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jpmorganmarketsAsia Pacific Equity Research31 July 2018Equity Ratings and Price TargetsMkt Cap Price Rating Price TargetCompany Ticker ($ mn) CCY Price Cur Prev Cur PrevTencent 700 HK 441,201.50 HKD 367.20 OW n/c 480.00 500.00Alibaba Group Holding Limited BABA US 494,386.20 USD 189.42 OW n/c 230.00 n/cBaidu BIDU US 88,415.81 USD 255.09 N n/c 260.00 n/cJD, Inc. JD US 53,514.43 USD 36.21 N n/c 38.00 n/cNetEase NTES US 35,080.29 USD 264.91 OW n/c 290.00 n/cChina Literature Limited 772 HK 8,060.19 HKD 69.40 N n/c 85.00 n/cCtrip International, Ltd CTRP US 22,337.98 USD 42.12 N n/c 45.00 n/cWeibo Corporation WB US 19,554.22 USD 87.05 OW n/c 142.00 n/cYY Inc YY US 5,559.91 USD 98.10 OW n/c 155.00 n/cMomo Inc MOMO US 8,522.28 USD 41.88 OW n/c 62.00 n/cSogou SOGO US 2,439.61 USD 10.33 OW n/c 14.00 n/cVipshop VIPS US 5,789.32 USD 9.85 OW n/c 18.00 n/cBilibili BILI US 2,933.83 USD 12.13 OW n/c 16.00 n/cSource: Company data, Bloomberg, J.P. Morgan estimates. n/c = no change. All prices as of 27 Jul 18 except for 700 HK 30 Jul 18 772 HK 30 Jul 18.China InternetThoughts into 2Q18 earnings: a challenging summerChinaInternetAlex Yao AC(852) 2800-8535alex.yaojpmorganBloomberg JPMA YAO Binbin Ding(852) 2800 8572binbin.dingjpmorganDaniel Chen(852) 2800-8579daniel.q.chenjpmorganJ.P. Morgan Securities (Asia Pacific) LimitedSee page 63 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, 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.We believe 2Q earnings season presents more downside than upside risk to China Internet sector earnings revisions, largely due to industry headwinds. We findmost of the industry developments in 2018 to be negative to China Internet industry earnings generation in the near term (please refer to Table 1) and we believe the capital market has not fully factored in the change in near-term earnings outlook, given only a -1% Bloomberg 2018 EPS consensus revision in the past three months. In light of the weak 2Q outlook, we are cautious on the near-term stock performance of the sector. Our top picks in the sector are: Momo, Alibaba, Vipshop. Expecting either soft 2Q numbers or negative commentary on 2H18 outlook for: Tencent, JD, YY, Sogou, Bilibili. We believe, to a large degree, these names near-term outlooks are dampened by industry headwinds such as govt approval process or online content tightening. On the other hand, we think Tencent and JDs 2019 outlook might become better post 2Q results as: 1) Tencent is likely to enjoy full-year monetization of PUBG and Fortnite in 2019,and 2) JD Logistics utilization and profitability are likely to further improve in 2019E, reducing margin drag to the consolidated financials. Eyeing upside risk to 2Q earnings forecasts and strong 2H18 outlook in: Baidu, NetEase, Momo. We believe these names present earnings upgrade opportunities due to low market expectations or solid business