China Internet OCT12 MIRAE11

China/Internet Services & Content
Overweight
13 October 2011
Five forcesMore platforms?

Qihoo (QIHU), Renren (RENN), Baidu (BIDU), Taobao, Tencent, SINA and SOHU are China Internets seven platforms. Helped by deepening adoption of HTML5 and smart-phones, these seven platforms are re-dividing Chinese Internets user base and re-constructing its ecosystems. In the near term, we see HTML5 and personalization being the two most actionable forces that will yield commercial value. In the long run, we see mobile Internet, e-commerce and convergence offering intriguing opportunities to build new mega-platforms. We initiate coverage on QIHU and RENN with BUY. We also like BIDU, Tencent, NetDragon and AutoNavi.
Five forces are reshaping the Chinese Internet landscape
(1) Migration of PC Internet users from client to web (HTML5); (2) rise of smart-phones and tablets as new hardware platforms for Internet (mobile Internet); (3) migration of offline retail to online (e-commerce); (4) discovery of social graph as a new means of personalization (personalization), and (5) convergence of cable, IP and Internet video (convergence) are the five forces reshaping Chinas Internet landscape. Among the five, we think the first one is the least appreciated by investors and the second one may be the most impactful in the long run.
Stocks for action Price

(11/12/20
Company Qihoo 360 Renren Baidu Tencent SINA SOHU YOKU NetDragon AutoNavi
Ticker QIHU US RENN US BIDU US 700 HK SINA US SOHU US YOKU 777 HK AMAP US
Rating BUY BUY BUY BUY BUY BUY BUY BUY BUY
11 close)
US$18.23 US$5.81 US$130.83 HK$173.30 US$78.48 US$57.09 US$22.21 HK$3.89 US$14.60
Target price US$37.5 US$6.5 US$195 HK$212 US$93 US$85 US$37 HK$5.9 US$27.0
Note: Prices are in local currency
Percentage of time spent in a browser in China

56% Total Internet usage through brow 55% 54% 53% 52% 51% 50% 49% 48% 47% 1/1/2009 7/1/2009 1/1/2010 7/1/2010 1/1/2011 7/1/2011
HTML5 and personalization are two most actionable forces in the near term
Mobile Internet, e-commerce and triple convergence are still in the infrastructure and/or user building phases. But HTML5 and SNS are taking place on the existing PC Internet user base and infrastructure and hence, are most actionable.
Reconstruction of user and content supply chain the key

With HTML5, applications can be run in an open web environment. This allows rapid building-up of a content supply chain through Open Platform Initiatives (OPI). Using social graph and other personalization techniques, apps are intelligently matched and marketed to users, which log on using open IDs. The reconstruction of user access and content supply chain is revamping the Internet ecosystem. We estimate platform revenue to increase 86% and 69% YoY over 2011-12 to Rmb8.4b and Rmb13.5b, respectively.
Exposure of platforms to monetizable upstream markets

Tencent BIDU Alibaba Group QIHU SINA SOHU RENN
Social/web games Group buying B2C Online video Online payment Online travel Online literature
Hedge fund investors Mobile Internet, e-commerce and triple convergence are still in the infrastructure or user base building phase. Uncertainty regarding the eventual winners provides a volatile ground for short-term trading.
Long-only investors HTML5 and SNS are two forces with user base and infrastructure already built. Investors can invest with relative certainty. We like QIHU as a key beneficiary of HTML5 on an already large installed base.
Eric Wen, Head of Internet/Media

852 3653 8631 eric.wen@miraeasset.hk
Nancy Yang, Internet/Media Analyst

852 3653 8630 nancy.yang@miraeasset.hk
Vincent Sun, Internet/Media Analyst

852 3653 8641 vincent.sun@miraeasset.hk
Source for above data: Bloomberg, companies, Mirae Estimates
See the last page of this report for important disclosures
Eric Wen, Head of Internet/Media, 852 3653 8631 eric.wen@miraeasset.hk Nancy Yang, Internet/Media Analyst, 852 3653 8630 nancy.yang@miraeasset.hk
Vincent Sun, Internet/Media Analyst, 852 3653 8641 vincent.sun@miraeasset.hk
13 October 2011
QIHU is our TOP BUY idea. We also like BIDU and Tencent
QIHU is our top pick because it benefits directly from HTML5 and mobile Internet and indirectly from e-commerce, personalization and convergence. We like BIDU because it benefits from HTML5, convergence (Baidu Qiyi), mobile Internet and e-commerce. We like Tencent because it has made significant inroads into mobile Internet and is a prime beneficiary of personalization.
SINA, RENN and SOHU have room for improvement

Both SINA and RENN benefit from HTML5 and personalization. They, however, are weak in monetization and traffic. SOHU can benefit from QIHUs education of the end users, but it lacks focus in any of the five forces. We see SINA having the largest room for improvement in execution.
Sub-platforms and indispensable tools can take steps up

Popularity of sub-Rmb1,000 smart-phones will drive Chinas 3G-enabled smart-phone user base to around 100m in 2012, equal to the PC Internet in 2005. At this point, we see Tencent as a certain winner in mobile Internet but sub-platforms such as NetDragon also offer investment opportunities. We see online video as a standalone platform segment if convergence eventually merges the operating system of PC, TV and smart-phones; we see YOKU as a potential winner. We currently do not see any winners in the e-commerce space other than Taobao and BIDU. We further believe that indispensable tools such as AutoNavi also offer investment opportunities in the evolution of mobile Internet and e-commerce.
13 October 2011
Executive summary
Five forces are reshaping the landscape of Chinese Internet
Just when Chinese Internet seems to be settling down to a handful of giants, new forces have emerged to reshape the landscape. The outcome, however, is not certain. We believe five forces are in play. Two (HTML5 and personalization) are taking place on the existing PC Internet user base, and hence, are more actionable. The other three (mobile Internet, ecommerce and convergence) are still in the infrastructure-building phase and hence, less predictable for investment purposes. The opportunity to produce mega-platforms such as Tencent-Alibaba-Baidu (TAB) does not only rest on the size of the new market, but also on entry barriers and execution. In particular, the ability to construct a value chain will be paramount in the coming years.
E-commerce, mobile Internet and convergence are still in the infrastructure and user-building phases. No mature business models are available yet
HTML5 and personalization are two most actionable forces

A zillion things can be done on the Internet. Should Internet users do them in a uniform, standardized web browser environment? Or should they use special downloadable software to optimize the usage experience? At least in China, many opt for the software solution (PC client) because of unstable network conditions, low user education, and high access ratio from the caf. Our data shows that the time spent market share between PC client and PC web is roughly 45-55. This phenomenon gives PC client companies enormous advantage to invade the browser, which Tencent did in 2005-07 and QIHU is doing again now. In mobile Internet, where device form factor and network conditions are also constraints, client (apps) is also the preferred way of doing things on the Internet.
Building a content ecosystem is all that matters

The arrival of HTML5 makes development of eye-catching web applications as easy as development of PC clients. The advantage of a web browser is obvious: It is standardized, with low development cost and a user base bigger than that of any single-purpose client combined. Hence, browser application has economies of scale. HTML5 enables building of a content ecosystem through connection to third-party developers, thus, driving revenue much faster than what can be done in the PC client era. We see QIHU succeeding in this fashion.
We look for user base and content supply chain to predict revenue growth potential
SNS is another form of personalization

What comes with HTML5 and open platform is the use of social graph to intelligently match and recommend third-party apps to Internet users. In China, however, the social graph resides with Tencent, which has a hybrid client-browser architecture. This has hindered the potential of SNS in China, but, in our view, SNS is just another form of personalization. We see companies such as SINA and RENN striving to rebuild a social graph and Tencent striving to migrate its social graph to a 100% web platform. In the meanwhile, we also see other less potent personalization tools such as Open ID benefiting companies such as QIHU and BIDU.
Why does China have no Facebook? The answer lies in Tencents browser-client hybrid architecture
Picture in mobile Internet, e-commerce and convergence is muddy

With sub-Rmb1,000 smart-phones hitting the high gear, we predict 3G-enabled smart-phone user base to reach around 100m in 2012, equaling the PC Internet in 2005. At this point, mobile Internets business model is still unclear, but we see Tencent as perhaps one of the certain winners in this space. We also see Taobao as perhaps one of the certain winners in ecommerce with BIDU and QIHU as two clear beneficiaries. If convergence eventually merges the operating system of TV, PC and smart-phone in China, we see YOKU as one of the potential winners.
Tencent has already cornered the mobile Internet market, in our view
Upside for QIHU: Selling traffic to any fragmented upstream

In 2005-06, Tencent leveraged its dominance in PC client (QQ IM) to build its presence in web (qq.com). Currently, Tencent has a combined time spent market share of overall Internet of 22%, 8% through client and 14% through web. QIHU and BIDU have tied at #2, each with ~8% share (QIHU exclusively through client and BIDU exclusively through web). Upside for QIHU comes from borrowing the playbook from Tencent to build its traffic base in web and a content ecosystem through Open Platform Initiative (OPI). QIHU is our top pick in the China Internet sector, with a target price of US$37.5.
QIHU has the most blue sky opportunities in both user base and content supply chain growth
13 October 2011
Upside for BIDU: further improvement in content ecosystem

BIDU is the second-largest traffic destination on web, more than three times the size of its next competitor, SINA. BIDU is also a major proponent and beneficiary of HTML5. BIDU is trying to reconstruct the content supply chain through its box computing initiative to make profit from growth in browser-based applications. Further BIDU has exposure in e-commerce, convergence and mobile Internet. We reiterate BUY on BIDU with a target price of US$195.
BIDU has opportunities largely in content supply chain improvement
Upside for Tencent: Cornering the mobile Internet ecosystem

Tencent has the largest web of social graph relationships on its platform. But its architecture is also the most complex, crossing both client (QQ IM and QQ games) and web (qq.com, Qzone, Pengyou and Weibo). Hence, Tencents work priority in HTML5 and personalization is to migrate its user base to 100% web architecture. Tencent is also striving to participate in ecommerce and convergence with mixed results, but we see it already taking a decisive lead in mobile Internet with the success of mobile messenger Weixin () and QQ Mobile Browser, in addition to its overwhelming installed base in Mobile QQ. To maintain this lead, Tencent must closely follow technological evolution in mobile Internet in the next few years. Monetization for mobile Internet is still at an early stage, which makes game slowdown a countering negative. We have a BUY on Tencent with a target price of HK$212.
Tencent has thrown more than one pizza at the wall and the mobile Internet one seems to have stuck
Opportunity for SINA: Weibo user growth and content ecosystem

