China: Technology: Internet Summary
Core Content
This report discusses the competitive landscape of China's internet industry, with a focus on the social platforms and their evolving role in the mobile internet ecosystem. It highlights the strategic moves by Tencent and Sina Weibo to enhance their platforms and monetize user engagement through various means. The analysis also includes valuation models and investment outlooks for Tencent and other key players in the industry.
Main Points
Social Platforms as the Center of Mobile Internet
- User Engagement: Social platforms are becoming the primary gateway for mobile internet usage due to their high user stickiness and ability to generate referral-based content.
- User Experience: These platforms offer timely information and strengthen social relationships, with location-based features like Weixin's shake-shake function enabling new connections.
- Monetization Potential: The vibrant user base generated through social interactions provides recurring traffic, which can now be monetized through advertising and mobile commerce.
Product Upgrades
- Weixin 5.0: Launched on August 5, 2013, this upgrade includes:
- Enhanced offline-to-online scanning features.
- Payment solutions linked to the app store.
- Integration of games, such as Tian Tian Ai Xiao Chu and Flight Battle.
- Translation services and barcode scanning.
- Emoticons for use in conversations.
- Public accounts and back-end services for enterprise users.
- Sina Weibo: Introduced advertising inventory for Taobao merchants, enhancing its relevance for e-commerce.
Monetization Roadmap
- Weixin: Expected to monetize in three stages:
- Value-added services (games, emoticons).
- Advertising.
- Mobile e-commerce.
- Sina Weibo: Advertising from SMEs and online merchants remains its key revenue driver, supported by Alibaba's alliance.
Investment Outlook
- Tencent: Reiterated as a "Buy" with a 12-month target price of HK$450, up from HK$320.
- Sina: Maintained as a "Buy" with a target price of US$92.
- Valuation: Based on a 1.0X PEG, the target price reflects a 11% to 15% increase in 2014-15E EPS. The implied total value of Weixin is US$38bn in the base case and US$50bn in the bull case.
Key Information
Target Price Calculation
| Company |
Old Value (HK$/share) |
New Value (HK$/share) |
Change (%) |
Implied Total Value (US$bn) |
| Weixin |
HK$30 |
HK$160 |
433% |
US$38bn |
| Legacy Business |
HK$290 |
HK$290 |
0% |
US$69bn |
| Tencent 12-m TP |
HK$320 |
HK$450 |
41% |
US$108bn |
Global Peer Comparison
| Company |
Market Cap (US$mn) |
P/E (2013E) |
P/E (2014E) |
EV/EBITDA (2013E) |
EV/EBITDA (2014E) |
EPS Growth (2013E) |
EPS Growth (2014E) |
PEG |
| Alibaba Group |
N/A |
N/A |
N/A |
US$105bn |
N/A |
N/A |
N/A |
1.7 |
| Amazon |
N/A |
N/A |
N/A |
US$162bn |
N/A |
N/A |
N/A |
1.0 |
| Baidu |
N/A |
N/A |
N/A |
US$33bn |
N/A |
N/A |
N/A |
1.0 |
| Facebook |
N/A |
N/A |
N/A |
US$115bn |
N/A |
N/A |
N/A |
1.0 |
| Google |
N/A |
N/A |
N/A |
US$321bn |
N/A |
N/A |
N/A |
1.0 |
| Yahoo |
N/A |
N/A |
N/A |
US$39bn |
N/A |
N/A |
N/A |
1.0 |
Key Risks
- Desktop Games Performance: The success of desktop games could impact overall revenue.
- Regulatory Risks: Potential regulatory challenges with Weixin's expansion and features.
Financial Highlights (Tencent)
Key Data
| Metric |
Current |
12/13E |
12/14E |
12/15E |
| Price (HK$) |
370.00 |
450.00 |
450.00 |
450.00 |
| Market Cap (HK$ mn / US$ mn) |
689,417.3 / 88,894.6 |
- |
- |
- |
Earnings Per Share (EPS)
| EPS (Rmb) |
12/12 |
12/13E |
12/14E |
12/15E |
| Basic, Pre-except |
7.82 |
9.61 |
13.17 |
16.79 |
| Basic, Post-except |
6.97 |
8.59 |
12.00 |
15.42 |
| Diluted, Post-except |
6.83 |
8.47 |
11.84 |
15.22 |
Growth and Margins
| Metric |
12/12 |
12/13E |
12/14E |
12/15E |
| Sales Growth (%) |
54.0 |
35.4 |
35.9 |
27.8 |
| EBITDA Growth (%) |
29.8 |
28.5 |
35.3 |
27.3 |
| EBIT Growth (%) |
29.1 |
26.7 |
36.9 |
28.2 |
| Net Income Growth (%) |
24.8 |
24.2 |
40.7 |
29.8 |
| EPS Growth (%) |
24.2 |
23.4 |
39.6 |
28.6 |
| Gross Margin (%) |
58.5 |
54.8 |
55.5 |
55.6 |
| EBITDA Margin (%) |
44.8 |
42.5 |
42.3 |
42.2 |
| EBIT Margin (%) |
38.9 |
36.3 |
36.6 |
36.7 |
Cash Flow Statement
| Metric |
12/12 (Rmb mn) |
12/13E (Rmb mn) |
12/14E (Rmb mn) |
12/15E (Rmb mn) |
| Net Income Pre-Preferred Dividends |
14,286.4 |
17,681.7 |
24,434.3 |
31,456.0 |
| Depreciation & Amortization Add-Back |
2,612.7 |
3,662.7 |
4,611.2 |
5,617.5 |
| Net (Inc)/Dec Working Capital |
3,508.0 |
2,560.4 |
5,943.1 |
6,146.3 |
| Cash Flow from Operations |
19,429.5 |
23,742.7 |
34,294.7 |
42,792.2 |
| Capital Expenditures |
(3,656.9) |
(4,772.4) |
(6,245.2) |
(7,670.1) |
Conclusion
The report emphasizes the strategic importance of social platforms in the Chinese mobile internet landscape, particularly highlighting Weixin's transformation into a mobile transaction platform. It also outlines the financial performance and valuation of Tencent, reinforcing its "Buy" rating with a target price of HK$450. Sina Weibo is similarly rated as a "Buy" with a target price of US$92, indicating continued confidence in its advertising-driven model. The analysis suggests that Weixin is well-positioned for monetization through a combination of value-added services, advertising, and e-commerce, with significant potential for growth and expansion.