developments. Change of forecasts: We increased Momos 18E/19E Non-GAAP EPS by 1%/10% due to solid core live broadcasting and an acceleration in Tantan monetization; we cut our Tencent 18E/19E non-GAAP EPS by 6%/4% due to PUBG approval delay and increase in client reserve fund ratio; We cut YYs18E/19E Non-GAAP EPS by 2%/0% (mostly for 3Q18) due to negative impact from the World Cup; We expect Bilibili to report a RMB89m Non-GAAP net loss in 2018 (vs. RMB58m net profit estimate) due to regulations and change in marketing strategy. Key focal points for 2Q18 earnings season: 1) govt approval of online game monetization, 2) implications from rise of Douyin, 3) investment strategies.2Asia Pacific Equity Research31 July 2018Alex Yao(852) 2800-8535alex.yaojpmorganFigure 1: Three-month stock performance summarySource: J.P. Morgan estimates, Bloomberg. Market cap and prices as of July 27, 2018. Past performance is not indicative of future results. Figure 2: 2QCY18 financial forecasts summary: JPMe vs. Bloomberg consensusSource: J.P. Morgan estimates, Bloomberg. Note: 1H18 forecasts for China Literaturepany Reporting currency Ticker Bloomberg JPMe Delta % Bloomberg JPMe Delta %Tencent RMB 700 HK EQUITY 78,328 76,632 -2.2% 2.05 2.04 -0.3%Alibaba RMB BABA US EQUITY 81,419 81,353 -0.1% 8.50 8.81 3.7%Baidu RMB BIDU US EQUITY 25,571 25,768 0.8% 16.52 15.07 -8.8%JD RMB JD US EQUITY 123,049 122,214 -0.7% 0.69 0.61 -11.0%NetEase RMB NTES US EQUITY 16,397 16,964 3.5% 18.52 20.89 12.8%Ctrip RMB CTRP US EQUITY 7,323 7,420 1.3% 1.42 1.28 -9.9%Weibo USD WB US EQUITY 424 429 1.1% 0.65 0.67 3.0%Vipshop RMB VIPS US EQUITY 21,149 21,055 -0.4% 0.94 0.94 0.1%China Literature RMB 772 HK EQUITY 2,746 2,466 -10.2% 0.56 0.58 3.2%Momo USD MOMO US EQUITY 482 482 0.1% 0.63 0.65 4.0%YY RMB YY US EQUITY 3,673 3,666 -0.2% 11.91 12.10 1.6%Bilibili RMB BILI US EQUITY 1,004 983 -2.1% -0.16 -0.03 N/ASina USD SINA US EQUITY 540 535 -0.9% 0.71 0.68 -4.2%Sogou USD SOGO US EQUITY 304 299 -1.4% 0.07 0.08 6.2%AutoHome RMB ATHM US EQUITY 1,807 1,664 -7.9% 5.72 5.33 -6.8%BitAuto RMB BITA US EQUITY 2,529 2,524 -0.2% 2.90 3.12 7.7%Fang Holdings USD SFUN US EQUITY 101 122 21.1% 0.05 0.07 20.0%Phoenix New Media RMB FENG US EQUITY 376 361 -3.9% 0.32 0.26 -17.1%Revenue Non-GAAP EPS3Asia Pacific Equity Research31 July 2018Alex Yao(852) 2800-8535alex.yaojpmorganIndustry headwinds to the sectorTable 1: Industry headwinds and impact to covered companiesIndustry headwindsCoverage companies affectedDetail Nature of the headwind Estimated 2018 financial impactEstimated duration of impactCommentSuspension of online games approvalTencent, NetEaseThe online games approval has been suspended since a few months ago due to Chinas government ministries restructuring. The former regulator of games approval, i.e. State Administration of Press, Publication, Radio, Film and Television (SAPPRFT), has been restructured into a few separate entities, including State