Weibo user growth and construction of a content ecosystem should provide revenue growth potential to SINA. But at this point, SINA still faces a few challenges, including: (1) rebuilding social graph in web against a vigilant, one-stop-shop, Tencent; (2) learning the ropes in building a content supply chain. We suggest patience to investors in the next couple of years.
SINA Weibos user scale is still small because investors only focus on what happens in the browser
Opportunity for SOHU: SOGOU to benefit from QIHU rise

Compared with QIHUs three-step traffic feeding loop, Safety Browser Personal Startup Page (PSP), SOHUs Pinyin Browser PSP loop has a smaller scale, but we expect SOGOU to benefit from QIHUs knowledge of the market. Similar to Tencent, SOHU also has a strong inhouse content development team, Changyou (CYOU US, BUY, TP: US$46), which will hinder its ability to construct an open platform ecosystem. We have a BUY on SOHU and a TP of US$85.
SOHUs user scale is smaller than Tencents and its internal content
Challenge for RENN: Maintain organic traffic growth

It should come as no surprise to investors now that comparing RENN with Facebook is inappropriate. While Facebook is the fourth-largest web property in the US, accessed by 75% of the US Internet users, Renren.com is the 12th largest, accessed by only 6%. We endorse RENNs strategy to acquire traffic (Nuomi and 56.com) and glue them with a social graph underneath. But the challenge of integration will be a major risk for the company. We initiate coverage on RENN with BUY and a target price of US$6.5.
RENN faced two bouts of user defections: one to Tencent in 2008 and one to SINA Weibo in 2010
Opportunities for NetDragon, YOKU and AMAP: New sub-platforms

The user and infrastructure build-up of mobile Internet, e-commerce and convergence give new companies an opportunity to build mega-platforms or sub-platforms. Even after PC Internet incumbents making successful entries, pioneers such as NetDragon (ND) would not necessarily lose steam. We also like companies making indispensable tools for new growth industries, such as AutoNavi (AMAP). Youku (YOKU) could be one of the eventual winners if Internet successfully becomes the underlying operating system for TVs, PCs and smart-phones. We have a BUY rating on NetDragon (TP: HK$5.9), YOKU (TP: US$37), and AMAP (TP: US$27).
Early movers can defend their turf if they build defensible entry barriers. Even though they will not be mega-platforms, becoming a sub-platform is still very investable given the current valuations
13 October 2011
T A B L E
O F
C O N T E N T S
Executive summary........................................................................................3
Five forces are reshaping the landscape of Chinese Internet HTML5 and personalization are two most actionable forces Building a content ecosystem is all that matters SNS is another form of personalization Picture in mobile Internet, e-commerce and convergence is muddy 3 3 3 3 3
Platform war: Chinese Internets seven platforms........................................6

Seven platforms: TAB+QIHU, SOHU, SINA, RENN Different traffic begets different monetization methods Browser and AppStore make monetization of traffic easier 6 6 8
Open platform is driven by client to web migration ......................................9

Internet usage time is migration from PC client to PC web Client to web migration limited by infrastructure and user profile Technical reason for client to web migration is HTML5 The migration mostly takes place in terms of time spent Tencent gained share in web, Qihoo 360 gained share in client Client isnt deadIt just becomes an AppStore But web is eventually the answer to everything, even mobile Open platform allows massive scalability on web Shortest route has tremendous advantage in mobile Internet 9 9 10 11 11 12 13 13 13
Feeding traffic from any fragmented upstream...........................................14

Social games growing fourfold in 2011, web game growing 87% YoY Group buying growing 619% YoY in 2011 Direct B2C (Amazon model) growing 139% YoY in 2011 All upstream with fragmented market shares can be platforms customers Platform monetization often happens at the fastest growing sectors Platform monetization has different depth 14 15 16 16 18 18
Platforms are not born equally: A cross examination..................................20

Is proprietary browser traffic bad? QIHU, BIDU and Tencent have the most third-party apps RENNs traffic is confined to campusTaobao has highest end-users Tencent, SINA and RENN have Subject Contextual Traffic (SCT) BIDU, QIHU and SOHU have Content Contextual Traffic (CCT) In-house apps at Tencent and SOHU could hinder platform opening 20 20 22 23 23 23
The planet of platforms: Compete by ecosystems .......................................24 Analyst team profile .....................................................................................25
13 October 2011
Platform war: Chinese Internets seven platforms

With the IPO of Renren (RENN) and Qihoo (QIHU) and Baidus (BIDU) Box Computing (BBC) and Tencents Open Platform Initiative (OPI), open platform has become a word of vogue in Chinese Internet. In this report, we try to compare Chinas seven platforms and draw investment conclusions. We find several cross currents underneath Chinese Internets open platform phenomenon, even though there are common themes based on: (1) HTML5 (browser as a universal application development environment); and (2) mobile Internet as a new hardware platform for applications. We also include: (3) e-commerce; (4) personalization; and (5) convergence in the five mega forces that are shaping Chinese Internet today.
Seven platforms: TAB+QIHU, SOHU, SINA, RENN

The commonly referred seven platforms are: Tencent, Alibaba (Taobao), BIDU, SINA (Weibo), QIHU, RENN and Kaixin. But from a traffic perspective, we think the seven platforms should be: Tencent, Alibaba (Taobao), BIDU, QIHU, SINA (Weibo), SOHU and RENN. We have replaced Kaixin with SOHU. A common misunderstanding is that platforms have the largest traffic. This is not true. According to iResearchs May 2011 numbers (Figure 1): The top ten entities in terms of daily active user (DAU) are: Tencent (483m), QIHU (465m), Microsoft (277m), SOHU (224m), BIDU (170m), Taobao (73m), SINA (70m), Xunlei (69m), NTES (41m), YOKU (30m) and PPS (26m). The top ten entities in terms of daily browsing time (DBT) are: Microsoft (326m hours), Tencent (230m hours), QIHU (238m hours), SOHU (52m hours), BIDU (33m hours), Taobao (19m hours), YOKU (16m hours), SINA (13m hours), Xunlei (8m hours), TUDO (8m hours), NTES (5m hours) and RENN (5m hours, excluding 56 and Nuomi).
Top seven platforms (exMicrosoft) by traffic should be: Tencent, QIHU, SOHU, Baidu, Alibaba, SINA and Renren
Absolute traffic, however, is the only way of looking at it. Traffic quality is also an important angle. Consider that: Majority of SOHUs DAU comes from SOGOU Pinyin, an input method, which makes very little contribution to DBT. Even though Pinyin contributed to 65% of SOHUs DAU, it accounts for only 0.04% of SOHUs DBT (which mostly comes from SOGOU browser); Majority of QIHUs traffic comes from Internet Safety, an application that QIHU has determined to make free. Most of QIHU Internet Safety applications run in the background of a PC environment, which users do not notice; Majority of SOHU and a substantial portion of QIHUs DAU and DBT come from browser, which is difficult to monetize; 1/3 of Tencent and majority of QIHU and SOHUs traffic come from PC client, which is more difficult to monetize than web (except online games).
Traffic from input method and Internet safety are passive forms of traffic
Some investors would view traffic from tools such as input method and security as low-value traffic. But where do we draw the line between good and bad traffic?
Different traffic begets different monetization methods

