Deutsche Bank Markets Research Rating Buy Asia China Technology Company Reuters Bloomberg Exchange Ticker 0700.HK 700 HK HKG 0700 ADR Ticker TCEHY ISIN US88032Q1094 3Q preview: Wechat eco-system thriving Expecting seasonally strong 3Q 3Q is a seasonally strong quarter for, especially in gaming and brand advertising. Expanding monetization of Qzone Mobile and Wechat official accounts should also support robust 3Q top-line growth. We forecast total 3 revs of RMB25.4bn (+28%YoY), in line with consensus. However, the gross margin may see pressure mainly due to increased rev sharing on growing licensed games and heavy video content investment. We thus expect GM to see a 0.9ppt QoQ retreat to 60.7%. Moments ad starts to pick up; P4P ads remain the growth engine We note increased its ad load rate on Wechat Moments from late August and officially launched a Moments ads website to attract new advertisers. Our channel checks show users now generally receive 1-2 Moments ads per week. The system sends more ads if users interact with the ads flow (e.g. click on the ads, Like the ads, etc). By comparison, the ad load rate for Qzone now is around 1 ad per user per day. Deepening Wechat Moments/official account monetization should continue to fuel P4P ad revs to contribute to 9.6%/17.2% of total group revs in FY15/16E. Mobile games should regain some momentum despite GM pressure Favorable seasonality (school summer vacation) and strong promotions should allow the mobile games business to regain some momentum in 3Q (DBe revs +11%QoQ vs flattish QoQ growth in 2Q). However, with more licensed games being introduced, rev sharing with game developers should increase accordingly, thus posing pressure on gross margins. In addition, the sustained heavy investment in video content and increasing interbank processing fees incurred by a growing payments business should also weigh on margins. We thus cut our FY15/16/17E GM est by 0.6ppt/1.1ppt/1.4ppt. Tweak down TP by 3% to HK$170; Maintain Buy; Risks We maintain FY15 top-line estimates and tweak down FY16/17E revs forecasts by 1%/1%. We also cut FY15/16/17E non-gaap NP by 2%/3%/4% to reflect GM pressure. Our target price of HK$170 (-3%) is based on SoTP, which involves: 1) 15x FY15E PE for online game + VAS segments 2)1.1x PEG for mobile games, 3)1.2x PEG for ads and 4) net cash. Risks: slower Wechat monetization, competition from other internet names. Date 14 October 2015 Company Update Price at 14 Oct 2015 (HKD) 142.60 Price target - 12mth (HKD) 170.00 52-week range (HKD) 170.50-105.30 HANG SENG INDEX 22,600 Alan Hellawell III Research Analyst (+852) 2203 6240 alan.hellawell@db.com Key changes Price target 175.00 to 170.00-2.9% Sales (FYE) 97,729 to 97,707-0.0% Op prof margin (FYE) Net profit (FYE) Source: Deutsche Bank Price/price relative 180 160 140 120 100 80 41.2 to 40.5-1.6% 29,426.6 to 28,918.1 60 10/13 4/14 10/14 4/15 HANG SENG INDEX (Rebased) -1.7% Performance (%) 1m 3m 12m Absolute 11.4-6.0 25.7 HANG SENG INDEX 4.8-10.0-1.9 Source: Deutsche Bank Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 60,436.8 78,932.0 97,707.3 122,736.7 156,257.7 Reported EPS FD(CNY) 1.66 2.54 3.08 4.02 4.94 DB EPS FD(CNY) 1.82 2.59 3.34 4.39 5.41 DB EPS growth (%) 19.1 42.3 29.2 31.2 23.2 PER (x) 29.8 35.6 34.9 26.6 21.6 Source: Deutsche Bank estimates, company data 1 DB EPS is fully diluted and excludes non-recurring items 2 Multiples and yields calculations use average historical prices for past years and spot prices for current and future years, except P/B which uses the year end close Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
Model updated:14 October 2015 Running the numbers Asia China Reuters: 0700.HK Buy Bloomberg: 700 HK Price (14 Oct 15) HKD 142.60 Target Price HKD 170.00 52 Week range HKD 105.30-170.50 Market Cap (m) HKDm 1,295,939 Company Profile USDm 167,217 Holdings Ltd provides internet, mobile and telecommunication value-added services in China.The company has an instant messaging community in China. also provides online advertising services. Price Performance 180 160 140 120 100 80 60 Oct 13Jan 14Apr 14 Jul 14 Oct 14Jan 15Apr 15 Jul 15 Margin Trends 48 44 40 36 32 28 HANG SENG INDEX (Rebased) 12 13 14 15E 16E 17E EBITDA Margin Growth & Profitability 60 50 40 30 20 10 0 Solvency 0-10 -20-30 -40-50 -60 EBIT Margin 12 13 14 15E 16E 17E Sales growth (LHS) ROE (RHS) 12 13 14 15E 16E 17E 40 30 20 10 0 Fiscal year end 31-Dec 2012 2013 2014 2015E 2016E 2017E Financial Summary DB EPS (CNY) 1.53 1.82 2.59 3.34 4.39 5.41 Reported EPS (CNY) 1.37 1.66 2.54 3.08 4.02 4.94 DPS (CNY) 0.17 0.21 0.25 0.33 0.40 0.40 BVPS (CNY) 4.5 6.3 8.7 11.6 15.5 20.2 Weighted average shares (m) 9,133 9,180 9,234 9,278 9,297 9,299 Average market cap (CNYm) 337,902 498,025 850,368 1,059,352 1,059,352 1,059,352 Enterprise value (CNYm) 312,856 458,336 771,214 970,831 922,989 894,006 Valuation Metrics P/E (DB) (x) 24.2 29.8 35.6 34.9 26.6 21.6 P/E (Reported) (x) 27.0 32.7 36.2 37.8 29.0 23.6 P/BV (x) 8.91 12.39 10.32 10.01 7.52 5.76 FCF Yield (%) 4.5 3.9 3.3 1.8 5.4 3.8 Dividend Yield (%) 0.5 0.4 0.3 0.3 0.3 0.3 EV/Sales (x) 7.1 7.6 9.8 9.9 7.5 5.7 EV/EBITDA (x) 17.3 20.1 21.8 21.4 15.9 12.6 EV/EBIT (x) 20.2 23.9 25.3 24.5 18.2 14.5 Income Statement (CNYm) Sales revenue 43,894 60,437 78,932 97,707 122,737 156,258 Gross profit 25,686 32,658 48,059 58,811 73,885 93,310 EBITDA 18,100 22,784 35,343 45,400 58,039 70,894 Depreciation 2,620 3,590 4,801 5,804 7,291 9,282 Amortisation 0 0 0 0 0 0 EBIT 15,479 19,194 30,542 39,596 50,748 61,612 Net interest income(expense) 0 0 0 0 0 0 Associates/affiliates 0 0 0 0 0 0 Exceptionals/extraordinaries -26-43 -1 0 0 0 Other pre-tax income/(expense) -402 129-1,528-3,122-3,172-3,172 Profit before tax 15,051 19,280 29,013 36,474 47,576 58,440 Income tax expense 2,266 3,718 5,125 7,263 9,507 11,678 Minorities 53 61 78 293 328 328 