Administration of Radio and Television (SART) and State News and Publication Bureau. The latter is the governing entity of online games approval and supervised by Chinas Publicity Department.Unable to monetize unapproved game titlesTemporary impactWe lower smartphone games revenue forecast for 2018 by 13% due to the suspension2H18Raising client reserve fund of payment companiesTencent, AlibabaThe reserve ratio will be increased from 45% of clients fund in April 2018 to 100% by January 2019, which will reduce interest income for Tencent and Ant FinancialStructuralWe estimate impacted interest income from clients fund represents less than 1% of Tencent/Alibabas total revenue in 2018.Permanent Please refer to our NotePayment settlement between ecommerce marketplaces and 3rd party merchantsJD, VipshopRegulator requires ecommerce companies that dont have payment license to settle marketplace transactions directly through third-party payment companies, rather than hold customers funds in escrow account themselvesStructuralIt will harm FCF generation capability for 1P ecommerce playersPermanent Please refer to our NoteIncreasing competition in consumer time spendTencent, YY, Momo, Bilibili, China Literature, WeiboDouyin, a short video app achieved 500m global MAU in mid-July. According to QuestMobile, total time spent of apps from Bytedance (developer of Toutiao/Douyin/Huoshan etc) have accounted for 10.1% of total internet time spent in China in June 2018, up from 3.9% a year ago.Unclear Unclear UnclearWe believe competition of time spend of leading mobile apps will eventually impact monetization outlook of those apps losing user attention.World Cup YY, MomoDuring World Cup period (mid June-mid July), due to conflict of timing (8-12PM), less live streaming users will watch/tip on the platforms.Temporal reduction of time and monetary spend on entertainment alternatives2-3% of negative impact to revenue 2-3Q18We believe World Cup will have similar impact to time spent on YY/Momo platform but more influence on YY revenue due to its relatively high revenue concentration of top spenders.Increasing regulation on online live broadcasting YYCAC blacklisting a number of online broadcasting hosts on YY platform including Tian You, one of the most famous hosts on YY LiveTemporal reduction of revenue in 1Q18 Unclear 1Q18Please refer to our NoteIncreasing regulation on online information disseminationWeiboCAC requested Weibo to suspend its hot topic function for a week in 1Q18 due to its involvement of inappropriate content.Temporal reduction of revenue in 1Q18 for WeiboUnclear 1Q184Asia Pacific Equity Research31 July 2018Alex Yao(852) 2800-8535alex.yaojpmorganAir-ticket VAS cross-sale CtripCtrip introduced an opt-in option in October last year by removing part of the default purchase of bundled products. After the strict execution of de-bundling VAS products, we think the worst seems to be overStructuralDue