If we remove QIHUs traffic from Internet safety (360 SafeGuard) and SOHUs traffic from input methods (SOGOU Pinyin), then: The top ten entities in terms of daily active user (DAU) are: Tencent (483m), , Microsoft (277m), BIDU (170m), QIHU (168m), SOHU (79m), Taobao (73m), SINA (70m), Xunlei (69m), NTES (41m), YOKU (30m) and PPS (27m). The top ten entities in terms of daily browsing time (DBT) are: Microsoft (326m hours), Tencent (212m hours), QIHU (166m hours), SOHU (51m hours), BIDU (33m hours), Taobao (19m hours), YOKU (16m hours), SINA (13m hours), Xunlei (8m hours), TUDO (8m hours), NTES (5m hours) and RENN (5m hours).
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13 October 2011
The top ten entities in terms of daily visiting times (DVT) are: Microsoft (2.63b times), QIHU (1.73b times), Tencent (1.70b times), SOHU (813m times), BIDU (708m times), Taobao (398m times), SINA (202m times), NTES (146m times), Xunlei (139m times), Xunlei (131m times) and RENN (70m times).
Top China Internet traffic entities by DAU, DBT and DVT
Client or web Type of apps Daily active user (DAU, m) Daily browsing time (DBT, m hr) 230 121 3 3 2 14 18 65 2 1 0 238 166 70 2 163 0 2 52 52 12 1 39 0 33 24 2 7 19 13 1 5 13 9 5 8 5 3 5 5 0 16 24 5 3 8 326 212 30 26 59 Daily visit times DVT (m) 1,696 625 73 39 33 16 64 742 55 31 15 2,746 1,728 338 680 1,593 63 72 2,166 813 117 43 653 1,353 708 597 95 15 398 324 24 50 202 160 42 131 101 30 146 139 6 72 21 70 16 46 2,632 2,128 277 211 16 100% 41% 7% 6% 4% 2% 2% 30% 4% 4% 1% 100% 35% 29% 21% 9% 7% 100% 16% 7% 11% 65% 100% 74% 22% 5% 100% 53% 12% 35% 100% 77% 23% 100% 84% 16% 100% 91% 9% 100% 100% 100% 100% 100% 96% 71% 8% 17% 4% 100% 53% 2% 1% 1% 6% 8% 28% 1% 0% 0% 100% 29% 1% 69% 0% 1% 100% 23% 2% 76% 0.04% 100% 72% 7% 21% 100% 68% 4% 28% 100% 65% 35% 100% 60% 40% 100% 98% 2% 100% 100% 100% 100% 100% 82% 65% 9% 8% 18% DAU break down DBT break down
Browser is a special kind of PC client. Browser opens a new microcosm of everything one can find in a PC client
Figure 1.
DVT Daily browsing break time per visit down (min) DBT/DVT 100% 37% 4% 2% 2% 1% 4% 44% 3% 2% 1% 100% 12% 25% 58% 2% 3% 100% 5% 2% 30% 62% 100% 84% 13% 2% 100% 82% 6% 13% 100% 79% 21% 100% 77% 23% 100% 96% 4% 100% 100% 100% 100% 100% 99% 81% 11% 8% 1% 8.1 11.6 2.9 5.1 3.6 51.8 16.8 5.3 2.4 1.3 1.2 5.2 5.8 12.4 0.2 6.2 0.3 1.7 1.4 3.8 6.0 1.1 3.6 0.0009 2.8 2.4 1.5 26.1 2.8 2.3 1.8 6.3 4.0 3.3 6.7 3.7 2.9 6.5 2.0 2.1 1.0 13.2 68.4 4.2 9.5 11.0 7.4 6.0 6.4 7.4 218.4
Daily browsing time per user (min) DBT/DAU 28.6 36.9 6.1 7.3 6.9 100.4 111.2 27.2 6.6 2.0 3.9 30.7 59.4 25.5 1.0 102.1 0.5 4.1 13.8 39.3 19.1 2.9 91.6 0.008 11.4 11.2 3.7 50.9 15.1 19.4 4.9 12.1 11.4 9.6 17.1 7.1 5.1 17.4 7.2 7.8 1.7 31.8 55.3 19.9 29.4 26.5 70.7 64.3 81.0 33.9 319.6
Tencent Client Client Client Client Client Client Web Web Web Web Community Game Music Game Video All purpose All purpose Community All purpose e-commerce
483 197 35 27 17 8 10 144 20 21 5 465 168 164 133 96 41 31 224 79 37 16 26 146 170 125 37 8 73 39 9 26 70 54 16 69 58 11 41 37 4 30 26 15 5 19 277 198 22 46 11
Tencent QQ QQ Game QQ Music QQ Pet QQLive Tencent TT (browser) QQ.com Pengyou.com Sousou search Paipai.com 2 Qihoo Qihoo excl. Safety 360 Safeguard 360 Antivirus 360 Safebrowser 360SafeBox 360.cn 3 SOHU SOHU excl. Pinyin SOHU.com SOGOU search SOGOU Browser SOGOU Pinyin 4 Baidu Baidu.com Hao123 Baidu Qiyi 5 Taobao Taobao Taobao Mall AliTalk 6 SINA SINA Weibo.com 7 Xunlei Xunlei Download Xunlei Kankan 8 NetEase 163.com Youdao 9 Youku 10 PPS Runner ups 11 Renren 12 Kaixin 13 TUDOU Special Microsoft Internet Explorer WORD EXCEL MSN
Source: IUT, Mirae Asset Research
Client Client Client Client Web
Safety Safety All purpose Safety All purpose
Web Web Client Client Web Web Web Web Web Web Client Web Web Client Web Web Web Web Web Web Web Web
All purpose All purpose All purpose Tools All purpose All purpose Video e-commerce e-commerce e-commerce Community All purpose Community Tools Video All purpose All purpose Video Video Community Community Video
Client Client Client Client
All purpose Tools Tools Community
Conclusions are not dramatically different. Regardless of how we cut and slice the data, the traffic dominance of QIHU stands out, mainly because of the browser. Despite having such dominance in traffic, QIHUs quarterly revenue in 2Q11 was only 3% of Tencents and 7% of BIDUs. What can account for the difference between traffic and revenue shares?
13 October 2011
We believe there is no bad traffic, but only traffic that hasnt found its use. We categorize traffic into four different forms: Long form, Short form, Contextual and Transactional. Video is long form traffic, meaning per visit browsing time and browsing time per user are both very long. Video traffic is very suitable to sell time-based ads; Browser is also long form traffic, in our view, but its status as a tool dictates that its advertising slots will be limited; Search is short form traffic, meaning per visit browsing time and browsing time per use are both very short. But search is gateway traffic, which is highly directional. It is short only because it passes on traffic to the downstream to process; Pinyin, directory and Internet safety are also short form traffic, but their monetization value may be smaller than search because they are push traffic for the Internet users, while search is pull traffic demanded by the users; Social networking and community traffic is contextual traffic, meaning they have special meaning for their producers. Contextual can be Subject Contextual and Content Contextual; E-commerce traffic is transactional traffic. B2C traffic relies on price differential to make a profit. C2C traffic charge is based on transactions.
Subject Contextual traffic is peculiar to the person; Content Contextual traffic is peculiar to the content There is no bad traffic; it is only that traffic hasnt found its payer
Browser and AppStore make monetization of traffic easier

In our earlier research notes, we stated three criteria of a platform: (1) Enormous traffic; (2) enormous stickiness; and (3) a proprietary payment system. Tencent is perhaps the first Internet platform in China. But it has been building applications by itself throughout its growth phase. Only in mid-2008 did Tencent start to license third-party client games. As a result, today Tencent has the broadest product lines ever in the Chinese Internet space and it virtually competes with everyone in the industry. The Tencent platform is actually an overlay of multiple platforms built on different technological architectures. We believe an important reason that Tencent builds most of its apps by itself is technological limitation. Client environment does not have standardized tools to build third-party apps. But in a web environment, especially with HTML5, third-party application developers are actually provided a standard set of development tools. If such tools are provided in the AppStore environment, like Apple has done in case of iPhone, then third-party applications can also blossom in a client environment. Web and AppStores have opened up an entirely new way of monetizing web traffic. Some of the previously unmonetizable traffic becomes monetizable and new Internet platforms could emerge as a result (Figure 2).
Figure 2. Traffic types and their monetization methods
Traffic types Traffic sub-types Long form Video Display Short form Search Directory/ browser/ Union Contextual Subject contextual Content contextual Link advertising 551 150% Baidu (BIDU US) Qihoo (QIHU US) SOHU (SOHU US) Transactional B2C C2C+group buying Transaction fee 160,100* 73% Taobao (Private) Tencent (700 HK) Meituan (Private) Lashou (Private)
Browser provides standard development tools to allow thirdparty applications to be developed, enabling previously unmonetizable traffic to be monetizable
Monetization method Brand advertising 2Q11 industry 1,480 revenues (m Rmb) Growth rate y-y 118% Leading player Youku (YOKU US) Tudou (TUDO US) Baidu Qiyi (BIDU US) SOHU Video (SOHU US)
Brand advertisng 3,802 14% SINA (SINA US) SOHU (SOHU US) Tencent (700 HK)
Key word advertising 5,142 62% Baidu (BIDU US)
Link advertisng Social games 551 150% Baidu (BIDU US) Qihoo (QIHU US) SOHU (SOHU US) 1,000 500% Tencent (700 HK) Renren (RENN US) Rekoo (Private) Hoolai (Private)
Price differential 19,100 110% 360BUY (Private) Dangdang (DANG US) VANCL (Private) Maso Maso (Private)
Source: Company data, iResearch, Tuan800, Mirae Asset Research. * Gross merchandise value (GMV), including group buying
13 October 2011
Open platform is driven by client to web migration

Starting from 2H10, the buzz word in the Chinese Internet space is open platform. Most of the excitement can be attributable to Facebooks success and Qihoo 360s challenge to Tencent. But, in fact, the first company to adopt an open platform in China is Alibaba Group through its Taobao Open Platform (TOP) initiative in 3Q08 as part of its Grand Taobao Strategy ( ). Baidu was the second in launching Box Computing open platform initiative in August 2009 during Baidu World. SINA further championed open platform in its first developer conference in November 2010. All the three companies benefit from the migration from PC client to web browser, but this does not mean that open platform is a cure all for every company.
Internet usage time is migration from PC client to PC web

The key to open platform is that it must share a common infrastructure in the form of published and fully documented external programming interfaces that allow using the platform in ways unintended by the original program. This interface is often called the Application Programming Interface (API). The web browser provides this common infrastructure. We often compare Facebook with Tencent as Chinas social graph. But from a technical architecture point of view, Facebook is 100% web based, allowing it to connect to any thirdparty programs who subscribe to its API (data format). Tencent, on the other hand, is an overlay of several platforms, some on the web browser, but more on proprietary PC client such as QQ IM, QQ Music and QQ Game. PC client has big installed base in China. In terms of time spent, that spent in a web browser (web time) only crossed 50% of total time spent (web+client) recently (Figure 3) and the pace of migration has been steady but slow; in more than two years, it only gained ~6 ppt. With HTML5, we see this trend accelerating.
Figure 3. Percentage of total usage time spent in browser over that spent in all PC clients
The US is a web-dominated market. China is split equally between web and client
56% Total Internet usage through brow 55% 54% 53% 52% 51% 50% 49% 48% 47% 1/1/2009
7/1/2009
1/1/2010
7/1/2010
1/1/2011
7/1/2011
Client to web migration limited by infrastructure and user profile

We need to caution investors that in China, migration from PC client to web is very slow, defeating any story of a fast rise of Internet giants such as SINA and strengthening arguments for a story of huge client user base and scantly monetized browser business such as QIHU. The pace of PC client to browser migration over the past two years has been a 0.2 ppt share shift in time spent per month. We believe the reason for this slow pace is Chinas network infrastructure and the composition of its Internet population. In 1H10, 31% of Internet users in China were students, 56% had monthly income below Rmb1,500 (84% below Rmb3,000) and 77% were without college education. We estimate that 130-150m PC Internet users, or a quarter of total, access the Internet from cafs (source: Ministry of Culture). These groups of low-income Internet users
9
Chinas first Internet platform, Tencent, built most of is apps by itself, which could now be an impediment
13 October 2011
have a very clear purpose, mostly entertainment. A dedicated PC client can more efficiently achieve this purpose in a minimum time and cost. Take the example of Tencent in March 2011; seven Tencent PC clients covered 317m Internet users while three Tencent web sites covered 209m. This is not exactly scientific, as there are user overlaps between client and web and within client and web. But if we measure total time spent, then Tencent users spend almost 2.2x the time in a PC client than that in a browser (Figure 4).
Figure 4.1 Tencents daily coverage population Figure 4.2 Tencent users spend 2/3 of time in a PC client
250 Daily coverage (m) 200 150
Client
Browser
0% 1%
Client
30%
51% 100 50 0 QQ Game QQ IM 5% 9% QQ IM QQ Pets Soso
QQ Music
Tencent TT
QQLive
QQ.com
QQ Pengyou
QQ Doctor
QQ Pets
Soso
1% 2% 0% 1% QQ Music QQLive QQ Doctor QQ.com
QQ Game Tencent TT QQ Pengyou
Source: Company data, Mirae Asset Research
Technical reason for client to web migration is HTML5