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 12,732 15,501 23,810 28,918 37,741 46,434 DB adjustments (including dilution) 1,492 1,478 414 2,476 3,501 4,400 DB Net profit 14,224 16,980 24,224 31,394 41,242 50,834 Cash Flow (CNYm) Cash flow from operations 19,376 24,313 32,633 27,813 68,730 53,814 Net Capex -4,087-4,771-4,256-8,794-9,819-12,501 Free cash flow 15,289 19,542 28,377 19,019 58,912 41,313 Equity raised/(bought back) 97 308 299 0 0 0 Dividends paid -1,225-1,541-1,919-2,331-3,042-3,742 Net inc/(dec) in borrowings -1,279 4,699 20,619 0 0 0 Other investing/financing cash flows -11,239-14,860-22,383-4,991-5,465-6,024 Net cash flow 1,642 8,148 24,993 11,697 50,405 31,547 Change in working capital 3,508 8,186 3,832-7,109 21,722-1,804 Balance Sheet (CNYm) Cash and other liquid assets 13,383 20,228 42,713 53,546 102,996 133,587 Tangible fixed assets 8,753 11,605 12,499 15,489 18,017 21,236 Goodwill/intangible assets 4,719 4,103 9,304 11,624 13,944 16,264 Associates/investments 40,196 59,868 92,215 95,833 99,818 104,362 Other assets 8,205 11,431 14,435 16,876 18,377 26,413 Total assets 75,256 107,235 171,166 193,368 253,152 301,861 Interest bearing debt 12,208 16,653 35,802 35,802 35,802 35,802 Other liabilities 20,899 32,119 53,240 47,106 70,498 74,824 Total liabilities 33,108 48,772 89,042 82,908 106,300 110,626 Shareholders' equity 41,298 57,945 80,013 108,056 144,120 188,175 Minorities 851 518 2,111 2,404 2,732 3,060 Total shareholders' equity 42,148 58,463 82,124 110,460 146,852 191,235 Net debt -1,175-3,575-6,911-17,744-67,194-97,785 Key Company Metrics Sales growth (%) 54.0 37.7 30.6 23.8 25.6 27.3 DB EPS growth (%) 29.8 19.1 42.3 29.2 31.2 23.2 EBITDA Margin (%) 41.2 37.7 44.8 46.5 47.3 45.4 EBIT Margin (%) 35.3 31.8 38.7 40.5 41.3 39.4 Payout ratio (%) 12.1 12.4 9.8 10.5 9.9 8.1 ROE (%) 36.5 31.2 34.5 30.8 29.9 27.9 Capex/sales (%) 9.3 7.9 5.4 9.0 8.0 8.0 Capex/depreciation (x) 1.6 1.3 0.9 1.5 1.3 1.3 Net debt/equity (%) -2.8-6.1-8.4-16.1-45.8-51.1 Net interest cover (x) nm nm nm nm nm nm Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Alan Hellawell III +852 2203 6240 alan.hellawell@db.com Page 2
Tightest mobile story in China internet Company well-positioned around industry mega-trends The impact of industry consolidation in O2O We view the ongoing consolidation in group-buying as eventually healthy in the pursuit of synergies and longer term reduction in competition intensity. As we have discussed before, by adopting a proxy war strategy, although has launched some subsidy-centric events to promote its own O2O products (mainly Wechat Payment), the company is largely insulated from any significant margin retreat relating to the more irrational peaks of a subsidy war. Following the merger, we believe is still well positioned in the area, with a moderately-sized stake in the post-merger entity, which itself has an ~80% market share in group buying. moreover benefits from an