20140224-高盛-Battle_of_the_Internet_giants_III__Online-to-offline_segment_in_focus_60页_1mb

Summary of Document: China Internet - Battle of the Internet Giants III

Core Content

This document is an equity research report analyzing the online-to-offline (O2O) transformation in the Chinese internet sector, with a focus on the potential of Tencent's Weixin payment platform and the overall market dynamics in 2014. It highlights the growth opportunities in O2O, the role of mobile internet and 4G technology, and the impact of payment solutions on consumer behavior and business models. The report also includes valuation updates for several Chinese internet companies and outlines the investment outlook for the sector.

Main Points

1. O2O as a Transformative Trend

• The Internet has significantly changed consumer behavior across multiple industries in China.
• Tencent's Weixin has replaced SMS in smartphone communication.
• Alibaba has moved a trillion RMB of retail business to online marketplaces.
• O2O technologies are expected to mature in 2014 due to the proliferation of smartphones and 4G networks.
• These technologies will allow mobile internet services to penetrate consumers' daily lives, from payments to social media interactions.

2. Key Enablers of O2O

• Scanning: QR codes enable mobile users to access web links, billing info, and location data.
• Accessibility: 4G rollouts improve network quality, enabling more seamless mobile internet experiences.
• Location: Smartphones with GPS and trilateration allow location-based services to function effectively.

3. O2O Market Growth

• The O2O market is expected to grow rapidly, with domestic O2O transaction volume (excluding travel) projected to exceed RMB 271bn by 2015.
• O2O will enable Weixin Payment to handle both online and offline transactions, with a forecasted 20% online share and 5% offline share by 2017.
• This is expected to generate RMB 42bn in revenue and RMB 10bn in NOPAT for Tencent.

4. Payment Ecosystem

• Mobile payment is evolving from carrier billing to QR code and NFC-based solutions.
• QR code payments are more scalable and user-friendly, especially for Alibaba and Tencent.
• Carrier billing has security and cost benefits but is limited due to high take rates and inefficiencies in large-ticket transactions.
• NFC-based payments are promising but face challenges in building a universal transactional protocol across banks, telcos, and merchants.

5. Valuation and Investment Outlook

• The report shifts valuation focus to an 18-month time frame, reflecting greater visibility into mobile internet and O2O growth.
• Tencent is upgraded to Buy with a target price of HK$700.
• Baidu is upgraded to Buy with a target price of HK$220.
• Sina is upgraded to Buy with a target price of HK$94.
• Sohu and Autohome are downgraded to Neutral.
• Youku Tudou is downgraded to Sell.

Key Information

• Target Prices and Returns:

  • Sina: Buy (HK$94), Prior: Buy (HK$94), Return: 27%
  • Baidu: Buy (HK$220), Prior: Neutral (HK$160), Return: 27%
  • Tencent: Buy (HK$700), Prior: Buy (HK$450), Return: 24%
  • Sohu: Neutral (HK$80), Prior: Buy (HK$98), Return: 6%
  • Autohome: Neutral (HK$34), Prior: Sell (HK$26), Return: -4%
  • Youku Tudou: Sell (HK$27), Prior: Neutral (HK$24), Return: -14%

• Market Cap and Valuation:

  • Tencent's target valuation in 2017E is RMB 345bn, with a target P/E of 35.
  • Weixin Payment is expected to have a GMV of RMB 4,234bn by 2017E, with a take rate of 1.0% and operating margin of 25%.
  • O2O is anticipated to drive revenue growth and disruptive gains in the sector.

• Growth Drivers:

  • Advertising and online-to-offline transitions (e.g., e-commerce, mobile gaming, financial services) are the primary drivers of revenue growth.
  • Baidu is expected to benefit from rising O2O advertising demand due to its map service and SME advertiser base.
  • Ctrip and Qunar are expected to benefit from online travel and group-buy models.

• Market Outlook:

  • Despite regulatory uncertainty (especially with VIE structures), the market remains focused on growth.
  • The sector is no longer undervalued and is expected to outperform due to disruptive potential and improving margins.

Conclusion

The Chinese internet sector is entering a transformative phase, driven by the adoption of mobile internet and 4G technology. O2O technologies, particularly Weixin Payment, are expected to play a critical role in reshaping consumer behavior and business models. The report highlights Tencent as a strong contender in the O2O space, with increased valuation and positive investment ratings, while Baidu and Sina are also viewed as growth opportunities. However, Youku Tudou is downgraded due to overvalued expectations. The overall market is seen as favorable for long-term growth, with increased focus on O2O and mobile payment ecosystems.