Hyper Text Markup Language (HTML) was originally designed for browsing web text and image, but not for running web applications. With HTML5, however, this will start to change. HTML was created in 1990. By 1997, its fourth edition (HTML4) was run, but evolving into HTML5 took 15 years or longer (HTML5 is still under development). Microsoft did not incorporate HTML5 into its Internet Explorer until IE9 in March 2011. In HTML5, flash, video and audio will become native to the browser. Hence, no plug-ins (Adobe Flash, Microsoft Silverlight and Javascript) will be needed like in HTML4. HTML5 also introduces Storage to replace Sessions and Cookies, making online payment more secure.
Figure 5.1 Browser market share in China, 1Q11 Figure 5.2 Browser market share worldwide, 1Q11
IE6s dominant market share also gives opportunities to local browsers such as 360, Sogou and Tencent TT
1.7% 1.7% 1.8%1.6% 1.8% 2.5% 4.5% 39.7% 18.7%
0.4% 4.1% 2.5%3.5% 5.7%
24.1%
16.7%
0.6% 0.4% 15.7% IE6 IE9 Google Chrome Maxthon

Source: Baidu, Mirae Asset Research
10.0% IE7 360 Tencent TT Firefox IE8 SOGOU The World Others 42.4%
IE6 Chrome
IE7 Safari
IE8 Opera
IE9 Others
Firefox
Source: BrowserStats, Mirae Asset Research
10
13 October 2011
Globally HTML5 compliant browsers have reached 75% market share. But in China, this ratio is below 35%. In China, IE6 has the biggest browser market share at 40% while globally, IE6s share has fallen to 3.5%. The reason for IE6s popularity in China is largely piracy. IE6 is the default browser of Windows XP, launched in 2001. By April 2011, Windows XP still occupied 86% of Chinas PCs, according to Baidu. Further, Microsoft started to tighten its policy against pirated windows in 2006, resulting in Windows XP and IE6 as the only Windows available in the black market, where most Chinese Internet users buy their PCs. Lastly, to support the widest user base, key Internet applications such as online banking and government websites support IE6. Microsoft did not provide HTML5 support until IE9. The lack of HTML5 support in IE opens up new opportunities for local browsers such as 360, Sogou and Tencent TT; 360 browser is now Chinas second-largest with 19% market share.
An important fact to remember is that 80% of the Chinese buy PCs from the black market and do not install virus protection
The migration mostly takes place in terms of time spent

Judging by daily user base, the migration of client to web is not really happening (Figure 6.1). However, judging by daily time spent, web traffic had a sharp gain in 1H10, probably due to the availability of long form online video.
Figure 6.1 China Internet [client: web] traffic by users Figure 6.2 China Internet [client: web] traffic by time spent
300 China Internet web and PC client user base (m) 250 200 150 100 50 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
1.2 Ratio of PC client to web Total viewing hour (m hours) 1.2 1.1 1.1 1.0
900 800 700 600 500 400 300 200 100 0 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11
4.5 Ratio of Client:Web

11
4.0 3.5 3.0 2.5 2.0
Web site daily coverage Client daily coverage (m) Client over web coverage
Total viewing hour (m hour) Total viewing hour ex-360 Client over web viewing hour
Tencent gained share in web, Qihoo 360 gained share in client

Over the past two and half years, within browser, the biggest share gainer in terms of time spent is Tencent, from 11% in January 2009 to 26% in July 2011 (Figure 7). The gain is primarily from growth in QQ.com (Qzone). Baidu (BIDU US, BUY, TP: US$195), SINA (SINA US, BUY, TP: US$93) and SOHU (SOHU US, BUY, TP: US$85) lost market share during 2H09-1H10, but gained back share through Baidu Qiyi (video), SINA Weibo and SOHU Video. Youkus (YOKU US, BUY, TP: US$38) market share was flat. Google, NetEase, Renren and Kaixin lost market share. Qihoo also gained share, but as we stated, its web share is small. On the PC client side, the biggest share gainer in terms of users and time spent is definitely Qihoo 360. From January 2009 to July 2011, combined users of Qihoo 360s client products (360 Safeguard, 360 AntiVirus, 360 SafeBrowser, 360 Safe) increased from 105m to 432m while Tencents client products (QQ IM, QQ Game, QQ Music, QQ Doctor, QQ Pets, Tencent TT and QQLive) grew from 250m to 378m. Even though users have overlaps, without doubt Qihoo 360 gained significant market share in terms of user base. We are cautious about applying time spent market share in PC clients because measurement tends to be less accurate. But direction-wise, we believe Qihoo 360s share gain is beyond questioning. Unit time spent in 360 SafeBrowser (~1.5 hours/day) is comparable with other client applications and even unit time spent in 360 Safeguard increased from 13 seconds/day in January 2009 to 2.8 minutes a day in March 2011.
Tencent has gained the most time spent share over the past two and half years in browser
Qihoo 360s client side user base probably has surpassed Tencent, even though unit time spent is low
13 October 2011
Figure 7.
2009-01 2009-02 2009-03 2009-04 2009-05 2009-06 2009-07 2009-08 2009-09 2009-10 2009-11 2009-12 2010-01 2010-02 2010-03 2010-04 2010-05 2010-06 2010-07 2010-08 2010-09 2010-10 2010-11 2010-12 2011-01 2011-02 2011-03 2011-04 2011-05 2011-06 2011-07
Web time spent market share Tencent and QIHU gained; NTES and Kaixin lost
SINA 4.9% 5.3% 5.3% 5.1% 4.8% 4.9% 4.6% 4.4% 4.1% 3.7% 3.9% 3.9% 3.8% 3.5% 3.7% 3.6% 3.6% 3.8% 3.6% 3.6% 3.7% 3.7% 4.3% 4.3% 4.4% 4.5% 5.3% 5.1% 5.1% 5.2% 5.1% Taobao SOHU 3.5% 4.1% 4.2% 3.9% 3.7% 3.3% 3.2% 3.1% 3.6% 3.7% 4.3% 4.3% 4.6% 3.4% 4.1% 4.0% 4.4% 4.0% 4.2% 4.3% 4.8% 5.2% 6.0% 6.6% 5.8% 4.3% 5.1% 5.2% 5.1% 5.3% 4.7% 3.5% 3.9% 3.6% 3.8% 3.8% 3.6% 3.6% 3.4% 3.2% 2.8% 3.1% 3.1% 3.1% 3.3% 3.7% 3.6% 3.6% 3.6% 3.7% 3.7% 3.7% 3.6% 3.9% 4.0% 4.2% 4.4% 5.0% 4.6% 4.8% 4.9% 4.8% NetEase Youku 3.3% 3.6% 3.5% 3.3% 3.3% 3.1% 2.9% 2.7% 2.7% 2.4% 2.6% 2.4% 2.4% 2.0% 2.5% 2.5% 2.3% 2.4% 2.3% 2.3% 2.2% 2.1% 2.4% 2.3% 2.2% 2.0% 2.3% 2.0% 1.9% 1.9% 1.6% 4.1% 3.8% 3.7% 3.6% 4.0% 4.3% 4.1% 4.0% 3.7% 3.6% 3.4% 3.8% 4.2% 4.5% 4.5% 5.5% 5.4% 5.2% 5.3% 5.2% 5.2% 5.2% 4.9% 5.0% 5.6% 5.9% 5.8% 6.1% 6.2% 6.1% 6.4% Google Renren Kaixin 0.9% 1.0% 1.0% 1.0% 1.0% 0.9% 0.9% 0.8% 0.8% 0.7% 0.7% 0.7% 0.7% 0.6% 0.6% 0.5% 0.7% 0.7% 0.6% 0.6% 0.6% 0.5% 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.3% 0.3% 0.3% 2.2% 2.4% 2.8% 3.5% 3.9% 3.4% 3.2% 3.3% 3.1% 3.2% 2.8% 2.5% 2.7% 2.9% 2.8% 2.9% 2.9% 3.0% 2.6% 2.3% 2.3% 2.4% 2.2% 2.1% 2.0% 2.1% 2.1% 2.0% 1.9% 1.9% 1.8% 1.3% 1.1% 1.9% 2.7% 4.0% 4.4% 4.4% 4.6% 4.4% 4.0% 3.4% 3.5% 2.7% 3.1% 3.1% 2.9% 2.8% 2.4% 2.1% 1.8% 1.8% 1.7% 1.7% 1.3% 1.3% 1.2% 1.0% 1.0% 1.0% 0.9% 0.9% QIHU 0.1% 0.1% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.2% 0.3% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.4% 0.5% 0.4% 0.5% 0.6% 0.6% 0.7% 0.7% 0.7% 0.7% 0.8% 0.8% 0.8% 0.8% 0.8% 8.6% 9.1% 9.0% 8.7% 8.5% 8.4% 8.0% 7.9% 8.3% 8.0% 7.7% 7.4% 7.3% 6.9% 7.9% 9.5% 9.3% 10.0% 9.8% 10.0% 10.3% 10.6% 10.7% 11.2% 11.3% 13.1% 12.7% 12.3% 12.1% 12.1% 11.9%
Tencent Baidu 10.8% 11.7% 12.3% 13.1% 14.0% 15.9% 17.6% 19.5% 22.5% 24.3% 25.9% 27.1% 28.6% 28.1% 27.7% 26.5% 27.2% 28.0% 28.4% 29.5% 30.7% 29.8% 28.6% 27.7% 24.8% 23.9% 22.6% 24.8% 25.7% 25.8% 26.2%
Source: IUT, Mirae Asset Research. SINA includes SINA Weibo. Tencent includes QQ.com, Pengyou, Paipai and Sousou. Baidu includes Qiyi.
Figure 8.1 PC client user base Qihoo gained a lot
Figure 8.2 PC client time spent Qihoo gained a lot
1,400 1,200 DAU (m 1,000 800 600 400 200 0 2009-01 2009-07 2010-01 2010-07 2011-01 QQ Properties Microsoft Properties
Source: IUT
Time spent market share PC cli
1,600
100% 80% 60% 40% 20% 0% 2009-01 2009-07 2010-01 2010-07 2011-01 2011-07 Tencent softwares Microsoft softwares Others QIHU softwares SOHU softwares
Qihoo Properties Other properties
Client isnt deadIt just becomes an AppStore