everimproving payment service in monetizing the growing transaction flow. In addition, we expect there to be similar consolidation in the take-out delivery market, in which also has an investment in a couple of the major players. Online video grows on increased content spend saw strong momentum in its online video segment in 2Q, with a YoY doubling in revs growth and increasing mobile rev contribution (~50%). We believe these trends were driven largely by intense head content investment. The company signed up online distribution contracts with one of the most popular TV shows, The Voice of China, and also spent US$500m to obtain exclusive online broadcasting rights from the NBA over a 5-year period. We expect the heavy investment to drive the top-line growth at the expense of some margin retreat short to medium-term. It s also worth noting that the company is actively seeking to cross-monetize some of this content by developing relating PC/mobile games, which should improve investment ROI. A bit of color on online finance Webank from late-3q started to test offering consumer loans on Wechat. We believe this effort to be a multi-year initiative. It will likely take quite a period of time for the company to offer the necessary user education and build up its data-based risk evaluation system. On the payments side, we expect the business to continue to grow nicely. The fast-ramp in social demand driven C2C payment transactions (e.g. friends sharing meal costs, gifting birthday red envelops, etc) offers a fine example of its improving user adoption and also suggests great monetization potential with more C2B payment scenarios to be introduced. Expecting slowing growth on PC games Although some key PC titles such as League of Legends seem to still maintain momentum, we tend to believe the growth in the company s PC game business is likely to see moderate slowdown given increasing competition from other entertainment means such as mobile games. We forecast PC games revs to grow 12.6%/9.9% YoY in FY15/16E (vs 24.2% in FY14). We meanwhile believe mobile game should maintain rapid growth Page 3
(+71.8%/28% YoY in FY15/16E), although s hyper growth phase is likely behind us We present s PC games portfolio and known pipeline below. Figure 1: s PC game Map PC games map Officially commercialized titles Title Title (Chinese) Developer Genre Beta testing history 1st/Alpha 2nd 3rd 4th 5th Open beta test From 1st test to OBT QQ Three Kingdoms QQ 三 国 MMORPG 29-Jun-07 QQ Huaxia QQ 华 夏 MMORPG 8-Aug-07 Dungeon and Fighter 地 下 城 与 勇 士 Neople Action 12-Mar-08 25-Apr-08 28-May-08 19-Jun-08 99 Cross Fire 穿 越 火 线 Smilegate FPS 19-Oct-07 25-Dec-07 26-Mar-08 28-Apr-08 25-Jul-08 280 XunXian 寻 仙 Pixelgame MMORPG 10-Jul-08 17-Sep-08 27-Oct-08 109 Alliance of Valiant Arms 战 地 之 王 Redluck FPS 26-Mar-09 27-Jul-09 26-Jan-10 306 QQ HXSJ QQ 幻 想 世 界 MMORPG 31-May-09 1-Jul-09 19-Nov-09 18-May-10 17-Jun-10 21-Jun-10 386 QQ Xiyou