IID Keynote: Keynote – Internet Models: What Worked, What Didn’t & What’s Next? Alan...

Deutsche Bank AG

Business models that have worked, those with ,challenges…and what’s nextApril 26 2013April 26, 2013

India Internet DayAlan Hellawell [email protected] (852) 2203 6240

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. MICA(P) 054/04/2013

Table of contents

• How the world views the China & global Internet 2 • Models that have worked 10• Models that have worked… 10• …those with challenges 25• …and what’s next 32

Deutsche Bank Alan Hellawell , [email protected], (852) 2203 6240, April 2013

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How the world views the China & globalHow the world views the China & global Internet


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A turbulent few years…

The MSCI World Internet Software & Services Index outperformed the S&P

y

Historic performance of tech IPOsp

Index by 19% since 2010. However, this is not the case in China…...


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Source: Bloomberg

China internet sector derating

The S&P has outperformed the Nasdaq China Technology Index by 44% since Historic performance of tech IPOs

p q gy y2010. Holdings in the index include Tencent (8%), Baidu (8%), Sina (7.7%), Lenovo (5.4%), Sohu (4.7%), Qihoo360 (4.5%), NetEase (4.2%).


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Source: Bloomberg

China IPO activity showing a real slowdown

Total deal count and IPO deal size in ChinaHistoric performance of tech IPOs

694

578

97.2

131.1116.1

100

120

140

800

1000

nnt

Total deal count and IPO deal size in China

247

409

578

461

101

47.459.4

23.7

20

40

60

80

200

400

600

US$

bill

ion

Deal

Cou

n

1010

20

02008 2009 2010 2011 2012 Till April 2013

Deal Count Value (US$ billion)

50

60

Number of tech IPOs

20

30

40

50

mber

of IPO

s on fi

le

19

0

10

2006 2007 2008 2009 2010 2011 2013

Num


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Source: Bloomberg

Software issuers outperformed Internet & New Media issuersSoftware issuers outperformed Internet & New Media issuers

Tech sector breakdown of IPOsHistoric performance of tech IPOs

Tech sector breakdown of IPOs

Jan-Apr 2012 Jan-Apr 2013

US$m Number of deals US$m Number of dealsUS$ u be o dea s US$ u be o dea s

Software & Services 1,174.0 8 321.7 3

Internet & New Media 496.1 5 0.0 0

Hardware/Semis 131.1 1 0.0 0

Performance of tech IPOs since 2009 by sector(a)

Clean Tech 61.9 1 92.9 1

Other 161.9 2 851.6 3

Performance of tech IPOs since 2009 by sector(a)

41.2% 34 9%

80.1%45.4% 50.0%

60.0%

180)

16.7%

3.6%

33.3% 34.9%

(1.0%)

25.8% 28.2%

NA NA

21.2%

(10 0%)0.0%

10.0% 20.0% 30.0% 40.0%

e pe

rfprm

ance

(T+1

(1.0%)

(17.9%)

(31.6%)(40.0%)(30.0%)(20.0%)(10.0%)

Hardware/Semis Internet & New Media Software & Services

Ave

rage

N t ( ) i l d T h IPO i 2010 b US$50 D t f A il 2013


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Note: (a) includes Tech IPOs since 2010 above US$50m. Data as of April 2013.Source: Bloomberg and Dealogic

The venture side

Activity seems to be on the wane• VC’s invested $1.4 billion into 231 Internet-specific companies in 1Q 2013, down 11% in dollars and 5% lower in deals than 4Q 2012 when $1.5 billion went into 243 deals. Two of the top ten deals for the quarter were in the Internet specific categorywere in the Internet-specific category. • Deals in China-based companies in 2012 fell 40% to $3.7 billion from a year earlier (Dow Jones VentureSource.) There is a pipeline of around y ( ) p p800 companies still waiting to list their shares.• Why?