In an environment of poor network conditions or with the requirement of high quality graphics, customized client does a better job than a generic browser. For big, mature applications browsers can optimize, but for new, evolving needs, a tailored client is often the answer. With HTML5, watching video and playing games have become basic functions. But for high-end experiences, an Adobe Flash plug-in still does a better job. In a nut shell, the benefit of web is convenience and cost: portable, standardized, and less redundancy in development. Its weakness is quality. With mobile Internet usage constrained by network speed, screen size and form factor, the dominant application form in iOS and Android is a mobile client, not a web browser.
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13 October 2011
But web is eventually the answer to everything, even mobile

Even though standalone client is the dominant form of content on mobile Internet, HTML5 is making a comeback by developing web apps wrapped in an app store look-and-feel. Facebook is reportedly taking such a route. If this is successful, an app store can be accessed in a mobile browser like Apples own Safari. Facebook will be able to legally circumvent Apples AppStore by using HTML5. Like in PC Internet, customized PC client was the early answer to satisfy an Internet users need at the time of bandwidth shortage (like AOL). As telecom infrastructure improves, standardized web browser can reduce development complexity and wastage. With HTML5, the arrival of mobile web browsing might be earlier than anticipated.
The answer for both PC and mobile Internet will be the browser (web), but even in mobile, it may arrive earlier than thought
Open platform allows massive scalability on web

The importance of Open Platform Initiative (OPI) is it builds up a content supply chain leveraging the webs common infrastructure. Sharing and connecting allows building of business models and sharing of economic profit previously beyond reach in the PC client era. This content supply chain can be reused when computing moves to the mobile Internet. Since browser has not been established as the default user interface in mobile Internet, proprietary AppStore environment such as Apples iOS and Googles Android has the potential to function as a mobile Internet operating system, much like Microsofts Windows. Hence, the competition on OPI is a competition of content supply chains. Whoever can develop the richest and best quality content supply chain will enjoy an advantage when mobile Internet takes off.
Q+ and 360 Desktop have limited use in PC Internet, but are aimed at mobile Internet
Shortest route has tremendous advantage in mobile Internet

In mobile Internet, shortest route to information has a tremendous advantage due to traffic, form factor and screen size limitations; PC browser is still not optimized for mobile devices traffic, form factor and screen size, leaving it clumsy in many ways. The revolutionary aspect of AppStore is it hands back the freedom of designing apps to individual app developers, who know what best suits their end-users. It is under this scenario that major platforms such as Tencent, Qihoo and Baidu are rolling out their own client environments. We think there are no sound reasons; in fact, it is a step backwards to install an open platform for PC client. The Internet browser is already an open platform. But for mobile Internet, the app environment reuses apps developed for PC and prepares for the eventual take-off of mobile Internet.
Figure 9.1 Web QQ interface occupying your desktop Figure 9.2 360 Safe Desktop largely the same
AppStore QQ IM QQ Weibo QMail QZone Browser
Source: Company data, Mirae Asset Research.
13
13 October 2011
Feeding traffic from any fragmented upstream

With Google and Apple advocating browser as an application environment for PC and AppStore as an application environment for smart-phones, development toolsets for browser-andAppstore-based computing are becoming available; this opens up new ways of monetization models and monetizable traffic. So far social/web games, group buying and online shopping are three areas seeing sharp growth in monetizable traffic and online shopping (B2C) has the biggest absolute size. Platform revenue opportunity for group buying and B2C could be in the form of advertising and that for social/web games in the form of joint operation. We believe platform advertising revenue can reach 5-10% of group buying GMV (assuming 7.5%), 1-3% of B2C (assuming 2%) and 30-70% of social/web games (assuming 50%) gross revenue. We estimate platform derivable revenue to increase from Rmb4.1b in 2010 to Rmb19.8b in 2013, representing a CAGR of 69%.
Figure 10. Platform revenue estimates
Platform derivable revenue from social/web games, group buying and B2C could reach Rmb19.8b in 2013
(Rmb m) Platform addressable market
2009 64,380
2010 134,210
2011E 250,222
2012E 422,132
2013E 632,330
Growth rate
101%
108%
4,089 2,760 1,450 130,000
86%
8,360 5,796 10,426 234,000
69%
13,475 8,693 15,639 397,800
50%
19,779 12,171 23,459 596,700
Rev. to the platforms 1,965 Social and web games Group buying GMV B2C revenue or GMV 1,380 200 63,000
Social games growing fourfold in 2011, web game growing 87% YoY
We estimate social games to grow 500% YoY from Rmb200m in 2010 to Rmb1b in 2011. We expect web games to grow 87% YoY from Rmb2.56b to Rmb4.80b. Together social and web games (SWG) would grow 110% YoY in 2011 (Figure 11). As mentioned in our game sector initiation on 6 May, A year of trench warfare, and in ChinaJoy post tour update on 1 August, Client game touches bottom, but rebound depends on willingness to change, social and web games have different characteristics from client games. Social and web games have very small development teams (6-20 people) and very short development cycles (3-6 months). Retention rate (1% after three months) and paying ratio tend to be very low (1%); for social games, ARPU is also very low (Rmb10/mo.) Hence, both social and web games must rely on huge traffic platforms to be able to turn in a profit. This allows Tencent and RENN to benefit from both social and web games and QIHU to benefit from web games. SINA is also testing waters with social games. SOHU has bought web game developer 7Road.
Figure 11. China online game market forecasts
1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 PC client game market size (RMB m) PC client game market share Y-Y growth rate 5,900 91% 18% 6,430 6,550 90% 88% 22% 21% 6,810 6,910 88% 86% 27% 17% 7,012 85% 9% 7,813 85% 19% 8,246 84% 21% 2009 25,690 89% 30% 2010 2011E 2012E 2013E 2014E 2015E
Primary beneficiaries of social game boom are Tencent and RENN. Primary beneficiaries of web game boom are Tencent, BIDU, RENN and QIHU
29,980 36,766 43,384 49,892 54,881 59,272 85% 81% 78% 73% 68% 65% 17% 23% 18% 15% 10% 8%
PC web+social game revenues (RMB m) 260 Web+social game market share 4% Y-Y growth rate Mobile game revenues (RMB m) 310 5% Mobile game market share Y-Y growth rate Total online game market size Y-Y growth rate 6,470
320 4%
350 5%
450 6%
570 638 747 804 7% 8% 8% 8% 119% 100% 113% 79% 540 7% 74% 590 7% 40% 8,240 15% 672 7% 20% 9,232 24% 767 8% 50% 9,817 26%
1,380 5% 176% 1,800 6% 32% 28,870 33%
2,760 8% 100% 2,568 7% 43% 35,308 22%
5,796 13% 110% 2,570 6% 0% 45,132 28%
8,693 16% 50% 3,900 7% 52%
12,171 18% 40% 6,500 9% 67%
15,822 20% 30% 9,440 12% 45% 80,143 17%
18,986 21% 20% 13,480 15% 43% 91,738 14%
420 6%
560 8%
510 7%
7,170 7,460
7,770 8,020 24%
55,978 68,563 24% 22%
Source: Company data, Mirae Asset Research, iResearch
14
13 October 2011
Group buying growing 619% YoY in 2011

2011 is a year that saw tremendous growth in the group buying segment200% YoY to Rmb4.35b, according to iResearchs projections. Industry sales complied by Tuan800 until July, however, indicate Rmb4.43b. Tuan800s number does not include Taobao Ju (), which is mostly product sales, not service sales typical of group buying. Tuan800s number only counts the top 12 group buying websites and probably counts the industry size. Hence, we estimate group buying industry sales at Rmb10.4b in 2011, up 619% YoY from 2010. We expect the growth rate to slow down to 50% in 2012 and 2013, but reaccelerate to 75% in 2014 as adoption of smart-phones puts location based services (LBS) as a reference service for group buying. For our analysis of the LBS market, please refer to our AutoNavi initiation on 8 July, O2O call option+map duopoly. QIHU and BIDU are two prime beneficiaries of group buying as it provides a good push traffic source for their Personal Startup page offering: tuan.360.cn and tuan.baidu.com. Both QIHU and BIDU are group buying aggregators, so is SINA Tuan. But RENN has decided to pursue the group buying business itself. Its Nuomi is a group buying site, not an aggregator. Tencent and SOHU both have group buying sites (Gaopeng and tuan.sohu.com) and group buying aggregators (tuan.qq.com and t123.sohu.com).
Figure 12.1 China group buying market size forecast
BIDU, QIHU and SINA Tuan are group buying aggregators. Taobao Ju, Renrens Nuomi are group buying sites. Tencent and SOHU have both group buying and group buying aggregator sites
Primary beneficiaries of group buying are QIHU and BIDU. But we believe Tencent also has potential
Figure 12.2 Leading group buying sites in China (2Q11)
70,000 60,000
0.25%
300
Revenues (Rmb m
Market size (Rmb m
0.20% 0.15% 0.10% 0.05% 0.00% 2010 2012E 2014E
50,000 40,000 30,000 20,000 10,000 0 Market size (Rmb m)
As percentage of retail sal
250 200 150 100 50
Lashou () Meituan () 24quan (24) Dianping () 58.com (58) Nuomi (Renren) Manzuo ()
April May June
As percentage of retail sales
Source: iResearch, Mirae Asset Research
Source: Tuan800, Mirae Asset Research
Figure 13.1 Baidu Index of Tencent, Qihoo and Baidus group buying aggregators
Figure 13.2 Baidu Index of Nuomi (RENN), Gaopeng (Tencent) and Aijia (SOHU) group buying sites
Source: Baidu, Mirae Asset Research. Green=Qihoo, Orange=Tencent, Blue=Baidu. SINA group buying traffic is negligible
Source: Baidu, Mirae Asset Research. Orange=Nuomi (Renren), Green=Tencent, Blue=SOHU
Ftuan (F)
55tuan () Didatuan ()
15
13 October 2011
We believe Tencent has great potential in group buying. Before QQ Tuan transitions into a group buying aggregator, it ranked #9 in the industry with May sales at Rmb34m. After Tencent consolidates its group buying JV with Groupon (Gaopeng) from its German partner, it will be competing on both group buying and group buying aggregation.
Direct B2C (Amazon model) growing 139% YoY in 2011

