share in China's online advertising market (%) Segmental Breakdown (RMB m) FY Dec 214A 215A 216F 217F 218F Revenues (RMB m) Value added services (VAS) 63,31 8,669 18, , ,685 Online advertising 8,38 17,468 28,616 44,364 63,22 Others 7,314 4,726 7,485 9,77 11,946 Total 78,932 12, , , ,851 Gross profit (RMB m) Value added services (VAS) 42,691 52,247 68,949 81,755 92,61 Online advertising 3,648 8,527 14,763 24,53 35,614 Others 1, Total 48,59 61,232 84,236 16, ,6 Gross profit Margins (%) Value added services (VAS) Online advertising Others Total Page 26