• Inability to exit portfolio companies because of difficult IPO conditions

• Concerns over “VIE”, alleged accounting fraud, evidence of slowing growth


4/24/2013

7

Source: Bloomberg

Client views on China internetSummary of investor views after two weeks in the US

Still generally cautiousSentiment still well off “Pre-Renren highs.”Continuing concerns over VIE, SEC/PCAOB pursuit of auditors

Inordinate focus on the largest players80% of meeting time spent on Baidu and TencentDramatic reduction in discussion of smaller cap names over past few years

Many questions on trajectory of digital ad spend recoveryMany questions on trajectory of digital ad spend recoveryHeavy focus on levels of competition in certain sub-sectors

SearchSearchE-commerce


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8

Client views on China internet (cont.)( )

Extensive discussion around potential M&A transactionIntense focus on what mobile means to the big Chinese internet names

When will mobile contribute positively to Baidu?What is the monetization time-line of Weixin?How does mobile impact China e-commerce?

Questions about “going global” (eg – Tencent plans) Many questions around IPO pipeline


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9

Models that have workedModels that have worked…


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C2C: “Copy-to-China”py

Time of launch Number of users U.S. China Number of users Time of launch

Feb-04 Over 1b Facebook SNS Renren over 200m Dec-05

Jun-06 500m Twitter Microblogging Sina Weibo over 500m Aug-09

May 03 150m Linkedin Professional SNS Ushi com over 1m Feb 10May-03 150m Linkedin Professional SNS Ushi.com over 1m Feb-10

Feb-05 800m Youtube Online video Youku 300m Jun-06

Sep-98 Over 1b Google Search Baidu 500m Jan-00

Nov-08 41m Groupon Group buy Lashou 20m Mar-10

Sep-95 150m eBay E-commerce Taobao ~500m May-03

J l 04 100 Y l R i Di i 55 A 03Jul-04 100m Yelp Review Dianping.com 55m Apr-03

Jun-09 100m WhatsApp Mobile IM WeChat over 300m Jan-11


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Source: Company data

Models that have worked…overtaking predecessorsg p

Some models resembled western peers onceSome models resembled western peers once upon a time, but have since vastly overtaken

those earlier modelsthose earlier models…


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The Vipshop example: Flash sales

Vipshop

p p p

Flash sale offers daily sales events selling a limited quantity of discounted products and services online for a limited period of time. Vipshop provides online flash sales for Chinese consumers, combining e-commerce and discount sales channels The company partners with leading brands by selling their excess inventory at discount prices Over 5,800 brands and over 250 merchandising staff

Product categories

SportswearCosmeticsApparel2,7592010 –2012 th b 6 7

Brand partner growth over time(1)

Accessories HandbagsFootwear

411

1,075

2,759 growth by 6.7x

TravelHome goodsChildren411

2010 2011 2012

S C d t


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13

Source: Company dataNote: Number of brand partners is a cumulative number since 2009, which includes primarily brand owners, and to a lesser extent, brand distributors and resellers.

O t ki th t d lOvertaking the western model

Broader addressable market in China

China U.S.

Broader universe of popular brands for mass market

Marketpositioning

Mostly focused on high-end and luxury markets

Discount / outlet retail channels saturated for mass market

merchandise

Lack of well-developed discount / outlet retail channel

Competition from offline channel

Well established online presence and capabilities

Largely rely on third party platforms to build online presence

Brands’ own online presence

Limited upfront depositMost products can be returned to

suppliers

Need to pay for inventory upfrontProducts can not be returned to

suppliers

Working capital requirement


April 131424/04/2013 15:59:21 2010 DB Blue template

14

…Vipshop: now so much more than its peersp p p

Both revenues and orders grew more than 200% YoY in 2012

Luxury goods account for only 10% of sales. Others are mostly mid to high end goods.