QQ 西 游 MMORPG 15-Dec-09 28-Jan-10 1-Apr-10 28-Jun-10 28-Sep-10 3-Mar-11 443 Xian Xia Zhuan QQ 仙 侠 传 MMORPG 28-Oct-09 28-Apr-10 20-Oct-10 11-Jan-11 19-Jul-11 629 Lineage 天 堂 Ⅰ NCSoft MMORPG 25-Aug-11 25-Aug-11 League of Legends 英 雄 联 盟 Riot Games MOBA 22-Apr-10 12-Aug-10 8-Dec-10 25-May-11 21-Jul-11 22-Sep-11 518 Continent of the Ninth 第 九 大 陆 NHN MMORPG 21-Apr-11 4-Aug-11 15-Dec-11 29-Feb-12 26-Apr-12 371 9j 九 界 SZDomain MMORPG 22-Jan-10 10-May-10 22-Nov-10 16-Aug-11 14-Mar-12 23-Aug-12 944 Legend of Yulong 御 龙 在 天 MMORPG 18-Aug-10 18-May-11 21-Jun-11 23-Nov-11 25-Dec-11 29-Sep-12 773 Legend of Xue Yuan 轩 辕 传 奇 MMORPG 13-Jul-10 2-Nov-10 17-Mar-11 7-Sep-11 20-Dec-11 3-Nov-12 844 Warface 战 争 前 线 Crytek FPS 15-Sep-11 10-Nov-11 22-Feb-12 31-May-12 30-Nov-12 25-Jan-13 498 NBA2K Online NBA2K OL Take-Two Sports 14-Jul-11 27-Oct-11 27-Dec-11 6-Jun-12 24-Oct-12 11-May-13 667 New Lineage II 新 天 堂 Ⅱ NCSoft MMORPG 29-Aug-10 28-Mar-12 6-Aug-12 19-Dec-12 16-May-13 991 War of Zombies 生 化 战 场 FPS 17-Apr-12 16-Nov-12 1-Feb-13 30-May-13 408 Asura 斗 战 神 MMORPG 11-Mar-12 26-Nov-12 25-Jun-13 16-Aug-13 12-Sep-13 12-Sep-13 550 Game of Gods QQ 封 神 记 Action 8-Jul-09 25-Sep-09 10-Dec-09 2-Nov-12 3-Apr-13 23-Sep-13 1538 Blade & Soul 剑 灵 NCSoft MMORPG 16-Aug-12 5-Dec-12 7-May-13 29-Oct-13 28-Nov-13 469 Assault Fire 逆 战 FPS 28-Apr-11 28-May-11 30-Sep-11 8-Jul-12 8-Sep-12 12-Dec-13 959 Blade & Sword 2 刀 剑 2 Pixelgame MMORPG 18-Aug-11 20-Dec-11 8-Jun-12 20-Dec-12 19-Aug-13 20-Mar-14 945 QQ Fairy QQ 仙 灵 MMORPG 30-Mar-13 11-Jul-12 7-Dec-12 23-Jan-13 21-Mar-13 30-Apr-14 396 Freestyle Football 自 由 足 球 Joycity Sports 19-Jun-13 24-Oct-13 13-Mar-14 8-May-14 8-May-14 847 FIFA Online3 FIFA Online 3 EA Sports 10-Sep-13 7-Nov-13 16-Jan-14 29-Apr-14 29-May-14 261 Age of Gunslinger 枪 神 纪 TPS 15-Apr-12 26-Oct-12 21-Nov-13 18-Apr-14 18-Jul-14 824 Mystic Fighter 魂 之 猎 手 CJ E&M GamesAction 5-Jul-13 19-Dec-13 2-Jul-14 26-Sep-14 26-Sep-14 448 Call of Duty OL 使 命 召 唤 OL Activision FPS 29-Nov-12 30-Apr-13 24-Oct-13 30-Jun-14 11-Jan-15 11-Jan-15 1049 Kritika 疾 风 之 刃 Allm Action 21-Mar-13 31-Jul-13 5-Mar-14 23-Jun-14 15-May-15 15-May-15 785 Moonlight Blade 天 涯 明 月 刀 MMORPG 29-Apr-13 1-Oct-13 1-Jul-14 18-Aug-15 18-Aug-15 898 Pipeline titles Title Title (Chinese) Developer Genre 1st/Alpha 2nd 3rd 4th 5th 6th Latest beta test From 1st test to now War Thunder 战 争 雷 霆 Gaijin Ent. MMO STG 15-May-14 5-Jun-14 19-Dec-14 11-Aug-15 11-Aug-15 517 Arche Age 上 古 世 纪 XL Games MMORPG 22-May-13 26-Dec-13 8-May-14 22-Oct-14 6-Aug-15 8-Sep-15 8-Sep-15 875 MX 勇 者 大 冒 险 Pixelgame TPS 16-Dec-13 16-May-14 16-Sep-14 24-Jun-15 24-Jun-15 667 Master x Master 全 职 大 师 Ncsoft,MOBA 26-May-15 26-May-15 141 Orcs Must Die 兽 人 必 须 死 Robot Entertainment TOBA 28-Apr-15 28-Apr-15 169 SMITE 神 之 浩 劫 Hi-Rez StudiosMOBA 31-Oct-13 25-Feb-14 21-May-14 7-Nov-14 23-Apr-15 23-Apr-15 713 Monster Hunter Online 怪 物 猎 人 OL CAPCOM Action 28-Jun-13 24-Oct-13 30-May-14 21-Apr-15 21-Apr-15 838 