If group buying is introducing the idea of couponing for the first time for the Chinese, B2C is desperately trying to break even by cannibalizing offline retail in the hope of breaking even at a high revenue point. This leads to a great need to search for a cheap source of buyer traffic. The E-commerce industry has an over-reaching competitor: Taobao. Due to Taobaos dominant market share, shared traffic with C2C (tax free and fake goods) and thus, a solid grip on buying customers, even B2C leaders such as 360BUY and Dang Dang cannot make money. In order to break even at a higher revenue scale, general online retailers are entering into more verticals, competing with numerous small specialty retailers, biggest of which is VANCL, but many are much smaller. Hence, both general online and specialty retailers are under pressure from Taobao to grow in scale. To grow revenue, they are constantly looking for a cheap source of traffic. We estimate the entire B2C market grew 111% in 1H11 with Direct B2C (Amazon model) growing 139% YoY. In 2010, total online shopping (B2C+C2C) had an industry size of Rmb461b, of which B2C accounted for Rmb56b, or 0.9% of Chinas retail sales (group buying is 0.01% of Chinas retail sales).
Figure 14. China e-Commerce market estimates
Revenue or GMV (Rmb b) Industry C2C GMV B2C Revenues or GMV Direct B2C Revenues (Amazon model) Platform B2C GMV (Rakuten model) Growth rate Industry C2C B2C Direct B2C Platform B2C Market share Taobao C2C Taobao Mall 360BUY Dangdang VANCL 81% 71% 80% 71% 53% 45% 88% 78% 91% 81% 77% 67% 75% 66% 104% 135% 93% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 47 36 10 2.6 7.9 56 43 13 3.4 10 74 56 18 4.9 13 86 64 22 6.1 16 85 62 22 6.5 16 101 74 28 8.3 19 114 82 32 10 22 161 114 47 15 32 162 113 49 16 33 179 123 56 19 37 2009 2010 263 200 63 17 46 461 331 130 40 90
Taobao is making all B2C difficult to make money
With the aid of capital, online shopping is making a run in Chinas offline retail industry, 3.2% of retail sales as of 2010
113% 111% 78% 102% 100% 69%
118% 121% 103% 106% 108% 91%
147% 143% 105% 149% 151% 130%
70% 8.5% 3.7% 0.6% 0.5%
69% 8.7% 4.1% 0.6% 0.5%
68% 8.9% 4.4% 0.5% 0.5%
67% 9.1% 4.8% 0.5% 0.6%
66% 9.3% 5.2% 0.5% 0.6%
65% 9.5% 5.6% 0.5% 0.7%
64% 10% 6.1% 0.5% 0.7%
64% 10% 6.5% 0.4% 0.8%
63% 10% 7.0% 0.4% 0.8%
62% 10% 7.5% 0.4% 0.9%
68% 8.9% 4.4% 0.6% 0.5%
65% 10% 6.0% 0.5% 0.7%
All upstream with fragmented market shares can be platforms customers

With browser becoming an infrastructure for applications, business processes can be carried on the Internet in a browser. Any business process that can be automated by the Internet will represent opportunities for web platforms. We believe: Online video or online music could be the next opportunity, especially if pay-perview becomes popular and platforms leverage the convenience of their online payment capabilities. Companies such as YOKU and TUDO already spend traffic acquisition cost on Baidu. In 2Q11, online video had advertising revenue of Rmb1b (excl. TV content reselling), up 118% YoY. Online video companies such as YOKU spent 25% of revenue on sales and marketing. We believe traffic acquisition cost of 10% of revenue is reasonable. In such a case, traffic acquisition cost could have reached Rmb100m in 2Q11. BIDU and QIHU are the bigger beneficiaries. For details on our analysis of the online video industry, please see our YOKU initiation dated 17 February 2011.
Online video (now) might be contributing Rmb100m per quarter to platforms, and is growing at triple digit YoY
16
13 October 2011
While online music is widely popular in China, most of it is pirated. The industry revenue size is very small. Online payment could be the next opportunity for platform monetization. While online payment usually represents the same transaction in B2C or C2C, the involvement of the payment step would mean additional revenue to the platforms at 0.2-0.5% of GMV as payment processing fees when the industry matures. In 2Q11, Chinas online payment industry size was Rmb457b, up 118% YoY. If a transaction fee of 0.35% of GMV can be realized, platforms can realize revenue of Rmb1.6b per quarter, growing at triple digits. AliPay has the largest market share in online payment, so it will be the biggest beneficiary.
China B2C market share by order volume, May 2011
Chinese name Origin C2C B2C B2C B2C B2C B2C B2C B2C B2C B2C B2C Offline B2C B2C B2C B2C B2C B2C Offline Mail order B2C Vertical Comprehensive 3C to comprehensive Books and media Comprehensive Clothing General merchandise Clothing 3C General merchandise General merchandise Shoes 3C 3C Bags Clothing Clothing Clothing, cosmetics Shoes General merchandise Baby products Clothing, cosmetics Inventory Doesnt own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Own Order market Operating share margin 67% 7.0% 6.6% 5.8% 3.2% 1.4% 1.1% 0.7% 0.9% 1.2% 0.3% 0.1% 0.3% 0.6% 0.5% 0.4% 0.2% 0.2% 0.3% 0.2% 0.3% Breakeven Loss 0.20% Loss Breakeven Loss Loss Loss Loss Loss Loss Loss Loss Loss Profitable Loss Loss Loss Loss Loss Loss
Online payment, when a processing fee can be realized (13 years), would generate Rmb1.6b in revenue per quarter for platforms and it is growing at triple digits
Figure 15.
Company 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20
Taobao Mall 360buy DANG DANG Amazon VANCL/V+ Yaodian100 Mecoxlane New Egg VIPshop Yihaodian Letao Suning ICSON Mbaobao Moonbasa iHush XIU OKBUY Yintai Redbaby 2688
100 2688
Source: ECPlus, Mirae Asset Research
Online travel could be a long-range opportunity, especially if LBS/O2O service can be popularized with the spread of 3G/4G. In particular, online travel and offline life style booking can be integrated in a persons mobile device to achieve seamless activity scheduling. In 2Q11, online travel recorded net revenue of Rmb2.2b (gross revenue ~10x), growing at 45% YoY. Companies such as CTRP spend 15% of net revenue on sales and marketing and others like eLong spend 40% and Qunar, possibly even more. We believe traffic acquisition cost of 5% is reasonable. In such a case, revenue contribution could be Rmb110m for platforms in 2Q11, growing at 40-50% YoY. Online literature could be another long-range opportunity for web platforms. In 2Q11, 143m Internet users reached online literature, according to iResearch. While leading players are introducing proprietary hardware platforms, Shanda Interactive forecasted revenue size of Rmb300m in 2010 and Rmb500m in 2011 in its IPO prospectus, of which it had 70% market share. However, Shandas traffic share is only ~1/3. Most other players in the industry suffer from lack of monetization tools.
Online travel, when most of the booking can be completed online (3-5 years), can contribute Rmb110m per quarter for platforms, growing at 40-50% YoY
Online payment, online video and online travel have a combined gross revenue of Rmb480b and revenue potential for platforms, assuming 0.35% of GMV of online payment, 10% revenue of online video and 5% of net revenue of online travel, would be Rmb1.8b, on a quarterly basis, growing at triple digits. QIHU has already launched Personal Startup Page (PSP) for video and online literature. It has featured online payment as one of the browser tabs. It has not yet launched offerings for online travel, but we notice that BIDU has acquired Qunar, Chinas leading travel search engine.
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13 October 2011
Figure 16. Online literature market at a glance

DAU (m) Total market Cloudary Qidian Hongxiu Readnovel XXSY XS8 SINA Literature Tencent Literature Booksky SODU Jinjiang SOHU Literature Zongheng (PWRD) 15.1 6.1 3.0 0.5 0.6 1.5 0.5 1.5 1.4 1.2 0.9 0.9 0.8 0.7 Daily tim spent share (%) 6.23 35% 20% 2% 4% 6% 3% 5% 2% 7% 1% 6% 1% 6% Daily visit times 2Q11 revenues (Rmb m) share (%) 40.7 34% 23% 3% 4% 3% 2% 7% 4% 6% 5% 5% 2% 4% 300 102
NA NA NA NA NA NA NA
Platform monetization often happens at the fastest growing sectors

When examining the six sectors that might contribute to platform growth, we found all of them growing at very high speeds. Five (social/web games, group buying, B2C, video and payment) are growing at triple digits YoY and one (travel) is growing at 40-50% YoY. We believe these industries are growing fast because they are all replacing offline or semi-online counterparts such as client games, classified ads/coupons, offline retail, TV and offline travel. Another characteristic of these sectors is that they have fragmented upstream, often with low entry barriers. Group buying probably has the lowest entry barrier, followed by social/web games, B2C and video. Online travel and online payment have high entry barriers. Fragmented market share tends to stimulate hyper-competition, making platforms the shovel seller who sells to the gold diggers.
Industries replacing offline competition and those with lowentry barriers are good revenue contributors for platforms
Platform monetization has different depth