Net revenues(US$ in millions)

Total orders (in thousands)

21,919 191.2%

629.1

204.7%

201.5%

299.6

184.8%

7,269

3,005

8,752 684.1%

32 6

227.1

105.2

597.1%

927

2010 2011 2012 4Q11 4Q12

32.6

2010 2011 2012 4Q11 4Q12



15


Underestimating the strength of a business model: g gVipshop

Vipshop has outperformed the Nasdaq Composite Index by 335% since March 22, 2012 (Vipshop IPO date)



16

Source: Bloomberg

A re-rating against peers

What we learned

g g p

What we learned• We were clearly too focused on Vipshop’s western peers

• Their exact business models• Their exact business models• Their inherent limitations

• We underestimated several factors• We underestimated several factors• The power of e-commerce to leapfrog China’s otherwise poorly

developed offline discounting infrastructuredeveloped offline discounting infrastructure• Unique cultural attributes of the market

• The sheer power of viral marketing, word-of-mouth, etc.p g, ,• Bargain hunting as an “achievement.”

M k t C /R t tiMarket Cap/Revenues at time of Vipshop IPO (3/22/2012)

Current Market Cap/Revenues Performance since 3/22/2012

Vipshop 1.3 2.4 78%Amazon 1.6 2.0 22%

eBay 3.3 4.7 40%


4/24/2013

17

Source: Bloomberg

YY.com: uniquely Chinese…q y

Th i l i f i f b iThere is also a growing profusion of business models emerging with no predecessors and no

counterparts.


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YY.com: uniquely Chinese (cont)q y ( )

YY is a rich communication social platform that connects Internet users through real-time interaction in massive scale

Rich communication includes real-time transmission of voice, video and text

Core product YY client, a PC-based software, is capable of hosting 1.4m t h t ith h th i li h l t th tiusers to chat with each other in one online channel at the same time.

12.7m channels were created on YY’s platform as of Sep 30, 2012


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YY.com: uniquely Chineseq y

User-created and user-defined online channels can be used to host various online activities (i.e. in-game communication, live music show broadcasting, l di d i id f ll )long distance education, video conference calls, etc.)

Monetization is a combination of ads-based and virtual item-based revenue modelsmodels


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YY: “Largest Real-time Social Platform in China”g

Viral Growth Scale Stickiness401 million

Viral Growth Scale Stickiness

total registered user (“TRU”) accounts (1),(2) 52 hours

70 millionper active user (5)

>10x

monthly active users (“MAU”) (3)

84 %

10 million

84 %market share (6)

Dec 2009 TRU (2)

Sep 2012 TRUs (2) peak concurrent

users (“PCU”) (4)

TRUs (2):37 million

(2):401 million

Deutsche Bank Alan Hellawell , [email protected], (852) 2203 6240, April 2013 21


Coming to appreciate unique business models: YY.comg pp q

YY h f d h N d C i I d b 48% i N 20 2012YY has outperformed the Nasdaq Composite Index by 48% since Nov 20, 2012 (YY IPO date)


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Source: Bloomberg

Up-and-coming internet: DB’s June internet tourp g

Private companies to be featured on our 2013 tour:

• Next generation on-line tour package t

Private companies to be featured on our 2013 tour:

• Mobile advertising networkoperator• Online classified information platform• Online payments company covering

• E-commerce lead generation platform• Mobile commerce platform

Child ’ b it• Online payments company – covering both B2C and B2B markets• Mobile and social games developers

• Children’s website• Cloud services company• Next generation LBAS based local

• Mobile app distribution platforms• Distance learning

• Next generation LBAS-based local lifestyle search and group buying platform



23

those with challenges…those with challenges


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Too much of a good thing going bad: China’s Group-buyingg g g g p y g

According to Tuan800, the number of group buy sites in China peaked in September 2011 at 5,058, then continued to drop sequentially since then. As of November 2012 there were 2 857 group buy sites in China down 56% comparedNovember 2012, there were 2,857 group buy sites in China, down 56% compared to September 2011.