Blade Calvary 刀 锋 铁 骑 RPG 21-May-14 1-Apr-15 1-Apr-15 511 Heroes of Newerth 超 神 英 雄 S2 Games MOBA 16-Dec-13 18-Mar-14 18-Jun-14 6-Nov-14 8-Sep-15 8-Sep-15 667 Dual of Kings 王 牌 对 决 /SNK Action 22-May-14 6-Nov-14 25-Jun-14 25-Jun-14 510 Metro Conflict: Presto 重 火 力 Redluck FPS 2-May-13 26-May-14 26-May-14 895 Rage of the Gods 众 神 争 霸 MOBA 12-Dec-13 13-Jan-04 14-Mar-14 14-Mar-14 671 Three Kingdoms 霸 三 国 OL RTS 6-May-13 20-Aug-13 18-Dec-13 18-Dec-13 891 Plant vs Zombie 植 物 大 战 僵 尸 Online EA Web game 9-Dec-13 9-Dec-13 674 Naruto Online 火 影 忍 者 OL Web game 5-Dec-13 5-Dec-13 678 Core Fight 炫 斗 之 王 FTG 7-Mar-12 1-Apr-12 29-Jun-12 16-Oct-12 16-Oct-12 223 NX 飞 行 战 记 TOPPIG Action TBC TBC Sura 天 刹 NSE Action TBC TBC Source: Deutsche Bank, company data, 17173.com s mobile games line-up is similarly quite deep. Page 4
Figure 2: s mobile game map Wechat/Mobile QQ games map Published games Title (Chinese) Developer Genre OBT/Official Launch Platform Timi Match Everyday 天 天 愛 消 除 -Timi Casual - Match-3 puzzle 4-Aug-13 ios/android Timi Link Everyday 天 天 連 萌 -Timi Casual - Link up 20-Aug-13 ios/android Rhythm Master 節 奏 大 師 -LightSpeed Casual - Music 2-Sep-13 ios/android Timi Run everyday 天 天 酷 跑 -Timi Casual - Parkour 15-Sep-13 ios/android Fight the landlord 欢 乐 斗 地 主 Chinese Poker 16-Oct-13 ios/android Plants vs Zombie 2 植 物 大 战 僵 尸 2 Popcap Tower defense 30-Oct-13 ios/android We Heroes 全 民 英 雄 MA Entertainment Corp. Card battle 21-Nov-13 ios/android Timi Speed Everyday 天 天 飛 車 -Timi Casual - Race car 19-Dec-13 ios/android We Fly 全 民 飞 机 大 战 -LightSpeed STG 31-Dec-13 ios/android Mahjong 欢 乐 麻 将 Mahjong 10-Jan-14 ios/android We Poker 天 天 德 州 扑 克 Poker/Gaming 24-Feb-14 ios/android Tower of Saviors 神 魔 之 塔 Mad Head Limited Card battle 1-Mar-14 ios/android Thunder fighter 雷 霆 戰 機 5agame STG 12-Mar-14 ios/android We Dance 全 民 炫 舞 Horizon3D Casual - Music 9-Apr-14 ios/android Everybody Pongpongpong 全 民 砰 砰 砰 CJ E&M Casual 11-Apr-14 ios/android We Town 全 民 小 鎮 -Lightspeed Simulation 15-Apr-14 ios/android We Fight 天 天 炫 斗 -Timi Action RPG 27-Apr-14 ios/android Castle Clash 城 堡 争 霸 IGG Strategy - "CoC" type 5-May-14 ios/android Taming Monster 全 民 打 怪 獸 CJ E&M Action RPG 11-May-14 ios/android All Men are Brothers 全 民 水 滸 -MoreFun Card battle 8-Jun-14 ios/android My Elf 全 民 精 靈 -Lightspeed RPG 19-Jun-14 ios/android Joyful West 歡 樂 西 遊 -Lightspeed Card battle 8-Jul-14 ios/android QFarm 全 民 農 場 Simulation 10-Jul-14 ios/android Mini Empire 迷 你 帝 国 YaoWan Strategy 25-Jul-14 ios/android Candy Crush Saga 糖 果 傳 奇 King Digital EntertainmentCasual - Match-3 puzzle 31-Jul-14 ios/android Modoo Marble 天 天 富 翁 CJ E&M Casual - Board Game 24-Jul-14 ios/android War of Immortals 全 民 斩 仙 Hoolai Games Action RPG 14-Aug-14 ios/android Long Qi Di Guo 龙 骑 帝 国 Strategy 26-Aug-14 ios/android Cut the fruit 全 民 切 水 果 Casual - puzzle 2-Sep-14 ios/android San Guo Zhi Ren 三 国 之 刃 Feiyu Action 22-Sep-14 ios/android Tian Tian Lai Zhan 天 天 来 战 