When examining the six industries that might contribute to the platforms growth, we found that they have gone to various lengths in monetizing their platform traffic. Some of the progress could be due to the nature of the traffic. For example, social games can only be monetized by contextual-rich traffic provided by Tencent, RENN and maybe, SINA. Other reasons could include: (1) platform complexity (mix of client and browser); and (2) in-house competition. Tencent is the most advanced in monetizing platform traffic: It has presence in all sectors: Social/web games, group buying, B2C, video, payment, travel and literature. BIDU is placed second: BIDU has presence in six out of the seven sectors, benefiting from web games, group buying, B2C, online video, online travel and online literature. Alibaba and QIHU are the third tier: Alibaba has presence in four out of six sectors: group buying, B2C, online payment and online travel; QIHU has presence in social/web games, group buying, B2C and video; SINA, SOHU and RENN fill the bottom: SINA, SOHU and RENN all have only three sectors, but we see the involvement of SINA and SOHU to be both lower than RENNs. Through the acquisition of 56.com and the launch of Nuomi, RENN is now deeply involved in video and group buying. It is also a first mover in social games. SINA and SOHU, however, are still only involved at a shallow level in social games and online literature. SINAs involvement in online video via the acquisition of TUDO is still at an early stage.
The problem for SINA, SOHU and RENN is their traffic is too small Tencent, BIDU, Alibaba Group and QIHU are more advanced in tapping into upstream to connect to their platforms, but Tencent doesnt have a 100% web architecture
Based on our observations: BIDU and Alibaba are born with platform DNAs and web traffic. They do not have inhouse applications to compete with third-party apps and are 100% browser based architecture;
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13 October 2011
Figure 17.
Gearing of platforms in platform markets

Tencent BIDU Alibaba Group QIHU SINA SOHU RENN
Social/web games Group buying B2C Online video Online payment Online travel Online literature
QIHU has the greatest potential to grow. It also does not have in-house competition. It is, however, still in the process of building its web traffic by leveraging its dominant PC client traffic. Hence, QIHUs growth can come from two parts: growth in web traffic itself and growth in monetization of the web traffic; Tencent and SOHU are born with in-house competition in various areas such as games and video. Tencents architecture is a mix of PC client and browser. These factors could hinder these companies growth; RENNs traffic is lower than all its platform peers and is not growing. We believe this will also hinder RENNs ability to realize platform-related growth; SINA has the greatest uncertainty among all its platform peers. SINAs traffic does not stand out, but it is arguably of better quality and is growing fast. If SINA successfully transitions itself from a social media to a social networking platform, then we would think most of the platform markets will be available to SINA. However, to rebuild Internet users social graph, away from Tencent, is a daunting task for SINA.
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13 October 2011
Platforms are not born equally: A cross examination

In Figure 1, we showed a detailed comparison of the platforms by Daily Active User (DAU), Daily Browsing Time (DBT) and Daily Visit Times (DVT). A summary table is reproduced below. With Tencent being the reference, we can see that from a DAU perspective, Baidu and QIHU are in the same league while SOHU, Taobao and SINA are in a separate league. From a DBT and DVT perspective, QIHU and SOHU benefit from contribution from their browsers. Taobao and SINA are in the next league. RENN and Kaixin are very small. From a traffic perspective, RENN is only 3-4% of Tencent.
Figure 18. Platform traffic summary table
Daily active user (DAU) 100 35 96 35 46 16 15 15 3.1 1.1 Daily browsing time Daily visit times (DBT) (DVT) 100 100 14 103 72 22 22 8 6 2.1 1.1 42 162 102 128 48 23 12 4.1 0.9
QIHU and SOHU have large traffic, but their market caps are small. RENN and Kaixin have small traffic, but their market caps are big
Tencent Baidu Qihoo Qihoo w/o safety SOHU SOHU w/o Pinyin Taobao SINA RENN Kaixin
Certainly the evaluation of QIHUs and SOHUs traffic has to do with how to evaluate the browser traffic. Browser traffic is very unique because it can theoretically encompass all web site traffic happening inside.
QIHU and SOHU have big traffic. RENN and Kaixin are very small
Is proprietary browser traffic bad?

We dont think so. We think there is no bad traffic, but it is traffic that has not found its payer. We believe most of the browser traffic can be monetized by long tail advertising, similar to Googles AdSense (contextual advertising). BIDU already has similar programs, but revenue from ad union is <5% of its revenue. However, we do believe long tail advertising needs enormous traffic to monetize. Below a certain threshold, the traffic may not be monetizable. This could explain why QIHUs traffic, although of a similar nature, might be worth more than SOHUs.
Contextual ads seems to be the way to monetize browser traffic
QIHU, BIDU and Tencent have the most third-party apps

Due to their software roots, it is not surprising that QIHU, BIDU and Tencent are the three with foremost third-party apps running on their platforms. According to DCCI, QIHU now has 130K third-party apps on its platform, games are nearly half (some mini-web games) and another 30% is video; According to the same source, BIDU now has 20K third-party apps; games are nearly half and another 37% comprises music and video; Tencent Pengyou has 11K third-party apps; Q+ has 3K and TenPay has a few hundreds. Majority of Pengyous third-party apps are games; SINA Weibo has 1K+ apps, but here, 50% of apps are Weibo tools, and 21% are games; Taobao has a few hundred third-party apps; nearly half are sales marketing oriented and another 30% management oriented; RENN has a few thousand third-party apps. Other websites comprise 70%.
QIHU, BIDU and Tencent lead in platform opening
Due to Chinas Internet user profile, game and entertainment remain the dominant form of thirdparty apps. Of the total 156K third-party apps under DCCIs survey hosted by the six platforms (Tencent, BIDU, Taobao, QIHU, SINA and RENN), 107K are games.
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13 October 2011
Figure 19.1 QIHUs third-party apps: total 130K
Figure 19.2 BIDUs third-party apps: total 20K
86.4
Number of 3rd party apps (K)
Online banking
Life style
Children
Literature
Pictures'
Fashion
Shopping
Finance
Game
Music
Video
100 90 80 70 60 50 40 30 20 10 0
10 9 8 7 6 5 4 3 2 1 0
9.04
4.62 2.8 1.82 1.58 0.16 Literature Life style Restaurants Chatting robot Web master tools
21
39.0 2.7 Tools News SNS
Music
Video
Source: DCCI, Mirae Asset Research. Data in August, 2011
Figure 20.1 Tencent Pengyous third-party apps: total 11K
Figure 20.2 TenPays third-party apps: total a few hundreds
12 Number of 3rd party apps (K) 10 8 6 4 2
10.75
0.090 0.080 0.070 0.060 0.050 0.040 0.030 0.020 0.010
Game
0.08
0.06 0.05 0.020.02 0.02 0.010.01 0.010.01 0.010.00 Mini game Utility Entertainment Education Group buying Finance Health Travel Baby Auto Fees
0.22 0 Game Life style
0.04 Tools
Figure 21.1 Tencent Q+s third-party apps: total 3K
Figure 21.1 SINA Weibos third-party apps: total 1K
Number of 3rd party apps
0.67 0.59 0.56 0.60 0.70 0.50 0.40 0.30 0.20 0.10 Life style 0.00 Entertainment Game 0.30 0.23 0.21 0.14 0.090.08 0.06 0.040.04 Children Literature Music Web site Widgets Office Tools SNS News
0.6 0.5 0.4 0.3 0.2 0.1
0.57
0.23
0.19 0.06 Mobile 0.03 0.01 0.01 0.01 Browser tool Blog plug in
Weibo tools
PC client
Games
Tools
13 October 2011
Figure 22.1 Taobaos third-party apps: total a few hundred
Figure 22.2 RENNs third-party apps: total 1K
0.14 0.12 0.1 0.08 0.06 0.04 0.02 0 0.03 0.01 0.01 0.01 0.00 0.00 0.00 0.00 0.09
0.16 0.14
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
0.70
0.18 0.04 Entertainment Web sites Games 0.03 Life style 0.03 Wireless 0.02 Study
22
M a m rk e an t ag ing em Da en t Bu a m t ye ini Ta r s n g ob e r ao v ic e k St e to or e ol s d O t h i sp la er Ta se y ob rv i ao W ce B r res ire a n el l e s lin s d m gt an oo ag ls em en t re
St o
RENNs traffic is confined to campusTaobao has highest end-users

In terms of demographics, a study by iResearch showed that Taobao has the highest end-users, followed by SINA. RENN has a high concentration in college while Tencent has the lowest average education levels. RENN has the youngest users, Taobao the oldest. RENNs average user age is 27.1, 0.8 below the average of 27.9 (Figure 23). Tencent, BIDU and RENN have the lowest income users, Taobao the highest. Average monthly income of a Tencent user is Rmb2,000, below the average of Rmb2,126. A RENN users average income is Rmb2,078, the second-lowest (Figure 24). RENN has the highest concentration of college graduates, Tencent and BIDU the lowest. If we assign graduate degree a value of 4 and below middle school a value of 0, we can scale the education rank of platform users with numeric values. College graduates have a value of 3 and an associate degree a value of 2. RENN has the highest concentration of college graduates, an average score of 2.4. SINA Weibo has the second-highest at 2.31 and Kaixin the third-highest at 2.30.
Age profile of platform users
Tencent Below 18 19-24 25-30 31-35 36-40 Above 40 Average age 14% 30% 22% 12% 9% 13% 27.8 Baidu 14% 29% 22% 12% 10% 13% 28.0 Taobao Qihoo 12% 30% 24% 13% 9% 12% 28.1 12% 31% 22% 13% 10% 12% 28.0 SINA Weibo Renren Kaixin 12% 34% 22% 11% 8% 12% 27.5 11% 39% 22% 10% 8% 11% 27.1 10% 28% 24% 13% 10% 14% 28.7 Average 12% 32% 23% 12% 9% 12% 27.9
RENN and Kaixin are niche platforms while others seem to be general platforms
Figure 23.
Figure 24.
Monthly income profile of platform users
No income Below 1000 1000-2000 2000-3000 3000-5000 Above 5000 Average income
Tencent 24% 7% 24% 27% 11% 7% 2,001
Baidu 24% 7% 24% 26% 12% 7% 2,069
Taobao 21% 7% 24% 27% 13% 8% 2,167
Qihoo 23% 7% 24% 27% 13% 7% 2,110
SINA Weibo 24% 7% 22% 26% 12% 8% 2,125
Renren 25% 8% 23% 25% 12% 8% 2,078
Kaixin 20% 6% 23% 28% 14% 9% 2,329
Average 23% 7% 24% 27% 12% 8% 2,126
13 October 2011
Figure 25.
Education profile of platform users