2000

2500

5000

6000RMBmThe No. of group buy sites peaked at

5,058 in September, 201158tuan, 1.4%Qianpin, 1.6% Others,

4.3%

Top 10 players as of Dec 2012

1000

1500

2000

3000

4000Dianping,

16.4%Dida, 1.7%

Gaopeng, 3.7%

N i 12 2%

55tuan, 12.6%

0

500

0

1000

2000

11 11 11 11 11 11 11 11 11 11 11 12 12 12 12 12 12 12 12 12 12 12 12

Lashou, 11.3%

Manzuo, 1.8%

Meituan, 32.8%

Nuomi, 12.2%

Feb-

Mar

-

Apr

-

May

-

Jun- Jul-

Aug

-

Sep-

Oct

-

Nov

-

Dec

-

Jan-

Feb-

Mar

-

Apr

-

May

-

Jun- Jul-

Aug

-

Sep-

Oct

-

Nov

-

Dec

-

Number of group buy sites Total GMV (RMBm)


Source: Deutsche Bank, Tuan800

Internet stocks with challenged business modelsg

60

70

80USD

Youku Tudou

10

12

14USD

Shanda Games

10

20

30

40

50

2

4

6

8

10

0

Youku Tudou

USD M L USD Ji

0

2

Shanda Games

60

80

100USD Mecox Lane

8

10

12

14

16USD Jiayuan.com

0

20

40

0

2

4

6

8

Youku Tudou Jiayuan.com Mecox Lane Shanda Games

Mecox Lane Jiayuan.com

Price changes (As of 19 April)ou u udou J ayua .co eco a e S a da Ga es

YOKU.N DATE.OQ MECO.OQ GAME.OQ

From IPO price -48.5% -51.5% -93.4% -74.5%

From highest price -74.4% -66.5% -93.4% -76.6%


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From highest price 74.4% 66.5% 93.4% 76.6%Source: Bloomberg

Challenged business models: Youku Tudoug

Yo k T do80

USDYouku Tudou

• Youku Tudou• Youtube-like Online video company. • The merger of two major platforms, Youku

and Tudou both being leading online50

60

70

and Tudou, both being leading online video sites in China. Revenues largely ads-based