to the contraction of cross-sale business, we expect topline growth to slow down to 18% YoY in 2018 vs. 39% in 2017. We also expect a flattish OPM in 2018 vs. +7.4ppt in 2017.Permanent Please refer to our NoteIncreasing regulation on online lending JianpuRegulator enforces 36% APR cap on online cash loans, banning loan facilitators from providing guarantee on loans and capping leverage and funding sources of micro lenders.StructuralThanks to business transition post introduction of the new regulation policy and its asset-light nature, the impact to Jianpu seems under controlPermanent Please refer to our NoteIncreasing industry competitionAlibaba, JD, Vipshop; Alibaba, Tencent; CtripIndustry competition is getting intensified in ecommerce, payment and online travel marketAlthough its not a structural issue, it may last for quite a whileIntense promotion and couponing will hurt profitability of these companiesUnclearDepreciation of RMB All covered companies RMB depreciated some 5% against US$ in 2Q18 UnclearEPS in US$ will be impacted by 5% if benchmarking to 1Q exchange rateUnclearSource: J.P. Morgan.5Asia Pacific Equity Research31 July 2018Alex Yao(852) 2800-8535alex.yaojpmorganTable 2: China Internet comp tableTicker Price PTMkt Cap EV CY18E CY19E CY20E CY18E CY19E CY20E CY19E CAGR(USDm) (USDm) PE PE PE PS PS PS PEG 20-21EChina internet portalsBaidu BIDU US USD 255.1 USD 260 88,957 81,688 22.3 x 23.4 x 18.1 x 5.4 x 5.0 x 4.2 x 0.9 x 26.0%Sogou SOGO US USD 10.3 USD 14 4,103 3,027 28.6 x 17.9 x 13.1 x 3.2 x 2.5 x 1.9 x 0.4 x 47.0%Sina SINA US USD 112.1 USD 180 5,968 4,485 32.3 x 19.7 x 13.0 x 3.6 x 2.6 x 1.9 x 0.4 x 44.1%Tencent 700 HK HKD 373.0 HKD 480 451,718 457,769 38.0 x 26.5 x 19.6 x 9.3 x 6.6 x 5.1 x 0.9 x 28.4%China Literature 772 HK HKD 70.4 HKD 85 8,125 7,052 47.8 x 33.6 x 25.0 x 9.6 x 7.3 x 5.8 x 1.2 x 27.5%Phoenix New Media FENG US USD 4.0 USD 10.0 290 200 27.3 x 18.5 x 15.1 x 1.2 x 1.2 x 1.2 x 0.9 x 20.0%Renren RENN US USD 2.1 N/A 144 151 N/A N/A N/A 0.3 x N/A N/A N/A N/A58 WUBA US USD 66.8 N/A 9,839 9,235 28.8 x 21.0 x 16.9 x 5.4 x 4.5 x 3.8 x 1.0 x 21.5%500 WBAI US USD 13.3 N/A 561 474 N/A N/A N/A N/A N/A N/A N/A N/AMean 32.1 x 22.9 x 17.3 x 4.3 x 3.8 x 3.4 x 0.8 x 30.6%Social & streamingYY YY US USD 98.1 USD 155 6,199 4,293 11.9 x 10.1 x 8.8 x 2.7 x 2.3 x 2.0 x 0.8 x 12.4%Tian Ge 1980 HK USD 5.9 N/A 966 752 N/A N/A N/A N/A N/A N/A N/A N/AWeibo WB US USD 117.5 USD 142 19,426 18,393 39.3 x 25.0 x 16.8 x 13.9 x 9.5 x 7.0 x 0.7 x 36.9%Momo MOMO US USD 41.9 USD 62 8,532 7,562 15.9 x 11.8 x 9.2 x 4.2 x 3.1 x 2.4 x 0.5 x 25.0%Bilibili BILI US USD 12.1 USD 16 3,378 3,175 -215 x 36.4 x 16.2 x 4.7 x 3.7 x 2.5 x -0.4 x N/AiQiyi IQ US USD 32.2 N/A 23,063 23,030 -29.0 x -37.7 x -79.8 x 6.4 x 4.7 x 3.7 x N/A N/AHuya HUYA US USD 35.3 N/A 7,190 7,024 120.4 x 56.4 x 34.3 x 10.7 x 6.7 x 5.0 x 2.1 x 27.1%Mean -9.4 x 17.0 x 0.9 x 7.1 x 5.0 x 3.8 x 0.7 x 0.3%Online verticalsFang Holdings