Tencent Baidu 1% 27% 25% 41% 5% 2.22 Taobao Qihoo 1% 24% 26% 43% 6% 2.28 1% 24% 27% 42% 5% 2.26 SINA Weibo Renren Kaixin Average 1% 24% 25% 45% 6% 2.31 1% 20% 24% 48% 7% 2.40 1% 24% 26% 43% 6% 2.30 1% 24% 26% 43% 6% 2.28 1% 28% 26% 41% 5% 2.21
Below middle school High school Associates Bachelors Masters or above Average education
Tencent, SINA and RENN have Subject Contextual Traffic (SCT)

In our view, Subject Contextual Traffic (SCT) is traffic that is peculiar to the producer and receiver of the traffic. It is often referred to as the SNS (social networking) or social graph traffic. Currently, monetization method for SCT is limited. Social game is the most likely monetization method, but the social game market is still small. We project social games revenue to grow from Rmb200m in 2010 to Rmb1b in 2011, with growth mostly accruing for Tencent.
BIDU, QIHU and SOHU have Content Contextual Traffic (CCT)

We believe content Contextual traffic is traffic that is peculiar to the content of the traffic. We refer to it as smart content. In China, monetization for CCT is also at an early stage, but has broader expertise than SCT, in our view. Application of cookies and other personalization techniques have long existed in the Chinese Internet space. BIDU has been selling contextual ads.
Tencent and SOHUs hybrid client-web architecture and strong in-house R&D could act as a hindrance for their platforms potential
In-house apps at Tencent and SOHU could hinder platform opening

The lack of development in social games in China can always be attributable to Tencents strategies. As Chinas largest social graph, Tencent has its own in-house games to compete with third-party games. This has slowed Tencents pace in opening up its platforms, which may be the reason why we have not seen social games becoming bigger than they are today.
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13 October 2011
The planet of platforms: Compete by ecosystems

In our view, platform is the eventual business model of all Internet businesses. This stems from Internet being a medium with zero marginal cost of servicing users. The so-called TAB (Tencent-Alibaba-Baidu), commonly referred to as the leading platforms in China, all rose to prominence through the same route: 1. Providing a basic, free and lightweight application to Internet users. For Tencent, it was Instant Messaging (IM), for BIDU, it was free search and for Alibaba, it would be C2C. None of these basic services consumes a lot of bandwidth, capex or labor; Build value added services (VAS) on top to monetize a certain percentage of traffic. For Tencent, it was virtual items; for BIDU, it was paid search of certain keywords. Alibaba it is still experimenting with various monetization schemes, but it inevitably involves VAS for a selected few; Having proprietary payment solutions to iron out the lack of commercial infrastructure in China. For Tencent, it was Q-coin virtual currency and for BIDU, the Phoenix Nest System (PNS) and its predecessor.
Within PC Internet, the competition in the future will be the competition of ecosystems
2.
3.
The advent of HTML5 just provides the infrastructure for more companies to succeed in the same manner as Tencent-Baidu-Alibaba because now, third-party apps developed for web can easily connect to the user base for monetization. Thus, competition in PC Internet would be a competition of ecosystems. While PC Internet, after a decade of growth, has come to a point of forming uniform web architecture for doing businesses online, other areas havent reached that point. Mobile Internet, for example, is still in the land-grabbing phase. Online retail, for example, faces a difficult offline logistics system. Triple convergence faces the competition of proprietary set-top box infrastructure of the cable and IPTV industries. We believe Internet and web will eventually win, but there are many years of struggle ahead. In these industries, while it is still too early to predict who will eventually be the mega-platforms, we do like companies with defensible barriers. We believe NetDragon has built an early lead in mobile Internet app stores, the gateway to mobile Internet just like search to PC Internet. It needs to pay attention to HTML5, which can circumvent the control of an app store via the mobile browser. We believe AutoNavi has also built an early lead in the mobile Internet of transportation devices. But lack of uniform technological infrastructure might hinder the emergence of platforms for many years to come.
24
13 October 2011
Analyst team profile Eric Wen

REGIONAL HEAD OF INTERNET, MEDIA AND TELECOMS
Eric covered Chinas internet sector at Morgan Stanley (2003) and then at UBS. Prior to joining Mirae Asset Securities, Eric was the Head of Regional TMT Research at MainFirst Securities and before that he covered internet and telecom companies at BNP Paribas. Between UBS and BNP Eric was CFO for two start-up internet companies, raising tens of millions of dollars in capital. Eric received his MBA from the University of Chicago and graduated from the University of Illinois at Urbana-Champaign with a degree in Chemical Engineering.
+852 3653 8631 eric.wen@miraeasset.hk
Nancy Yang
INTERNET/TELECOM ASSOCIATE, CHINA
Nancy is an analyst in Miraes China Internet/media team, with a focus on the advertising and ecommerce sectors. Nancy joined Mirae Asset Securities from Lazard China, where she focused on Internet-related M&As and equity financing. In her capacity she worked with a range of Chinese Internet companies. Prior to Lazard, Nancy worked at Deloitte & Touche Financial Advisory Service Group. Nancy graduated with a BA degree in Finance from Charles Sturt University in Australia.
+852 3653 8630 Nancy.yang@miraeasset.hk
Vincent Sun
INTERNET ASSOCIATE, HONG KONG/CHINA
Vincent joined Mirae Asset Securities from Credit Suisse to work with Eric Wens team to expand our Internet and telecoms coverage. Vincent received his MSc from the University of British Columbia (UBC) and his BBA from Shanghai Jiao Tong University (SJTU).
+852 3653 8641 vincent.sun @miraeasset.hk
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13 October 2011
Recommendations
By stock (12 months) Buy: A target price + 10% or more above the current price, Hold: Target price within - 10% to +10% of the current price Reduce: A target price of 10% or less below the current price By industry Overweight: over +10% of the current industry index Neutral: -10% to +10% of the current industry index Underweight: -10% or less than the current industry index
Earnings quality score

Earnings Quality Score = 0.70*(Historical Earnings Stability) + 0.15*(Consensus Forecast Certainty) + 0.15*(Consensus Forecast Accuracy) 1. Historical Earnings Stability - The variability of the net profit growth rate (YOY) over the last 20 quarters was translated into percentage terms. - Earnings growth variability was calculated based on MAD (Median Absolute Deviation), rather than SD (Standard Deviation) in order to minimize distortion from outliers. - The lower the earnings growth variability, the higher this indicator. 2. Consensus Forecast Certainty - The gap between analysts' views on 12-month forward EPS was translated into percentage terms. - The gap is calculated by dividing the SD of 12-month forward EPS with the average value. - The narrower the gap, the higher this indicator. 3. Consensus Forecast Accuracy - The median value of absolute EPS surprise over the last 3-year was translated into percentage terms. - EPS surprise was calculated based on 'the actual figure at the end of the year / the consensus estimate at the beginning of the year - 1'. - The lower the absolute EPS surprise, the higher this indicator. * Reference 1) Consensus Forecast Certainty and Consensus Forecast Accuracy were applied only to companies with more than 5 years of EPS estimates. 2) We gave the average score of 50 to cases in which the aforementioned indicators could not be produced.
26
13 October 2011
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Five forcesMore platforms?

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US$18.23 US$5.81 US$130.83 HK$173.30 US$78.48 US$57.09 US$22.21 HK$3.89 US$14.60

Note: Prices are in local currency

Percentage of time spent in a browser in China

Reconstruction of user and content supply chain the key

Exposure of platforms to monetizable upstream markets

Eric Wen, Head of Internet/Media

Nancy Yang, Internet/Media Analyst

Vincent Sun, Internet/Media Analyst

See the last page of this report for important disclosures

China/Internet Services & Content

SINA, RENN and SOHU have room for improvement

Sub-platforms and indispensable tools can take steps up

China/Internet Services & Content

HTML5 and personalization are two most actionable forces

Building a content ecosystem is all that matters

SNS is another form of personalization

Picture in mobile Internet, e-commerce and convergence is muddy

Upside for QIHU: Selling traffic to any fragmented upstream

China/Internet Services & Content

Upside for BIDU: further improvement in content ecosystem

Upside for Tencent: Cornering the mobile Internet ecosystem

Opportunity for SINA: Weibo user growth and content ecosystem

Opportunity for SOHU: SOGOU to benefit from QIHU rise

Challenge for RENN: Maintain organic traffic growth

Opportunities for NetDragon, YOKU and AMAP: New sub-platforms

China/Internet Services & Content

Platform war: Chinese Internets seven platforms........................................6

Open platform is driven by client to web migration ......................................9

Feeding traffic from any fragmented upstream...........................................14

Platforms are not born equally: A cross examination..................................20

China/Internet Services & Content

Platform war: Chinese Internets seven platforms

Seven platforms: TAB+QIHU, SOHU, SINA, RENN

Different traffic begets different monetization methods

China/Internet Services & Content

Client Client Client Client Web

Safety Safety All purpose Safety All purpose

Client Client Client Client

All purpose Tools Tools Community

China/Internet Services & Content

Browser and AppStore make monetization of traffic easier

Key word advertising 5,142 62% Baidu (BIDU US)

China/Internet Services & Content

Open platform is driven by client to web migration

Internet usage time is migration from PC client to PC web

Client to web migration limited by infrastructure and user profile

China/Internet Services & Content

250 Daily coverage (m) 200 150

51% 100 50 0 QQ Game QQ IM 5% 9% QQ IM QQ Pets Soso

1% 2% 0% 1% QQ Music QQLive QQ Doctor QQ.com

QQ Game Tencent TT QQ Pengyou

Source: IUT, Mirae Asset Research

Source: Company data, Mirae Asset Research

Technical reason for client to web migration is HTML5

1.7% 1.7% 1.8%1.6% 1.8% 2.5% 4.5% 39.7% 18.7%

0.4% 4.1% 2.5%3.5% 5.7%

0.6% 0.4% 15.7% IE6 IE9 Google Chrome Maxthon

Source: BrowserStats, Mirae Asset Research

China/Internet Services & Content

The migration mostly takes place in terms of time spent