• Primary reasons20

30

40

y• Lack of awareness of commoditization of

video industry • Lack of barriers to entry for those with

0

10

12/8

/201

0

1/8/

2011

2/8/

2011

3/8/

2011

4/8/

2011

5/8/

2011

6/8/

2011

7/8/

2011

8/8/

2011

9/8/

2011

10/8

/201

1

11/8

/201

1

12/8

/201

1

1/8/

2012

2/8/

2012

3/8/

2012

4/8/

2012

5/8/

2012

6/8/

2012

7/8/

2012

8/8/

2012

9/8/

2012

10/8

/201

2

11/8

/201

2

12/8

/201

2

1/8/

2013

2/8/

2013

3/8/

2013

4/8/

2013

captive traffic and strong balance sheets• Continued “arms race” in content

procurement

Youku Tudou

Price changes (As of 19 April)Youku Tudou

YOKU.N

From IPO price 48 5%From IPO price -48.5%

From highest price -74.4%


April 13

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Source: Bloomberg

Challenged business models: Jiayuang y

Jia an com16

USDJiayuan.com

• Jiayuan.com• Online dating platform offering information

on single adults seeking long-term relationships/marriage.10

12

14

p g• Generating revenue primarily from online

services (fee-based VAS) and offline events/VIP services4

6

8

• Primary reasons• User churn (unable to generate long-term

user loyalty due to relationship/marriage orientation) thus incurring recurring

0

2

5/11

/201

1

6/11

/201

1

7/11

/201

1

8/11

/201

1

9/11

/201

1

10/1

1/20

11

11/1

1/20

11

12/1

1/20

11

1/11

/201

2

2/11

/201

2

3/11

/201

2

4/11

/201

2

5/11

/201

2

6/11

/201

2

7/11

/201

2

8/11

/201

2

9/11

/201

2

10/1

1/20

12

11/1

1/20

12

12/1

1/20

12

1/11

/201

3

2/11

/201

3

3/11

/201

3

4/11

/201

3

orientation), thus incurring recurring marketing expenses

• Increasing competition from other marriage-oriented online dating platforms

1 1 1 1 1 1Jiayuan.com

e.g. Baihe.com and Zhenai.com.• Advent of “free” dating platforms.• Impact from general social-oriented

l tf ( W ib d W i i ) hi h

Price changes (As of 19 April)Jiayuan.com

DATE.OQ

From IPO price 51 5% platforms (e.g.Weibo and Weixin), which are usually free and associated with higher user stickiness.

From IPO price -51.5%



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Source: Bloomberg

Challenged business models: Mecox Laneg

Meco Lane100

USDMecox Lane

• Mecox Lane• E-commerce site with a specific focus on

apparel.


70

80

90

• Primary reasons• E-commerce market in China currently still

involves significant investment• Unfavorable competitive environment20

30

40

50

• Unfavorable competitive environment within China’s e-commerce space.

• Unclear market positioning, deployment of offline stores on large scale

0

10

• Large e-commerce platforms building formidable scale which threaten the survival of small e-commerce players.

• Lack of unique business model or product

Mecox Lane

• Lack of unique business model or product categories compared to e-commerce giantsPrice changes (As of 19 April)

Mecox Lane

MECO.OQ




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Source: Bloomberg

Challenged business models: Shanda Gamesg

Shanda Games14

USDShanda Games

• Shanda Games• Chinese online gaming company


10

12

• Intensifying competition among major game operators due to a growth slowdown in the overall online gaming market

• Turbulence in company management and2

4

6

• Turbulence in company management and structure

• Advent in rapid succession of new games models: social games, web games, mobile

0

2

9/25

/200

9

11/2

5/20

09

1/25

/201

0

3/25

/201

0

5/25

/201

0

7/25

/201

0

9/25

/201

0

11/2

5/20

10

1/25

/201

1

3/25

/201

1

5/25

/201

1

7/25

/201

1

9/25

/201

1

11/2

5/20

11

1/25

/201

2

3/25

/201

2

5/25

/201

2

7/25

/201

2

9/25

/201

2

11/2

5/20

12

1/25

/201

3

3/25

/201

3

games• Excessive expansion across multiple

fields, however, with no core business.• Lack of unique features compared to other

1 1 1 1

Shanda Games

• Lack of unique features compared to other online gaming giants

Price changes (As of 19 April)Shanda Games

GAME.OQ




April 13

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Source: Bloomberg

and what’s next…and what s next


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What’s next: China e-commerce

CECRC releases 2012 China e-commerce reportCECRC releases 2012 China e-commerce reportThere were roughly 24,875 e-commerce-related enterprises (including B2C, C2C and other types) in China as of 2012, up ~20% YoY. CECRC identified roughly 45 e-commerce investments in 2012, including 1) Belle investing USD200m inCECRC identified roughly 45 e commerce investments in 2012, including 1) Belle investing USD200m in shoe-focused B2C, 2) 360Buy obtaining USD400m in funding, etc.

B2C e-commerce In terms of transactions, Taobao remained No. 1, with a 52% market share, followed by 360Buy (22%), y y ( )Suning Yigou (3.6%), Tencent’s B2C (3.3%), Vancl (2.7%), Amazon China (2.3%).

The mobile commerce marketMobile commerce transaction volumes in China reached RMB96.5b in 2012, up 135% YoY. CECRC expects it to reach RMB130b (up 35% YoY) in 2013. The mobile commerce population reached 250m in 2012, up 67% YoY. Likely to reach 373m by 2013.