Jianyue Action 8-Oct-14 ios/android Heng Sao Xi You 横 扫 西 游 Youxigu Action 10-Oct-14 ios/android Tian Tian Lai Ta Fang 天 天 来 塔 防 Strategy 16-Oct-14 ios/android Tian Tian Feng Zhi Lu 天 天 风 之 旅 Strategy 26-Oct-14 ios/android Qi Xiong Zheng ba 七 雄 争 霸 Youxigu Strategy 12-Nov-14 ios/android The Legend of Sword and Fairy 仙 劍 奇 俠 傳 RPG 20-Nov-14 ios/android Seven Knights 七 骑 士 Card battle 28-Nov-14 ios/android Xian Xia Dao 仙 侠 道 XMFunny Action RPG 2-Dec-14 ios/android Dragon Heroes 游 龙 英 雄 Yinhan Games Action RPG 3-Dec-14 ios/android I'm MT 2 我 叫 MT2 LocoJoy Card battle 16-Dec-14 ios/android Happy poker 欢 乐 斗 牛 Chinese Poker 16-Dec-14 ios/android Lord of Dark 全 民 破 坏 神 Action RPG 26-Dec-14 ios/android Year 2015 We Fire 全 民 突 击 FPS 1Q15 ios/android Tian Tian Dou San Guo 天 天 斗 三 国 Muhegame Action RPG 1Q15 ios/android Quan Min Chuang Tian Xia 全 民 闯 天 下 Baihui game RPG 1Q15 ios/android Dragon Blaze 龙 界 启 示 录 Flint RPG 1Q15 ios/android Quan Min Paopao Da Zhan 全 民 泡 泡 大 战 Bling Storm Puzzle 1Q15 ios/android Da Nao San Guo 大 闹 三 国 Card battle 1Q15 ios/android Quan Min Zhu Gong 全 民 主 公 Youxigu Card 1Q15 ios/android MX 勇 者 大 冒 险 Pixelgame ATM 1Q15 ios/android GongBao Lao Nai Nai 2 宫 爆 老 奶 奶 2 Kunpo Games Action 2Q15 ios/android Wequiz 脑 力 达 人 -MoreFun Puzzle 2Q15 ios/android ChaoBaoSanGuo 潮 爆 三 国 Yuxiang tech Card 2Q15 ios/android Everlasting Chronicles 天 天 传 奇 Card 2Q15 ios/android DNW 魔 龙 与 勇 士 Action 2Q15 ios/android Miracle Nikki 奇 迹 暖 暖 Pape Studio Strategy 2Q15 ios/android Laughter of Three Kingdoms 三 国 笑 传 Giant PRG 2Q15 ios/android 9LZ 九 龙 战 Action 3Q15 ios/android KOF98UM online 拳 皇 98 终 极 之 战 OL Ourpalm-Playcrab Card 3Q15 ios/android Chinese Chess 天 天 象 棋 Board & card 3Q15 ios/android The Legend of MIR 2 热 血 传 奇 Shengda RPG 3Q15 ios/android The Heros Kill 英 雄 杀 Board & card 3Q15 ios/android Huan Le Up 欢 乐 升 级 Board & card 3Q15 ios/android WeMoba 全 民 超 神 MOBA 3Q15 ios/android Pipeline games Source: Deutsche Bank, company data Official announcement Naruto Mobile 火 影 忍 者 -MoreFun Action TBD TBD Carrot Fantasy 3 保 卫 萝 卜 3 Feiyu Tower Defense TBD TBD Legend of Galaxy 星 河 战 神 HuaxiaLeyou TPS TBD TBD Stoneage 石 器 时 代 CJ-game RPG TBD TBD DnF Mobile 地 下 城 与 勇 士 Action TBD TBD Infinity Blade Saga 无 尽 之 剑 - 命 运 ARPG TBD TBD Legend of Heroes 英 雄 战 迹 MobBA TBD TBD Summary from news flow War Assembling 战 争 总 动 员 -Lightspeed Strategy - "CoC" type TBD TBD National Front Line 全 民 防 线 ChinaSG TPS TBD TBD Battle of Sango 赤 壁 亂 舞 Square Enix Card battle/tower defense hybrid TBD TBD Pop Ginger Man 泡 泡 姜 饼 人 BlingStorm Casual - Match-3 puzzle TBD TBD Infinite Tower Defense 無 限 塔 防 -MoreFun Casual - Tower defense TBD TBD Voice of China 全 民 偶 像 -LightSpeed Casual - Music TBD TBD Help the naughty cub 幫 幫 熊 孩 子 -Northern Light Casual - Puzzle solving TBD TBD Everyday Cute Warfare 天 天 争 霸 -Timi Casual - Tower defense TBD TBD Big Bang 魔 石 計 劃 Casual - Match-3 puzzle TBD TBD FC Manager 足 球 經 理 HanbitSoft/T3 Entertainment Soccer TBD TBD Monster Strike 怪 物 彈 珠 MIXI Card battle TBD TBD Day Day Up 天 天 向 上 -Timi Casual TBD TBD Temple Run2 神 廟 逃 亡 2 Imangi Studios LLC Casual - Parkour TBD TBD Avengers 復 仇 者 聯 盟 /Disney Marvel TBD TBD TBD Puzzle and Dragons 智 龍 迷 城 Gungho Card battle TBD TBD Page 5