SFUN US USD 3.2 USD 4.2 1,421 1,786 11.3 x 8.1 x 6.7 x 3.1 x 2.7 x 2.4 x 0.5 x 17.2%Leju LEJU US USD 1.7 USD 1.8 224 60 -5.7 x 63.8 x 31.4 x 0.5 x 0.4 x 0.4 x 0.9 x 71.9%Bitauto BITA US USD 24.7 USD 38 1,797 278 17.5 x 12.3 x 9.6 x 1.1 x 0.9 x 0.8 x 0.5 x 26.8%Mean 7.7 x 28.0 x 15.9 x 1.6 x 1.3 x 1.2 x 0.6 x 38.6%China online gamesNetdragon 777 HK HKD 17.0 N/A 1,157 947 87.3 x 35.6 x 26.3 x 1.7 x 1.4 x 1.1 x N/A N/AKingsoft 3888 HK HKD 20.8 N/A 3,632 2,711 20.2 x 13.2 x 10.4 x 3.7 x 2.8 x 2.2 x N/A N/AChangyou CYOU US HKD 14.9 N/A 788 -262 10.1 x 8.1 x N/A 1.5 x 1.5 x 1.6 x N/A N/ANetEase NTES US USD 264.9 USD 290 34,790 29,568 21.5 x 18.7 x 15.6 x 3.1 x 2.5 x 2.1 x 0.8 x 24.6%Forgame 484 HK HKD 8.1 N/A 143 49 N/A N/A N/A N/A N/A N/A N/A N/AIGG 799 HK HKD 10.7 N/A 1,777 1,554 8.2 x 7.5 x 7.6 x 2.2 x 2.0 x 1.9 x N/A N/ABoyaa 434 HK HKD 2.2 N/A 209 -59 4.5 x 4.4 x 3.6 x 1.7 x 1.5 x 1.5 x N/A N/AMean 25.3 x 14.6 x 12.7 x 2.3 x 1.9 x 1.8 x 0.8 x N/AChina travelCtrip CTRP US USD 42.1 USD 45 22,965 22,810 35.2 x 25.5 x 18.9 x 5.4 x 4.5 x 3.6 x 0.9 x 27.0%Tuniu TOUR US USD 7.6 N/A 986 503 N/A 48.4 x 32.3 x 2.4 x 1.9 x 1.4 x N/A N/AMean 35.2 x 37.0 x 25.6 x 3.9 x 3.2 x 2.5 x 0.9 x 27.0%China e-commerceAlibaba BABA US USD 189.4 USD 230 491,012 482,639 32.7 x 24.0 x 18.3 x 9.0 x 6.3 x 4.7 x 0.8 x 30.3%Vipshop VIPS US USD 9.9 USD 18 6,491 5,751 14.3 x 10.7 x 8.4 x 0.5 x 0.4 x 0.3 x 0.5 x 22.3%JD JD US USD 36.2 USD 38 51,936 49,647 54.4 x 30.3 x 19.3 x 0.7 x 0.6 x 0.5 x 0.7 x 42.3%Jumei JMEI US USD 2.1 N/A 309 -45 N/A N/A N/A N/A N/A N/A N/A N/AMean 33.8 x 21.7 x 15.4 x 3.4 x 2.4 x 1.8 x 0.7 x 31.6%China Internet FinanceJianpu JT US USD 5.4 USD 8 890 656 -57.7 x 42.0 x 17.3 x 2.8 x 1.5 x 1.0 x N/A N/AYirendai YRD US USD 19.3 N/A 1,173 714 6.5 x 4.8 x 4.0 x 1.2 x 1.0 x 0.8 x N/A N/AChina Rapid Finance XRF US USD 1.9 N/A 127 52 -3.7 x 8.4 x 4.7 x 1.0 x 0.6 x N/A N/A N/ANoah Holdings NOAH US USD 53.0 USD 58.0 3,043 2,737 21.5 x 17.3 x 13.3 x 6.0 x 4.9 x 3.9 x N/A N/AQudian QD US USD 8.3 N/A 2,742 1,371 7.5 x 5.2 x 3.9 x 1.6 x 0.9 x 0.7 x N/A N/AMean -5.2 x 15.5 x 8.6 x 2.5 x 1.8 x 1.6 x N/A N/ASource: J.P. Morgan estimates, Bloomberg. Prices are as of July 27, 2018.6Asia Pacific Equity Research31 July 2018Alex Yao(852) 2800-8535alex.yaojpmorganTencentWe tweak down our 2018/19 revenue forecasts by 4%/5% as we revise down both smartphone and PC games revenue, as well as other revenue. As a result, we cut our18E/19E/20E non-GAAP EPS by 6%/4%/4%, respectively.Expect near-termweakness in gaming revenueWe turn more cautious on online games performance (esp. smartphone games) in 2Q and coming quarters. We revise smartphone games and PC games revenue down by13%/2% for 2018E and by 8%/1% for 2019E. Key reasons leading to our downward revisions include: The suspension of online games approval in recent months because of tightened regulations on content, as wel
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