LogisticsThe courier industry had seen a CAGR of 27% in the past five years in terms of revenue. Roughly 50% of the revenues that couriers earned last year came from e-commerce.Self owned and operated logistics has become an important feature. E.g. 360Buy on average processes 800K orders per day 80% of them being distributed through its own logistics infrastructure800K orders per day, 80% of them being distributed through its own logistics infrastructure.


The China e-commerce marketE-commerce market trading value reached RMB2.4tn in 4Q12, up 27.5% YoY. A f 4Q12 t t l B2B f SME h d RMB

The China e commerce marketE-commerce gross merchandise value

40%3 00As of 4Q12, total B2B revenue from SMEs reached RMB 4.45bn. Largest player took 40.7% of the B2B market, followed by Global Sources with 8.7% market share.As of 4Q12, Taobao accounted 95% of China C2C and

35.0%33.6% 34.2%

28.1% 26.3% 25.0%

22.6%

27.5%

20%

25%

30%

35%

40%

1 50

2.00

2.50

3.00

T-Mall represented 57% of the China B2C market. As of 4Q12, 360Buy took a 49% share in the independently-operated B2C market, followed by Suning (13.6%) and Amazon.cn (6.8%).

1.38

1.5

1.631.82 1.75 1.88 2.00

2.40

0%

5%

10%

15%

20%

0 00

0.50

1.00

1.50

0%0.001Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12

e-commerce market GMV (RMBt) YoY

4Q12 China B2B market share 4Q12 China B2C market share 4Q12 China C2C market share

Paipai5.46%

eachnet0.01%

AlibabaSuning 5.5%

others13.5%

Alibaba.com

40.7%Other41.7%

Tmall56.7%

Tencent B2C4.7%

Taobao94.53%

Global Sources

8.7%mysteel

5.6%

hc360.com

3.3%

360buy19.6%


4/24/2013 2010 DB Blue template 33

Source: Deutsche Bank, iResearch

Thank you!Thank you!


April 13

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Appendix 1ppImportant DisclosuresAdditional information available upon request

For disclosures pertaining to recommendations or estimates made on a security mentioned in 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.

Analyst Certification

The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Alan Hellawell III.


24/04/2013 15:59:21 2010 DB Blue template

35

Equity Rating Key Equity Rating Dispersion and Banking

Buy: Based on a current 12-month view of total shareholder return (TSR = percentage change in share price from current price to projected target price plus projected dividend yield), we recommend that investors buy the stock.

Relationships

y

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.

55 %

38 %

200250300350400450

Notes:

1. Newly issued research recommendations and target prices always supersede previously published research.

2. Ratings definitions prior to 27 January, 2007 were:

7 %17 % 16 % 12 %0

50100150

Buy Hold Sell

Buy: Expected total return (including dividends) of 10% or moreover a 12-month period

Hold: Expected total return (including dividends) between -10%and 10% over a 12-month period

Asia-Pacific Universe

Companies Covered Cos. w/ Banking Relationship

Sell: Expected total return (including dividends) of -10% orworse over a 12-month period


24/04/2013 15:59:21 2010 DB Blue template

36

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.

3. Country-Specific Disclosures

Australia and New Zealand : This research, and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act , y , y g pand New Zealand Financial Advisors Act respectively.

Brazil: The views expressed above accurately reflect personal views of the authors about the subject company(ies) and its(their) securities, including in relation to Deutsche Bank. The compensation of the equity research analyst(s) is indirectly affected by revenues deriving from the business and financial transactions of Deutsche Bank. In cases where at least one Brazil based analyst (identified by a phone number starting with +55 country code) has taken part in the preparation of this research report, the Brazil based analyst whose name appears first assumes primary responsibility for its content from a Brazilian regulatory perspective and for its compliance with CVM Instruction # 483.and for its compliance with CVM Instruction # 483.

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