Valuation and risks Valuation Our target price is based on SoTP. We believe this approach captures the respective segmental values of 's increasingly varied business model, each segment being at a different growth stage. We apply 1) 15x FY15E PE for online game + VAS segments, taking China's online games universe average as a benchmark; 2) 1.1x PEG for mobile games, for co's dominance in mobile gaming market; 3)1.2x PEG for ads, due to stronger outlook than industry average. The residual value is net cash. Risks Slowdown in Wechat MAU growth, decline in Wechat user activity Underperformance in WeChat games monetization Competition from other internet names Worse-than-expected PC games performance Worse-than-expected advertising market conditions Larger-than-expected investment in Wechat and other new initiatives Page 6
Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure 0700.HK 142.40 (HKD) 14 Oct 15 1,7,14,15 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/disclosuredirectory.eqsr. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/disclosure.eqsr?riccode=0700.hk Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Alan Hellawell III Page 7
Security Price 14 October 2015 Historical recommendations and target price: (0700.HK) (as of 10/14/2015) 700.00 Previous Recommendations 600.00 500.00 400.00 1 2 3 4 5 Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations 300.00 200.00 100.00 6 7 8 9 10 11 12 13 Buy Hold Sell Not Rated Suspended Rating *New Recommendation Structure as of September 9,2002 0.00 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Date Jan 15 Apr 15 Jul 15 1. 13/11/2013: Hold, Target Price Change HKD410.00 8. 03/09/2014: Buy, Target Price Change HKD159.00 2. 10/12/2013: Upgrade to Buy, Target Price Change HKD570.00 9. 12/11/2014: Buy, Target Price Change HKD155.50 3. 20/02/2014: Buy, Target Price Change HKD671.00 10. 12/01/2015: Buy, Target Price Change HKD156.00 4. 19/03/2014: Buy, Target Price Change HKD665.00 11. 18/03/2015: Buy, Target Price Change HKD160.00 5. 14/05/2014: Buy, Target Price Change HKD668.00 12. 13/05/2015: Buy, Target Price Change HKD178.00 6. 19/05/2014: Buy, Target Price Change HKD133.00 13. 12/08/2015: Buy, Target Price Change HKD175.00 7. 13/08/2014: Buy, Target Price Change HKD150.00 Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period Equity rating dispersion and banking relationships 500 450 400 350 300 250 200 150 100 50 0 53 % 22 % 37 % 10 % 17 % 18 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship Asia-Pacific Universe Page 8
Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com. Page 9
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